Business Law

Case Report – March 2022

Mcardle-Bracelin v. Cong Hotel, LLC, 2022 U.S. Dist. LEXIS 29081 (N.D.N.Y. February 17, 2022, 20-CV-861-TJM-TWD

In this opinion, the District Court denied franchisor defendants’ motion for judgment on the pleadings on plaintiff’s labor law class action on behalf of herself and other similarly situated persons working as non-exempt servers, waiters, bartenders, and other related positions at Embassy Suites Hotels in New York state. The Court found the operative complaint had stated a claim that the franchisor defendants were joint employers of the plaintiff.

Procedural Background

Plaintiff Noel McCardle-Bracelin filed a labor law class action on behalf of herself and others who worked as non-exempt servers, waiters, bartenders, waitstaff, room service attendants, and other non-managerial service workers for Embassy Suites Hotels in New York state. Plaintiff alleged that Defendants charged hotel customers a service fee for banquet services provided to hotel customers but failed to remit such monies to the workers as gratuity wages. The named Defendants include both franchisees operating individual hotels and franchisors Embassy Suites Franchise, LLC and Hilton Franchise Holding, LLC (“Franchisor Defendants”). Plaintiff alleged that Franchisor Defendants served as Plaintiff’s joint employers.

Plaintiff alleged that Defendants charged on average a 20% gratuity charge on food and beverage bills, that customers reasonably believe such charges were gratuities to be paid in their entirety to service staff, and that Defendants only paid a portion of such charges to the staff. Plaintiff alleged she and other workers only received 5% of the 20% gratuity charge. Because of the discrepancy between the 20% charge and the amount Plaintiff and other staff received, Plaintiff alleged that her wage statements were inaccurate. Plaintiff alleged three claims under New York’s labor laws and one claim for unjust enrichment.

The Franchisor Defendants filed a motion for judgment on the pleadings, which is treated the same as a 12(b)(6) motion to dismiss. The Franchisor Defendants argued that Plaintiff failed to allege facts sufficient to “make plausible that they are joint employers.”

Legal Analysis

The parties agreed that the Faior Labor Standards Act (“FSLA”) and New York Labor Law provide the same definition for “employer” and that both rely on definitions under the FSLA. The FSLA uses a very broad definition of “employee,” stretching the meaning to cover some parties who might not qualify as such under a strict application of traditional agency principals. To achieve the remedial aims of the statute and comply with the definition, in determining whether an employer-employee relationship exists is grounded in “economic reality” rather than “technical concepts.” Courts should not rely on isolated factors but rather upon “the circumstances of the whole activity.” Therefore, whether an employment relationship exists “is a flexible concept to be determined on a case-by-case basis by review of the totality of the circumstances.”

Plaintiff alleged the Franchisor Defendants were joint employers. The joint employer doctrine “imposes liability for violations of labor or employment laws not only on the nominal employer but also on entities that, although legally separate from the nominal employer, handle certain aspects of the employer-employee relationship jointly.”

Courts typically use one of two tests to determine whether a party is an employer within the meaning of the FLSA: (a) the “formal control” test, and (2) the “functional control” test.

The formal control test asks whether the alleged employer: (1) had the power to hire and fire employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records. The factors are nonexclusive and overlapping “to ensure that the economic realities test is sufficiently comprehensive and flexible to give proper effect to the broad language of the FLSA.”

The “functional control” test applies six factors: (1) whether the alleged employers’ premises and equipment were used for the plaintiffs’ work; (2) whether the subcontractors had a business that could or did shift as a unit from one putative joint employer to another; (3) the extent to which plaintiffs performed a discrete job that was integral to the alleged employers’ process of production; (4) whether the responsibility under the contracts could pass from one subcontractor to another without material changes; (5) the degree to which the alleged employers or their agents supervised plaintiffs’ work; and (6) whether plaintiffs worked exclusively or predominantly for the alleged employers.

The Court found that the allegations of the operative complaint did not meet the formal control test for the Franchisor Defendants. The Court noted that, while the allegations of the complaint indicated some degree of control over the proposed class employees, there were no allegations that the Franchisor Defendants had any power to hire and fire workers, determine the rate and method of payment for workers, kept employment records, or set work schedules. The Court therefore concluded that, “[t]aken as whole, such allegations do not plausibly allege a degree of formal control over the terms and conditions of employment that make plausible joint employment under the formal control test.”

In applying the “functional control” test, the Court noted that while some the factors are difficult to translate to the franchisor-franchisee context and therefore do not deserve much weight, courts still apply the test in the franchisor-franchisee context, emphasizing the factors that are relevant.

The Court concluded that Plaintiff had alleged facts sufficient to make plausible her claim that the Franchisor Defendants were joint employers. The Court cited to allegations in the operative complaint that Plaintiff as an employee operated under terms created and regulated by the Franchisor Defendants, “such as that the reservation system, appearance, quality control procedures, training of management, and initial operation of the hotel came under the direction of the Franchisor Defendants.” The Court also referenced allegations that the license between the franchisee and the Franchisor Defendants (i.e., the franchise agreement) established terms for operation, worker appearance, and the services the hotels provided. The Court concluded that “[s]uch allegations are sufficient, if barely, to state a claim.”

David M. Greeley, Esq. of Greeley Thompson, LLP prepared this Case Report. Mr. Greeley’s practice focuses on representing franchisors and franchisees in disputes.

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