Client Bulletins
Franchisor not liable for franchisee’s tip policy that allegedly violated Massachusetts law

Client Bulletin #617
June 8, 2017

The Massachusetts Superior Court has recently issued a favorable opinion to franchisors under the Massachusetts Tips Act. In Yarpah v. Bowden Hospitality Newton, LLC d/b/a Crowne Plaza Hotel, Justice Kenneth W. Salinger held that a franchisor could not be responsible for a hotel franchisee’s administrative charge to customers, which (the plaintiff claimed) was an unlawful taking of a gratuity by the franchisee-hotel.

The Tips Act provides, in pertinent part, as follows:

(d) If an employer or person submits a bill, invoice or charge to a patron or other person that imposes a service charge or tip, the total proceeds of that service charge or tip shall be remitted only to the wait staff employees, service employees, or service bartenders in proportion to the service provided by those employees.

Nothing in this section shall prohibit an employer from imposing on a patron any house or administrative fee in addition to or instead of a service charge or tip, if the employer provides a designation or written description of that house or administrative fee, which informs the patron that the fee does not represent a tip or service charge for wait staff employees, service employees, or service bartenders.

(Emphasis added.)

Plaintiff Roland Yarpah was a former employee of the Crowne Plaza Hotel in Newton, which added an eight percent “administrative fee” to bills for functions where food or alcohol was served. The fee was not paid to employees as tips but was retained by the Hotel. Mr. Yarpah sued the Hotel under the Tips Act, and then sought to add as defendants franchisor Holiday Hospitality Franchising, LLC, which gave the Hotel its license to do business under the “Crowne Plaza” name, and Holiday’s parent, Six Continent Hotels.

The Superior Court denied Mr. Yarpah’s request to add Holiday and Six Continent as defendants, finding that neither entity had any control over or received any revenue from the Hotel’s administrative charges. Under Massachusetts law, the court said, a plaintiff has standing to sue a particular defendant only if the defendant owes a legal duty to the plaintiff, breaches that duty, and causes the plaintiff to suffer injury as a result. “[Because Holiday and Six Continent] owe no duty under the Tips Act, [Mr. Yarpah] lacks standing to sue them,” the court said.

In ruling on the “duty” issue, the court allowed Holiday and Six Continent to submit material outside the pleadings, including declarations, and pages from the licensing agreement. The court credited all of the testimony in the declarations and concluded as follows:

[The proposed defendants] do not own, operate, or control the Hotel where [Mr. Yarpah] worked. They did not assess or collect any of the administrative charges at issue in this case. They have never told [the Hotel] what or how to bill for its banquet and event services, and they have no right to do so. They have no control over whether and how [the Hotel] assesses an administrative charge for its banquets and functions. Neither [of the proposed defendants] has received, and thus has not retained, any part of the revenue generated [by the] administrative charge. Nor can they exercise any control over what [the Hotel] does with those revenues.

The court further found that “entities that neither collect nor retain any part of a tip or service charge have no duty to employees under the Tips Act.” Having concluded that Holiday and Six Continent owed no duty to Mr. Yarpah, the court found that Mr. Yarpah did not have standing to sue them.

The court also rejected Mr. Yarpah’s argument that Holiday could be held vicariously liable for a violation of the Tips Act because of its status as the franchisor. Citing to Depianti v. Jan-Pro Franchising Int’l, Inc., the Court said, “The mere fact that [Holiday] receives payments under its license agreement with [the Hotel] does not make [Holiday] liable for [the Hotel’s] alleged violation of the Tips Act. ... Nothing in [the Tips Act] imposes liability on franchisors or licensors that receive royalties paid from the general net revenue of a hotel or other business that collects a service charge.”

The court noted that it disagreed with the analysis of a federal judge in Carpaneda v. Domino’s Pizza, Inc., on this point.  In Carpaneda, Judge William G. Young denied a franchisor’s motion to dismiss claims under the Tips Act based on a pizza delivery charge. Because the franchisor had a contractual right to receive a percentage of all revenues received by the franchisee, including the delivery charge, Judge Young found that the franchisor could be liable for alleged Tips Act violations by the franchisee.

In Yarpah, on the other hand, none of the payments to Holiday included any share of the Hotel’s administrative charge or other revenue from function services. Thus, Justice Salinger found that the franchisor was not liable under the Tips Act. In Justice Salinger’s view, it “makes no sense and cannot be squared with the plain language of the [Tips Act]” for an entity to be liable simply because the entity receives a dividend from the gross revenue of a business that violates the Tips Act.

Analysis

Justice Salinger’s analysis of a franchisor’s possible liability under the Tips Act is a positive development for Massachusetts franchisors. The question may eventually work its way to the highest court of Massachusetts, the Supreme Judicial Court, where there is some notable guidance.

First, in DiFiore v. American Airlines, Inc., the Supreme Judicial Court found in 2009 that American Airlines could not avoid liability under the Tips Act when it imposed a $2-a-bag charge for curbside check-in. The plaintiffs were skycaps, some of whom were employed by a contractor, not by American. Nonetheless, because American imposed the charge and controlled how it was collected and distributed, the Court found that American could be liable under the Tips Act.

(After the state Supreme Court answered this question about the applicability of the Tips Act, the DiFiore case returned to federal court, and the U.S. Court of Appeals for the First Circuit ultimately ruled in favor of American, finding that the baggage charge was legitimate and that the skycaps’ challenge was preempted by the Federal Aviation Administration Airline Deregulation Act.)

In Depianti, a 2013 case that did not involve the Tips Act, the Massachusetts high court further elaborated on what is required for a franchisor to be held vicariously liable for the alleged wrongdoing of a franchisee. The Court ruled that the franchisor must actually step in and control the day-to-day operations of the franchisee that are alleged to be creating the harm in order to be vicariously liable.

Yarpah applies Depianti and recognizes that a franchisor’s liability cannot be created simply because it has systems in place for the sharing of revenues within the franchise system. On the other hand, had the franchisor actually taken control of the imposition or day-to-day handling of the fee, or retained all or part of the fee itself, the result might have been different.

Against the background of DiFiore and Depianti, Justice Salinger’s opinion gives franchisors with Massachusetts franchisees new guidance in ensuring that certain charges or fees are not misinterpreted to create liability.

For a printer-friendly copy, click here

Best Law Firms LinkedIn Blog Mobile App Facebook Twitter Youtube