Federal court upholds jury finding that franchisor’s principal was employer of franchisee’s employee: 3 takeaways

by DLA Piper
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A recent case out of the United States District Court for the Western District of Texas upheld a jury finding that a franchisor’s principal was the employer of a former franchisee’s employee, despite the fact that the employee’s own testimony made it clear the franchisor’s principal did not have direct control over the employee.

In Orozco v. Plackis,1 the plaintiff filed an action under the Fair Labor Standards Act (FLSA) against Craig Plackis, founder and principal of the Craig O’s Pizza and Pastaria franchised restaurant chain.  The plaintiff, who had worked as a kitchen employee in a franchised restaurant before that location went out of business, claimed Plackis failed to pay him minimum wage and overtime hours as required by the FLSA.

At the conclusion of the jury trial, Plackis orally moved for judgment as a matter of law, which the court denied.  The jury found that:

  • Plackis was the plaintiff’s employer
  • Plackis was engaged in an enterprise under the FLSA
  • the plaintiff was not exempt from overtime wages under the FLSA and
  • Plackis willfully violated the FLSA.

After the court entered judgment awarding the plaintiff monetary damages, Plackis renewed his motion for judgment as a matter of law, arguing that the plaintiff failed to present evidence that Plackis was the plaintiff’s employer or that the plaintiff was employed in an enterprise within the meaning of the FLSA.

EMPLOYER-EMPLOYEE RELATIONSHIP?

The court first addressed Plackis’s argument that there was insufficient evidence at trial to establish he was the plaintiff’s employer.  To determine whether an individual or entity is an employer, the court considered whether the alleged employer: (1) possessed the power to hire and fire employees; (2) supervised or controlled employee work schedules or conditions of employment; (3) determined the rate or method of payment; and (4) maintained employee records.

Although the plaintiff conceded that Plackis did not maintain his employee records, the court noted that each element of the test need not be present in every case. As for the remaining three elements of the employer test, Plackis argued that the plaintiff’s own testimony during trial precluded any finding that he was the plaintiff’s employer.  The plaintiff had testified that Plackis did not hire the plaintiff, did not have the authority to fire him, did not set up his schedule, did not determine his rate of pay or method of payment and never had discussions with him about his position or work responsibilities.

Despite the plaintiff’s own testimony regarding Plackis’s absence of direct control, the court concluded that because the plaintiff was employed as a kitchen employee, his lack of awareness or understanding of the business relationship between Plackis and the franchisee could not be viewed as dispositive or a legal bar to consideration of the other evidence presented at trial demonstrating control.

Plackis also argued that the franchise agreement governing the franchised location made it clear that the franchisee had the ultimate authority and responsibility for the management and operation of the franchised location.  The court disagreed, concluding that the franchise agreement, which specifically required that the franchisee comply with policies and procedures promulgated by the franchisor for the selection, supervision or training of personnel, provided enough evidence from which the jury could conclude that the franchisor had the ability and authority to control the franchisee and employees in the franchisee’s location.

The court also concluded that there was sufficient evidence for the jury to conclude that Plackis individually, as opposed to the franchisor entity, had the ability to control the franchisee’s employees because Plackis was an officer and principal of the franchisor entity, received royalties from the franchised locations, trained the franchisees and handled the operations side of the business for the franchisor entity.

In upholding the jury’s finding of an employment relationship, the court focused on testimony that suggested Plackis supervised and controlled the work schedules and conditions of the plaintiff’s employment.  Plackis testified that he examined work schedules for the franchised locations as part of his role to train the franchisees on how to forecast profits and losses, and had advised the franchisee on cutting employees and hours worked to reduce labor costs.  After that meeting, the franchisee implemented certain scheduling changes that expanded the plaintiff’s work duties.  The court reasoned that a jury could recognize the effect of Plackis’s advice was to change the plaintiff’s working conditions.

The court also considered evidence that some of the employees at the franchised location where the plaintiff worked also worked at one of the nearby Craig O’s locations owned by Plackis, and that the plaintiff’s work schedule was affected by the time one of Plackis’s employees arrived after completing his work at the location owned by Plackis –  the plaintiff could not leave for the day until that employee arrived at the franchised location.

“ENTERPRISE” UNDER THE FLSA?

The court next turned to Plackis’s argument that there was insufficient evidence the plaintiff was employed in an “enterprise” under the FLSA.  The FLSA minimum wage and maximum hours statutes cover any employee who is employed in an enterprise engaged in commerce or in the production of goods for commerce.  The three main elements of an enterprise are related activities, unified operation or common control, and common business purpose.  To satisfy the US$500,000 annual gross sales volume requirement of the definition of “enterprise” for 2008 and 2011, the plaintiff had to establish that the three main elements existed between the franchised Craig O’s location where the plaintiff worked and the nearby location that Plackis owned.

Plackis only challenged the “unified operation or common control” element of the enterprise test, again citing the franchise agreement, which required the franchisee to reserve and exercise ultimate authority and responsibility with respect to the franchise’s operation.  The court found this provision unpersuasive, and instead pointed to other provisions of the franchise agreement that required franchisees to attend training programs offered by the franchisor and to comply with all policies, regulations and procedures promulgated by the franchisor.

Moreover, because the plaintiff had already presented sufficient evidence from which a jury could reasonably conclude that Plackis had control over the plaintiff to make him an employer under the FLSA, the court held that the jury could reasonably conclude that Plackis had common control over the franchisee’s location so as to find that the franchisee’s location and the location owned and operated by Plackis constituted a single enterprise under the FLSA.  In reaching that conclusion, the court held that although the existence of a franchise relationship alone was not sufficient to confer enterprise coverage, the existence of the franchise relationship was not the sole basis for conferring enterprise coverage.

THREE TAKEAWAYS FOR FRANCHISORS

The case, which is currently on appeal, is important for several reasons.

First, it found that a principal and officer of a franchisor – as opposed to the franchisor entity – was an employer of a former franchisee’s employee, despite the fact that the employee testified the principal had no direct control over the plaintiff’s employment. 

Second, the court found that an employer-employee relationship existed because, among other things, the franchisee implemented some of the franchisor’s suggestions regarding ways to increase the franchisee’s profits by reducing labor costs.

Third, the court held that although the existence of a franchise relationship alone is insufficient to create enterprise coverage, it is also insufficient alone to preclude enterprise coverage under the FLSA.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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