Employment Law Daily Corporate form not conclusive as to employee status of franchise owners
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Friday, October 5, 2018

Corporate form not conclusive as to employee status of franchise owners

By Ronald Miller, J.D.

Finding that a district court improperly ignored the economic realities test, the Tenth Circuit reversed the lower court’s grant of a motion to dismiss a complaint filed by the Secretary of Labor, which asserted that Jani-King violated the FLSA and sought an injunction to require the employer to keep the requisite FLSA employee records. The complaint alleged that individuals who personally perform janitorial cleaning work for Jani-King through the franchise arrangements were employees under the FLSA. The appeals court pointed out that it is well settled that the economic realities of an individual’s working relationship with the employer—not necessarily the label or structure overlaying the relationship—determine whether the individual is an employee under the FLSA. Based on the factual allegations in the complaint, janitorial cleaners who personally perform the work plausibly qualified as FLSA employees (Acosta v. Jani-King of Oklahoma, Inc., October 3, 2018, McKay, M.).

Franchise arrangements. Jani-King is a janitorial company providing cleaning services in the Oklahoma City area. The company engages individuals, pairs of related individuals, or small corporate entities to perform janitorial work on its behalf through franchise arrangements. The employer recently began requiring individuals and pairs of related individuals—both those already affiliated with Jani-King and those who are new—to form corporate entities, which then become the named parties to the franchise arrangements.

Following an investigation into Jani-King’s employment practices, the Secretary of Labor filed a complaint alleging violations of the FLSA and seeking an injunction to require Jani-King to keep the requisite FLSA employee records. Specifically, the Secretary asserted that individuals who form corporate entities and enter franchise arrangements as required by Jani-King “nonetheless personally perform the janitorial work on behalf of Jani-King” and based on the economic realities of this relationship, are Jani-King’s employees under the FLSA.

Motions to dismiss. In response, the employer filed a motion to dismiss on two grounds: (1) the Secretary failed to plausibly suggest that every franchise owner should be treated as an employee under the FLSA, and (2) the Secretary failed to name the franchisees as necessary parties. The district court granted Jani-King’s motion to dismiss the Secretary’s complaint.

The Secretary then filed an amended complaint alleging that the individuals who personally perform the janitorial cleaning work for Jani-King through the franchise arrangements are employees under the FLSA, and asking that Jani-King be required to keep records about those individuals. Jani-King again filed a motion to dismiss, arguing that the Secretary was not free to ignore its corporate organization. The district court again granted Jani-King’s motion, concluding that the amended complaint “ignores corporate forms” and does not plausibly suggest the FLSA applies to all janitorial cleaners.

Economic realities test. Here, the Secretary alleged that Jani-King violated the FLSA because it did not “make, keep, and preserve the required records” for janitorial cleaners who personally performed the janitorial cleaning work as designated by Jani-King “as a result of improperly classifying these individuals as independent contractors when they were, in fact, employees.” The amended complaint acknowledged that many of these janitorial cleaners are individuals or “corporate entities owned by one or sometime two individuals” who have entered franchise agreements with Jani-King, but alleged a series of facts to show that, per the economic realities test, these individual janitorial cleaners are employees under the FLSA. It is well settled that the economic realities of an individual’s working relationship with the employer—not necessarily the label or structure overlaying the relationship—determine whether the individual is an employee under the FLSA. In determining whether an individual is an employee under the FLSA, the inquiry is not limited to the contractual terminology between the parties or the way they choose to describe the working relationship. Thus, where the Secretary had alleged that Jani-King violated the recordkeeping requirements with respect to individuals who personally perform the janitorial cleaning work as designated by the alleged employer, the fact that those individuals were franchises or had formed corporations did not end the inquiry.

Specificity of complaint. The appeals court next rejected Jani-King’s contention that because the amended complaint did not mention a single franchise owner by name and did not include allegations specific to any one individual, it failed to inform Jani-King of the grounds for the Secretary’s claims against the employer. Noting that the Secretary’s amended complaint asserted that Jani-King violated the FLSA by failing to keep records of its “employees,” defined in the pleading as “individuals who personally perform the janitorial cleaning work as designated by the employer, the appeals court concluded that Jani-King had full notice of the alleged wrongdoing.

Although the amended complaint did not specifically name the individuals or entities who allegedly triggered the recordkeeping requirements of the FLSA, the factual allegations were sufficient at the pleading stage to give Jani-King notice of which franchisees might be implicated by this action. As a consequence, janitorial cleaners who personally perform the work, and based on the factual allegations in the complaint, plausibly qualified as FLSA employees due to the economic reality of their relationship with Jani-King.

Lastly, the appeals court agreed with the Secretary that the individual identities of the janitorial cleaners were not necessary at the pleading stage because the complaint was not seeking individualized relief. Accordingly, the appeals court concluded that the Secretary’s amendment complaint contained sufficient factual matter to state a facially plausible claim for relief. The judgment of the district court was reversed and remanded.

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