Owner’s advice to franchisee doesn’t make him FLSA employer

Neither a franchise agreement nor the economic realities test supported a finding that an owner/franchisor, by merely providing advice to a struggling franchisee, acted as the employer of its cook, the Fifth Circuit ruled, overturning a jury verdict and finding the owner/franchisor was entitled to judgment as a matter of law.

Husband and wife franchisees initially hired the cook at a salary of $1200 biweekly in 2005; by 2007, his salary had been reduced to $1050 biweekly; in 2011, it was changed to $10 per hour, at which time the cook quit and sued the franchisees for FLSA minimum wage and overtime violations. Although he settled with the franchisees, the cook then added the owner/founder of the franchise as a defendant. The owner/franchisor moved for judgment as a matter of law, which was denied, and a jury found for the cook. On appeal, the owner/franchisor challenged the first two findings by the jury: whether he was the cook’s employer and whether the cook sufficiently established enterprise coverage.
Before the Fifth Circuit, the owner/franchisor argued that none of the factors in the economic reality test were met and further, that the terms of the franchise agreement showed the franchisee retained control over the cook’s franchise location. The appeals court agreed, concluding the lower court should have granted the owner/franchisor’s motion for judgment as a matter of law because there was legally insufficient evidence for a reasonable jury to find that he was the cook’s employer under the FLSA.

Economic realities test

Even the cook conceded that he failed to provide any evidence suggesting that the owner/franchisor maintained the cook’s employment records, which was the fourth element of the economic reality test. However, this failure was not fatal, so the court looked to the other three elements: whether the alleged employer: (1) possessed the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment.

Authority to hire or fire

Testimony that some employees worked at both the owner/franchisor’s restaurant and the franchisee’s location did not show that the owner possessed the power to hire or fire the cook. Disagreeing with the magistrate judge’s conclusion, the court found the jury could not reasonably infer that the owner/franchisor hired employees for his location and then directed them to work at another. Rather, the mere fact that franchisee hired employees who worked at the owner’s restaurant did not prove that the owner hired or fired employees; it suggested, however, that employees who were already trained were more desirable candidates. Nor did the timing between the owner’s meeting with the franchisee, which preceded personnel changes, suggest that the owner had the power to hire or fire the cook. And the cook’s own testimony was that the franchisee hired him and had the authority to fire him, not the owner.

Supervise or control

Nor was there legally sufficient evidence that the owner supervised and controlled employee work schedules or conditions of employment at the franchisee location. The franchisee made changes to the cook’s hours and salary shortly after meeting with the owner. Moreover, the owner reviewed employee work schedules at the franchisee location, trained the cook (and the franchisee), visited the location frequently, emailed the franchisee with suggestions on how to improve the profitability of the restaurants, implemented changes to the menus, contracted with vendors for supplies for the franchise, and directed various advertising plans. Even coupled with evidence that the cook was directed to remain at work until an employee who worked at the owner’s restaurant arrived, none of the evidence was legally sufficient in the Fifth Circuit’s opinion to show the owner supervised or controlled the cook’s working conditions.

Temporal proximity between the owner’s meeting with the franchisee and changes implemented in the franchisee’s location alone did not establish that a jury could infer the owner possessed the authority to supervise or control employee work schedules or conditions of employment. Not only did the owner and the franchisee testify that the owner merely provided advice, the cook also testified that the franchisee controlled his schedule and the owner never discussed the cook’s responsibilities or position. The appeals court found it reasonable that a franchisor would train new franchisees and their employees and, via email, set out broad policies for the entire franchise and provide assistance to franchisees. None of the evidence demonstrated that the owner supervised or controlled the cook’s schedule or employment conditions.

Rate and method of pay

Awareness of the cook’s salary alone was not enough to justify an inference that the owner determined the cook’s rate and method of payment. Meetings between the owner and the franchisee, without more, did not demonstrate that the owner decided the cook’s rate or method of pay. In fact, the cook testified that the owner did not control his rate of pay; he similarly testified that the franchisee set his rate and method of payment.

Franchise agreement

Finally, the franchise agreement itself did not support the jury’s verdict Although it directed the franchisee to “comply with all lawful and reasonable policies, regulations, and procedures promulgated or prescribed from time to time by Franchisor,” it also stated that the franchisee exercised “ultimate authority and responsibility with respect to the management and operation of Franchisee’s shop.” The cook conceded that the franchise agreement was insufficient, by itself, to establish that the owner was the cook’s employer, but the court also found that it did not lend support to otherwise satisfy the economic reality test. The court thus entered judgment in favor of the owner. (Orozco v Plackis, 5thCir, 164 LC ¶36,248.)

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