Joint Employer

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In Lomeli v. Jackson Hewitt, Inc., the United States District Court in the Central District of California held that the plaintiff, Luis Lomeli (“Lomeli”), had submitted enough evidence to hold the franchisor (“Jackson Hewitt”) vicariously liable for potential class actions due to a franchisee’s preparation and submission of fraudulent tax returns. The most concerning part of this decision is that the Court held that Jackson Hewitt could be directly liable for the fraud claims. This decision is another lesson in the necessity of leaving a certain level of discretion to a franchisor’s franchisees.

Under the direct liability claim, the Court examined Jackson Hewitt’s level of involvement in the submission of a franchisee’s tax returns. Specifically, the Court noted that the franchisee was required to use Jackson Hewitt’s proprietary software to submit the fraudulent tax returns and that Jackson Hewitt controlled the software. Further, despite the fact that Jackson Hewitt had approved the submission of a tax return for Lomeli mere days before, Jackson Hewitt approved a second submission for Lomeli with a markedly different tax return. As such, Jackson Hewitt had and controlled the information that gave rise to the fraudulent filing of the tax returns. To make matters worse, Jackson Hewitt had recently run an advertising campaign touting its 100% accuracy guarantee and superiority to “mom and pop” tax preparers. The Court held that these affirmative statements to the public had the explicit purpose of engendering their trust. Further, Jackson Hewitt could not run these advertisements to convince consumers to use them and then immediately turn around and dismiss any reliance on them. As such, Lomeli could proceed with its fraud claim directly against Jackson Hewitt.

As a secondary claim if the direct liability claim fails, the Court examined the level of control Jackson Hewitt exerted over certain areas of the operation of the franchise to determine vicarious liability. In holding that Jackson Hewitt could be vicariously liable for Lomeli’s fraud claim, the Court highlighted Jackson Hewitt’s ability to hire, direct, supervise, discipline or discharge the franchisee’s employees, the required use of Jackson Hewitt’s Code of Conduct for employee relations and required attendance by franchisee’s employees at training sessions aimed at preventing the specific harm claimed by Lomeli. The Court noted that Jackson Hewitt’s control of the instrumentality that caused the harm, the hiring of tax preparers, directly contributes to its vicarious liability.

Unfortunately for Jackson Hewitt (and franchisors everywhere), Jackson Hewitt could be 100% liable for the filing of the inaccurate and fraudulent tax returns.

 

The fight against joint employment of franchisors and franchisees took a small hit when the Western District of Pennsylvania (“Court”) chose to allow a franchisee’s employee’s suit to proceed. In Harris v. Midas, et. al., the plaintiff, Hannah Harris (“Harris”), convinced the Court that she had proffered enough evidence to allege a plausible basis to hold the franchisor (“Midas”) as a joint employer and vicariously liable for the franchisee’s conduct with respect to Harris’ sexual harassment claims against her franchisee employer.

In the instant case, the Court looked at three factors commonly employed to evaluate joint employer liability. First, the Court examined Midas’ authority to hire and fire employees, promulgate work rules and assignments and set conditions of employment. While the Court noted that Midas did not have the authority to hire or fire employees, the Court held that Midas could establish work policies. Specifically, the Court pointed to the provisions of the Franchise Agreement that require franchisees to comply with all lawful and reasonable policies imposed by Midas. Those policies specifically include those policies governing the training of personnel. Further, Harris noted that Midas provided guidance to its franchisees on the creation of its employee handbook and the inclusion of a sexual harassment policy, further exerting its control to influence these workplace policies.

Second, the Court held that while Midas did not exert control over the day-to-day supervision of employees, under the Franchise Agreement, Midas had the authority to do so. Notably, the Court cited Midas’ ability to require employees to attend additional training programs. Further, Midas trained the franchisee who, in turn, trained its employees on the Midas system. Lastly, the Court noted Midas’ ability to visit and inspect the franchisee’s location as further evidence of Midas’ potential influence over the day-to-day supervision of the franchisee’s employees. The Court’s reliance on these provisions is worrisome because many franchisors use similar language to protect the uniformity of the brand.

The last factor, Midas’ control over employee records, the Court again made a stretch to connect the dots. The Midas Franchise Agreement stated that Midas has the right to audit and examine the franchisee’s books and records, which, the Court held, could be interpreted to include personnel files if read as broadly as possible.

