Franchised Employees Might Be Employees of Franchisor

In a troubling development for franchisors, a Missouri federal district court has conditionally certified a class of plaintiffs in a collective action brought against Hotshots Sports Bar & Grill under the federal Fair Labor Standards Act (“FLSA”) and Missouri's wage and hour laws. The ruling in White v. 14051 Manchester, Inc., 2012 U.S. Dist. LEXIS 170052 (E.D. Mo. Nov. 30, 2012) is concerning because it holds, at least preliminarily, that employees of independently owned franchises may be considered employees of the franchisor under the FLSA, based on a common form of control exercised in most franchisor-franchisee relationships.

The named plaintiffs in the White case are current and former servers and bartenders of Hotshots locations who claim that they were unlawfully required to participate in a tip-sharing pool with “back of the house” employees. Under the FLSA and many state wage and hour laws, tips are the property of the employee, and an employer may not require tip sharing. Employees may voluntarily elect to share or pool tips, but wage and hour laws typically forbid mandatory tip sharing.

The named plaintiffs in White sought to conditionally certify a putative class of plaintiffs consisting of all employees who participated in a tip pool or who worked as a tipped employee at any Hotshots location, including franchised locations. Unlike a typical class action brought under Federal Rule of Civil Procedure 23, the FLSA permits “collective” actions in which putative class members must affirmatively opt in to the case rather than being automatically included in the case unless they opt out. FLSA plaintiffs may seek early conditional class certification for purposes of providing notice to potential class members of their right to opt in to the case. A defendant may then move at a later date to decertify the class on the grounds that a class action should not be permitted.

In White, the Missouri federal district court held that the plaintiffs met the standards for conditional class certification because they alleged a common tip-pooling policy or practice and were, therefore, “similarly situated” under the FLSA. The court rejected the franchisor's argument that certain putative class members were employed by independent franchisees, not the franchisor, and were therefore not similarly situated. The court held that the FLSA broadly defines an “employer” to include any person “acting directly or indirectly in the interest of an employer in relation to an employee.” In addition, the court noted that the plaintiffs alleged that the franchisor exercised control by sending its employees to help open the franchised locations. The court held that, given these allegations and the FLSA's broad definition of “employer,” the franchisor had sufficient control over the plaintiffs to be their employer, at least for purposes of conditional class certification.

Franchisor 'Control'

The White court's ruling is concerning, because the type of “control” discussed by the court is present in most franchisor-franchisee relationships and does not involve any day-to-day control by the franchisor over the franchisee's operations or employees. If the preliminary ruling in White stands, controls that a franchisor typically includes in its franchise agreement and operations manuals could be found to create employment law liability for the franchisor under the FLSA even if the franchisor exercises no control over the franchisee's employees. Similarly, guidance or training provided by the franchisor to help a franchisee open a location and to understand and meet system standards could lead to FLSA liability. These types of controls are critical for franchisors, because they help ensure that franchisees maintain system standards necessary to protect the franchisor's brand, trademarks and customer goodwill.

It is hoped that the White court will reverse its ruling when the Hotshots franchisor seeks, as it presumably will, to decertify the FLSA class. The legal burden for FLSA plaintiffs to obtain conditional class certification is less onerous than at the class decertification phase. This lower legal burden may have affected the White court's conditional certification ruling, and a different result might occur when the White court conducts a more stringent analysis of the franchisor's arguments and any evidence regarding control exercised by the franchisor. Since issuing its conditional class certification ruling, the White court has already shown some receptiveness to the Hotshots franchisor's arguments, issuing a ruling on Dec. 18, 2012, that the franchisor did not have to produce employment records for individuals that it claimed were employed independently by franchisees. This ruling might be a sign that the court is open to further analysis of the franchisor's “employer” arguments at a later phase of the case.

In the meantime, franchisors should continue to take preventive steps to minimize their risk of being held liable for claims by a franchisee's employees. While not an exhaustive list, franchisors should consider the following:

• Limit controls over a franchisee to only those controls necessary to maintain franchise system standards and to protect the franchisor's brand, trademarks, and proprietary data and consumer confidence, satisfaction, and safety;
• Maintain carefully drafted franchise agreements and operations manuals that avoid any language providing for unnecessary controls over a franchisee's day-to-day operations or employment practices;
• Include language in franchise agreements and operations manuals that affirmatively states that franchisees are solely responsible for their day-to-day operations and employment practices, including hiring, managing, compensating, disciplining and firing employees;
• Require franchisees to conspicuously disclose to the public and to employees that the franchisee is an independently owned and managed operation;
• Include appropriate defense and indemnity provisions in franchise agreements so that if a franchisor is held to be liable as an employer of a franchisee's employees, the franchisor has a contractual claim against the franchisee;
• Require appropriate insurance coverage by franchisees for claims; and
• Regularly train the franchisor's employees that franchisees are solely responsible for their day-to-day operations and employment practices and that, as much as practicable, the franchisor's employees should not, during franchise location openings or at other times, control or participate in a franchisee's day-to-day operations, practices or decisions.

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Megan L. Anderson is a principal in the Minneapolis office of Gray Plant Mooty, and Maisa Jean Frank is an attorney in GPM's Washington, DC, office. Anderson can be contacted at 612-632-3004 or [email protected], and Frank can be contacted at 202-295-2209 or [email protected].

