In a recent ruling, the Court of Appeal reaffirms its finding that a franchisor is not a “joint employer” under the California Labor Code. As such, McDonald’s corporation recently avoided the extension of employer liability for the acts of its franchisee.
In the case of Salazar v. McDonald’s Corp., a class of employees (“plaintiffs”) of a McDonald’s franchisee in Oakland, Haynes Family Limited Partnership (“Haynes”), filed suit against its franchisee employer, Haynes, and the corporate entities McDonald’s U.S.A., LLC and McDonald’s Corp. (collectively “McDonald’s.”) (See Salazar v. McDonald’s Corp., No. 17-15673 (9th Cir. 2019).) The plaintiffs, a class of approximately 1400 employees, allege McDonald’s is a joint employer, along with their undisputed employer Haynes, and thus owes the same duty of care to them that Haynes would. The employees allege this duty was breached when the defendants, including both franchisee and franchisor, denied the employees overtime, meal and rest breaks, among other violations of the California Labor Code.
The legal issue raised in this action was whether a corporate franchisor always owes a legal duty as an “employer” to employees of their franchisees? According to the federal district court, no, and the 9th Circuit Court of Appeals, agrees.
Here, McDonald’s, as a franchisor, had a contractual arrangement with the entity, Haynes, as a franchisee. Under the terms of this franchise agreement, Haynes operates a McDonald’s store franchise in Oakland utilizing the McDonald’s brand and under the specific terms intended to maintain a certain corporate uniformity throughout McDonald’s franchises worldwide. Under this agreement, Haynes’ employees’ are required to wear McDonald’s uniforms and keep them clean. Haynes is also required to use specific computer systems (Point of Sale and In-Store Processor) to open and close the store. McDonald’s also has an optional software, “e*Restaurant People Management Deployment and McDonald’s Dynamic Shift Positioning Tool,” which is “a bundle of tools designed to innovate employee management—from hire to retire.” Haynes was never required to use this software, but opted to do so.
Plaintiffs argued such aforementioned factors render McDonald’s liable to them under numerous theories, including as an “employer,” under a theory of “ostensible agency” based on plaintiffs’ perception they were agents of defendants, and under negligence. As to all theories, both the district court and the Ninth Circuit Court of Appeal disagreed, with the district court dismissing the action in favor of McDonald’s, and the Court of Appeal affirming the district court’s ruling.
Plaintiffs thereafter sought a rehearing before the California Supreme Court, claiming the issues were novel, however, the Court of Appeal recently nixed the request in a filing on December 11, 2019. In so doing, and as further explained in the Court’s reasoning below, California reaffirms its recent rulings generally declining to broaden the definition of “employer” to franchisors.
Who is an “employer?”
California defines an “employer” as a person or entity “who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person.” (See California Wage Order No. 5-2001, section 2(H).) California further clarifies this definition of “employer” in its ruling in the case Martinez v. Combs, 231 P.3d 259, 277–79 (Cal. 2010), wherein the California Supreme Court provided three definitions by which a person or entity may be deemed an employer under the law:
- to exercise control over the wages, hours, or working conditions, or
- to “suffer or permit” to work, or
- to engage, thereby creating a common law relationship.
In an even more pointed ruling, the California Supreme Court specifically addressed the issue of joint liability and the franchisor/franchisee relationship in the relatively recent case, Patterson v. Domino’s Pizza, LLC, 333 P.3d 723, 725 (Cal. 2014), wherein the Court effectively limited the liability of franchisors. Specifically, the Court held that 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.” (See Patterson, 333 P.3d at 739–40.) (Italics added for emphasis.)
The Court’s reasoning as to why McDonald’s is not liable as an employer here
Here, as to the first definition “to exercise control over the wages, hours or working conditions,” plaintiffs argue McDonald’s retained a contractual right of control through its specifically required standards, optional standards, and site visits. However, the Court held that although McDonald’s had the ability to impose “comprehensive and meticulous standards” with regard to uniformity of its brand, McDonald’s did not retain a “general right of control” over wages, hours, or working conditions. As such, McDonald’s would not be an employer under the first definition requiring control over the wages, hours or working conditions.
As to the second definition, “to suffer or permit to work,” the Court clarified that such definition refers to the “power to either cause [the employee] to work or prevent [the employee] from working.” (Futrell v. Payday Cal., Inc., 119 Cal. Rptr. 3d 513, 524–25 (Ct. App. 2010).) However, plaintiffs’ arguments attempt to link liability by claiming McDonald’s induced Haynes to utilize a computer system that caused them to lose their meal and rest breaks. Thus, plaintiffs’ arguments are misplaced and do not address whether McDonald’s had the right to hire or fire the employees. As such, defendants would not be an employer under the second definition, where defendants “suffer or permit” plaintiffs to work.
As to the third definition, “to engage, thereby creating a common law relationship,” the principle test “is 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, 769 P.2d 399, 404 (Cal. 1989).) The Court of Appeal relied on the pointed ruling in Patterson where the Court explicitly stated it “cannot stand for the proposition that a comprehensive [franchise] system alone constitutes the ‘control’ needed to support vicarious liability claims.” The Court further explained that more control is required, such as in the hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.” (Id. at 739.) As such, defendants would not be an employer under the third definition, relying on the California common law relationship.
As to the theory of liability based on “ostensible agency” pursuant to Wage Order 5-2001, the Court of Appeal summarily rejected the argument, explaining the plain terms of the wage order indicate “the reference to an “agent” applies only to an entity that actually employs the worker or that actually exercises control over the wages, hours, or working conditions of the worker. McDonald’s does none of those things.” (Salazar v. McDonald’s Corp., 9th Cir., No. 17-15673, Order and Amended Opinion, Filed October 1, 2019; Amended December 11, 2019, p. 20.)
As to the theory of liability based in negligence, the Court of Appeal concluded plaintiffs failed to establish the essential elements of both duty and damages, and as such, could not move forward on their claims.
McDonald’s is not a “joint employer” under the California Labor Code. California franchisors can thus count a win here, as the Court declined to broaden the definition- and thus liability- of the term “employer” to include franchisors. Nevertheless, franchisors- and especially McDonald’s should not forget its perception as deep pockets, and continued potential for liability, lest they forget the outcome of the (infamous) hot coffee burn case that rendered a nearly $3 million verdict, despite being franchisors.
 Stella LIEBECK, Plaintiff, v. MCDONALD’S RESTAURANTS, P.T.S., INC. and McDonald’s International, Inc., Defendants. Liebeck v. McDonald’s Restaurants, P.T.S., Inc., No. CV-93-02419, 1995 WL 360309 (N.M. Dist. Aug. 18, 1994), vacated sub nom. Liebeck v. Restaurants (N.M. Dist. 1994)