Furthermore, Harris argued that Midas was vicariously liable for the franchisee’s conduct because the franchisee was essentially acting as Midas’ agent. The Court agreed holding that the terms of the Franchise Agreement are so generally phrased as to provide Midas broad discretionary power to impose nearly any restriction or control it deems appropriate.

While the case at hand is at the initial phase and will likely be subject to further scrutiny, it demonstrates another avenue that courts are using to impose joint employer liability. Here, the Court is relying upon the broad and sweeping provisions of the Franchise Agreement that Midas is using to protect its brand and franchise system. The fine line franchisors must continue to tread between exerting just enough control to ensure proper maintenance of the franchise system but not enough to cause joint employer liability continues.

 

In December, we wrote that the NLRB had issued a decision overturning Browning-Ferris’ joint employer test and returning to the previous standard for determining joint employment.  That decision in Hy-Brand Industrial Contractors was seen as a return to sanity by employers and pro-business groups.

Unfortunately, the NLRB announced today that it had vacated the Hy-Brand decision due to the fact that one of its members who heard the case had a conflict.  Member William Emmanuel’s law firm had participated in the Browning-Ferris case.  Since Hy-Brand directly addressed the Browning-Ferris standard, the NLRB Inspector said that Emmanuel should not have participated in the Hy-Brand case.

The Browning-Ferriss case set forth a standard for joint employment that noted that businesses could be joint employers simply because they reserved the right to control the actions of the other entity’s employees, even if they never actually exercised that authority.  That, of course, created great consternation in the franchise setting as franchisor agreements may typically have a broad right to address franchisees’ employee issues that may never actually be exercised.  Franchisors, conscious of protecting their brand’s image, usually inserted such clauses to insure that a franchisee’s employees would not denigrate the brand.

It is not clear at this point when Hy-Brand will be reheard or if the issue will come before the Board in another case.  In the meantime, employers are stuck with Browning-Ferriss.  To the extent that employers revised franchise agreements after the Hy-Brand decision was issued, they should have those agreements reviewed by legal counsel.

Yesterday afternoon, the NLRB issued a decision in Hy-Brand Industrial Contractors that caused a collective sigh among employers.  The decision rolls back the joint employer standard to what it was before Browning-Ferris Industries, 362 NLRB No 186.

The Browning-Ferris decision was greeted with alarm by most employers, especially franchisers and franchisees, as it made it easier for employees to claim that two entities were joint employers.

Specifically, Browning-Ferris held that two entities could be joint employers even where they never exercised joint control over essential terms and conditions of employment.  It was enough that there was an agreement between the parties where they reserved the right to exercise joint control.

The Hy-Brand decision explicitly overrules Browning-Ferris.  Interestingly, the decision discusses in some detail the negative impact Browning-Ferris had on franchisers.

Now the test for determining whether an employer has exercised joint control goes back to what it was before Browning-Ferris was decided in 2015.  Two entities will be found to be joint employers where:

  • joint control is exercised;
  • the control has a “direct and immediate” impact on employment terms; and
  • where such control is not merely “limited and routine.”

Franchisers should still be careful when setting up controls over payroll processes or scheduling of employees of franchisees or when they have reserved the right to address discipline with the franchisee’s employees.  The mere fact that an employer reserves the right to weigh in on disciplinary issues will no longer mean that they could be a joint employer.  However, if that right to weigh in on discipline is frequently exercised, then there might be a finding of joint employment.  In other words, wade carefully.

The U.S. House Committee on Education and the Workforce recently approved the “Save Local Business Act” (HR 3441 – Byrne).  If enacted, the Act would limit joint employer liability by reversing the rule announced by the NLRB in Browning-Ferris Industries, 362 NLRB No. 186.  The Browning-Ferris decision departed from 30 years of precedent by issuing a new joint employer test with significant ramifications for the franchise model.  Under Browning-Ferris, a company (e.g., a franchisor) that has “indirect” or “potential” control over the employees of another company (e.g., a franchisee) may be considered a joint employer of those employees. The decision significantly expanded franchisors’ potential liability for matters related to their franchisees’ employees (including collective bargaining and employment torts).  Browning-Ferris is currently on appeal before the D.C. Circuit Court of Appeals.

