Tag Archives: Franchises

12.12.22
by

Horizontal Risk: Criminal Case Moves Forward on No-Poach Agreement Among Competitors

Christian Encarnacion-Strand presents an unusual problem for the Cincinnati Reds. His name is too long to fit horizontally across the back of his uniform. The Reds are taking an upside-down-horseshoe approach to this problem, and if this minor league third baseman makes the big league club this year, his 18-character surname (with hyphen) would win the award (there’s no award) for most characters in a major league surname.

The current honor lies with Simeon Woods Richardson, a pitcher for the Twins, whose unhyphenated surname stretches 16 characters (including the space). The Twins applied more of a 3/4 circle strategy, which I think is less visually appealing than the Reds’ approach.

When it comes to horizontal challenges, placing letters on a uniform falls in the category of very low risk. The twitter community may have strong opinions, but there’s no real implication to either approach.

But when it comes to horizontal relationships among companies competing for talent, it’s much more important to get things right. No poaching agreements can lead to criminal charges — as we can see from a case making its way through the federal district court in Connecticut.

In the pending case, Company A outsourced engineering projects to companies B through F, all of whom compete for engineering talent. Companies B through F also compete with each other for projects from Company A.

Between 2011 and 2019, Companies A through F allegedly agreed to restrict the hiring and recruiting of engineers and other skilled-labor employees between them. All of the companies allegedly agreed to (1) not hire employees of Companies B through F and (2) not proactively contact, interview, and recruit applicants who were employed by another one of the companies. Company A allegedly policed and enforced the agreement.

This arrangement led to a criminal indictment, charging that these no-poaching agreements were a conspiracy in restrain of trade, in violation of the Sherman Act. The indictment alleges that the companies engaged in illegal market allocation, which suppressed competition for talent and wages.

The defendants filed a motion to dismiss the indictment. Because this issue potentially affects staffing and franchise relationships, the American Staffing Association, the Society for Human Resource Management, and others filed amicus briefs in support of the motion to dismiss.

On December 2, 2022, the district court denied the motion to dismiss. The opinion evaluates the arguments on both sides and considers how this arrangement compares to others where no-poach agreements have been held to be permitted. For example, the court considered whether the agreed-upon restraint was “ancillary to a legitimate business collaboration.” If yes, that could support an exception to the legal prohibition on restraints of trade. But the court ruled that the relationship here was competitive, not collaborative, because Companies B through F were competing for outsourcing work from Company A.

From a procedural standpoint, this decision does not make any findings about whether the arrangement actually did violate the law. This ruling is just the denial of a motion to dismiss, which means the case can move forward.

But the opinion should provide a wake up call to the staffing industry, the franchise industry, and other organizations where a small identifiable number of companies are competing for talent and for engagements.

The federal government has made it a priority to minimize restraints of trade and has shown a willingness to issue criminal indictments against companies (and individuals) who enter into unlawful agreements that restrict labor mobility.

That is not to say that all no-poach agreements are unlawful. In many situations they are appropriate. But companies in horizontal competition with each other need to tread very carefully, and any no-poach agreement among horizontal competitors may create significant legal problems, including potential criminal liability.

For baseball uniforms, horizontal challenges can be addressed with the upside-down horseshoe or 3/4 circle strategy (preferably the former!). But these simple solutions are not available in the business world, where companies compete for talent and engagements. As of now, there is no upside-down horseshoe exception to the Sherman Act.

Amicus briefs were file

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

2018_Web100Badge
 
10.12.20
by

Thanks, Electric Grandma! When Laws Collide, ABC Test Falls (This Time, at Least).

In 1982, a trio of children and their father had no grandma but desperately needed one. So, according to IMDB, they got “a very special robot grandmother to assist them.” It was futuristic fun and all the hijinks that accompany that sort of thing but, at its core, this was a simple clash of incompatible laws.

The Laws of Nature said “No Grandma,” but the Laws of Biomedical Engineering as Modified by 1980s Television Science Fiction said “Yes!”

This week’s post is also about what happens when two laws are incompatible, but we’ll steer clear of trying to figure out which part of grandma’s backside in the TV ad has father smiling in that way that makes me uncomfortable.

In Massachusetts, a group of 7-Eleven franchise owners sued 7-Eleven, Inc., claiming they should have been classified as employees of 7-Eleven, Inc. under the Massachusetts Independent Contractor Law. The Mass IC law is the strictest in the nation (take that, California!) and imposes an ABC Test that lacks the exceptions enjoyed by a select few Golden Staters.

