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Orozco v. Plackis, 2014 U.S. App. LEXIS 12680 (5th Cir. Tex. July 3, 2014)
On July 3, 2014, the Fifth Circuit ruled that an employee of a Craig O’s Pizza franchised restaurant failed to establish that the franchisor qualified as his “employer” under the economic reality test required by the Fair Labor Standards Act. Among other rulings, the court held that the general provisions of the franchise agreement requiring the franchisee to “follow the policies and procedures promulgated by the franchisor” where, in themselves, insufficient to satisfy the test. Finding insufficient evidence of actual control, the federal appellate court reversed the jury’s verdict and dismissed the employee’s wage and hour claims against the franchisor.
FACTS AND RULINGS
The Plaintiff, Benjamin Orozco worked in a Craig O's Pizza and Pasteria (“Craig O's”) franchise in San Marcos, Texas, owned by a franchisee. After changes were made to Plaintiff’s salary, he quit and filed suit against the franchisee, alleging that he was not paid overtime or minimum wage as required under Fair Labor Standards Act ("FLSA"). Plaintiff settled with the franchisee and added Craig Plackis, the founder of the Craig O's franchise system as a defendant. The claim against the franchisor went to a jury trial and the jury found in favor of Plaintiff. Thereafter, the franchisor filed a motion for judgment as a matter of law, which the trial judge denied. The franchisor appealed the ruling to the Fifth Circuit.
On appeal, the franchisor argued that there was insufficient evidence to support the jury’s findings that Plackis (the franchisor) was the Plaintiff’s employer. Analyzing the issue, the Fifth Circuit stated that under the FLSA, an employer is defined as "any person acting directly or indirectly in the interest of an employer in relation to an employee." 29 U.S.C. ยง 203(d). The court held that the “economic reality test” is applied when determining a party's status as an employer under the FLSA. (2014 U.S. App. LEXIS 12680, *5)
Under the economic reality test, the courts evaluate "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, and (4) maintained employment records. (Citation and internal quotation marks omitted.) However, a party need not establish each element in every case. (Citations omitted.) The dominant theme in the case law is that those who have operating control over employees within companies may be individually liable for FLSA violations committed by the companies. Moreover, the remedial purposes of the FLSA require the courts to define 'employer' more broadly than the term would be interpreted in traditional common law applications." (2014 U.S. App. LEXIS 12680, *5-6. Citations and internal quotation marks omitted.)
Reviewing the evidence in this case, the appellate court determined that Plaintiff failed to present evidence that the franchisor held the power to hire and fire him. There was evidence that the founder Plackis met with the franchisee to discuss profitability, after which the franchisee terminated her dishwasher. However, Plackis testified that he merely gave the franchisee non-binding advice, and the franchisee testified that she made the decision to adjust the schedule. Furthermore, the court held, the evidence that some of the franchisee’s employees had also worked at some of the franchisor’s corporate locations was also insufficient to establish the ability to hire and fire the employees.
Additionally, the appellate court held that the fact that Plackis assisted the franchisee by reviewing employee schedules and providing training to the franchisee and its employees, “does nothing to suggest that the [the franchisor] supervised or controlled the employees.” (Id. at *13) Likewise, according to the court, “emails to [the] franchisees merely reveal a franchisor setting broad policies for the entire franchise and providing assistance to franchisees.” (Id.)
The court also concluded that the trial court erroneously held that because the franchisor was aware of the employee’s salary, the jury could reasonably infer that the franchisor was deciding or establishing his rate of pay. The plaintiff himself had testified that the franchisee set his rate of pay and the method of payment.
Finally, the appellate court also determined that the Franchise Agreement also failed to support the jury’s verdict. The court found that although the Franchise Agreement provides some controls over the franchisee’s method of operations, it “does not indicate that the franchisor had sufficient authority to satisfy the economic reality test.” (Id. at *16.) The court noted that the trial court relied on provisions in the Franchise Agreement stating that the franchisee had to follow "policies and procedures promulgated by the franchisor for 'selection, supervision, or training of personnel.'" Finding little significance in these provisions, the court stated, “[w]e fail to see how this innocuous statement suggests that [the franchisor] hired or fired employees, supervised or controlled employee work schedules or employment conditions, or determined
[the employee’s] rate and method of payment.” (Id. at *17.)
The court concluded by stating that it did not mean to suggest that franchisors can never qualify as an employer of the franchisee’s employees under the FSLA. However, in this case, the court found that the assistance and advice to the franchisee and the provisions of the franchise agreement were insufficient to satisfy the economic reality test.
The appellate court thus reversed the trial court’s denial of a judgment as a matter of law, and entered judgment in favor of the franchisor.
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