Franchisors Protected in New Ruling by California Supreme Court After NLRB Asserts Determination That Franchisors Are Joint Employers

Two noteworthy developments in past months in the area of employment law issues related to franchise relationships may have franchisors understandably concerned, but there is also reason to be cautiously optimistic in light of a more recent California Supreme Court opinion on the issue.

First, on July 29, 2014, the National Labor Relations Board (NLRB) ruled that McDonald’s (as a franchisor) was a joint employer with its franchisees in connection with labor claims made by employees of its franchisees. In a striking reversal of the approach that is typically taken to determine whether a joint employer relationship exists, the NLRB asserted without explaining its rationale that McDonald’s “and/or” its franchisees will be named as respondents in several pending matters because the Board “determine[d]” that McDonald’s was a joint employer.

In the two-paragraph “ruling,” the NLRB General Counsel stated that the Board found “merit” in 43 of 181 claims filed against McDonald’s and its franchisees regarding alleged conduct in connection with pro-labor protest activities by workers. The fact that the NLRB is taking the position that McDonald’s is a joint employer in these cases suggests that the company could be held responsible for the actions of franchisees and the franchisee’s employees at McDonald’s restaurants nationwide. Not surprisingly, McDonald’s is publicly taking the position that it is not a joint employer and that the ruling represents a significant departure from several decades of legal precedent on the issue. While the next step in this matter will involve either a settlement(s) with McDonald’s or several hearings before administrative law judges regarding the employees’ claims, the issue is likely to be appealed – possibly up to the U.S. Supreme Court – if McDonald’s status as a joint employer in these matters is upheld.

Then, almost exactly one month later on August 28, 2014, the California Supreme Court struck a very different tone in Patterson v. Domino’s Pizza, — Cal. 4th — (Aug. 28, 2014, No. S204543), where it reaffirmed that the traditional “degree of control” analysis governs whether a franchisor could be held vicariously liable for the alleged harassment of one franchisee employee by another (supervisory) franchisee employee.

In Patterson, the Court affirmed the trial court’s original judgment granting the franchisor’s motion for summary judgment and held that “the [franchisor’s] imposition and enforcement of a uniform marketing and operations plan cannot automatically saddle the franchisor with responsibility for employees of the franchisee who injure each other on the job.” Furthermore, the Court stated that “[i]t follows that potential liability on the theories pled here requires that the franchisor exhibit the traditionally understood characteristics of an ‘employer’ or ‘principal,’ 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.”

The Supreme Court therefore affirmed that it is the “totality of the circumstances” involved in the franchise relationship itself and the degree of “control” that the franchisor exercises over the franchisee that governs whether a franchisor can be liable for the employment or personnel practices of the franchisee. Because the “essentially uncontradicted evidence” in the Patterson case showed that it was the franchisee that made day-to-day decisions regarding hiring, supervision, and disciplining of employees, no employment or agency relationship existed between Domino’s and the franchisee, and Domino’s was therefore not held vicariously liable for the alleged conduct at issue involving sexual harassment in the workplace.

The California Supreme Court’s opinion on this issue will hopefully influence other courts nationwide that may hear appeals regarding similar issues, but, at the same time, the NLRB will most certainly continue to pursue its recently adopted position on this matter. Companies and individuals in franchise relationships are advised to stay tuned regarding further developments in this area of law.

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