Legal Aid's Favorable Settlement For Domino's Workers Continues To Receive Media Coverage; New York Law Journal Publishes Essay On Joint Employer Liability For Franchisors Written By Legal Aid Staff Attorneys

The New York Law Journal has published an essay entitled "Domino's Challenges Joint Employer Liability for Franchisors" by Hollis Pfitsch and Richard Blum, who are Staff Attorneys in The Legal Aid Society's Civil Practice Employment Law Unit. The essay focuses on a recent major federal court settlement in which delivery workers in four Domino's pizza restaurants in Manhattan are receiving payments totaling nearly $1.3 million for unpaid wages. Ms. Pfitsch and Mr. Blum were members of the Legal Aid litigation team in Cano v. DPNY in which Shearman & Sterling LLP served as pro bono counsel. As described in their Law Journal essay, " while the original lawsuit was against a franchise and individual franchise owners and managers, Domino's Pizza Inc., the international corporation, was successfully added to the lawsuit in a motion to amend seeking liability of Domino's as a joint employer. While rare, the case applied well-settled principles of joint employment under wage and hour law to bring in the franchisor."

Following New York Times and MSNBC coverage, the settlement has also received coverage in Law360 and Bloomberg News. In a Law360 article, Ms. Pfitsch indicated that the settlement will give plaintiffs in similar fair labor standards cases more negotiation power. According to Mr. Blum, the case establishes that "[i]f you violate your workers' rights, you will be confronted and will pay for it.”

'Domino's' Challenges Joint Employer Liability for Franchisors
Richard Blum and Hollis Pfitsch
New York Law Journal
February 26, 2014

After more than three years of litigation, delivery workers for four Domino's pizza restaurants in Manhattan are receiving payments for unpaid wages. The payments of nearly $1.3 million began in January and are divided among approximately 60 delivery workers. The case involves a rare situation: while the original lawsuit was against a franchise and individual franchise owners and managers, Domino's Pizza Inc., the international corporation, was successfully added to the lawsuit in a motion to amend seeking liability of Domino's as a joint employer. While rare, the case applied well-settled principles of joint employment under wage and hour law to bring in the franchisor.

Cano v. DPNY, Inc. No. 10-cv-07100-ALC-JCF (S.D.N.Y) alleged a range of labor law violations, including time shaving and off-the-clock work, and was originally filed in the Southern District by The Legal Aid Society and Shearman & Sterling as pro bono counsel. The authors were members of the Legal Aid team.

After the original defendant corporation, DPNY Inc., a franchisee, filed for bankruptcy, much of the litigation played out in bankruptcy court. On Dec. 4, 2013, Southern District Bankruptcy Judge James Peck entered an order confirming a plan of reorganization under Chapter 11 of the Bankruptcy Code for DPNY, Inc., which included a settlement agreement resolving the wage and hour claims of past and current delivery workers at the four stores of the franchise.

The workers will receive $1.282 million from the franchise, as well as a commitment that the franchise will follow requirements of federal and state labor law on an ongoing basis.

In addition, the plan was made possible only as a result of concessions from Domino's to the franchise. Specifically, Domino's will not receive certain payments owed by the franchisee until after the delivery workers are paid in full. Domino's also waived some interest payments from the franchisee and reduced the rate of interest. Peck required that the corporation identify those contributions on the record in order to approve a release of claims.

Domino's required a release because Magistrate Judge James Francis granted plaintiffs' motion in the original wage and hour action to amend their complaint to add Domino's as a defendant.1 The court ruled that, under a Rule 12(b)(6) standard, plaintiffs had pled sufficient facts to state a claim against Domino's as a joint employer under the Fair Labor Standards Act. While such a result would seem perfectly sensible to most non-lawyer observers, the decision set a new precedent for analyzing franchisor liability under the FLSA.

The court's reasoning applied existing joint employment standards to the facts pled, but in the past, simply invoking the franchise structure has served as a bar to joint employer status. The Domino's case raises the question: will courts take this cue to apply established FLSA principles to the facts pled against franchisors, regardless of their status as franchisors?

