Franchisor Liability For Overtime Law Violations

By harley erbe

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In a recent post about Des Moines employment law, I discussed an NLRB legal opinion that indicated that the McDonald’s parent corporation may be liable for labor law claims against its franchise restaurants. I left for another time a discussion of how McDonald’s or other franchise parent corporations might be responsible for other employment law matters involving their franchise owners, such as overtime law, wage law, or wrongful termination cases. Two recent federal overtime law decisions have shed some light on how courts will view the franchisor liability question in the overtime context. 

The cases were Orozco v. Plackis, an appellate decision by the United States Court of Appeals for the Fifth Circuit, and Olvera v. Bareburger Group, L.L.C., a federal trial court decision from New York. In both cases the courts based their decisions on the “economic reality” test that I reviewed in an earlier post about joint employer liability under federal overtime law. Of course, as often happens, two courts applying the same law to separate factual situations reached different conclusions.

Orozco involved a pizza restaurant franchisor. The Fifth Circuit ruled that the parent franchisor company was not an employer of a cook at a franchisee’s restaurant who sued under the Fair Labor Standards Act for overtime and minimum wage violations. Using the economic reality test, the Fifth Circuit concluded that the franchisor had no authority to hire and fire the cook, set the cook’s schedule, or establish the cook’s pay rate. The Fifth Circuit also found no evidence that the franchise parent advised the franchisee on employment matters or maintained employment records for the franchisee. So the parent company wasn’t liable for any of the franchisee’s employment law issues.

On the other hand, the federal district court in Olvera ruled that a franchisor could be considered liable for wage violations at a franchisee’s restaurant location. The Olvera plaintiffs demonstrated that the restaurant and franchisor affiliates had sufficient control to establish the franchisor’s liability. The district court considered the fact that the franchisor assisted the franchisees with employee training, dictated certain payroll procedures and timekeeping methods, and tracked employees’ performance at the franchisee restaurants. The franchisor also exhibited significant control over the franchisee restaurants in other ways: establishing requirements for franchise operations, mandatory procedures for preparation of customer orders, setting wages, maintaining employee records, and assuming hiring and firing authority. 

As I noted, these are specific decisions predicated on facts that are unique to each case. Although they’re useful for the discussions about the law applicable to potential franchisor liability under federal overtime law, they’re not very useful on a factual basis because each case will always have its own set of underlying facts. As the Fifth Circuit observed in Orozco, it did not “suggest that franchisors can never qualify as the FLSA employer for a franchisee’s employees; rather, we hold that Orozco failed to produce legally sufficient evidence to satisfy the economic reality test and thus failed to prove that Plackis was his employer under the FLSA.”

Overtime cases require legal analysis of federal statutes, U.S. Department of Labor regulations, and court decisions.  Please feel free to contact us if you need the assistance of a Des Moines overtime lawyer.

By Harley Erbe

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