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The Fifth Circuit Court of Appeal recently held in Orozco v. Plackis that a franchisor was not liable to a franchisee employee for alleged minimum wage and overtime violations because the franchisor was not an "employer" under the Fair Labor Standards Act ("FLSA"). No. 13-50632, 2014 WL 3037943 (5th Cir. July 3, 2014).
Under the FLSA, an employer is broadly defined as "any person acting directly or indirectly in the interest of an employer in relation to an employee." 29 U.S.C. § 203(d). Relying on the economic reality test, the Fifth Circuit examined the employer‒employee relationship by examining whether the franchisor: (1) possessed the power to hire and fire the employee, (2) supervised and controlled the employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records. After examining the evidence, the Fifth Circuit held that the franchisor was not an employer under the FLSA because the employee lacked legally sufficient evidence to establish any of the elements of the economic reality test.
In Orozco, a restaurant cook filed a lawsuit against the restaurant’s franchisee owners, alleging minimum wage and overtime violations under the FLSA, and after settling with the franchisee owners, the employee added the restaurant’s franchisor owner as a defendant. At trial, the jury rendered a verdict in favor of the employee, finding, in part, that the franchisor was the employee’s employer and the franchisor was part of an enterprise covered by the FLSA. The district court denied the franchisor's motion to set aside the jury’s verdict, and the franchisor appealed.
The Fifth Circuit reversed the district court and rendered judgment in favor of the franchisor. The Fifth Circuit found that the evidence did not allow the jury to find that the franchisor was an employer under the FLSA. In fact, the Fifth Circuit found that none of the elements of the economic reality test weighed in favor of employer status. It is noteworthy that the United States Department of Labor filed an amicus brief in favor of the employee, but the Fifth Circuit ignored the DOL’s brief in the opinion.
FLSA suits continue to proliferate and employees of franchisees sometimes look to franchisors as a "deep pocket" or, in this case, an "extra pocket" to recover money. Franchisors (especially in the Fifth Circuit – Louisiana, Mississippi, and Texas) should consider the Orozco decision as an arrow in the quiver to avoid possible liability against FLSA lawsuits filed by franchisee employees. Nevertheless, franchisors also should know that Orozco does not provide absolute immunity against FLSA lawsuits, as the Fifth Circuit clarified that the Orozco decision does not mean "franchisors can never qualify as the FLSA employer for a franchisee’s employees." Franchisors should know and appreciate that the FLSA broadly defines who and what constitutes an employer (more broadly than the common law definition of employer), and the analysis of determining an employer’s status is fact specific.
Note: I am not the author of this article, which was written by Erin L. Malone, a labor and employment attorney in Phelps Dunbar's Tampa, Florida office. I am posting it because it highlights the liability dangers to franchisees/franchisors under the FLSA.