Under the Mass IC law, “an individual performing any service” for another is presumed to be an employee. To avoid that conclusion, the alleged employer must prove all three parts of a strict ABC Test:

(A) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and

(B) the service is performed outside the usual course of the business of the employer; and

(C) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

The plaintiffs claimed that they were employees under Part A of the Mass IC Law because 7-Eleven exerted control over how they ran their stores.

But 7-Eleven said the type of control exerted was the type of control required under the Federal Trade Commission’s Franchise Rule and the 154-page Compliance Guide that instructs franchisors on what they need to do.

A federal district court agreed with 7-Eleven. The court ruled that the Mass IC Law and the FTC’s Franchise Rule were incompatible when it came to franchising, and the federal rule carries the day.

Case dismissed.

Other courts have agreed, even in California, that when the type of control exerted is required under another law, that is not the type of control that converts someone to an employee. The “required control” argument can be a powerful defense to a claim of independent contractor misclassification.

There has been a lot of concern in the franchising world that the increased adoption of ABC Tests and other laws designed to convert everyone into an employee may put the entire franchise model at risk. This decision, while certain to be appealed, should be somewhat reassuring to franchisors that the franchise model can survive, even in the face of the strictest of ABC Tests.

Meanwhile, The Electric Grandmother was nominated for a 1982 Primetime Emmy for Outstanding Children’s Program, and Maureen Stapleton went on to do voiceover for the non-electric grandmother in Snow Cat, showing her versatility in playing both electric and non-electric grandmothers.

Snow Cat, according to IMDB, was a “series of children’s videos with awesome original songs about awesome trucks.” In case you needed something to watch tonight.

© 2020 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

 
2018_Web100Badge
 
02.25.19
by

Joint Employment Update: Ohio Law Throws Franchisors a Bone, But It’s Not Entirely Delicious

This is Zippy enjoying a delicious treat.

When I throw my dog a bone, she is so happy. She goes and gets it, eats it, and wonders why she is unable to speak to express her gratitude. She doesn’t wonder, “Why is he throwing me a mere bone instead of an entire squirrel?” The bone is enough for complete contentment.

Ohio lawmakers have thrown franchisors a bone. They’ve limited the circumstances when franchisors can be held jointly liable if individual franchise owners commit certain Ohio employment law violations.

Under the new law, franchisors are not jointly liable for minimum wage, overtime, or pay frequency violations by franchise owners and are not jointly responsible for franchise owners’ responsibilities under unemployment insurance and workers’ compensation law — unless: Continue reading →

11.12.18
by

NYC to Franchisors: We’re Going “Crazy on You”!

Barracuda NYCIn 1976, the band Heart released the album Dreamboat Annie. Soon after its release, the label (Mushroom Records) released a suggestive National Enquirer-style ad suggesting that sister Ann and Nancy Wilson might also be lesbian lovers. Ann’s outrage led her to write the song “Barracuda,” about ambush and false accusations.

A different Heart song title came to mind as I read the latest attempt by the New York City Council to hold franchisors responsible for acts they did not commit. 

A bill co-sponsored by 19 council members would amend the City’s anti-discrimination law to hold franchisors strictly liable for discriminatory acts by their franchisee. We have seen many attempts to expand the definition of “joint employer” to include franchisors, but this proposal goes beyond anything we’ve seen. This bill doesn’t even deal with the concept of “joint employment.” It just says that franchisors are liable for discriminatory acts of their franchisees, without any analysis of their involvement in the discriminatory acts or their level of control over the franchisee. It’s automatic.

That’s crazy. Holding one company strictly liable for the wrongful acts of another raises all sorts of legal concerns and, if passed, the bill will certainly be challenged in court.

Franchisors, the Council wants to go “Crazy on You.”

Now, truth be told, in the Heart song, going “Crazy on You” has a very different meaning than I intend it here. Ann Wilson and Roger Fisher (her bandmate, co-writer, and lover) meant it in an amorous way, but there is certainly no love between NYC and franchisors. The attacks by NYC on the franchisor-franchisee relationship are more like those of the sharp-toothed predator of the sea, the Barracuda.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

10.22.18
by

Is this weird trick the key to defeating independent contractor claims? (Hahahahahaha. No.)