The best place to begin the analysis of Francis's decision is the language of the statute itself. The FLSA's definition section does not define the key terms "employ" and "employer." Instead, it articulates concepts included within the meanings of those terms. For example, under the FLSA, to "employ" includes to "suffer or permit" an individual to work. "'Employer' includes any person acting directly or indirectly in the interest of an employer in relation to an employee." Finally, the statute offers only a circular definition of "employee." An "employee" is "any individual employed by an employer."

The answer to why the definitions are not more definitive lies in Congress's intention to capture an extremely broad set of relationships and not to delimit coverage. As courts have repeatedly held, the FLSA definition of "employer" is "'the broadest definition [of 'employ'] that has ever been included in any one act.'" It "sweeps in almost any work … done for the employer's benefit or with the employer's acquiescence." The FLSA is a remedial statute designed to address the needs of workers who lack sufficient bargaining power to protect minimal labor standards. The drafters drew from earlier child labor statutes. The intention behind those statutes was to look beyond the formal relationships recognized by the common law to see if a party knew about the work and had the power to stop it. Any party in that position was liable if children were found to be working illegally. The words adopted from the child labor law, "to suffer or permit," "mean[] that [the employer] shall not . . . permit by acquiescence, nor suffer by a failure to hinder."

A key principle that derives from this understanding of employment is that of joint employment. Under federal regulations, multiple individuals and entities can employ an employee at the same time. Therefore, any person or entity that suffers or permits an employee to work or acts directly or indirectly in the interest of an employer is itself an employer. The significance of joint employment, in turn, is that each employer is jointly and severally liable.

In applying this sweeping concept of employer under the FLSA, courts have developed the concept of an "economic realities" test, so designated to distinguish it from any test that looks at the formal relationships. Courts have come to label the key ingredient either as "operational" or "functional" control over the business in question. This test is a tool to assist courts in determining whether a putative employer knew about the work and had the power to stop the work or otherwise fix the violations at issue.

The U.S. Court of Appeals for the Second Circuit has issued a series of decisions developing its understanding of operational or functional control in determining whether a defendant is a joint employer under the FLSA. The court has found individuals to be liable as joint employers, not based on day-to-day control, but rather because of their operational or functional control. Having authority over the people who managed the business is sufficient. In Irizarry v. Catsimatidis, 722 F.3d 99, 110 (2d Cir. 2013), for example, the Second Circuit held that a "person exercises operational control over employees if his or her role within the company, and the decisions it entails, directly affect the nature or conditions of the employees' employment."

In particular, the court has noted that the power to shut down the business is demonstrative of operational control, and therefore, liability. The Second Circuit has also made clear that employer "status does not require continuous monitoring of employees, looking over their shoulders at all times, or any sort of absolute control of one's employees. Control may be restricted, or exercised only occasionally, without removing the employment relationship from the protections of the FLSA, since such limitations on control do not diminish the significance of its existence."

Indeed, as the court held in Zheng v. Liberty Apparel Co., 355 F.3d 61, 70 (2d Cir. 2003), there is no rigid rule for identifying a FLSA employer and "in certain circumstances, an entity can be a joint employer under the FLSA even when it does not hire and fire its joint employees, directly dictate their hours, or pay them."

In another joint employer case, Barfield v. N.Y.C. Health and Hosps. Corp., 537 F.3d 132 (2d Cir. 2008), the court again found liability because the defendant "suffered" the plaintiff's work. The court held the New York City Health and Hospitals Administration liable as a joint employer of a nurse who had worked over 40 hours in many weeks, but through different temporary agencies, rejecting the defendant's argument that it had not reviewed and compared the time records from the different temporary agencies.

The court noted that the defendant possessed the information concerning the plaintiff's work hours. The fact that the defendant had not reviewed the information in its possession did not relieve it of responsibility as an employer. As Judge Benjamin Cardozo stated in a New York Court of Appeals case, "Whatever reasonable supervision by oneself and one's agents would discover and prevent, that, if continued, will be taken as suffered."

These cases provided the basis for potential franchisor liability in the Domino's case. First, it is clear that the particular formal relationship does not preclude a review of the economic realities of that relationship. Thus, there is no per se rule exempting franchisors from liability as joint employers with their franchisees. It depends on the facts of the relationship, not the label.

