particular methods of operation, the power to control is only seldom used, as where the business has been in operation for a long time without change in methods of operation and practically no actual direction is necessary; also common control may exist where the control, although rarely visibly exercised, is evidenced by the fact that mere suggestions are adopted readily by the business being controlled.

(c) In the retail industry, particularly, there are many instances where, for business reasons, related activities performed by separate companies are so unified or controlled as to constitute a single enterprise. A common example, specifically named in the definition, is the leased department. This and other examples are discussed in sections 779.225 through 779.235.

VARIOUS BUSINESS

ARRANGEMENTS

Section 779.225-LEASED DEPARTMENTS (a) As stated in section 3 (r), the enterprise includes "departments of an establishment operated through leasing arrangements." This statutory provision is based on the fact that ordinarily the activities of such leased departments are related to the activities of the establishment in which they are located, and they are performed for a common business purpose either through "unified operation" or "common control."

(b) In the ordinary case, the establishment may control many of the operations of the leased department and unify its operation with its own. Thus, they may operate under a common trade name; the establishment may determine, or have the power to determine, the leased department's space location, the type of merchandise it will sell, its pricing policy, its hours of operation and some or all of its hiring, firing and other personnel policies; advertising, adjustment and credit operations, may be unified, and insurance, taxes, and other matters may be included as a part of the total operations of the establishment. Some or all of these and other functions, which are the normal prerogatives of an independent businessman, may be controlled or unified with the store's other activities in such a way as to constitute a single enterprise under the Act.

(c) Since the definition specifically includes in the "enterprise", for the purpose of this Act, "departments of an establishment operated through leasing arrangements", any such department will be considered a part of the enterprise in the absence of special facts and circumstances warranting a different conclusion.

(d) Whether, in a particular case, the relationship is such as to constitute the lessee's operation to be a separate establishment rather than a "leased department" as described in the definition, will depend upon all the facts including the agreements and arrangements between the parties as well as the manner in which the operations are conducted. If, for example, the facts show that the lessee occupies a physically separate entrance, and operates under a separate name, with his own separate employees and records, and in other respects conducts his business independently of the lessor's, the relationship of the parties may be only that of landlord and tenant. In such a case, the lessee's operations will not be regarded as a "leased department” and will not be included in the same enterprise with the lessor.

Section 779.226-EXCEPTION FOR AN INDEPENDENTLY OWNED RETAIL OR SERVICE ESTABLISHMENT UNDER CERTAIN FRANCHISE AND OTHER ARRANGEMENTS

While certain franchise and other arrangements may operate to bring the one to whom the franchise is granted into a large enterprise (see section 779.232), section 3 (r) contains a specific exception for certain arrangements entered into by a retail or service establishment which is under independent ownership. The specific exception in section 3(r) reads as follows:

Provided, That, within the meaning of this subsection, a retail or service establishment which is under independent ownership shall not be deemed to be so operated or controlled as to be other than a separate and distinct enterprise by reason of any arrangement, which includes, but is not necessarily limited to, an agreement, (1) that it will sell, or sell only, certain goods specified by a particular manufacturer, distributor, or advertiser, (2) that it will join with other such establishments in the same industry for the purpose of collective purchasing, or (3) that it will have the exclusive right to sell the goods or use the brand name

of a manufacturer, distributor, or advertiser within
a specified area, or by reason of the fact that it oc-
cupies premises leased to it by a person who also
leases premises to other retail or service establish-
ments.

Section 779.227-CONDITIONS WHICH
MUST BE MET FOR EXCEPTION

This exception, in accordance with its specific terms, will apply only if the following conditions are met:

(a) The establishment must be a "retail or service establishment" as this term is defined in section 13(a) (2) of the Act (see discussion of this term in sections 779.312 and 779.313); and

(b) The retail or service establishment must not be an "enterprise" which is large enough to come within the scope of section 3 (s) of the Act; and

(c) The retail or service establishment must be under independent ownership.

Section 779.228-TYPES OF ARRANGEMENTS CONTEMPLATED BY EXCEPTION

If the retail or service establishment meets the requirements in paragraphs (a) through (c) of section 799.227, it may enter into the following arrangements without becoming a part of the larger enterprise, that is, without losing its status as a "separate and distinct enterprise":

(a) Any arrangement, whether by agreement, franchise or otherwise, that it will sell, or sell only certain goods specified by a particular manufacturer, distributor, or advertiser.