The Save Local Business Act would amend the National Labor Relations Act and Fair Labor Standards Act to clarify that a person or company is a joint employer only if it “directly, actually, and immediately, and not in a limited and routine manner, exercises significant control over the essential terms and conditions of employment.” Essential terms and conditions include hiring employees, discharging employees, determining individual employee rates of pay and benefits, day-to-day supervision of employees, assigning individual work schedules, positions, and tasks, and administering employee discipline.

During its hearings, the Committee heard from franchise owners who described the impact of the Browning-Ferris rule on their business operations. Many legislators have specifically cited the franchise industry in announcing their support for the Act.  The Act’s passage would be a major win for the franchise model, which has been plagued with uncertainty over joint employer liability since the Browning-Ferris decision.

Neon sign spelling `Not`Another case has been decided adding to the back and forth in the legal world on the issues of a joint employer relationship of a franchisor and its franchisee and vicarious liability and agency between a franchisor and franchisee.

In Harris v. Midas, (2017 WL 3440693 (W.D. Pa. Aug. 10 2017)) a federal court in Pennsylvania dismissed an auto repair service franchisor from a sexual harassment case brought by a former employee of one of its franchisees.  The plaintiff alleged multiple and continuing acts of sexual, emotional and physical harassment against multiple managers of the franchisee.  The plaintiff sued the franchisor, Midas, under theories of joint employment, agency and vicarious liability.  In particular, for the joint employment claim, they relied on Myers v. Garfield & Johnson Enters, Inc., 679 F. Supp. 2d 598 (E.D. Pa. 2010) where the Third Circuit stated that “a joint employer relationship may exist for the purposes of Title VII when two entities exercise significant control over the same employee.”

The Harris court went through a detailed analysis of various aspects of control in an employment situation which had been used by district courts within their circuit and found them to be lacking.  In this case, the court stated that the plaintiff did not plead facts sufficient to support that the franchisor “had any authority to: hire or fire her [the plaintiff], promulgate work assignments, control her compensation, benefits, or hours, supervise her day-to-day work, discipline her, pay her salary, or manage her employee records.”   This lead the court to believe that the local franchisee company retained almost all control over her employment and to reject the claim of joint employment.

The court followed a somewhat similar analysis for the agency and vicarious liability claims.  In this analysis, the parties agreed that the issue is whether a franchisor exercised control over the franchisee’s business operations.

In discussing the case Drexel v. Union Prescription Centers, Inc., 582 F.2d 781 (3d. Cir. 1978), the court pointed to the differentiation between controls that led to a legitimate agency/vicarious liability relationship and those that “evidence [the franchisor’s} concern with the ‘result’ of the store’s operation rather than the ’means’ by which it was operated.”  The court did acknowledge and allow for many of the usual controls exercised by a franchisor and the absence of daily control led them to rule that the plaintiff failed to allege a claim for agency or vicarious liability.

Janitorial services franchisor Jan-Pro Franchising International, Inc. (“Jan-Pro”) is not the employer of its unit franchisees, according to a recent California federal court decision. Roman v. Jan-Pro Franchising Int’l, Inc., No. C 16-05961 WHA (N.D. Cal. May 24, 2017). The plaintiff franchisees failed to show that Jan-Pro exercised sufficient control over their day-to-day employment activities.

Copyright: stocksolutions / 123RF Stock Photo

What makes this case unique is that Jan-Pro operates a three-tiered franchising structure, often called a subfranchise arrangement. Under this arrangement, Jan-Pro grants subfranchise rights to a regional master franchisee (“Master Franchisee”), who is responsible for selling Jan-Pro unit franchises to individual franchisees (“Unit Franchisees”) in a particular geographic territory. The Unit Franchisees operate the franchised cleaning service business. Importantly, as is common in a subfranchise arrangement, Jan-Pro never directly contracts with its Unit Franchisees. Instead, Jan-Pro directly contracts with its Master Franchisees. Then, the Master Franchisees directly contract with the Unit Franchisees.

 

The plaintiff Unit Franchisees claimed that they were misclassified as independent contractors when they were really Jan-Pro’s employees. They sought minimum wages and overtime premiums from Jan-Pro. The plaintiffs argued that they were Jan-Pro’s employees under California law because the contracts between Jan-Pro and its Master Franchisees permitted Jan-Pro to control the business of the Master Franchisees and Unit Franchisees through its policies and procedures.

Under California law, “to employ” means

  1. To exercise control over the wages, hours or working conditions, or
  2. To suffer or permit to work, or
  3. To engage, thereby creating a common law employment relationship.

