S.D.N.Y.: Members Of Restaurant Co-op Are Akin To Partners And Not Employees Within Meaning Of FLSA

Godoy v. Restaurant Opportunity Center of New York, Inc.

Plaintiffs, brought suit against Defendants Restaurant Opportunity Center of New York, Inc. (“ROC-NY”), 417 Restaurant LLC a/k/a ROC N.Y. Restaurant LLC d/b/a Colors, ROC-NY Worker Owner Restaurant, LLC a/k/a RWOR, Saru Jayaraman, and Grace Gilbert, as President of ROC-NY (“Defendants”), alleging breach of contract, fraud, and violations of the federal Fair Labor Standards Act (“FLSA”), 28 U.S.C. § 216(b), and New York State Labor Law. Plaintiffs, former restaurant workers and members of Defendant not-for-profit corporation ROC-NY, alleged that Defendants broke their agreement with Plaintiffs that Plaintiffs would gain equity in and employment at the “worker-owned” restaurant they helped ROC-NY to create in exchange for the hundreds of hours that Plaintiffs contributed to that effort. Plaintiffs sought through this action damages and injunctive relief in the form of their promised shareholder status in and employment at the restaurant, now known as “Colors,” back pay for the work they performed on behalf of ROC-NY during the period of 2002-2005 and the wages they did not earn because they were not employed at the restaurant once it opened, and costs and attorneys’ fees in prosecuting this action. Defendants moved to dismiss Plaintiffs’ First Amended Complaint in its entirety, pursuant to Fed.R.Civ.P. 12(b)(6). In granting Defendants’ Motion, the Court discussed the unique situation under which the Plaintiffs worked for and with the co-op, applying the various economic reality tests to determine that they were not “employed” by Defendants, and therefore dismissing the Complaint.

Several Plaintiffs became members of Defendant ROC-NY in August 2002. Several months later, ROC-NY began seeking grants to launch what was described as a “cooperatively owned restaurant” which would be run by-workers displaced after the September 11 terrorist attacks, and a “Cooperative Committee” of ROC-NY was created to direct that effort. Several Plaintiffs were initial members of the Cooperative Committee. Other Plaintiffs joined ROC-NY and the Cooperative Committee in around 2003, and one Plaintiff joined in around 2004. All of the Plaintiffs joined the Cooperative Committee when they joined ROC-NY, and many served on the Committee’s Board of Directors at various times.

Significantly, the Court noted, “[ha]ving surveyed the various economic reality tests and factors applied by the courts, this Court finds lacking any standard applicable to the question presented by the particular facts of this case-that is, whether workers laboring for and together with a not-for-profit corporation to develop a business that they would co-own are employees of that corporation for purposes of the FLSA. Instead, the Court finds company with the Tenth Circuit in its decision in Wheeler v. Hurdman, 825 F.2d 257 (10th Cir.1987). In that case, the Circuit considered whether a general partner of an accounting firm was an “employee” of that firm for purposes of a FLSA action. After reviewing the traditional “economic reality” factors employed by the courts, the Court noted the “absence … of any coherent standard of ‘economic reality’ for supposed application to partners” in a business, and concluded that “the specific independent contractor/employee factors … are largely useless in a general partnership context.” Id. at 271-72. The Court explained that while “[t]he focal point in deciding whether an individual is an employee” under the “economic realities” jurisprudence, “is whether the individual is economically dependent on the business to which he renders service … or is, as a matter of economic fact, in business for himself,”

Consideration of the factors used by the Tenth Circuit in Wheeler to assess the economic reality presented by a partnership supports the absence of an employer-employee relationship in this instance. See Wheeler, 825 F.2d at 274-75. Like partners at a firm. Plaintiffs, as putative co-owners of the business they were working to create, “assume[d] the risks of loss and liabilities” of the venture, and had a real opportunity to share in its profits upon success. Plaintiffs’ hours of “sweat-equity” represented their “capital” contribution to the business, and one that “would earn [Plaintiffs] equity in the RWOR” as “sweat equity converted to cash equivalent in stock.” While Plaintiffs’ “right to share in management” once the restaurant opened is not specifically alleged in the Complaint, the Court notes that Plaintiffs were members of the Board of Directors of the Cooperative Committee tasked with the management of the restaurant’s planning and development phase. Taken together, the balance of these “economic realities” weighs against the existence of an employment relationship in this case. As Plaintiffs and Defendants were at all relevant times putative co-owners of the restaurant they were working to create, the Court finds that Plaintiffs were not, as a matter of economic reality, the employees of Defendants. As such. Plaintiffs have no claims under the FLSA, see Alamo, 471 U.S. at 296-97, and Defendants’ Motion to Dismiss these claims is GRANTED.”

This unfortunate result, seems unavoidable given the fact that the Plaintiffs were technically “owners” of the business for which they worked, and it is likely that the decision will have limited application in future cases.

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