In a troubling development for franchisors, a Missouri federal district court has conditionally certified a class of plaintiffs in a collective action brought against Hotshots Sports Bar & Grill under the federal Fair Labor Standards Act (“FLSA”) and Missouri's wage and hour laws. The ruling in White v. 14051 Manchester, Inc., 2012 U.S. Dist. LEXIS 170052 (E.D. Mo. Nov. 30, 2012) is concerning because it holds, at least preliminarily, that employees of independently owned franchises may be considered employees of the franchisor under the FLSA, based on a common form of control exercised in most franchisor-franchisee relationships.

The named plaintiffs in the White case are current and former servers and bartenders of Hotshots locations who claim that they were unlawfully required to participate in a tip-sharing pool with “back of the house” employees. Under the FLSA and many state wage and hour laws, tips are the property of the employee, and an employer may not require tip sharing. Employees may voluntarily elect to share or pool tips, but wage and hour laws typically forbid mandatory tip sharing.

The named plaintiffs in White sought to conditionally certify a putative class of plaintiffs consisting of all employees who participated in a tip pool or who worked as a tipped employee at any Hotshots location, including franchised locations. Unlike a typical class action brought under Federal Rule of Civil Procedure 23, the FLSA permits “collective” actions in which putative class members must affirmatively opt in to the case rather than being automatically included in the case unless they opt out. FLSA plaintiffs may seek early conditional class certification for purposes of providing notice to potential class members of their right to opt in to the case. A defendant may then move at a later date to decertify the class on the grounds that a class action should not be permitted.

In White, the Missouri federal district court held that the plaintiffs met the standards for conditional class certification because they alleged a common tip-pooling policy or practice and were, therefore, “similarly situated” under the FLSA. The court rejected the franchisor's argument that certain putative class members were employed by independent franchisees, not the franchisor, and were therefore not similarly situated. The court held that the FLSA broadly defines an “employer” to include any person “acting directly or indirectly in the interest of an employer in relation to an employee.” In addition, the court noted that the plaintiffs alleged that the franchisor exercised control by sending its employees to help open the franchised locations. The court held that, given these allegations and the FLSA's broad definition of “employer,” the franchisor had sufficient control over the plaintiffs to be their employer, at least for purposes of conditional class certification.

Franchisor 'Control'

The White court's ruling is concerning, because the type of “control” discussed by the court is present in most franchisor-franchisee relationships and does not involve any day-to-day control by the franchisor over the franchisee's operations or employees. If the preliminary ruling in White stands, controls that a franchisor typically includes in its franchise agreement and operations manuals could be found to create employment law liability for the franchisor under the FLSA even if the franchisor exercises no control over the franchisee's employees. Similarly, guidance or training provided by the franchisor to help a franchisee open a location and to understand and meet system standards could lead to FLSA liability. These types of controls are critical for franchisors, because they help ensure that franchisees maintain system standards necessary to protect the franchisor's brand, trademarks and customer goodwill.

It is hoped that the White court will reverse its ruling when the Hotshots franchisor seeks, as it presumably will, to decertify the FLSA class. The legal burden for FLSA plaintiffs to obtain conditional class certification is less onerous than at the class decertification phase. This lower legal burden may have affected the White court's conditional certification ruling, and a different result might occur when the White court conducts a more stringent analysis of the franchisor's arguments and any evidence regarding control exercised by the franchisor. Since issuing its conditional class certification ruling, the White court has already shown some receptiveness to the Hotshots franchisor's arguments, issuing a ruling on Dec. 18, 2012, that the franchisor did not have to produce employment records for individuals that it claimed were employed independently by franchisees. This ruling might be a sign that the court is open to further analysis of the franchisor's “employer” arguments at a later phase of the case.

In the meantime, franchisors should continue to take preventive steps to minimize their risk of being held liable for claims by a franchisee's employees. While not an exhaustive list, franchisors should consider the following:

• Limit controls over a franchisee to only those controls necessary to maintain franchise system standards and to protect the franchisor's brand, trademarks, and proprietary data and consumer confidence, satisfaction, and safety;
• Maintain carefully drafted franchise agreements and operations manuals that avoid any language providing for unnecessary controls over a franchisee's day-to-day operations or employment practices;
• Include language in franchise agreements and operations manuals that affirmatively states that franchisees are solely responsible for their day-to-day operations and employment practices, including hiring, managing, compensating, disciplining and firing employees;
• Require franchisees to conspicuously disclose to the public and to employees that the franchisee is an independently owned and managed operation;
• Include appropriate defense and indemnity provisions in franchise agreements so that if a franchisor is held to be liable as an employer of a franchisee's employees, the franchisor has a contractual claim against the franchisee;
• Require appropriate insurance coverage by franchisees for claims; and
• Regularly train the franchisor's employees that franchisees are solely responsible for their day-to-day operations and employment practices and that, as much as practicable, the franchisor's employees should not, during franchise location openings or at other times, control or participate in a franchisee's day-to-day operations, practices or decisions.

'

Megan L. Anderson is a principal in the Minneapolis office of Gray Plant Mooty, and Maisa Jean Frank is an attorney in GPM's Washington, DC, office. Anderson can be contacted at 612-632-3004 or [email protected], and Frank can be contacted at 202-295-2209 or [email protected].