(b) Any such arrangement that it will have the exclusive right to sell the goods or use the brand name of a manufacturer, distributor, or advertiser within a specified area.

(c) Any such arrangement by which it will join with other similar retail or service establishments in the same industry for the purpose of collective purchasing. Where an agreement for "collective purchasing" is involved, further requirements are imposed, namely, that all of the other establishments joining in the agreement must be retail or service establishments under independent ownership, and that all of the establishments joining in the collective pur

chasing arrangement must be "in the same industry." This has reference to such arrangements by a group of grocery stores, or by some other trade group in the retail industry.

(d) Any arrangement whereby the establishment's premises are leased from a person who also leases premises to other retail or service establishments. In connection with this rental arrangement, the Senate Report cites as an example the retail establishment which rents. its premises from a shopping center operator (S. Rept. 145, 87th Cong., 1st Sess., p. 41). It is clear that this exception was not intended to apply to the usual leased department in an establishment, which is specifically included within the larger enterprise under the definition of section 3 (r). (See discussion under section 779.225.)

Section 779.229-OTHER
ARRANGEMENTS

With respect to those arrangements specifically described in the proviso contained in the definition, an independently owned retail or service establishment will not be considered to be other than a separate and distinct enterprise, if other arrangements the establishment makes do not have the effect of bringing the establishment within a larger enterprise. Whether or not other arrangements have such an effect will necessarily depend upon all the facts. The Senate Report makes the following observations with respect to this:

Thus the mere fact that a group of independently owned and operated stores join together to combine their purchasing activities or to run combined advertising will not for these reasons mean that their activities are performed through unified operation or common control and they will not for these reasons be considered a part of the same "enterprise". This is also the case in food retailing because of the great extent to which local independent food store operators have joined together in many phases of their business. While maintaining their stores as independently owned units, they have affiliated together not just for the purchasing of merchandise, but also for providing numerous other services such as (1) central warehousing; (2) advertising; (3) sales promotions; (4) managerial advice; (5) store engineering; (6) accounting systems; (7) site location; and (8) hospitalization and life insurance protection. (S. Rept. 145, 87th Cong., 1st Sess., p. 42.)

The report continues with the following observations:

Whether such arrangements bring the establishment within the franchisor's, lessor's, or grantor's "enterprise" is a question to be determined on all the facts. The facts may show that the arrangements reserve the necessary right of control in the grantor or unify the operations among the separate "franchised" establishments so as to create an economic unity of related activities for a common business purpose. In that case, the "franchised" establishment will be considered a part of the same "enterprise". For example, whether a franchise, lease, or other contractual arrangement between a distributor and a retail dealer has the effect of bringing the dealer's establishments within the enterprise of the distributor will depend upon the terms of the agreements and the related facts concerning the relationship between the parties.

There may be a number of different types of arrangements established in such cases. The key in each case may be found in the answer to the question, "Who receives the profits, suffers the losses, sets the wages and working conditions of employees, or otherwise manages the business in those respects which are the common attributes of an independent businessman operating a business for profit?"

For instance, a bona fide independent automobile dealer will not be considered a part of the enterprise of the automobile manufacturer or of the distributor. Likewise, the same result will also obtain with respect to the independent components of a shopping center.

In all of these cases if it is found on the basis of all the facts and circumstances that the arrangements are so restrictive as to products, prices, profits, or management as to deny the "franchised" establishment the essential prerogatives of the ordinary independent businessman, the establishment, the dealer, or concessionaire will be considered an integral part of the related activities of the enterprise which grants the franchise, right, or concession. (S. Rept. 145, 87th Cong., 1st Sess., p. 42).

Thus, there may be a number of different types of arrangements established in such cases, and the determination as to whether the arrangements create a larger "enterprise" will necessarily depend on all the facts. Some arrangements which do not create a larger enterprise and some which do are discussed in sections 779.230-779.235.

Section 779.230-FRANCHISE AND
OTHER ARRANGEMENTS

(a) There are many different and complex arrangements by which businesses may join to perform their activities for a common purpose. The quotation in section 779.229 from the Sen

ate Report shows that Congress recognized that some franchise, lease, or other arrangements have the effect of creating a larger enterprise and whether they do or not depends on the facts. The facts may show that the arrangements are so restrictive as to deprive the individual establishment of those prerogatives which are the essential attributes of an independent business. An establishment through such arrangements may transfer sufficient "control" so that it becomes in effect a unit in a unified chain operation. In such cases the result of the arrangement will be to create a larger enterprise composed of the various segments, including the establishment which relinquishes its control.