Weird trick to defeat independent contractor claims Jani-King

As everyone with an internet connection now knows, articles promising “one weird trick” to solve some real-world problem are everywhere. These articles are annoying. (It’s called clickbait.) You open up the article, and the “weird trick” is usually something you already knew anyway. Or the weird trick just doesn’t work.

So what’s the “weird trick” here?

Requiring independent contractors to form corporate entities. Then you have a business-to-business contract, not employment. Right?

Ok, it’s not weird at all. Lots of companies use this approach.

But does it work? Not necessarily.

Let’s consider the issue under the Fair Labor Standards Act (FLSA). The FLSA requires employees to be paid a minimum wage and overtime (unless there’s an exemption) and requires employers to keep certain kinds of pay records.

The test for determining whether someone is an employee under the FLSA is Ye Olde Economic Realities Test. 

Dear Reader, hold onto your seat, because we’re about to see this test in action!

Can you defeat independent contractor misclassification claims by requiring workers to form legal entities? Let’s see…

A federal appeals court recently considered a dispute involving Jani-King and its franchise model for providing janitorial services. Under Jani-King’s business model, the individuals who provide cleaning services are not treated by Jani-King as its employees. Rather, Jani-King requires that anyone who wants to provide janitorial services under the Jani-King name must form a legal entity, like an LLC. Then Jani-King enters into a franchise agreement with the LLC, and the LLC/franchisee provides the cleaning services. There is no job offer or employment agreement between Jani-King and the individuals performing the services. It’s all treated like a business-to-business, franchisor-franchisee relationship.

The Department of Labor (DOL) is questioning the legitimacy of this model.  The DOL began an investigation and then filed a lawsuit, claiming that Jani-King’s franchisees are really Jani-King’s employees under the FLSA, and Jani-King therefore had to comply with FLSA record-keeping requirements, as well as its overtime and minimum wage rules.

The reason Jani-King’s “one weird trick” doesn’t necessarily work is because to determine whether someone is an employee under the FLSA, it doesn’t matter what you call the worker. You can call the worker a contractor or a franchisee, but using that tag doesn’t mean the worker is not an employee under the FLSA. That’s a legal determination made using the Economic Realities Test.

In this case, the trial court judge in Oklahoma had dismissed the DOL’s case, ruling that Jani-King’s contracts were with entities, not individuals, so there could not be an employment relationship. The Tenth Circuit Court of Appeals, however, said that’s not true. 

The Court of Appeals ruled that a six-part Economic Realities Test must be used to determine whether the individual franchisees who performed the janitorial work should be considered employees under the FLSA. Under the Economic Realities Test, a court must examine the economic realities of the relationship, not merely rely on the parties’ labels. 

In the Tenth Circuit (which covers Oklahoma, New Mexico, Kansas, Colorado, Utah, and Wyoming), here are the factors to consider under the Economic Realities Test:

1) The degree of control exerted by the alleged employer over the worker; 

2) The worker’s opportunity for profit or loss; 

3) The worker’s investment in the business; 

4) The permanence of the working relationship; 

5) The degree of skill required to perform the work; and 

6) The extent to which the work is an integral part of the alleged employer’s business.

The not-so-weird trick of requiring workers to set up a legal entity does not necessarily work. It can be helpful, but only if the facts show that the entity is not economically reliant on the other party. The facts matter, not the labels.

This case is headed back to the trial court for some fact-finding to determine how these six factors play out.

In the meantime, remember that “one weird trick” to solve some real-world problem is probably not weird at all, and it may or may not work. But it may arouse your curiosity and cause you read the article. Here, Jani-King’s one weird trick aroused the DOL’s curiosity, which is not something a business should want to do.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

 

10.11.18
by

Extra Pepperoni! Domino’s Fends Off Joint Employment Claims

Pizza Food Slice Cheese Mushroom Veggies V

Domino’s Pizza in Russia recently had to cancel a promotion offering free pizza for life to anyone who got a tattoo of the Domino’s logo after too many people tatted up. The Russian franchisee that offered the promotion was overwhelmed by the response. It canceled the scheduled two-month promotion after just four days.

Franchise owners have to adhere to brand standards, but they have flexibility on other things, such as how vigorously to encourage their customers to ink. It can be confusing to the public, however, which decisions are made by franchisors and which decisions are made by franchisees. Not surprisingly, this confusion extends to employment situations, where claims of joint employment are frequently asserted against franchisors, even though individual employment decisions are made by franchisees.