Martinez v. Combs, 49 Cal. 4th 35, 64 (2010). However, in the franchise context, controlling the “means and manner” of a franchisee’s operations is not sufficient to make a franchisor an employer. A franchisor is only an employer if it retains or assumes general control over employment matters such as hiring, direction, supervision, discipline and discharge. Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th 474, 498 (2014).

The court concluded that Jan-Pro did not employ the Unit Franchisee’s employees. It reached this result despite the fact that the Master Franchisees exerted control over the Unit Franchisees under the contracts between them. Critical to the court’s analysis was the fact that these contracts did not confer any rights on Jan-Pro to control or terminate the Unit Franchisees. Nor was Jan-Pro a third party beneficiary of these agreements, which could give Jan-Pro the right to directly enforce them. Moreover, Jan-Pro never directly contracted with the Unit Franchisees.

The court’s analysis focused on features that are specific to subfranchise arrangements, especially the lack of a direct contractual relationship between Jan-Pro and its Unit Franchisees. A subfranchise arrangement is only one form of multi-unit arrangement, and is not appropriate for all franchise systems. Franchisors engaged in or considering this system should perhaps not put too much emphasis on the court’s analysis. For one thing, a franchisor may want to have some contractual rights it can enforce directly against Unit Franchisees. Additionally, even if Jan-Pro had directly contracted with Unit Franchisees, there appeared to be scant evidence that Jan-Pro controlled employment conditions in a manner that would make it a joint employer. However, if a franchisor were to indirectly control employment conditions through a subfranchise arrangement, a court might come to a different conclusion. In any event, the court’s decision was well reasoned and grounded in a firm understanding of franchising. It was certainly a win for the franchise model, made especially important by the fact that it took place in California, which is typically considered an employee and franchise friendly jurisdiction.

In Gessele v. Jack in the Box, Inc., the franchise world got a win in the joint employer battle when the United States District Court for Oregon (“Court”) held that Jack in the Box, Inc. (“JIB”) was not the joint employer of certain employees of its franchisees as a matter of law using the economic reality test in granting summary judgment in JIB’s favor.

Here, several employees brought a putative class action lawsuit against JIB for violation of the minimum-wage and overtime provisions of the Fair Labor Standards Act (“FLSA”) and various other Oregon wage-and-hour laws as a joint employer. After a long litigation history that involved dismissing the first suit and the employees re-filing this suit, JIB moved for summary judgment arguing that it did not violate the FLSA or any other law with respect to the employees because it was not a joint employer.

Copyright: bluedarkat / 123RF Stock Photo
Copyright: bluedarkat / 123RF Stock Photo

In analyzing whether JIB was a joint employer of the employees, the Court utilized the “economic reality” test which outlines on four main factors including whether the alleged employer: (i) had the power to hire and fire employees; (ii) supervised and controlled employee work schedules; (iii) determined the rate and method of payment; and (iv) maintained employment records.

Pursuant to the factors listed above, JIB argued that it did not have any power to hire and fire employees, control employee work schedules, determine employee pay rate or maintain employment records citing relevant portions of the franchise agreement which state that franchisees are solely responsible for hiring and firing decisions, employee decisions and the day-to-day operations of the restaurant. Further, JIB relied on the testimony of JIB’s legal department, JIB’s franchisees and the employees themselves, which provided that the franchisees determine all conditions of employment for employees of the restaurant, are in charge of all hiring and firing decisions. Further, in actual practice the franchisees and its managers were in charge of all employment matters. The employees argued that while JIB did not have the specific authority to control these employment matters, JIB still fulfilled the economic reality test because JIB imposed very specific requirements for who the franchisees were allowed to hire, made franchisees’ employees use the designated time-keeping software and scheduling system, and maintained a collection of franchisees’ employee’s data through its required software.

In making its decision, the Court was unconvinced by the employees’ arguments and noted that the Ninth Circuit had previously found that franchisor/franchisee relationships with similar circumstances failed to surpass the requirements of the economic reality test. The Court utilized these cases as guidance for ruling in favor of JIB’s motion for summary judgment noting that the power to terminate a franchise alone is insufficient to create a joint employment relationship.

