Update on Orozco v. Plackis: was franchisor’s principal the employer of franchisor’s employee? Fifth Circuit reverses – 3 takeaways

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We reported in September 2013 about Orozco v. Plackis,1 a case out of the United States District Court for the Western District of Texas in which the plaintiff (a cook in a franchised restaurant) filed an action under the Fair Labor Standards Act (the FLSA) against Craig Plackis, owner of the Craig O’s Pizza and Pastaria franchised restaurant chain. The plaintiff filed suit alleging that he was not paid overtime and minimum wage as required by the FLSA.

At the conclusion of the jury trial, the jury found, among other things, that Plackis was the plaintiff’s employer. Plackis then appealed to the United States Court of Appeals for the Fifth Circuit.2

Was Plackis the plaintiff’s employer?

The Circuit Court reversed the District Court’s denial of Plackis’s motion for judgment as a matter of law, holding that there was legally insufficient evidence for a reasonable jury to conclude that Plackis was the plaintiff’s employer under the FLSA and the “economic reality test.” Under the economic reality test, courts consider whether the alleged employer: (1) possessed the power to hire and fire employees; (2) supervised and controlled employee work schedules or conditions of employment; (3) determined the rate and method of payment; and (4) maintained employment records.

Power to hire and fire employees. Two facts were principally taken into consideration regarding this element: (a) some employees worked at both Plackis’s location and the franchisee’s location, and (b) Plackis met with the franchisee and provided advice on improving the franchisee’s profitability. The Circuit Court held that these facts did not show Plackis possessed the power to hire or fire the plaintiff.

The franchisee’s testimony explaining that she hired employees from Plackis’s location because they would not need training supported Plackis’s contention that this element was not met, as it suggested that the franchisee had an independent reason for hiring employees from Plackis’s location. As for testimony regarding a meeting between Plackis and the franchisee after which the franchisee removed certain employees from her work schedule, the Circuit Court noted that both Plackis and the franchisee testified that Plackis merely provided the franchisee with advice on improving the profitability of the franchised location. The Circuit Court found that “[t]his is conduct we would expect a franchisor to engage in with a franchisee, especially a struggling franchisee.” Plackis’s authority to hire and fire could not be inferred simply because of the sequence between the meeting and the changes implemented at the franchised location.

Supervised or controlled conditions of employment. The Circuit Court also concluded that the plaintiff failed to present legally sufficient evidence that Plackis supervised and controlled employee work schedules or conditions of employment in support of the second element of the economic reality test.

The proximity between Plackis’s and the franchisee’s meeting and the changes to the plaintiff’s work schedule did not establish that Plackis had the power to supervise or control employee work schedules or conditions of employment. The facts that Plackis reviewed the work schedules and trained the franchisee and the plaintiff did not suggest that Plackis controlled or supervised the employees at the franchised location because it was reasonable to assume that a franchisor would provide training to new franchisees and their employees. 

Determined the rate and method of payment. With respect to the third element of the test, the Circuit Court found that the plaintiff did not produce legally sufficient evidence that Plackis determined the plaintiff’s rate and method of payment. The District Court erroneously concluded that because Plackis was aware of the plaintiff’s salary, the jury could reasonably infer that Plackis was essentially advising the franchisee on his salary. In fact, the plaintiff testified that Plackis did not control his rate of pay. The Circuit Court also failed to understand how the fact that the plaintiff had to remain at work until an employee from Plackis’s restaurant arrived at the franchised location suggested that Plackis determined the plaintiff’s rate and method of pay.

The Circuit Court held that the franchise agreement also failed to support the jury’s verdict. Section 8a of the franchise agreement stated as follows: “Franchisee shall at all times comply with all lawful and reasonable policies, regulations, and procedures promulgated or prescribed from time to time by Franchisor in connection with Franchisee’s shop or business.” The section also stated: “Franchisee shall, irrespective of any delegation of responsibility, reserve and exercise ultimate authority and responsibility with respect to the management and operation of Franchisee’s shop.” Although section 8a demonstrated that Plackis had at least a certain degree of control over the franchised location, the Circuit Court determined that it was insufficient evidence to support the jury verdict. The plaintiff conceded that the franchise agreement alone was insufficient to establish that Plackis qualified as the plaintiff’s employer under the FLSA. The Circuit Court did not believe that the “innocuous statement” in the franchise agreement that the franchisee had to follow “policies and procedures promulgated by the franchisor for ‘selection, supervision, or training of personnel’” suggested that Plackis hired or fired employees, supervised or controlled employee work schedules or employment conditions, or determined the plaintiff’s rate and method of payment.

Maintained employment records. The plaintiff conceded that he failed to provide any evidence that Plackis maintained the plaintiff’s employment records and accordingly, the Circuit Court did not address the fourth element of the economic reality test.

Three takeways for franchisors

Although the Circuit Court stressed that its decision “did not suggest that franchisors can never qualify as the FLSA employer for a franchisee’s employees,” the case is important for several reasons. 

First, the Circuit Court held that although the franchisee implemented the franchisor’s suggestions regarding ways to increase the franchisee’s profitability, this did not lead to an inference that the franchisor had control over employment decisions. 

Second, the Circuit Court found that although the franchisor provided training to the franchisee’s employee, this did not suggest the franchisor had control over or supervised the franchisee’s employees.

Third, the Circuit Court held that general language in the franchise agreement regarding the franchisee having to follow the franchisor’s “policies and procedures” regarding the “selection, supervision, or training of personnel” did not suggest that the franchisor had control over or supervised the franchisee’s employees.


1 2013 WL 3306844 (W.D. Tex. June 13, 2013).

2 2014 WL 3037943 (5th Cir. July 3, 2014).

 

Topics:  Employer Liability Issues, FLSA, Franchise Agreements, Franchises, Franchisors, Minimum Wage, Over-Time, Restaurant Industry, Unpaid Overtime, Wage and Hour

Published In: Civil Procedure Updates, Franchise Updates, Labor & Employment Updates

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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