Franchisors May Be Liable to Franchisees’ Employees Under Recent State Cases
As noted in our first blog, the National Labor Relations Board (NLRB) has recently identified temporary service workers, outsourced and subcontracted services, and franchising as target areas for an expanded joint employer concept. By potentially making franchisors like McDonald’s legally liable for employment law compliance at its franchised locations, the NLRB is promoting a pro-labor agenda. However, this attacks the franchise business model, which relies on an independent franchisee fully responsible for its own legal compliance. Neither franchisors nor franchisees favor disregarding the independence of franchisees.
However, franchisors often win these legal battles. In a 2014 Fifth Circuit case under the federal Fair Labor Standards Act, the court held that the plaintiff, a cook in a franchisee’s restaurant was not the employee of the principal of a small restaurant franchisor. Therefore the franchisor’s principal was not liable for overtime and minimum wages to franchisees’ employees. The court concluded that assistance given by the franchisor in employment matters was not tantamount to control of the employment relationship. Orozco v. Plackis, 2014 WL 3037943 (5th Cir. July 3, 2014).
Since the dawn of franchising over 50 years ago, many claimants have asserted that franchisors are responsible with franchisees under various state laws, or otherwise attempt to blur the line of independence between franchisors and franchisees. However the pace of these attacks has increased due to the agenda of the unions attempting to organized franchised restaurants and retail businesses. For the most part, franchisors have won those battles, and courts have held that because franchisors and franchisees are independent businesses, employees of franchisees are not employees of the franchisor. However, there are exceptions, and three recent California cases illustrate the issues.
1. Franchisor Wins; Franchisee is Independent Employer.
The California Supreme Court in Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th 474 (2014), held that the franchisor was not liable for sexual harassment by its franchisee of its employee. The employee lawsuit included claims under California’s Fair Employment and Housing Law and tort and common law employment law claims. The franchisee’s employee claimed that because Domino’s had control of the franchisee, it was a joint employer. She also claimed that the franchisor was vicariously liable, because the franchisee was the franchisor’s agent. The trial court granted summary judgment for the franchisor, and the lower appellate court reversed, holding that these matters should be tried as questions of fact. In a 4 to 3 decision the California Supreme Court reversed in favor of Domino’s, and held that there was no triable issue of fact, based on the record before it. With this close decision, if the facts were slightly different, the franchisor might have lost.
2. Tie Result; Avis May be Employer of its Rental Operator.
Later in the year the United States District Court for the Central District of California decided Ambrose v. Avis Rent a Car Sys., Inc., 2014 U.S. Dist. LEXIS 170406 (S.D. Cal. Dec. 8, 2014). Ambrose had entered into an “independent operator” agreement to operate a Budget Rent a Car business, which was similar to a franchise but Ambrose paid no franchise fees. Ambrose argued that because Budget had the right to control the manner and means by which she accomplished the results required by the agreement, she was Budget’s employee. Budget argued it was not Ambrose’s employer because it did not retain direct control over her hours of operation, employee appearance standards, work hours, or wage rates. Applying the “right to control” test, the court found that there was an issue of material fact as to whether Budget was Ambrose’s employer, and denied both parties’ motions for summary judgment. The case will therefore be tried.
3. Franchisor May Lose; Massage Envy Form.
A federal district court in California determined that a franchisor could be held liable for violation of the California Unfair Competition law (UCL) based upon the content of form membership agreements it had drafted and distributed to its franchisees for use with customers. In Hahn v. Massage Envy Franchising, LLC, 2014 U.S. DC LEXIS 147899 (S.D. Cal. Sept. 25, 2014), the plaintiffs represented a class of customers who had signed membership agreements at one of Massage Envy’s franchised clinics. They argued that a provision in the agreements that required customers to forfeit unused prepaid massage services when they cancelled their memberships or failed to make timely payments violated the UCL. In moving for summary judgment, Massage Envy argued that it could not be held liable because it was not a party to the membership agreement. The court denied summary judgment on that issue. The evidence demonstrated Massage Envy required its clinics to use the form membership agreements and exercised “wide-reaching control” over its franchisees’ day-to-day operations beyond what was necessary to protect its brand and goodwill. The court distinguished this case from Patterson because the franchisor in Patterson did not have control over the franchisee’s employment practices, whereas Massage Envy prepared the membership agreements.
DORSEY DO’S AND DON’TS:
Franchisors who do not want to be caught up in these cases should review their franchise agreements, disclosure documents, marketing materials, customer materials and Web sites, forms and manuals, training, communications, IT systems, and unwritten practices with legal counsel to reduce unnecessary controls.
Where franchisors provide a franchisee forms (such as customer contracts – as in the Ambrose case), there always should be a disclaimer, tailored to the situation, that a franchisee should get its own legal advice, and that laws vary from jurisdiction to jurisdiction. Franchisees should be advised to customize the forms for local laws and conditions, and to submit any changes to the franchisor for its approval.