DMP Dominos Pizza Enterprises Limited

In the latest dispute over the legal relationship between companies and their franchisees, New York's attorney general on Tuesday claimed that Domino's Pizza Inc. is responsible for its franchisees knowingly underpaying their employees.

Attorney General Eric Schneiderman, who is suing the company, said a four-year investigation revealed that Domino's is highly involved in the hiring and firing practices of its franchisees and that the Ann Arbor, Mich.-based parent company mandated that they use a payroll software system that undercalculated gross wages and failed to fix it when problems were brought to their attention.

Mr. Schneiderman claims Domino's parent company is liable for the alleged underpayment because it's a joint employer with its franchisees, an argument at the heart of a broader industry fight over who's responsible for the worker-related actions of franchisees.

The issue of joint employment is popping up as regulators grow more aggressive about holding businesses accountable for people whose employment conditions they control but don't claim as employees.

That can include temporary workers hired through staffing agencies, workers brought on to projects through subcontracting firms or employees at independently owned franchise businesses that license their brands from larger companies.

The lawsuit against Domino's and three of its franchisees, filed in state Supreme Court in Manhattan on Monday, claims that the company's faulty payroll system led to workers being underpaid a total of at least $565,000 for 10 of its stores. Mr. Schneiderman says he is seeking that amount for employees but wants a full accounting of any wages owed.

Domino's spokesman Tim McIntyre said Tuesday that the pizza chain's franchisees, not the company, are solely responsible for the hiring, firing, and payment of their own employees but that the company had been working for more than three years to help its franchisees understand wage and hour laws.

Regulators say they're trying to keep up with labor market changes that are resulting in more fractured work arrangements that can leave employees and the government unsure about who's responsible when a grievance arises.

The Labor Department in January issued guidance that suggested more businesses should be classified as being joint employers of workers whose employment conditions they control but don't claim as employees. While the guidance didn't amount to a policy change, it did seek to clarify that the scope of joint employment is broader than many employers believe it to be under two federal labor laws the agency enforces.

Separately, the National Labor Relations Board, a federal agency that referees workplace disputes and oversees union-organizing elections, toughened its joint-employer standard in August in a way that's expected to sweep more companies into that category when it handles complaints it gets.

The NRLB named McDonald's Corp. as a joint employer with franchisees in a number of complaints around the country, alleging that McDonald's and certain franchisees violated workers' rights by punishing them for participating in protests and other activities meant to improve their wages and working conditions.

Those complaints are pending and McDonald's has said it would fight the joint employer classification.

Mr. McIntyre of Domino's said that establishing Domino's as a joint employer with its franchisees would "deprive our independent business owners of the opportunity to make their own employment decisions" and "impact the viability of the franchise model."

Other business groups have echoed that point, arguing that treating parent companies as joint employers threatens small-business owners and companies that want the option to outsource work when they need it.

Companies in fast food, construction and other industries also worry that such classification will make it easier for unions to organize and push for higher wages.

Write to Julie Jargon at julie.jargon@wsj.com and Melanie Trottman at melanie.trottman@wsj.com

(END) Dow Jones Newswires

May 24, 2016 15:35 ET (19:35 GMT)

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