(b) The term "franchise" is not susceptible of precise definition. The extent to which a businessman relinquishes the control of his business or the extent to which a franchise results in the performance of the activities through unified operation or common control depends upon the terms of the contract and the other relationships between the parties. Ultimately the determination of the precise scope of such arrangements which result in creating larger enterprises rests with the courts.

Section 779.231-FRANCHISE ARRANGEMENTS WHICH DO NOT CREATE A LARGER ENTERPRISE

(a) While it is clear that in every franchise a businessman surrenders some rights, it equally is clear that every franchise does not create a larger enterprise. In the ordinary case a franchise may involve no more than an agreement to sell the particular product of the one granting the franchise. It may also prohibit the sale of a competing product. Such arrangements, standing alone, do not deprive the individual businessman of his "control" so as to bring him. into a larger enterprise with the one granting the franchise.

(b) The portion of the Senate Report quoted in the section 779.229, cites a "bona fide independent automobile dealer" as an example of such a franchise arrangement. (It is recognized that employees of a retail or service establishment primarily engaged in selling automobiles or trucks are specifically exempt from the

Court rejected Gulf's contentions and held as follows:

It may be conceded that it (Gulf) does not exercise full control over all of the actions of the dealers in a strict legal sense, but its actual control is so effective that little room is left for independent action on their part, while full enjoyment of the advantages inherent in a chain store system on its part is ensured. Adequate control over the operating methods of the dealers and of the retail prices of the goods is secured by the right retained by the company to cancel the license agreement and to put an end to the business relations between the parties; and at the same time to retain possession of the dealer's premises under the lease ***. The method of storage and sale of the merchandise is largely determined by the kind of equipment which is furnished by the company to all dealers alike; and variations in local methods of conducting the business are constantly subject to the supervision and suggestions of the agents of the company ... (the goods) sold at the stations at substantially the same prices and in substantially the same way as if the stations were actually owned by the company

**

Gulf also argued that the term "controlled" in the taxing statute had to be construed most strongly against the Government, and should not be extended by implication and, therefore, the term should be held to refer only to legally enforceable control and should not be extended to encompass a situation where there was only the ability to influence the dealer through the power to terminate his contract. The Court held that the purpose of the taxing statute was to cover all chain store organizations; that it was not confined to stores under common ownership, but applied to all stores owned, operated, maintained, or "controlled" by the same person; and the Court concluded that "It is reasonable to say that the Gulf Company, within the meaning of the tax statute, operates as well as controls the stations as part of an integrated chain store organization."

(c) The factors which the West Virginia Court considered significant in concluding that the requisite "control" existed under this taxing statute, are also applicable under a remedial statute such as the Fair Labor Standards Act in determining whether a franchise or other arrangement brings the dealer to whom the franchise is granted into a larger enterprise.

635882°-62- -5

Section 779.233-INDEPENDENT CONTRACTORS PERFORMING WORK "FOR" AN ENTERPRISE

(a) The definition in section 3 (r) specifically provides that the "enterprise" shall not include "the related activities performed for such enterprise by an independent contractor." This exclusion will apply where the related activities. are performed "for" the enterprise and if such activities are performed by "an independent contractor."

(b) The Senate Report in referring to this exception states as follows:

It does not include the related activities performed for such an enterprise by an independent contractor, such as an independent accounting firm or sign service or advertising company, *** (S. Rept. No. 145, 87th Cong., 1st Sess., p. 40).

The term "independent contractor" as used in section 3(r) has reference to an independent business which performs services for other businesses as an established part of its own business activities. The term "independent contractor" as used in 3(r) thus has reference to an independent business which is a separate "enterprise," and which deals in the ordinary course of its own business operations, at arms length, with the enterprises for which it performs services.

(c) There are many instances in industry where one business performs activities for separate businesses without becoming a part of a larger enterprise. In addition to the examples cited in the Report they may include such services as repairs, window cleaning, transportation, warehousing, collection services and many others. The essential test in each case will be whether such services are performed "for" the enterprise by an independent, separate enterprise, or whether the related activities are performed for a common purpose through unified operation or common control. In the latter case the activities will be considered performed "by" the enterprise, rather than "for" the enterprise, and will be a part of the enterprise. The distinction in the ordinary case will be readily apparent from the facts. In those cases where questions arise a determination must be made