Food and Beverage Law Update: September 2018

by Holland & Knight LLP

Holland & Knight LLP

Labor and Employment

Jimmy John's Avoids Joint-Employer Finding in Worker Overtime Litigation

By Michael Starr

In In re: Jimmy John's Overtime Litigation, 2018 WL 3231273 (N.D. Ill. June 14, 2018), a federal district court ruled that fast-food franchisor Jimmy John's did not become a joint employer with its franchisees merely by maintaining brand standards. Jimmy John's, the franchiser of a fast-food restaurant, was sued by employees of some of its franchisees. The plaintiffs were assistant store managers (ASMs) who claimed they were misclassified as exempt under the Fair Labor Standards Act (FLSA) and not paid overtime.

Jimmy John's maintained a relationship with its franchisees that was typical for the fast-food industry. Each franchise was owned and operated as an independent business, but was required to uphold brand standards to ensure constant quality for all Jimmy John's restaurants. Compliance with brand standards was monitored by "business coaches" who regularly inspected each restaurant but did not audit compliance with employment-related matters such as whether ASMs were properly classified as exempt or non-exempt under the FLSA. In reaching its decision, the court relied on several factors. For example, the court ruled that Jimmy John's employment of business coaches to provide guidance on hiring and discipline did not amount to "actual control over" franchise employment decisions. The court also ruled that while Jimmy John's "may have influenced staffing decisions" (emphasis added) indirectly through the requirements of its standardized Operations Manual, this did not constitute "direct authority or control."

The fundamental question, as the district court saw it, was "whether Jimmy John's exercised control and authority over franchise employees in a manner that caused the FLSA violation (at least in part)" (emphasis added). That violation, according to the plaintiffs, arose from the alleged misclassification of ASMs as FLSA-exempt. The evidence showed, however, that the franchise owners determined whether to classify employees as exempt or nonexempt and that while Jimmy John's used its brand standards to standardize the customer experience across all franchise stores, it did not attempt to control classification under the FLSA or require all franchise owners to classify their employees uniformly. Significantly, the court reasoned that any control Jimmy John's did exercise over franchisees related to its brand standards, which, the court said, "Jimmy John's is entitled to enforce and protect through compliance measures against the franchisees."

The Jimmy John's decision is a welcome recognition that enforcing brand standards does not, in itself, make the franchisor a joint employer of the employees of its franchisees. Nationwide franchisors, however, must be cautious in assessing the import of the Jimmy John's decision. Other courts take a much more expansive review of the joint-employer concept for FLSA purposes. One federal court of appeals, for example, has ruled that two separate businesses can avoid a joint-employer finding only if they "are 'entirely independent'" and "'completely dissociated' with regard to the essential terms and conditions that govern a worker's employment." Salinas v. Commercial Interiors, Inc., 848 F.3d 125, 137 (4th Cir. 2017). If the "completely disassociated" test is utilized, strict enforcement of brand standards by a franchisor that indirectly influences a worker's essential terms and conditions of employment would conceivably result in its being found the joint employer of its franchisee employees.

Wage and Hour

U.S. Supreme Court Leaves Tip Pooling in Flux

By Nathan A. Adams IV

In two consolidated appeals styled National Rest. Ass'n v. U.S. Dep't of Labor, No. 16-920, 2018 WL 3096374 (June 25, 2018) and Wynn Las Vegas LLC v. Cesarz, No. 16-163, 2018 WL 3096373 (June 25, 2018), the U.S. Supreme Court denied without comment certiorari petitions challenging a U.S. Court of Appeals for the Ninth Circuit decision styled Oregon Rest. And Lodging Ass'n v. Perez, 816 F. 3d 1080 (9th Cir. 2016). The court in Perez upheld an Obama-era rule, 76 Fed. Reg. at 18,841-42 (Ap. 5, 2011) (codified at 29 C.F.R. §§531.52, 531.54 and 5531.59), which prohibited employers under the FLSA from pooling the tips of servers and other "front of the house" workers who were paid at least the full minimum wage and distributing a share to "back of the house" workers who do not typically receive tips.

As background, in December 2017, the U.S. Department of Labor (DOL) submitted a proposal to the White House Office of Management and Budget to rescind the rule. In April 2018, DOL announced that due to a March amendment to the FLSA, included in the 2018 Consolidated Appropriations Act, Pub. L. No. 115-141, Div. S, Tit. XII, §1201(c), 132 Stat. 348, employers who pay tipped workers the full federal minimum wage without claiming a tip credit can now include certain non-managerial workers who are not "customarily and regularly tipped" such as cooks and dishwashers in tip pools. The anticipated rescission of the Obama-era rule is still only proposed. The denial of certiorari leaves unresolved tension with Perez.