The Takeaway. It is of utmost importance to ensure that both the franchise agreement and franchise disclosure document contain language to protect the franchisor in the context of a potential case of joint employment. Best practices include making sure the franchise documents provide that all employment matters and day-to-day decisions are the sole responsibility of the franchisee. Additionally, please be aware that any court will examine the conduct of the parties and all circumstances surrounding the relationship in making a joint employment determination. As such, it is important not only to ensure that the franchise documents adequately protect a franchisor but that your actions are not in contravention to the explicit terms of the franchise documents, and that your training of franchisees and employees–especially regional staff–reflect this reality.

Copyright: eintracht / 123RF Stock Photo
Copyright: eintracht / 123RF Stock Photo

Last month, the North Carolina State Assembly voted 109-0 to pass SB 303, which mandates that a franchisor is not the employer of a franchisee or a franchisee’s employees. The legislation now moves to the North Carolina Senate for consideration.  This follows the actions of many other states to provide clarity under state law as to what is an employee in a franchised business located in their state. For more information on these efforts, please see my blog of December 31, 2015: “More States Moving to Limit Fallout from Browning Ferris”.

The new provision is quite simple and states: “Neither a franchisee nor a franchisee’s employee shall be deemed to be an employee of the franchisor for any purposes, including, but not limited to, this Article and Chapters 96 and 97 of the General Statutes.  For purposes of this section, “franchisee” and “franchisor” have the same definitions as set out in 16 C.F.R. 436.1.”   So, if an entity is a franchisor or franchisee under Federal law, neither the franchisee nor the franchisee’s employee shall be deemed an employee under North Carolina law.  Please note that this will not affect any determination of “joint employment” under Federal law.

And the story continues…

Copyright: photoncatcher / 123RF Stock Photo
Copyright: photoncatcher / 123RF Stock Photo

A federal district court in Trenton, New Jersey, has ruled that franchisor 7-Eleven was entitled to summary judgment on a franchisee’s claims that it violated the New Jersey Franchise Practices Act (NJFPA) by imposing unreasonable performance standards and attempting to terminate the franchise agreement without good cause.

7-Eleven brought suit against a New Jersey multi-unit franchisee requesting that the court enjoin the franchisee from operations and compel the franchise owner to vacate and surrender five 7-Eleven locations.   The franchisor alleged the franchisee committed incurable breaches of the franchise agreement which included a failure to maintain a minimum required net worth at each location.  The franchisee brought counterclaims including alleged violations of the NJFPA, federal Fair Labor Standards Act (FLSA) and the New Jersey Law Against Discrimination (NJLAD). 7-Eleven then moved for summary judgment on the counterclaims.

In granting summary judgment to 7-Eleven the court rejected the franchisee’s claim that it violated the NJFPA by imposing unreasonable standards.  The court found there was no evidence that the compulsory standards were unreasonable. Further, the franchisee admitted that he failed to pay payroll taxes, provide workers’ compensation insurance, or withhold and pay Social Security taxes for employees of his stores, all of which constituted material breaches of the franchise agreements. 7-Eleven was entitled to summary judgment on this claim because no reasonable juror could find that 7-Eleven did not have good cause to terminate the franchise agreements under the NJFPA.

In addition, the court found that the franchisee could not be considered a 7-Eleven employee because the franchisee failed to demonstrate he was an employee in support of his FLSA claim. The court outlined five factors in support of its decision to grant summary judgment on this claim including the fact that: (1) 7-Eleven did not control the manner in which the franchisee performed his 7-Eleven business; (2) it was undisputed that the franchisee shared in the gross profits of the store; (3) the franchisee alleged that he spent millions of dollars on franchise fees, licenses, approvals, and related goods and services in operating his stores; (4) the franchisee demonstrated entrepreneurial skills in the operation of the six stores; and (5) the franchisee could terminate the franchise agreements at any time and 7-Eleven could terminate the agreements for good cause. 7-Eleven was therefore entitled to summary judgment on the terminated franchisee’s counterclaims brought under the FLSA and  NJLAD.

The court specifically details the voluminous records offered by the franchisor showing that (1) the franchisee clearly and unambiguously breached the franchise agreement, (2) notice was provided to the franchisee and (3) the franchisee had an opportunity to cure the default. This should be a lesson to all systems that (A) clear and fair system requirements along with (B)  internal processes which are followed at all times in the event of a franchisee breach, can help a franchisor prevail at the summary judgment stage.  This is true even in states with laws considered “franchisee-friendly.”