Labor & Employment Law Daily Jimmy John’s is not a joint employer of franchisee employees
Monday, July 2, 2018

Jimmy John’s is not a joint employer of franchisee employees

By Nicole D. Prysby, J.D.

National sandwich franchisor Jimmy John’s asserted control over independent franchisees only with respect to brand standards, as they related to the company’s interest in providing a consistent customer experience across stores; it played no role with respect to its franchisees’ employees. As such, the franchisor was not a joint employer of the franchisees’ employees, held a federal district court in Illinois. Although Jimmy John’s provides extensive operational guidelines for its franchisees, it took no active role in hiring or firing, establishing disciplinary procedures, work schedules, or compensation. Even considering factors beyond the economic realities test, the court found that Jimmy John’s was not a joint employer because in many cases, the franchisor’s guidelines were not mandatory or enforced. Although Jimmy John’s business coaches audited the franchises and provided input, they did not have the authority to mandate that franchise owners follow their input (In re Jimmy John’s Overtime Litigation, June 14, 2018 [unsealed June 21, 2018], Kocoras, C.).

Background. Former employees of Jimmy John’s franchisees brought a FLSA action against both the franchisees and Jimmy John’s, alleging they were improperly classified as exempt under the FLSA and thus denied overtime pay. They claimed that Jimmy John’s was a joint employer, citing the extensive guidelines that it imposed in its franchise agreements (via an operations manual) and the company’s use of business coaches who inspect and audit each franchisee. Jimmy John’s moved for summary judgment on the question of whether it was a joint employer. It also moved to exclude an expert report by a witness for the plaintiffs.

Economic realities test. The court first considered which test was appropriate to analyze whether Jimmy John’s is a joint employer, and began with the economic realities test. The court found that Jimmy John’s does not have the power to hire and fire franchisee employees. Although it provides guidelines on the process for franchisees, even extensive guidelines do not equate to the power to hire and fire. And Jimmy John’s use of no-hire clauses did not demonstrate that it had hiring power, but merely protected franchisees from unfair competition, the court reasoned.

Jimmy John’s also did not have the power to discipline employees. The company’s operations manual set forth specific rules for discipline and termination, but Jimmy John’s played no role in the actual disciplinary process. Nor was there a showing that franchisees actually followed the guidelines and terminated employees for reasons stated in the rules. Jimmy John’s business coaches, who worked with franchisee employees, did not discipline employees but only noted when employees failed to comply with an operational standard. Nor did Jimmy John’s exert control over work schedules or conditions of payment via its staffing requirements. The requirements were merely guidelines and the franchisee managers themselves were in charge of creating and managing employee schedules. Jimmy John’s business coaches did direct franchisees to revise schedules or staffing levels, but their role was limited to monitoring, not control.

Jimmy John’s did not determine rates or methods of payment. It may have influenced franchisees to adopt a corporate bonus program, but did not compel them to adopt it. And although it answered questions from franchisees about how to pay employees, providing guidance is not taking an active role in determining compensation, the court said. Finally, as to maintaining employment records, Jimmy John’s played no role in that activity and had only the right to inspect the franchisees’ records.

Other factors. The employees argued that factors beyond the economic realities should be used to determine whether Jimmy John’s is a joint employer. The court considered the factors suggested by the employees, and rejected all of them. The franchisor’s operational guidelines on such HR matters as employee training and appearance policies did not dictate a finding that it is a joint employer. Nor did its checklists regarding store appearance, organization, equipment, and stocking. Although the guidelines were extensive, they were aimed at ensuring that each franchise provided the same customer experience. And Jimmy John’s use of business coaches was intended to enforce brand standards and related mainly to quality control or brand uniformity. Although the business coaches had influence over employees’ bonus eligibility and amount, the ultimate decision on bonuses remained with the franchise owners.

The ultimate question in dispute in this FLSA case was whether the employees were misclassified as exempt employees, and it was the franchise owners, not Jimmy John’s, who made that determination, and Jimmy John’s makes no effort to control the franchisee employees’ classification under the FLSA. Consequently, Jimmy John’s was not a joint employer, the court found.

Expert report excluded. The employees submitted a report by an expert in HR management and employment relations, analyzing the relationship between Jimmy John’s and the employees of its franchisees. The report concluded that Jimmy John’s had the right to control—and did control—franchisee employees’ wages, hours, and working conditions through its operational standards.

Although the expert did not have particularized knowledge of franchising, that was not necessarily a requirement, the court said. It was more concerned, though, with the factual inaccuracies in the expert’s report, especially because the errors related to central issues in the case concerning whether Jimmy John’s business coaches had firing or disciplinary authority over franchisee employees. Critical gaps between the relied-upon facts and the conclusions drawn, and faulty analysis such as a failure to connect the concept of vertical agency to the record evidence, rendered the report inadmissible, the court held.

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