Labor & Employment Law Daily McDonald’s not a joint employer of franchisee employees, not liable in Labor Code class action
Thursday, October 3, 2019

McDonald’s not a joint employer of franchisee employees, not liable in Labor Code class action

By Lisa Milam, J.D.

The corporate entities did not exercise direct control over the employees or “suffer or permit” them to work. Nor was McDonald’s liable for the franchisee’s alleged wage-hour violations under an ostensible agency theory.

McDonald’s Corp. is not a joint employer of a California franchisee’s employees under any of the definitions set forth under California Wage Order No. 5-2001, a Ninth Circuit panel held, affirming summary judgment in favor of the corporate defendants against the employees’ California Labor Code claims. The workers also pursued the corporate fast-food giant under ostensible-agency and negligence theories, but the district court properly rejected these claims as a matter of law. Numerous amicus briefs were filed on behalf of both sides in this closely watched case—a significant win for the franchise industry in a case against the biggest franchise target, and in the federal circuit (and state) perhaps most likely to have been amenable to joint-employer liability (Salazar v. McDonald’s Corp., October 1, 2019, Graber, S.).

Class action wage suit. The Haynes Family Limited Partnership, which operates eight McDonald’s franchises in the Bay area, was sued by a group of employees who alleged that the franchise failed to pay them overtime and provide all required meal and rest breaks, among other violations of the California Labor Code. They also asserted negligence claims and sought civil penalties under the Private Attorneys General Act (PAGA). Their putative class action, filed on behalf of some 1,400 franchise employees, also named McDonald’s corporate entities.

The district court granted summary judgment to McDonald’s on the employees’ contention that the fast-food giant was their joint employer. The court also disposed of their claims against the franchisor under an “actual agency” theory. However, it let the plaintiffs’ pursue their novel approach that the franchisor could feasibly be liable for the franchisee’s California Labor Code violations based on an “ostensible agency” relationship. Ultimately, though, the district court found this claim untenable too, putting an end to what was left of their suit against the McDonald’s corporate entities.

The employees settled their surviving claims against the franchisee, and the district court granted preliminary approval to the classwide settlement granting monetary and injunctive relief. On appeal, the employees challenged the grant of summary judgment in McDonald’s favor.

Franchise facts. Haynes, the franchisee, selects, hires, and trains employees, supervises and disciplines them, and sets and pays their wages. Haynes also sets employee schedules and monitors their timekeeping. There is no evidence that McDonald’s performs any of those functions.

McDonald’s did, however, require its franchisee to use the corporate point-of-sale (POS) and in-store processor (ISP) computer systems to open and close each location each day. Haynes managers attended courses at McDonald’s “Hamburger University,” and then trained other employees on meal and break policies and other topics. Also, at least one McDonald’s-trained manager had to be on-site during each shift at Haynes’ eight restaurants. Haynes voluntarily used the applications that come with the McDonald’s ISP software for scheduling, timekeeping, and determining regular and overtime pay, including its “People Management Deployment” and “Dynamic Shift Positioning” tools, which determines where employees should be stationed throughout their shifts, and what duties they should perform. The ISP system assigns all hours recorded by workers to the date on which the shift began, including on overnight shifts.

According to the employees, the McDonald’s ISP system caused many employees who worked more than eight hours in a 24-hour period to be denied overtime pay because it didn’t recognize these additional hours as overtime. Also, the ISP settings do not schedule rest breaks or require second meal periods. The system sets meal periods to occur at intervals of 5:15, 5:30, or 6:00 hours, but California law requires meal periods at the five-hour mark; moreover, the ISP doesn’t flag when rest breaks are missed. Consequently, the employees also missed pay they should have received for missed and late breaks. Yet McDonald’s had attested that the ISP settings were compliant with labor laws, and the franchisor “strongly encouraged” the franchisee not to change any of the settings. In fact, Haynes management didn’t even have the capability to alter the system settings to fix overtime allocation errors.

