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A case decided by the 7th U.S. Circuit Court of Appeals potentially has opened new paths of liability for employers. The court ruled that claims against a franchisor and its franchisees could proceed simultaneously in a consolidated lawsuit.
Employees brought this lawsuit under the federal Fair Labor Standards Act (FLSA), which regulates pay practices. The employees filed the case as a nationwide class action on behalf of all assistant store managers of Jimmy John's corporate-owned stores, contending that the managers were misclassified as overtime-exempt under the FLSA.
[SHRM members-only toolkit: Determining Overtime Eligibility in the United States]
Jimmy John's corporate is a national food franchisor that contracts with franchisees to operate retail stores under its brand. Jimmy John's owns only 2 percent of its stores; the rest are owned and operated by franchisees. Even so, the employees claim that Jimmy John's corporate and the franchisees are joint employers.
This case is typical of efforts by plaintiffs' employment lawyers to try to tie liability to a corporate parent; that is where the big money is, since local stores have a limited number of employees and financial assets. The potential costs in nationwide class actions pressure franchisors to settle.
In a regular class action, the time limits for filing FLSA lawsuits stop running on the date the class action is filed. In contrast, in a collective action under the FLSA, limits on filing individual claims continue to run for each potential plaintiff, considered separately, until each plaintiff files written notice that he or she consents to join the lawsuit.
Two years after suing Jimmy John's corporate, the employees filed separate lawsuits against their respective franchisee employers in federal trial courts across the country. About 660 individuals joined in the FLSA collective action. Approximately 600 people work for franchisees. The other 60 work at corporate-owned stores.
These lawsuits were based on the employees hedging their bets in case it was determined that the parent corporation and the franchisees were not joint employers. The corporate parent argued that it did not exercise sufficient control over its franchisees' pay decisions to be considered a joint employer with the individual stores.
The trial court agreed with Jimmy John's corporate and prohibited the lawsuits against the franchisees from proceeding until the claims against Jimmy John's corporate were resolved. The 7th U.S. Circuit Court of Appeals disagreed and decided that the claims against the franchisor and its franchisees could advance at the same time.
Cases from the 7th Circuit are only controlling in the states of Illinois, Indiana and Wisconsin, but federal appeals courts around the country sometimes rely on decisions involving similar issues from their fellow appeals courts.
In Re: Jimmy John's Overtime Litigation, 7th Cir., No. 17‐1655 (Dec. 14, 2017).
Professional Pointer: This decision does not hold that franchisors are liable for the employment practices of their franchisees. It remains to be seen whether this case will set new precedent on the merits, that is, whether a franchisor has sufficient employee relations control to be liable for the FLSA practices of its franchisees. In any event, this will be a fact-intensive case. The point is that a franchisor that assumes it can have no liability for the HR practices of its franchisees may be doing so at its peril.
Philip M. Van Hoy is an attorney with Van Hoy, Reutlinger, Adams & Dunn, PLLC, the Worklaw® Network member firm in Charlotte, N.C.
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