Similarly, franchise agreement language declaring a franchisee's employees not to be employees of the franchisors cannot be determinative or it would completely undermine the FLSA. It is a bedrock principle of the FLSA that no entity can contract out of its obligations. The entire purpose of the FLSA is to establish rules that employers and employees cannot bargain out of, precisely from a recognition that some employees do not have sufficient bargaining power to sustain a floor of labor standards.

Beyond that, these decisions remind us that the traditional employment test might begin but does not end the inquiry. Even if an entity does not hire, fire or process payroll, it can still be a joint employer under the FLSA. If the clothing manufacturer at the top of a chain of contractors may hold enough control to be deemed a joint employer as in Zheng, a franchisor can also be held liable if it retains comparable control. Whether or not it does is a factual inquiry.

In the Dominos's case, the plaintiffs alleged facts concerning corporate Domino's' control over key functions of their jobs, including over hiring, management policies, training, staff equipment uniforms, supplies, delivery areas and methods and procedures for delivery. For instance, the suit alleged that Domino's developed systems for screening, interviewing and assessing employment applicants that were used in its franchise stores in an effort to reduce employee turnover. It also alleged that Domino's imposed specific requirements for delivery employees' work, such as setting delivery areas, monitoring delivery times and specifying the methods and procedures used in preparing and delivering customer orders.

Perhaps most importantly, the plaintiffs alleged that Domino's controlled the record-keeping systems used by the franchise, specifically, records of workers' delivery times and of wages and hours and payroll. Domino's had the right or power to know of employees' unpaid work through the information collected by the trademarked computerized record-keeping system that it required franchisees to use. These records provided information far beyond that required to ensure "quality control" over the food products being served.

As in Barfield, the records to which Domino's had unfettered access, including employee wages and hours, gave them information necessary to determine not only that plaintiffs had worked certain hours but also that they had not been paid for all of that time.

Finally, the plaintiffs alleged that Domino's had the power to terminate the franchise if it determined that the franchise had violated any laws or company policies, or engaged in practices that adversely affected the good will of the Domino's trademark.

The plaintiffs argued that these facts showed that Domino's had more than sufficient functional or operational control over the franchise to be considered suffering or permitting the employees' work or to acting indirectly in the interest of the franchise employer, and thus to be liable as a FLSA joint employer.

The plaintiffs did not argue that Domino's hired or fired or even paid franchise workers, since direct or day-to-day control is not necessary. Rather, the plaintiffs pointed to Domino's alleged involvement in the establishment of employment policies and practices, its monitoring of the workers' delivery times, its unfettered access to wage and hour records, and its ability to stop the work by closing or threatening to close the franchise.

As noted above, Second Circuit precedent precludes a "see no evil" defense that the putative joint employer simply did not avail itself of information that it had in its possession. In other words, that Domino's might not have compared its delivery time records to the clock in/clock out times in its possession, which would have demonstrated that the plaintiffs were not paid for all the hours they worked, does not protect it from a finding that it had the capacity to review this information and act on it.

Domino's argued that these points proved too much, specifically that on the plaintiffs' theory, all franchisors would be liable for the conduct of their franchisees. However, the plaintiffs' point was, on the contrary, that the franchise relationship does not determine joint employer status.

A study for the U.S. Department of Labor's Wage and Hour Division noted that in the fast-food industry, FLSA violations are much more common among franchise-owned businesses than businesses directly owned by national or international chains. If the franchisor, in fact, retains sufficient operational control, it should be held liable as a joint employer under the FLSA, regardless of formal arrangements or disclaimers. This approach honors both the letter and the purpose of the statute.

Domino's Deal Heralds FLSA Woes For Fast-Food Chains
By Natalie Rodriguez
Law360, New York
February 04, 2014

An unusually large $1.3 million settlement scored recently by delivery workers from a Domino's Pizza Inc. franchisee over alleged Fair Labor Standards Act violations included some surprising provisions that go beyond the average deal and unexpectedly implicated the franchisor — a combination that should have other brand name restaurant chains worried, attorneys say.

While Domino's became entangled in helping to cover the hefty settlement for delivery workers affiliated with New York City franchisee DPNY Inc. through a unique set of circumstances — primarily DPNY's bankruptcy — its presence in the matter and several significant promises that were exacted from the franchisee should have fast-food chains on the watch for increasingly fierce FLSA fights.

