Franchise 101: Salon Franchisor Weaved into Joint Employment Claims; and No Joint Employment, No Cry

Franchisor 101: Salon Franchisor Weaved into Joint Employment Claims

A Michigan federal district court denied a franchisor’s motion to dismiss claims under Title VII of the Civil Rights Act of 1964 and Michigan law, and claims alleging retaliatory termination and sexually hostile work environment at franchised locations. The claims alleged the franchisor was liable as a joint employer.

Dy N Fly, a franchisor of hair coloring salons, was sued by employees of two franchisees. The employees alleged that Dy N Fly held significant integrated control over the franchise owner’s operations and actions. These actions included the franchise owner sending sexually provocative text messages, frequently making inappropriate comments, unwanted touching, and explicit advances. The employees complained to Dy N Fly’s co-founder, who looked to evade responsibility by saying the franchisor had nothing to do with the franchise owner’s behavior.

Dy N Fly filed a motion to dismiss the joint-employer claims. In denying the motion, the court determined that Dy N Fly’s owner and co-founder’s alleged knowledge and involvement created a plausible inference that Dy N Fly shared or codetermined essential terms and conditions of employment. The alleged facts included Dy N Fly’s co-founder introducing one plaintiff to the franchisee for a management position; asking a plaintiff to reconsider terminating her employment with the franchisee; a text message the co-founder composed for plaintiff to send to the franchise owner pleading to “let her do her job”; his promises to address the employee’s complaints with Dy N Fly’s President; and offering a small severance for an agreement not to sue Dy N Fly.

The district court rejected Dy N Fly’s reliance on a disclaimer of the franchisor’s responsibility for personnel decisions in the franchise agreement, finding the disclaimer not to be dispositive at the pleadings stage. Further, Dy N Fly’s brand standard manual to franchisees had a human resources section, with headings in the table of contents suggesting detailed policies governing the terms and conditions of employment, including interview and training processes, discipline and termination, sexual harassment policy, as well as minute details of daily routines.

Small franchisors like Dy N Fly are prone to joint employer claims for not observing contractual formalities and separateness inherent in the franchisor-franchisee relationship. Franchisors whose principals have close personal relationships with a franchisee and/or employees of the franchised business should consult franchise counsel before relying on personal relationships with the parties or resorting to self-help to protect itself from joint employer claims.

Acuff v. Dy N Fly, LLC, 22-cv-12329 (E.D. Mich. May 5, 2023)

Franchisee 101: No Joint Employer, No Cry

A federal district court in New York dismissed workplace harassment and retaliation claims against corporate affiliates of the Golden Krust Caribbean Bakery & Grill franchisor for damages as a result of workplace harassment and retaliation under Title VII of the Civil Rights Act of 1964 and other New York laws. The court held that the joint employer doctrine did not apply because the plaintiff did not allege that the franchisor controlled the plaintiff’s daily employment activities.

Previously the plaintiff dismissed the franchisor with prejudice, and the franchisee defendants failed to appear and were found to be in default. Rather than seek default judgment, the plaintiff proceeded with claims against the franchisor’s affiliates, alleging these defendants were joint employers because they required approval over the franchisee’s decisions. Such oversight included the location of the franchise, appointment of all management level employees, the lease or purchase terms of restaurant equipment, offering of advice on restaurant design, support services, and optional training programs.

The district court identified a list of factors to be analyzed, including control over an employee’s hiring, firing, training, promotion, discipline, supervision, and handling of records, insurance, and payroll. The guiding factor is whether an entity other than the employee’s formal employer has power to pay the employee’s salary, hire, fire, or otherwise control the employee’s daily employment activities.

The plaintiff failed to allege that the defendants shared control over the terms and conditions of her employment. The allegations failed to articulate how the alleged day-to-day control or influence that the defendants had over the Golden Krust franchise allowed them to control plaintiff’s daily employment activities, such that one could properly conclude that a putative employer-employee relationship existed.

The plaintiff also did not show a level of involvement by the franchisor in the franchisee’s decision-making to sustain a joint employment allegation. The plaintiff alleged that the franchisor set and enforced requirements on all franchises in areas such as monitoring employee performance and specifying procedures that employees must follow. This allegation was not sufficient to show that the franchisor controlled the plaintiff’s daily employment activities.

The defendants sought an attorney fees award because it was obvious that they were not parties to the franchise agreement between the dismissed franchisor and the defaulting franchisee. The district court declined because the joint employer doctrine turns on whether the parties shared significant control of the same employee, rather than any formal written agreement.

Most franchise agreements require franchisees to defend and indemnify the franchisor and its affiliates against claims premised on a co-employment relationship. With no franchisee or franchisor in this case to do either, the franchisor’s affiliates handled their own defense and were unable to recover attorney fees that the franchisee would otherwise be obligated to pay. Even if a “deeper pocket” defendant is more likely to be pursued in a joint employer case, franchisees should not assume that going into default will suspend their indemnity obligation.

Doe v. Golden Krust Caribbean Bakery & Grill Inc., No. 18-cv-05734 HG-TAM (E.D.N.Y Mar. 27, 2023)