Joint Employer Attacks Continue to Threaten Franchise Model

09/13/2017 / Susan Tegt

This summer, the franchising community scored a victory in the continuing joint employer battle when the Department of Labor rolled back its Obama-era guidance creating employer liability for workplace violations if the employer exercised indirect control over the workplace. As we celebrate the victory of the return of the DOL’s “direct control” standard, we should remain only cautiously optimistic in the wake of several recent federal court decisions highlighting the continued joint employer threats to the franchise model.

For example, earlier this year, the Fourth Circuit Court of Appeals developed an entirely new joint employer test in Hall v. DirecTV, LLC, 846 F.3d 757 (4th Cir. 2017), drastically departing from the common-law agency and “economic realities” tests employed by other circuits. Rather than apply one of these tests, both of which largely examine the degree of control exercised by the putative employer, the Fourth Circuit held that the “fundamental question” governing the joint employer question is “whether two or more persons or entities are ‘not completely dissociated’ [emphasis added] with respect to a worker such that the persons or entities share, agree to allocate responsibility for, or otherwise codetermine – formally or informally, directly or indirectly – the essential terms and conditions of the worker’s employment.” The putative employer petitioned this ruling to the U.S. Supreme Court on June 6, 2017. According to an amicus brief filed by the International Franchise Association and others, the Fourth Circuit’s new joint-employer test “go[es] beyond the franchise industry’s worst nightmares.” 

In another concerning decision, Ocampo v. 455 Hospitality, LLC, 2016 WL 4926204 (S.D.N.Y. Sept. 14, 2016), the district court denied a franchisor’s motion to dismiss state and federal employment claims brought by employees of one of its franchisees. The employees of a Doubletree hotel franchise sued the franchisee and the franchisor, alleging violations of the Fair Labor Standards Act and New York labor law. The franchisor moved to dismiss on the grounds that the employees failed to plausibly plead facts that the franchisor was an employer under the applicable statutes.

In reaching its decision, the court considered two multi-factored tests that predominantly focused on the level of control exercised by the franchisor over the employees. The court found that the following allegations were sufficient to state a joint employment claim, the franchisor: 

  • imposed mandatory training programs for hotel employees
  • maintained a right to inspect the hotel at any time
  • imposed mandatory record-keeping requirements on the franchisees
  • established standards and specifications for hotel construction, furnishing, and operation
  • required the franchisee to use a particular business software system to track revenue and operations
  • retained the unlimited right to make changes to the manner in which the hotel was operated
  • performed audits of the hotel to confirm compliance
  • maintained the right to terminate the franchise which would cause the termination of the employees’ employment
  • was aware of, and failed to stop, the franchisee’s unlawful wage practices

The court’s ruling in Ocampo is troubling for franchisors. The court indicated that it was not persuaded by the language in the franchise agreement indicating that the franchisee was an “independent contractor” of the franchisor, noting that “economic realities, not contractual labels, determine employment status.” Also disturbing is the fact that the allegations relied upon by the plaintiff employees, with the exception of the franchisor’s knowledge of unlawful wage practices, could be made against any franchisor. The court’s ruling is limited to a determination that the employees pleaded enough facts to survive a motion to dismiss, but nevertheless it is a troubling precedent that could encourage the proliferation of joint-employer claims. 

Keep in mind that we are also awaiting the determination of the landmark appeal in Browing-Ferris Industries of California, Inc. v. NLRB in the D.C. Circuit Court of Appeals – oral arguments were heard last spring. We will continue to monitor the progress of Browning-Ferris, Ocampo, and DirecTV, and provide important updates as they become available.