Hunton Employment & Labor Perspectives

Less than two months ago, on July 29, 2014, the National Labor Relations (NLRB) made an announcement that it intends to hold franchisors legally responsible for unfair labor practices committed by its franchisees.  A recent Fifth Circuit opinion follows this trend by potentially expanding the number of discrimination and harassment suits corporate parent franchisors may face for discrimination and harassment committed by franchisees. EEOC v. Simbaki, Ltd.

The case began with sexual harassment EEOC charges filed by two female employees of a Berryhill Baja Grill & Cantina restaurant on Montrose Boulevard in Houston, Texas. The charges alleged that the restaurant’s owner, slapped, grabbed, kissed and spanked the women. Berryhill Baja Grill & Cantina is a restaurant chain, with individual restaurants owned either by Berryhill’s corporate parent (Berryhill Hot Tamales Corporation) or by third-party franchisees. The restaurant  at issue in the EEOC charges was owned by a third party-franchisee. The charges named “Berryhill Baja Grill” as the employer and identified the Montrose Boulevard location as where the alleged harassment took place. The charges did not mention the parent Berryhill Hot Tamales Corporation.

The “Named-Party” Analysis

After investigating, the EEOC filed suit in the Southern District of Texas, naming Berryhill Montrose as a defendant. A couple months later, the parent Berryhill Hot Tamales Corporation was added as a co-defendant. The parent moved for summary judgment, claiming the employees had failed to exhaust their administrative remedies by not naming the corporation as a defendant in their EEOC charges. The district court agreed and granted summary judgment. The court did not let the women invoke judicially-recognized exceptions to Title VII’s named-party requirement because they were represented by counsel when they filed their charges.  The “named-party” requirement generally provides that only parties named in an EEOC charge may be liable for the conduct alleged.

Represented v. Pro-Se Status Irrelevant To The “Named-Party” Analysis

On appeal to the Fifth Circuit, the employees argued that even represented parties are entitled to invoke the exceptions to the named-party requirement. Recognizing this question as an issue of first impression, the appellate court agreed. The court explained that allowing only pro se parties to use the named-party exceptions would conflict with the general requirement that pro se parties fundamentally abide with the procedural rules of federal court. In addition, the court noted that making the named-party exceptions available to all litigants is more consistent with “the well-recognized practice of liberally construing Title VII’s procedural requirements in light of the statute’s remedial purpose.” As a result, the court remanded the case to the district court to determine if the employees could meet the notice requirements necessary to invoke one of the named-party exceptions.  Two exceptions are (1) when there is an identity-of-interest between the two parties, or (2) if an unnamed party had actual notice and an opportunity to respond.

Implications For Corporate Parents

The issue before the Fifth Circuit arises at the EEOC level with some frequency, since it is often hard for plaintiffs to determine the proper defendant from a group of affiliated companies. And, if the NLRB’s announcement and Simbaki signal a trend, it could increase the legal risks faced by corporate parents. It may become necessary for corporations to implement more stringent franchise licensing processes and oversight procedures.