Meanwhile, in Pataky v. Brigantine, Inc., No. 17-cv-00352, 2018 WL 3020159 (S.D. Cal. June 18, 2018), the district court certified a class in settlement of a claim for violation of the California Business and Professions Code, section 17200 (Unfair Competition Law), based on violation of the FLSA's prohibition against forcing employees to share tips with employees who do not provide direct table service to customers in places where the kitchen staff does not customarily and regularly receive tips as a predicate offense.

Furthermore, the district court in Trawick v. Tri-Star Res. Gp., LLC, No. 17-00456, 2018 WL 2337285 (D. Hawaii May 23, 2018), in reliance upon Kilgore v. Outback Steakhouse of Fla., Inc., 160 F. 3d 294 (6th Cir. 1998), ruled that hosts may participate in tip pools. Like "bus persons," hosts are mentioned in 29 C.F.R. §531.54 as an example of restaurant employees who may receive tips from tip outs by servers. According to the court in Kilgore, "One can distinguish hosts from restaurant employees like dishwashers, cooks, or off-hour employees like an overnight janitor who do not directly relate with customers at all."

Judicially Enforced DOL Subpoena Overturned

By Nathan A. Adams IV

In Acosta v. La Piedad Corp., 894 F. 3d 947 (8th Cir. 2018), the court ruled that a restaurant company doing business as El Mezcal Mexican Restaurant was not in civil contempt for failure to produce documents in response to a DOL subpoena that demanded production of documents reflecting business activities of shareholders without regard to where the documents were located or whether they pertained to the company's business under DOL investigation into compliance with the FLSA. The subpoena was broad, requesting 22 categories of documents, including "all documents showing the names and addresses of all other businesses that are partially and/or fully owned by any of the owners of La Piedad Corporation and the percentage of ownership." The subpoena lacked statutory or judicial authority authorizing a subpoena commanding a party to produce documents that are not within its possession, custody or control. Moreover, the company plainly stated in response that it had no responsive documents and there was no factual basis in the record for inferring an agency relationship between El Mezcal and other businesses owned by the defendant's shareholders.


Reliance on False Label Not Always Necessary to State a Claim

By Nathan A. Adams IV

In Johnson v. Atkins Nutritionals, Inc., No. 2:16-cv-04213, 2018 WL 3398162 (W.D. Mo. July 12, 2018), the plaintiff sued the defendant on various theories for alleged deceptive labels, but during deposition he testified that he remembered seeing, but not reading the "Counting Carbs?" label. When asked whether the label was important to his purchasing decision, the plaintiff testified that his then-wife "would direct him to purchase certain things that they wanted" as part of a no-carb to low-carb diet plan to cut sugar and lose weight. The defendant argued that an element of a claim under the Missouri Merchandising Practices Act (MMPA) must be reliance on the alleged false label. The defendant argued the label must at least be material to the consumer's purchasing decision. The court disagreed that reliance or materiality were necessary elements of the MMPA claim any more than that the plaintiff had suffered some "ascertainable loss." The plaintiff consumed the products and was not adversely affected, but the court determined that the plaintiff need only show that the product was worth less than what he paid for it due to the alleged false label. The court did grant summary judgment on the plaintiff's claims for breach of express warranty and unjust enrichment as they pertain to the "Counting Carbs?" label on chocolate peanut butter bars. The defendant failed to solicit similar reliance deposition testimony for three other products, so the related claims remained. The court also denied summary judgment on the plaintiff's claims with respect to the "Only Xg Net Carbs" label, although the plaintiff said he did not think "only" "really does anything."

Ambiguity Regarding Definition of Word on a Label Prevents Dismissal

In Cohen v. East West Tea Co., LLC, No. 17-CV-2339, 2018 WL 3656112 (S.D. Cal. Aug. 2, 2018), the plaintiff alleged that the defendant advertises and sells tea products containing "Organic Kombucha" when, in reality, they do not. The plaintiff argued there is a common understanding that kombucha contains live organisms. The defendant disagreed and argued that any reasonable person would know that there cannot be live organisms in the tea bag when the tea is boiled. Nevertheless, the court denied the defendant's motion to dismiss because it could not conclude as a matter of law that members of the public are not likely to be deceived by the product's packaging. "Without an approved nor agreed upon definition of kombucha" like "all natural," a reasonable consumer could assume kombucha includes live bacteria. The plaintiff alleged that she would not have bought the tea but for the alleged misrepresentation; therefore, the court determined that she alleged sufficient reliance on the label. The court also found that the plaintiff pled all of the elements of breach of express warranty and determined that she has standing for injunctive relief.


