4.29.2011

Court Finds Franchisor not Liable as Joint Employer

SERVPRO Industries, Inc. (SERVPRO) grants entrepreneurs a license as independent franchises to use SERVPRO’s trademarks and customer service system in exchange for royalties. This relationship is certainly not unique, but can result in liability for the franchisor under the Fair Labor Standards Act (FLSA) and other employment laws.

In Reese v. Coastal Restoration and Cleaning Services, Inc., 2010 WL 5184841 (S.D. Miss. 2010), SERVPRO granted Coastal Restoration and Cleaning Services, Inc. (Coastal) rights as a franchisee. A Coastal employee (Plaintiff) brought suit under the FLSA against both Coastal and SERVPRO. Plaintiff alleged that Coastal and SERVPRO were joint employers. If a plaintiff can establish that two entities are joint employers, then both may be found liable under the FLSA for double the amount of wages wrongfully withheld or due to the employee and for attorney’s fees. The FLSA permits an employee to recover wages for a minimum of two years. In cases where the employee can establish a willful violation of the law, the employee can recover for a period of three years. The FLSA lends itself to class action lawsuits brought on behalf of numerous employees, which means increasingly high dollar amounts.

Courts typically employ the “economic reality test” to determine whether an entity is an employer for purposes of the FLSA. If an entity is not an employer, then it cannot be held liable under the FLSA. This test requires courts to consider whether the alleged employer: 1) had the power to hire or fire employees; 2) had the authority to supervise and control the employee; 3) had the right to determine the rate and method of payment for the hours worked; and, 4) maintained employment records. SERVPRO submitted an affidavit of its president that stated all franchises are independently owned and operated and franchise operators are independent contractors. In addition, the affidavit stated that SERVPRO does not: direct the daily operations of franchises, supervise or control a franchise’s employees, determine the rate of pay or the work schedules for employees of franchises, or maintain employment records for employees of franchises.

Plaintiff argued that SERVPRO had the power to hire or fire him and relied on an “Employee Certification Training Program Form” that authorized Coastal to perform a background check and to provide the results of the background check to SERVPRO. The court sided with SERVPRO and determined that the contractual provision permitting the background checks was simply “one of the quality control standards SERVPRO requires as a condition to granting a franchise….” As such, Plaintiff could not meet the first element of the “economic reality test.”

Plaintiff argued the franchise license agreement demonstrated that SERVPRO had the authority to supervise and control Coastal employees. The agreement provided:

1.2(a) obtain such vehicles, equipment, supplies, cleaning products, uniforms, computer hardware and software as FRANCHISOR may require for OPERATOR to meet FRANCHISOR'S then-current standards as reflected in the latest equipment and products package for new franchise sales;
The court again sided with SERVPRO and determined the language of the agreement did not demonstrate that SERVPRO has the authority to supervise and control employees, especially because the president’s affidavit specifically stated it did not.

Under the third factor, Plaintiff again relied on the franchise agreement and argued it demonstrated that SERVPRO had the power to control his rate and method of pay. Plaintiff cited the following sections of the franchise agreement:

4.1 OBLIGATION TO KEEP RECORDS. OPERATOR agrees to install, and maintain at all times, a complete and uniform accounting system in accordance with generally accepted accounting principals and meeting the standard operating procedures and specifications prescribed periodically by FRANCHISOR. These procedures and specifications may include, but are not limited to, all sales and cash journal sheets, bank reconciliations, payroll records, ... as required by FRANCHISOR.... OPERATOR agrees to maintain complete and accurate records, accounts, books, data and reports which shall accurately reflect all particulars relating to or arising out of this Agreement ...

4.2 REPORTING REQUIREMENTS. OPERATOR shall deliver the following reports to FRANCHISOR ...

(a) a monthly report of gross volume in a form approved by FRANCHISOR.
The court determined that nothing in these sections empowered SERVPRO to control what Coastal paid Plaintiff or how it paid him. Additionally, the court found no evidence under the fourth factor to suggest that SERVPRO maintained employment records for Plaintiff. Accordingly, the court granted judgment in favor of SERVPRO.
The importance of this case is not in the outcome. It is important for franchisors to be cognizant of the degree of control they exercise over franchisees, especially the employees of a franchisee. It is also important to periodically review your franchise agreements to insure that nothing contained within them may be used by a plaintiff to hold you liable. Franchisors need to protect themselves now more than ever given the rise in FLSA lawsuits across the nation and the fact that courts recognize broad coverage under the FLSA. This means that if it is a close call, the court will rule in favor of the plaintiff. Liability under the joint employer doctrine is not limited to the FLSA; it also applies to a host of federal and state laws, such as claims brought under Title VII for discrimination and sexual harassment claims. While a certain level of control over a franchise is necessary, exercising too much control can prove costly.





Contact: Jon Secrest
614.723.2029
jsecrest@ralaw.com

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