Question 48: We are reviewing a plan for takeover. The owner of the very small company also owns a fast food restaurant franchise. We are told that they have never considered the two as common/controlled for testing, etc., because the employees of the restaurant are employed by the franchise sponsor. Does that sound right?
Answer: We start where you did, that if one individual owns two businesses, then they are under common control, and all employees of either are deemed to be employed by a single employer.
Now we ask who are the employees of fast food outlet. The employer says "We don't have any employees." You say "Oh? Who's flipping burgers and making shakes?" The employer responds "They aren't on my payroll; they work for the franchisor." And you say ... leased employees!
I don't have enough information to say whether the workers are common law employees of your client or not. A case can be made that they are common law employees of your client, because your client is the one giving day-to-day directions about what they do. However, they do have to follow the instructions of the franchisor as well, and I would guess that they would be found to be common law employees of the franchisor.
But, even if there are common law employees of the franchisor, they are certainly working under your client's direct control, and are performing services for your client, benefiting his (or her) bottom line. So, if your client is not their employer, then they would meet the tests of being leased employees if they satisfy the substantially full-time requirement.
Under IRS Notice 84-11, a worker is treated as working substantially full-time for a recipient if the worker performs at least 1,500 hours of service for that recipient in a 12 month period. Given the high number of part-time employees in a typical fast food operation, that requirement (about 30 hours per week) probably keeps many of them from ever gaining the status of leased employee.
But, if someone does satisfy that requirement, then he or she is a leased employee of your client, and hence is deemed to be an employee of your client. And, if the individual is deemed to be an employee of the fast food operation, then he or she is deemed to be an employee of the other business as well, due to Code Section 414(c).
My recommendation is that you have the situation reviewed by counsel. The first question counsel should examine would be to verify that the workers are not common law employees of your client. (The Microsoft case keeps teaching us that the employer isn't necessarily the company issuing the paychecks--it's the company that has control.) If they are common law employees of the franchisee (your client), then the 1,500 hour rule is irrelevant. If they are not common law employees, then review to determine if they are leased employees.
This question is a good demonstration that you cannot stop at a controlled group/common control analysis. You need to look at all the different ways someone can be treated as your employee. I cover these issues at length in my book, Who's the Employer?. (Common law employees are discussed in chapter 2. Leased employees are examined in chapter 4. Common control and controlled groups make up chapters 6 through 12.)