Louisiana Gallonage Tax on Dealers a Permissible Occupational License Tax

By Joshua D. Aubuchon

In Beer Industry League of La. v. City of New Orleans, No. 2018-CA-0280, 2018-CA-0285, 2018 WL 3216508 (La. June 27, 2018), the court held that a state gallonage tax levied on dealers who handled beverages with high-alcohol content was an "occupational license tax" authorized by the state constitution and, thus, a municipal ordinance authorizing a similar tax was also constitutional. The Beer Industry League of Louisiana (the Louisiana beer distributor's association) and the Louisiana Restaurant Association claimed that the City of New Orleans "exceeded its authority ... by imposing licensing fees and taxes upon the alcohol beverage industry in excess of the amounts allowed by law," and that the tax was "a direct tax on property in the control of whomever has possession of it and not an occupational license tax upon the activities of the dealer in handling the property." Although the tax was based upon gallonage, the court had previously reasoned that "the term occupational license tax consistently has been used to refer to any tax on the activity or privilege of conducting a business or practicing a profession." Because the tax imposed was on the entity selling the high-alcohol beverages for the privilege of selling those beverages and not upon the ownership of the product itself, the Louisiana Supreme Court held that the tax would indeed constitute an occupational license tax and was, therefore, a valid exercise of its authority to levy and collect taxes.

Regulation and Legislation

"80/20" Rule Under Scrutiny

DOL's so-called "80/20 rule" declares that tipped employees who spend more than 20 percent of their working hours on non-tipped duties cannot be paid the sub-minimum wage for those duties. Some states such as New York have implemented a similar or stricter regulation. Pending a ruling in Marsh v. J. Alexander's LLC, 882 F. 3d 777 (9th Cir. 2018) (en banc), which is reviewing a panel's ruling that the 80/20 rule is not entitled to deference because it has not gone through rulemaking, another lawsuit has been filed against DOL in the U.S. District Court for Western Texas, No. 1:18-cv-00567 that aims to stop DOL from enforcing the 80/20 rule. Meanwhile, two more district courts have denied defendants' requests for interlocutory appeal of plaintiffs' allegations that they required putative class members to spend more than 20 percent of their time performing non-tip-producing "side work" activities, meaning that the plaintiffs will still need to defend these claims. Alverson v. BL Rest. Operations, LLC, No. 5-16-cv-00849, 2018 WL 1618341 (W.D. Tex. April 3, 2018); Nelson v. Firebirds of Overland Park, LLC, No. 17-2237, 2018 WL 3818915 (D. Kan. Aug. 10, 2018).

Labeling of Food Sold in Glass-Front Vending Machines to Be Revised

The U.S. Food and Drug Administration (FDA) proposes to revise the type size labeling requirements for front of package calorie declarations for packaged food sold from glass-front vending machines. Comments on the proposed rule are due by Sept. 25, 2018.

Drive-By Lawsuits Lead to ADA Reform Proposals

H.R. 620 proposes to reform the Americans with Disabilities Act (ADA) to minimize so-called drive-by lawsuits by requiring a person asserting an ADA claim to give notice to the business specific enough to identify the barrier and allege that the owners or operators failed to remove or make substantial progress remediating the barrier. It passed the U.S. House of Representatives in February and is pending in the U.S. Senate. Similar bills are pending in some state legislatures such as in Texas (SB 827/HB 1463).

The Last (Plastic) Straw?

Efforts to minimize or prevent use of plastic straws and utensils are gaining momentum. For example, a measure that passed the California Assembly would prohibit restaurants from providing single-use plastic straws unless requested by a customer. In New York City, Mayor Bill de Blasio's administration strongly supports a bill that would ban plastic straws in the city. Many cities already ban plastic straws and/or utensils, such as Seattle, Wash.; Malibu, Calif.; Oakland, Calif.; Santa Barbara, Calif.; Fort Myers Beach, Fla.; and Delray Beach, Fla.

Dietary Fiber Expansion Proposed

The FDA recently issued guidance identifying additional isolated or synthetic non-digestible carbohydrates that it intends to propose, adding to the list of those that meet the regulatory definition of "dietary fiber" contained in 21 CFR §101.9(c)(6)(i).

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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