Legal Cases Put Spotlight on Franchisor Liability

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When a former employee of a Domino’s Pizza store in California filed a sexual harassment complaint in 2009, she decided to sue a variety of different parties. This included not only the franchisee and her former supervisor, but also the franchisor.

The dispute ultimately made its way to the California Supreme Court. In August, the court ruled that franchisors are liable in such cases only if they have day-to-day control over relevant employment matters (Patterson v. Domino’s Pizza LLC, Calif., No. S204543 (Aug. 28, 2014)).

Meanwhile, another key development has been unfolding in the area of franchisor-franchisee relationships. In dozens of cases alleging unfair labor practices, the National Labor Relations Board (NLRB) said that McDonald’s USA can be deemed a “joint employer” along with the franchisee, and both parties can be held liable.

The takeaway: Franchisors should know how to reduce the risk of liability, and franchisees should know how to negotiate the best deal they can get for themselves. Ironically, though, some franchisors and franchisees collaborate closely on certain matters, believing they’ll be less likely to get into legal trouble in the long run.

Whatever they choose to do, both parties should be clear what they’re agreeing to–and be aware of the possible implications of their decisions.

California Supreme Court Case

In the Domino’s Pizza case, Taylor Patterson alleged that her male supervisor sexually harassed her through offensive comments and behaviors. Patterson reported this to the owner of the Domino’s Pizza franchise in Thousand Oaks, and her father contacted the police and the Domino’s corporate office, according to the complaint. Patterson eventually quit her job.

Her 2009 lawsuit stated various causes of action, including violation of the Fair Employment and Housing Act (FEHA). Patterson stated that the franchisor–Domino’s –employed both her and supervisor Renee Miranda, and she sought to hold the franchisor “vicariously liable” for the alleged offense. But Domino’s asserted that it wasn’t the employer, because it lacked day-to-day authority over choosing, managing and disciplining workers. According to Domino’s, that control rested with Daniel Poff, the owner of the franchisee Sui Juris LLC.

The trial court granted summary judgment for Domino’s, finding that the company lacked control over employment matters and therefore wasn’t liable for any of the claims.  The appeals court reversed, citing evidence that Domino’s intruded into the franchisee’s employment decisions.

In its 4-3 ruling, the California Supreme Court reversed the appellate court’s decision. It cited many factors, including evidence that Poff had authority over the application process and hiring decisions.

The court also determined that “with respect to training employees on how to treat each other at work, and how to avoid sexual harassment, it appears that Sui Juris, not Domino’s, was in control.”

Also, the ruling stated that Domino’s “lacked contractual authority to manage the behavior of Sui Juris’ employees while performing their jobs, including any acts that might involve sexual harassment.”

The court noted that Poff implemented his own “zero tolerance” policy on sexual harassment, and that he exercised control by disciplining violators.

In addition, Domino’s had no system for reporting sexual harassment complaints made by employees of franchisees. To report the complaints made by Patterson, her father used a toll-free number for Domino’s customers to complain about their meal or service.

The California Supreme Court noted that Domino’s area leader, Claudia Lee, told Poff to “get rid of” Miranda when she heard about the sexual harassment allegations. But the court found no indication that her statement was a demand.

The court stated: “No reasonable inference can be drawn that Domino’s, through Lee, retained or assumed the traditional right of general control an ‘employer’ or ‘principal’ has over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.”

Justice Kathryn Werdegar and two other justices dissented, citing evidence that Poff felt pressured to do what Lee told him.

NLRB Decision

As for the McDonald’s case, NLRB General Counsel Richard Griffin controversially said that as a franchisor, McDonald’s USA could be considered a “joint employer” in many cases alleging unfair labor practices. The general counsel investigated 181 cases arising from employee protests, and found that 43 have merit. If a settlement isn’t reached, then McDonald’s USA can be named as a respondent, along with the franchisee.

In a blog post, University of California, Irvine, law professor Catherine Fisk wrote that activists are pushing for franchisors to be considered joint employers, because they view it as crucial for improving working conditions.

“When a company outsources the hiring and supervision of the workforce to a labor contractor or to a franchisee but maintains control over the operation of the business, workers find that it is essential to involve the lead company” in negotiating and enforcing workers’ rights, Fisk wrote in the blog post.

