August 5, 2019
By: Thomas M. O’Connell
Citation:
Salazar v. McDonald’s Corp., 944 F.3d 1024 (9th Cir. 2019).
Executive Summary:
In a reported decision, United States Court of Appeals, Ninth Circuit, held that McDonald’s corporate was not a joint employer and could not be held liable under ostensible-agency theory. This was a significant victory for the franchise industry given recent events.
Relevant Background:
The Haynes Family Limited Partnership (“Franchisee” or “Haynes”) operated eight McDonald’s franchises in Oakland and San Leandro, California. As a franchisee, Haynes was required to pay fees to McDonald’s and to meet certain brand standards. Haynes, however, controlled all aspects of its employment decisions (i.e., hiring, training, scheduling, disciplining, etc.) and there was (and is) no evidence that McDonald’s performs any of those functions.
Plaintiffs were employees of a McDonald’s franchisee located in Oakland, California. They sued Haynes and McDonald’s alleging that they were denied overtime premiums, meal and rest breaks, and other benefits in violation of California law and, most relevant here, that (i) McDonald’s was a joint employer and (ii) McDonald’s was liable for those wage violations under an ostensible agency theory. Plaintiff’s primary allegation supporting these theories was that Haynes voluntarily used a McDonald’s computer system for scheduling, timekeeping, and determining regular and overtime pay that may have led to errors in scheduling, payments, and other issues that could lead to violations of California wage and hour laws.
Plaintiffs and Haynes reached a class-wide settlement but Plaintiffs proceeded against McDonald’s. McDonald’s moved for summary judgment on the ground that it was not a joint employer of the workers at the franchises and that it owes them no duty of care. Judge Seeborg of the United States District Court for the Northern District of California granted McDonald’s motion. Plaintiff’s appealed to the Ninth Circuit.
Decision:
The Ninth Circuit upheld the District Court’s decision through a thorough and well-reasoned analysis of joint-employer law and ostensible agency theory. Regarding the analysis of joint-employer liability, the critical findings were as follows:
- Under California Wage Order 5-2001, section 2(H), an “employer” is one “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.” In a variation of this definition, the California Supreme Court in Martinez v. Combs, 49 Cal.4th 35 (2010) found that an entity acts as an employer under one of three circumstances: “(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law relationship.” Following the Martinez decision, the California Supreme Court in Patterson v. Domino’s Pizza, LLC, 60 Cal.4th 474 (2014) found that the franchisor only becomes a joint-employer “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.”
- Starting first with the “Control” definition of an employer, the Court found that McDonald’s does not retain a general right of control over day-to-day aspects of work at franchises. Echoing a fundamental precept of franchising, the Ninth Circuit stated the following:
Franchisors like McDonald’s need the freedom to impose comprehensive and meticulous standards for marketing their trademarked brand and operating their franchises in a uniform way … McDonald’s involvement in its franchises and with workers at the franchises is central to modern franchising and to the company’s ability to maintain brand standards, but does not represent control over wages, hours, or working conditions. (citations and quotations omitted.)
- Moving second to the “Suffer or Permit” definition of an employer, the Court dismissed application of the recent Dynamax decision as inapplicable and stated that the “suffer or permit” definition pertains only to the responsibility for the fact of employment itself and not whether McDonald’s caused Plaintiff’s employer to violate wage-and-hour laws by giving the employer bad tools or bad advice. In plain language, the Ninth Circuit identified a critical flaw of the joint-employer analysis proposed by Plaintiffs (and various other entities in the last decade):
We note finally that Plaintiff’s proposed interpretation of suffer or permit to work would yield absurd results. California follows the rule–including in the context of labor law–that courts may not interpret a statute so as to produce absurd consequences … Suppose, in this case, that the ISP system had been designed not by McDonald’s but by an IT specialist and that Haynes’ accountant and lawyer urged Haynes to use it. Under Plaintiffs’ view, by causing wage-and-hour violations, the IT specialist, the accountant, and the lawyer would become joint employers of Haynes employees. No California case suggests that this would be a permissible understanding of what it means for a person or entity to employ someone. (citations and quotations omitted.)
- Moving third to the “Common Law” definition of an employer, the Court quoted G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal.3d 341 (1989) stating that “[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the desired result,” followed directly by the statement that the Patterson Court held that “the means and manner test generally used by the Courts of Appeal cannot stand for the proposition that a comprehensive franchise system alone constitutes the control needed to support vicarious liability claims.” Based on these foundational concepts, the Court held that while McDonald’s may have been aware that Haynes was violating wage-and-hour laws, there is no evidence that McDonald’s had the requisite level of control to render it a joint employer.
Regarding Plaintiff’s theory that McDonald’s should be held liable under an ostensible-agency theory, the Court made the following relevant findings:
- Wage Order 5-2001 defines “employer” as stated above.
- The reference to “agent” in the definition only applies to an entity that actually exercises control over the wages, hours or working conditions of the worker and McDonald’s does none of those things.
- Further, Plaintiff’s negligence claims against McDonald’s cannot survive because McDoanld’s had no “supervisory” duty of care over its franchisee to prevent it from the alleged wage-and-hour violations.
Looking Forward:
After the Ninth Circuit’s decision in Vazquez and the Governor signing AB5 into law, October couldn’t get much worse than September for the franchise community in California. Admittedly, I was pretty worried about this decision. As a result, when it came out, I excitedly read through it once to ensure that the franchise community truly did secure a victory and then read through it a second time cheering on the court the same way many of us cheered on our favorite heroes in Avengers: End Game. (Yes, I’m a nerd for multiple reasons.)
Like every other decision that we have covered here that implicates California franchise law or joint employer liability, there are lessons to be learned:
- First and foremost, California remains open for franchising. Plaintiffs will continue to bring numerous cases against franchisors and franchisees, unions will be back tilting at their imaginary franchisor/franchisee windmills, and AB5 is surely the first of many legislative pushes in the State that will have an impact on franchising. It is not to say that it will be easy but there still are legal avenues to overcome these obstacles.
- Second, and relatedly, franchisors and franchisees need to take note what legal avenues remain available to maintain brand standards without becoming a joint employer and determine which legal avenues are most at risk.
- Third, this matter and numerous others in the last decade demonstrate if a franchisor or any other putative employer exercises direct control over wages, hours, or terms and conditions of employment, that is the highest risk of being considered a joint employer. With this in mind, all franchisor employees should be trained so that a single misstep by a well-intentioned employee does not undermine the franchise.
- Last, to the extent that you as a franchisor or franchisee are going to use tools like the software at issue in this matter, trust but verify. Tools fail; software coding can become corrupted, and mistakes can happen. If you need an accountant or lawyer to check your payroll for a month to ensure that calculations were done correctly, that is infinitely cheaper than litigation and settling a class action lawsuit brought by 1,400 employees.
This article was originally published on the California Franchise Network.