“If I'm a franchisor, I'm going to be nervous now — across the country — about what my franchisee is doing,” said Carolyn Richmond, co-chair of Fox Rothschild LLP’s hospitality practice.

The payout settled various claims, including allegations that DPNY failed to properly pay workers minimum wage and overtime, violated tip credit rules, and later retaliated against the workers who complained, according to court documents. By and large, the cash payment alone is pretty significant in an FLSA action of this magnitude, according to some attorneys.

“I have not seen something of this magnitude in one city. It is surprising to me,” said Susan Eisenberg, a partner with Akerman LLP's labor and employment practice group.

And the deal further promises that delivery workers will from now on be paid minimum wage instead of a tipped wage and that certain expenses, such as bike repairs and some outerwear purchases, will be covered by the company. This is unusual in that it raises the settlement to a standard above the basic promises of the law, said Legal Aid attorney Hollis Pfitsch, who represented the workers. And attorneys, including the victors, expect the deal to give plaintiffs in similar FLSA suits a bit more negotiation power.

“I first hope that everyone complies with the law. But obviously, if there are other employers that continue to do this nonsense, they will have to pay significantly. ... We hope that's a message out there,” said Richard Blum of Legal Aid.

The settlement could also help bolster other FLSA plaintiffs' efforts to drag the mother-ship brand company into such fights, attorneys say. “This is somewhat nerve-racking when you have a rash of similar lawsuits over the last 10 years,” Richmond said.

Because Domino's was linked as having a significant role in the training programs and payroll management of DPNY, which was the first Manhattan franchisee for the company, the brand company agreed to several concessions, according to Blum. While Domino's didn't directly hand over funds for the settlement, it agreed to delay or waive certain payments that DPNY owes it and lowered the interest rates on some payments in order to help free up cash for DPNY.

“There's a lot of very good law in joint law employment, and it is developing, as I would put it, back toward the statute. ... I think this is an example,” Blum said, noting that some courts are beginning to trend toward relying on a broad economic realities test rather than a formal relationship test.

Others, however, point out that the circumstances of a bankrupt franchisee and the franchisor's unusual involvement with the company throw some unique wrinkles into the case.

“Such an involvement in the franchisee is not something you typically see,” Fox Rothschild LLP attorney Glenn S. Grindlinger said.

The case also had significant backing from Legal Aid and Shearman Sterling LLP attorneys who fought on behalf of the workers pro bono, which doesn't happen for every lawsuit.

However, that kind of legal support is popping up more often than in the past and is another reason employers should be wary of getting hit with one of these suits, according to Richmond. “You get a lot of great legal minds being thrown at these cases,” she said.

FLSA suits have become increasingly popular over the last decade, and some of the most recent iterations of these cases have involved tipped workers and delivery workers, which significantly increases the hospitality industry focus, according to attorneys.

“I've been noticing an increasing in filings, certainly on delivery worker cases,” Richmond said.

Although New York has become a hotbed of activity for such FLSA claims, it is not alone. Eisenberg has also seen a significant increase in Florida, and cases are popping up across the country.

Last week, American Pizza Partners, which operates 130 Pizza Hut franchises, was hit with a proposed class action in Colorado federal court alleging the company uses a flawed method to determine reimbursement rates for drivers using their own cars. And in November, a class of 300 delivery drivers sued Jimmy John's Gourmet Sandwich franchise operator Bushwood Investments LLC in Kansas federal court, alleging the company failed to compensate them for work expenses

“What I'm seeing more and more are sophisticated types of FLSA suits,” said Duane Morris LLP attorney Kevin Vance, who is based in Florida. He noted that the stream of litigation started out with several single-plaintiff lawsuits over missed overtime wages, but it has become more focused on class actions over issues like misclassification of independent contractor status, improper tip pooling and the improper use of tip credits.

And with the DPNY settlement adding to the string of successes for workers, some attorneys say restaurant chain clients should be on guard to not run afoul of the FLSA.

“It can be very costly to your workers. If you violate your workers' rights, you will be confronted and will pay for it,” Blum said.