She concluded: “If McDonald’s allows franchisees enough autonomy to enable them to deal with their employees over wages, then McDonald’s will no longer be a joint employer.”

In a statement, McDonald’s rejected the NLRB’s determination that it’s a joint employer. Although McDonald’s provides franchisees with resources in areas like food quality and customer service, it doesn’t control the “essential terms and conditions of employment” of franchisee workers, the company said.

Guidance for California Businesses

Given the California Supreme Court decision and the NLRB determination, both franchisors and franchisees should carefully consider how to structure their agreement, according to Jennifer Shaw, a Sacramento attorney at Shaw Valenza.

The more control that franchisors have over day-to-day employment matters, the more likely courts will be to find them “vicariously liable” in these types of cases, Shaw told SHRM Online. To lower the chances of being found liable, franchisors should ensure that franchisees are responsible for day-to-day operations, she said.

To reduce the risk of liability, the agreement should make clear that the franchisor and franchisee are separate entities, noted Bryan Hawkins, an attorney at Stoel Rives in Sacramento. The agreement should state that the franchisor isn't the employer and has no control over day-to-day employment, he told SHRM Online.
For their part, franchisees generally want all the support they can get from the franchisor, according to Shaw. So it’s advisable for franchisees to negotiate the best deal they can get in terms of liability, she said. If the franchisor requires the use of its programs or systems, then the franchisee should be indemnified for that, Shaw noted. For instance, if the franchisor requires the franchisee to use a specific payroll system, the franchisor should agree to pay for any damages or liability that the franchisee might incur as a result of using that system. This should be included in the franchise agreement.

Businesses should pay attention not only to the franchise agreement, but also their actual practices, Hawkins emphasized.

“Courts are looking to see if you’re actually following through with what’s in your contract,” he said.

In many ways, though, the Supreme Court made things more confusing for businesses, Hawkins added.
In the Domino's case, one factor used in the court’s decision is that the franchisee appeared to be in control of sexual harassment training. The court's message is that for franchisors to protect themselves from liability, they shouldn't help with sexual harassment training, Hawkins said. However, franchisors typically have more experience than franchisees in this type of training. It would be beneficial for franchisors to help conduct sexual harassment training, but they may be hesitant to do so because of liability concerns, he said.

Shaw observed that both the franchisor and franchisee potentially could be better off if they work together more closely in certain areas. For example, they might collaborate on wage-hour compliance and payroll processes. Although there would be a risk of joint liability in the event of a lawsuit, both partiesprobably would be less likely to get sued in the first place, according to Shaw. Hawkins said he agrees with this assessment.
“The irony is they would be less likely to get into trouble,” Shaw said.

 

Shaw noted that some franchisors and franchisees have very cooperative relationships, including a few of her own clients. In these situations, both parties might be on the hook for liability–but they’re both okay with that.

As for sexual harassment training, both parties might choose to collaborate in that area also. But that could be dangerous, because of the California Supreme Court case, Shaw said. She noted that Domino’s avoided trouble by not providing harassment training to the franchisee.

The best advice is to work closely with labor-relations counsel on deciding the best course of action, Shaw added.

“Both sides need to be clear what they’re agreeing to when they enter those agreements,” she said.

The position of the NLRB general counsel might be compatible with the Supreme Court’s decision in the Domino's case, Hawkins noted. Although the Supreme Court ruled that Domino’s wasn’t vicariously liable in this case, the court said that franchisors potentially could be liable if they have day-to-day authority in employment matters.
Shaw believes that the NLRB wants to make an example of McDonald’s. The agency’s decision is more of a concern for bigger companies, because they’re more likely to get on its radar, said Shaw, who represents some McDonald’s franchisees in matters unrelated to the NLRB cases.

Meanwhile, a controversial bill that would have affected California franchises won’t become law, as Gov. Jerry Brown vetoed it in late September.

Senate Bill 610, sponsored by the American Association of Franchisees and Dealers, was touted as a way to protect franchisee rights. But the International Franchise Association opposed the bill, saying that it was unnecessary and confusing. Shaw said she thinks the bill was poorly written, and it is unclear what the implications would have been if the governor had signed the bill.

Toni Vranjes is a freelance business writer in San Pedro, Calif.

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