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Should Joint Employment and Wage and Hour Disputes Be Arbitrated?

March 28, 2017Articles The Legal Intelligencer

In Geselle v. Jack in the Box, 3:14-CV-1092-BR (D. Or. Dec. 13, 2016), the district court had just reviewed the joint pretrial order in this 6-year-old case, and was entertaining certain issues for summary judgment. In 2016, the parties cross-moved for partial summary judgment and the court was called upon to resolve tricky issues regarding arbitration in wage and hour disputes and joint employment generally.

In 2010, employees of Jack in the Box in Oregon filed a class action for the violation of the minimum wage and overtime provisions under the Fair Labor Standards Act (FSLA), as well as various violations of Oregon law. Before the case came to trial, Jack in the Box sold selected company-owned stores to franchisees. As the case was being prepared for trial, a new plaintiff, Jason Diaz joined in 2011, and Jack in the Box filed a summary judgment motion to limit the issues at trial. After review in the U.S. Court of Appeals for the Ninth Circuit, the case was remanded for trial and summary judgment was filed on certain aspects of the case.

Employee of Franchisee is not Employee of Franchisor

On March 29, 2010, "franchised" several corporate-owned Jack in the Box ­restaurants (including the restaurant at which Jessica Gessele, Mauldin, and Diaz were employed) to franchisee Northwest Group, Inc. (NWG). The plaintiffs assert the FLSA defines the employment relationship in expansive terms that should lead the court to conclude the defendant was the plaintiffs' employer during the relevant period.

Courts within the Ninth Circuit decide joint employment issues by application of the economic realities test, which reviews the entire circumstances to determine how the defendant may have acted like an employer. The Ninth Circuit held the test focuses primarily on four factors: "whether the alleged employer had the power to hire and fire the employees; supervised and ­controlled employee work schedules or conditions of employment; determined the rate and method of payment; and maintained employment records." The Ninth Circuit identified five additional "regulatory factors" courts should consider:

  • The nature and degree of control of the workers;
  • The degree of supervision, direct or indirect, of the work;
  • The power to determine the pay rates or the methods of payment of the workers;
  • The right, directly or indirectly, to hire, fire or modify the employment conditions of the workers; and
  • Preparation of payroll and payment of wages.
  • The Ninth Circuit also identified a number of "nonregulatory" factors for courts to consider when they are applicable:
  • The degree of the alleged employer's right to control the manner in which the work is to be performed;
  • The alleged employee's opportunity for profit or loss depending upon the alleged employee's managerial skill;
  • The alleged employee's investment in equipment or materials required for the alleged employee's task, or the employee's employment of helpers;
  • Whether the service rendered requires a special skill;
  • The degree of permanence of the working relationship;
  • Whether the service rendered is an integral part of the alleged employer's business;
  • Ownership of property or facilities where work occurred; and
  • Whether responsibility under the ­contracts between a labor contractor and an employer passes from one labor contractor to another without material changes.

The court concluded that Jack in the Box did not engage in joint employment with the franchisee. Based on the ­franchise ­agreement, the court found that the ­franchisee is an independent contractor and shall not be deemed an agent partner joint venture or employee of Jack in the Box and that no fiduciary relationship between the parties exists. The franchisee has no right to bind or obligate Jack in the Box in any way, and shall in no way represent any right to do so. Jack in the Box ­disclaims the right to control terms and conditions of ­employment of the franchisee's employees.

Based on affidavit evidence, the court ­concluded that when a restaurant is ­franchised, it does not control the terms and conditions of employment of the franchisee employees; the franchise is exclusively responsible for the terms of employment, compensation and all aspects of the employment relationship; the franchisee handles all aspects of daily operations, including assignment of duties, supervision, training, coaching and discipline of employees; the franchisee determines who to hire into what position at the restaurant; the franchisee decides which employees to schedule to work, what days and times to schedule them, when the employees will take breaks, and the total number of hours the employees will be scheduled to work each week. Although disputed, the court concluded that no evidence undermines the assertions that Jack in the Box has no input, control or direction over schedules, hours, or hiring decisions. Jack in the Box does not provide any employee benefits to franchisee employees, and that the franchisee is solely responsible for payments associated with workers' compensation benefits and unemployment.

Based the factual findings, the court concluded that once the company-owned locations were sold to franchisees, then Jack in the Box ceased being the joint employer.

The Employee was required to arbitrate this case

When plaintiff Jason Diaz was 16 years old, he applied for a position at a Jack in the Box corporate location in 2008. Although he never wrote his signature with a pen, Diaz electronically signed the arbitration agreement as part of the new-hire process at Jack in the Box. Diaz affirmatively accepted the arbitration agreement by logging onto a CBT terminal, reviewing the agreement, clicking "yes" that he agreed to the terms, and entering his ­confidential password to record his agreement. Under Oregon law, that electronic signature is binding.

Although Diaz signed before he reached the age of majority, he had the opportunity to disaffirm the contract when he reached the age of majority. The court found that he had not timely disaffirmed the arbitration agreement when he reached the age of majority; accordingly, the arbitration contract was valid and enforceable.

Unenforceable provisions of the arbitration clause were severable

Diaz attacked the arbitration clause as ­illegal because the clause stated: ­"neither employee nor company shall be entitled to join or consolidate in arbitration claims ... or arbitrate a representative action or a claim as a representative or member of a class." This portion of the clause violates the mutual aid and protection clause of the NLRA, 29 U.S.C. Section 157, and the collective action provision of the FLSA, 29 U.S.C. Section 216. Morris v. Ernst & Young, 834 F.3d 975 (9 Cir. 2016), to support their assertion.

The Morris case, applied to the defendant's contract, Section 7 and Section 8 [of the NLRA] make the terms of the ­concerted action waiver unenforceable. The "separate proceedings" clause prevents concerted ­activity by employees in arbitration proceedings, and the requirement that employees only use arbitration prevents the initiation of concerted legal action anywhere else. The result: interference with a protected Section 7 right in violation of Section 8. Thus, the "separate proceedings" terms in the defendant's contracts cannot be enforced under federal labor policy or under the Federal Arbitration Act.

In its reply, Jack in the Box asserts the arbitration agreement does not violate the NLRA because it contains a severability clause permitting the court to sever the concerned-action prohibition of the agreement. The court applied existing case law to save the enforceable portion of an arbitration agreement; accordingly, the illegal provisions were severed and the labor claims continued as part of the class action for trial.

We should expect more cases resolving disputes regarding the scope of ­arbitration clauses in labor disputes until the issues of joint employment are resolved by ­legislation.