Employment Law Daily Franchisee’s claim that franchise agreement was ‘scheme’ to avoid FLSA liability subject to arbitration
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Tuesday, December 12, 2017

Franchisee’s claim that franchise agreement was ‘scheme’ to avoid FLSA liability subject to arbitration

By Ronald Miller, J.D.

In an action arising out of a janitorial franchise agreement, a federal district court in Georgia ruled that a franchisee must arbitrate claims that the franchise arrangement was a “scheme” to avoid FLSA liability. According to the plaintiffs, the franchisor misclassified its janitors as franchisees and independent contractors, not employees. However, the court found the plaintiffs failed to request mediation of their claims, which was a condition precedent to either party’s ability to file a lawsuit or commence arbitration. Nonetheless, the court concluded that a stay was more appropriate than dismissal, to allow the plaintiffs to make a proper request for mediation. Finally, after rejecting the plaintiffs’ contention that a class waiver provision was unenforceable, the court also concluded that it was appropriate to grant the franchisor’s motion to compel arbitration (Richardson v. Coverall North America, Inc., December 7, 2017, Thrash, T.).

Franchise agreement. Randall Richardson owned Janitorial Tech, a limited liability company that performed commercial cleaning services. The defendant, Coverall, operates a commercial cleaning franchising business. The parties entered a franchise agreement in which Janitorial Tech would become a Coverall franchisee. Under the agreement, Richardson would perform cleaning services for Coverall’s customers, and Coverall would pay Janitorial Tech. The plaintiffs paid Coverall a $15,570 franchise fee, and Coverall promised to provide $3,000 in guaranteed monthly business. The plaintiffs financed the franchise fee with a loan from Coverall, with Richardson as the guarantor. The plaintiffs alleged that Coverall failed to provide the guaranteed business. According to the plaintiffs, throughout the process, Coverall would only formally engage Janitorial Tech.

The plaintiffs brought a collective action alleging that Coverall misclassified its janitors as franchisees and independent contractors, and that Coverall’s franchise arrangement was merely a scheme to avoid FLSA liability by requiring its janitors to create limited liability companies and enter franchise agreements. Additionally, they alleged that Coverall did not provide the amount of business that it promised, and that it provided illegal loans to the plaintiffs. In response, Coverall filed motion to dismiss or alternatively stay the litigation pending arbitration.

Mediation. Coverall argued that the claims should be dismissed because mediation was a condition precedent to the filing of a lawsuit. It pointed to a provision in the franchise agreement which stated that mediation was a condition precedent to either party’s ability to file a lawsuit or commence arbitration. The parties did not dispute that this provision was valid and enforceable under Georgia law. Instead, they disputed whether the plaintiffs had requested mediation. The court found that the plaintiffs did not make a good-faith request for mediation, and so had not satisfied the condition precedent to filing suit. The evidence showed that Richardson communicated with Coverall concerning its failure to provide the guaranteed business it had promised, and about refinancing the debt on the loans he owed to Coverall. The parties attempted to informally resolve these two specific issues. However, his email communications did not touch on FLSA allegations, fraud allegations, or claims that the loans violated state law. As such, his requests for mediation did not address the issues in dispute here. Moreover, the court rejected the plaintiffs’ contention that Coverall waived its right to rely on the alternative dispute resolution mechanism in the franchise agreement by refusing to mediate. Emails between the parties demonstrated that the plaintiffs never raised complaints concerning the issues in dispute. Therefore, Coverall never refused to mediate these issues at all. Further, the court concluded that the issue of waiver should be decided by the arbitrator, not the court.

However, the court concluded that a stay was more appropriate than dismissal. It observed that when confronted with an objection that a plaintiff has initiated litigation without satisfying arbitration or mediation requirements, courts routinely stay rather than dismiss proceedings to allow for implementation of the agreed-upon dispute resolution mechanism. Therefore, the court stayed this litigation until the plaintiffs made a proper request for mediation.

Arbitration. The court also concluded that it was appropriate to grant Coverall’s motion to compel arbitration. According to the franchise agreement, any disputes that remained unresolved after the completion of mediation should be submitted to arbitration. Importantly, the franchise agreement also contained a provision delegating questions of validity or enforceability of the arbitration agreement to the arbitrator. When an arbitration agreement contains a delegation provision and the plaintiff raises a challenge to the contract as a whole, federal courts may not review the claim because it has been committed to the power of the arbitrator. Instead, the plaintiff must challenge the delegation provision specifically. In this instance, none of the plaintiffs’ arguments specifically challenged the delegation provision. Therefore, these disputes should be decided by an arbitrator.

Class action waiver. Next, the plaintiffs challenged the class action waiver in the arbitration clause. They alleged that the language of the waiver provision created a carve-out from the delegation provision for challenges to the class action waiver. The court concluded that their argument misconstrued the contractual language, which merely states that if a court, under some circumstance, were to conclude that the waiver was unenforceable, then those disputes would be heard by a court of competent jurisdiction. There was no carve-out provision for review of the class action waiver.

The court also rejected the plaintiffs’ contention that the class action waiver was unenforceable because it violated the NLRA, the Georgia Industrial Loan Act, and Georgia’s Payday Lending Act. These arguments challenged the enforceability of a portion of the arbitration agreement, which the parties had committed to be determined in arbitration.

Richardson’s claims. Finally, the court examined the contention that Richardson’s claims were not subject to arbitration. Specifically, the plaintiffs argued that Richardson was not a party to the arbitration agreement between Coverall and Janitorial Tech. However, the claims of Richardson and Janitorial Tech were inextricably intertwined so as to favor compelling Richardson to arbitration. Richardson’s claim for relief arose out of the business relationship resulting from the franchise agreement. Moreover, he personally guaranteed Janitorial Tech’s performance of its obligations under the franchise agreement. Accordingly, the court found it appropriate to compel Richardson to arbitrate his claims.

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