Franchisors Not Liable for Franchisee’s Labor Violations, Ninth Circuit Rules

Franchisor-provided POS equipment was one issue in the lawsuit.

Recently, the Ninth Circuit Court of Appeals issued an important wage and hour decision related to joint employment, particularly for franchisors (Salazar, et al. v. McDonald’s Corp.). The court decided whether McDonald’s, a franchisor, was liable for wage and hour violations as a joint employer of its franchisee’s employees.

In the lawsuit, the plaintiff class members who worked at McDonald’s franchises operated by a franchisee, alleged they were denied overtime premiums, meal and rest breaks, and other benefits in violation of the Labor Code. The plaintiffs further alleged that McDonald’s Corp., as the franchisor, and the franchisee were joint employers; therefore, McDonald’s Corp. was liable for the various labor violations.

Under the franchise agreement, McDonald’s required the franchisee to use its Point of Sale (POS) and In-Store Processor (ISP) computer systems every day to open and close each McDonald’s franchise location. One of the plaintiffs’ allegations was the ISP system caused workers to miss out on overtime pay, including from missed or late meal and rest breaks. McDonald’s represented to the franchisee that its computer systems would make “personnel maintenance easier,” attesting that the ISP settings were compliant with labor laws and strongly encouraged the franchisee not to change any settings. However, in some instances, the franchisee could not fix any settings for overtime allocation errors.

The court evaluated the question of joint employment by looking at the three alternative definitions for what it means to “employ” someone:

  • Control: To meet this definition, an employer must exercise “control over the wages, hours, or working conditions” of the workers. Even though McDonald’s did impose standards for marketing and operations, the court concluded this wasn’t enough. The court recognized that “[f]ranchisors like McDonald’s need the freedom to impose comprehensive and meticulous standards for marketing [their] trademarked brand and operating franchises in a uniform way.”
  • Suffer or Permit: For this definition of joint employer, the court said the plaintiffs were focused on the wrong issue. Instead of what McDonald’s role was in causing the alleged wage and hour violations, they should look at whether the franchisor is one of the plaintiffs’ employers. The court held that McDonald’s did not meet the “suffer or permit” definition because that pertains to responsibility for the fact of employment itself — even though the evidence “would permit a finding that McDonald’s could have prevented some of the alleged wage-and-hour violations but did not do so.”
  • Common Law: The court held that McDonald’s was not an employer under the common law test, which focuses on “whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired” (S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations). The court found that “McDonald’s exercise of control over the means and manner of work performed at its franchises is geared specifically toward quality control and maintenance of brand standards,” and therefore, McDonald’s cannot be classified as an employer of the franchisee’s workers under this definition.

In addition to a review of these definitions, the court applied Patterson v. Domino’s Pizza, which held that a franchisor was not a joint employer because a franchisor “becomes potentially liable for actions of the franchisee’s employees, only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.”

Therefore, even though McDonald’s required use of its POS and ISP system, McDonald’s was not the joint employer of the franchisee’s employees because it did not control the employees’ hiring, firing and working conditions.

Employer Takeaway

This case is certainly a breath of fresh air for joint employment, but franchisors should remain cautious of their role in the business of their franchisees to avoid unintentionally becoming a joint employer. If McDonald’s controlled or directed the franchisee’s daily employment activities, the outcome could have been very different.

In an opinion footnote, the court reminds both franchisors and franchisees of the importance of addressing allocation of risk and responsibility in the franchise agreement itself.

Bianca N. Saad, Employment Law Subject Matter Expert

Confused about joint employment? CalChamber members can read more about Joint-Employer Liability in the HR Library. Not a member? See how CalChamber can help you.

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