In a delicious decision for franchisors, a New York federal court has ruled that Domino’s Pizza’s corporate entities are not joint employers of the employees who work at individually owned Domino’s franchises – at least under federal and New York State wage and hour law. (Click here for Five Things You Should Know About Joint Employment.)

Joint employment claims are a constant threat in the franchise space. Major restaurant and fast food franchisors are frequently alleged to be joint employers when plaintiffs bring employment lawsuits against individual franchisees. The franchisors (like Domino’s) are viewed as the deep pockets and, by targeting the franchisor’s corporate office, plaintiffs can try to build class actions that include groups of employees across multiple franchises. Or, by tagging a franchisee as a joint employer, plaintiffs can feel more confident that enough dollars will be available to pay any judgment.

The court’s ruling, which granted summary judgment to Domino’s corporate entities, evaluated the plaintiffs’ joint employment claims under the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL) using a two-part Economic Realities Test.

Following guidance from the Second Circuit Court of Appeals, the court looked at two sets of factors: one set to assess formal control exercised by the franchisor, and the second set to assess functional control by the franchisor. (That’s not the test used everywhere.)

As is typical in franchisor-franchisee relationships, the franchisee (store owner) signed a franchise agreement, agreeing that it – not the franchisor – “shall be solely responsible for recruiting, hiring, training, scheduling for work, supervising and paying the persons who work in the Store and those persons shall be [franchisee’s] employees, and not [franchisor’s] agents or employees.”  The agreement required the franchisee to adhere to brand standards to ensure consistency in product, but individual employment decisions were to be made at the store level, not by the franchisor.

Based on this framework, the court analyzed the facts using the formal control factors and the functional control factors.

The formal control factors included whether the franchisor:

  1. had 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.

The functional control factors for determining joint employment, some of which do not even make sense in the context of a franchise relationship, are:

  1. whether the alleged employers’ premises and equipment were used for the plaintiffs’ work;
  2. whether the subcontractors had a business that could or did shift as a unit from one putative joint employer to another;
  3. the extent to which [the] plaintiffs performed a discrete line job that was integral to the alleged employers’ process of production;
  4. whether responsibility under the contracts could pass from one subcontractor to another without material changes;
  5. the degree to which the alleged employers or their agents supervised [the] plaintiffs’ work; and
  6. whether [the] plaintiffs worked exclusively or predominantly for the alleged employers.

After evaluating the facts using these factors, the court ruled that the Domino’s corporate franchisor entities were not joint employers. The franchisor entities were therefore dismissed from the lawsuit, but the court allowed the case to continue against the individual franchise owners.

The decision is refreshing for franchisors, but not too refreshing.  As noted here, other Courts of Appeal – mainly the Fourth Circuit – apply different tests for determining whether a company is a joint employer under the FLSA, even though the FLSA is a federal law that you would think would be interpreted the same way all across the country.

The test for joint employment under the National Labor Relations Act is different too – and is likely to change again.  It is possible for a company to be a joint employer under one law or test but not under other laws or tests. There is no uniformity or consistency.

For now, franchisors should rejoice in this small victory, but the fight to protect franchisors against joint employment claims is far from over — unlike the Russian tattoo promotion, which is entirely kaput.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

09.13.18
by

Loss of Control? New Trademark Bill Would Help Franchisors to Reduce Joint Employment Risks

C52476FF-F79A-4A4C-A1B2-5C359ADBCBB9

The Van Halen song, “Loss of Control,” supposedly is intended to poke fun at the punk rock scene, turning everything up to high volume and high frequency. It is not a song to fall asleep to. If the lyrics took more than ten minutes to write, I’d be as surprised and disappointed as if I found a brown M&M in the Van Halen dressing room.

The lyrics consist of a few basic lines and then repeating the phrase “Loss of Control” over and over and over again at high speed. A copy of David Lee Roth’s handwritten lyrics can be found here.

Franchisors constantly struggle with how much control they can exert over their business model and over franchisees without becoming a joint employer of the franchisee’s employees. On one hand, they need brand consistency to project an image to the public and to ensure that a reliable product or service is being offered, regardless of franchise location. On the other hand, day-to-day decisions like hiring and scheduling should be left to the individual franchise owner.

One area where franchisors absolutely must exert control is over their trademarks. They need to ensure that their marks are used consistently and appropriately and that individual franchise owners don’t use the marks in unapproved ways.

A new bill introduced in Congress aims to help franchisors protect their marks in a way that does not increase the risk of a joint employment finding.

The proposed Trademark Licensing Protection Act has bipartisan support, having been co-introduced by House Small Business Committee Chairman Steve Chabot (R-OH) and Rep. Henry Cuellar (D-TX).

If passed, it would declare that when a mark is licensed to a related company (such as a franchisee), any control exerted over that mark “for the purpose of preserving the goodwill, reputation, uniformity, or expectation of the public of the nature and quality of goods or services associated with the mark” would not be evidence of an employer-employee relationship or of joint employment.

This clarification would be helpful to the franchise industry. Franchisors are under constant attack with claims of joint employment. This bill would help protect them against joint employment claims while helping them to avoid a loss of control.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

07.09.18
by

Free Smells! Jimmy John’s Avoids Franchisor Joint Liability

Joint employment jimmy john’s overtime litigation

The famous bank robber Willie Sutton supposedly once said that he robs banks “because that’s where the money is.” I doubt he said that since it seems rather incriminating. (“I’m sorry, your honor. What I meant is ‘If I did it…” See, Simpson, O.J.). But that’s the legend anyway. You can read more here on whether it’s true.

The strategy for plaintiffs in overtime cases is much the same. Sue the deepest pockets. That’s where the money is. When the deepest pocket is not your employer, allege joint employment.

That’s what happened in the recent overtime lawsuit against some Jimmy John’s franchise owners (the direct employers) and the franchisor (corporate Jimmy John’s). The lawsuit is cleverly titled In Re: Jimmy John’s Overtime Litigation. Like many lawsuits, the case has dragged on for four years. It has not been freaky fast.

Continue reading →

06.01.17
by

Franchises Continue to Fight Joint Employment Claims

IMG_1074.JPGAre franchisors responsible for the wage and hour violations of their individually owned franchisees?

This question continues to vex the courts. (Vex! Great Scrabble word!) Despite the promise of more pro-business policies from the current administration, lawsuits filed by employees against franchisors show no signs of slowing down. Here’s why.

When employees allege wage and hour violations against individually owned franchisees (your local store), such as a failure to properly pay overtime, the employees usually try to convert that lawsuit into a class action.

Continue reading →

04.20.17
by

What’s Up? Black Car Drivers Are Independent Contractors. Here’s Why.

balloons-1786430_1280At the end of Pixar’s Up, Carl and Russell sit on a curb pointing out cars: “Red one!” “Blue one!” Then Dug (the dog) calls out “Gray one!” which I find endlessly funny every time I watch it.

Whatever color the car, they sat there content, eating ice cream.

Black car companies in New York are celebrating too (hopefully with ice cream), after a recent decision preserving their drivers’ status as independent contractors. In Salem v. Corporate Transportation Group, the Second Circuit Court of Appeals ruled that drivers were not entitled to overtime pay, since they were not employees, but rather independent contractor franchisees.

We’ve written often in this blog about the different tests for determining Who Is My Employee? This case was brought under the Fair Labor Standards Act (FLSA) and comparable New York law, so the Court applied an Economic Realities Test. This test measures whether workers are economically dependent on one company to earn a living or are in business for themselves.

Relying on the Economic Realities factors, the Court ruled the drivers were economically independent and were in business for themselves. Here are the keys to victory:

  1. The drivers purchased franchises, choosing from a variety of options (rent, own);
  2. The drivers used their own cars and paid all their own expenses;
  3. The drivers could drive for competitors or for personal clients;
  4. The drivers were entrepreneurs, controlling many significant aspects of their personal driving business;
  5. The drivers were free to accept or reject jobs;
  6. The drivers chose when, where, and how often to work; and
  7. The franchisor company could not freely terminate the drivers’ franchise agreements.

While independent contractor relationships remain under fire, this decision shows that there’s still hope. Companies can win these cases when they carefully construct the facts, relinquish control, and allow contractors to run their own enterprises.

Although these drivers had considerable discretion over how to run their individual businesses, none (unfortunately) had the creativity to ditch the car and transport customers in a helium-balloon powered house.  Now back to the film.

film-158157_1280

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.