Not a statutory employer. The California Supreme Court has provided three alternative definitions of “employer” within the meaning of California Wage Order No. 5-2001: “(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.” McDonald’s didn’t fit the bill under any of these options, the Ninth Circuit found.

McDonald’s didn’t meet the “control” definition of employer. The appeals court found that the corporate entity does not retain any general right of control over the franchisees’ workforce or more direct control over the daily aspects of their work. Rather, any direct control the franchisor may assert over the franchisees’ workers “is geared toward quality control” of the McDonald’s brand. This exercise of control, the appeals court said, “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.”

“Suffer or permit.” Nor did McDonald’s meet the “suffer or permit” definition. The plaintiffs argued that the corporate franchisor induced the franchise to use the corporate ISP system and discouraged any alterations to the system that might have conformed to California wage-hour laws, thus disclaiming its ability to prevent wage-and-hour violations caused by its ISP system’s settings. However, the employees erred in focusing on responsibility for the alleged wage-hour violations, according to the appeals court, because the “suffer or permit” definition “pertains to responsibility for the fact of employment itself.” As the court explained, “The question under California law is whether McDonald’s is one of Plaintiffs’ employers, not whether McDonald’s caused Plaintiffs’ employer to violate wage-and-hour laws by giving the employer bad tools or bad advice.”

A state appeals court, in a 2018 decision in Curry v. Equilon Enterprise, LLC, defined “suffer or permit” to work in accordance with California Supreme Court decisions. It explained that corporate liability is based on an entity’s knowledge of an individual’s work, and its “failure to prevent that work from occurring.” Here, McDonald’s had neither knowledge of, nor ability to prevent the franchisee’s employees from working.

The employees cited the California Supreme Court’s landmark 2018 decision in Dynamex Operations West, Inc. v. Superior Court to no avail. In that case, the state high court adopted a new test of independent contractor status under California wage orders, but independent contractor determination had no bearing here, as neither party contends the Haynes employees are independent contractors; rather, the issue is whether the Haynes employees are jointly employed by McDonald’s.

Not a common-law employer. Under California common law, the main determinant 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 result desired.” A franchisor has an employment relationship with franchisee employees, for liability purposes, “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.” McDonald’s did not do so. And again, while the franchisor retained some degree of control over its franchisees’ “means and manner” for purposes of brand integrity, this test “cannot stand for the proposition that a comprehensive [franchise] system alone constitutes the ‘control’ needed to support vicarious liability claims.” More is needed, in the franchise context, to establish liability under a common-law definition of “employer.”

“McDonald’s exercise of control over the means and manner of work performed at its franchises is geared specifically toward quality control and maintenance of brand standards,” the appeals court concluded. “Thus, McDonald’s cannot be classified as an employer of its franchisees’ workers under the common law definition.” Although there was arguably evidence that McDonald’s knew of its franchisee’s wage-hour violations, there was no evidence the corporate entity had the requisite level of control to be liable as a joint employer for those violations.

Ostensible agency theory rejected. Initially, the district court allowed the employees to pursue their ostensible agency claim, finding considerable evidence that McDonald’s caused them reasonably to believe that Haynes was merely acting as a McDonald’s agent. They “uniformly declared” their belief that both they and Haynes worked for McDonald’s. They had to wear McDonald’s uniforms, prepare and serve McDonald’s food in McDonald’s packaging, and say “Welcome to McDonald’s.” Their managers interacted with McDonald’s consultants, wore McDonald’s uniforms, and referred to themselves as “working for McDonald’s.” Employees received “McDonald’s Store Policies” and some employees had applied for the job through a McDonald’s website. While the website apparently stated that the job was “with an independently owned and operated McDonald’s franchisee,” the Ninth Circuit noted that “disclosures of this sort don’t automatically defeat the reasonableness of an individual’s beliefs, courts have found.” Also, no one ever told the employees that McDonald’s wasn’t their employer.

Still, the district court struck a final blow in the workers’ bid to hold the fast-food giant liable, rejecting as untenable their contention that McDonald’s was liable under an ostensible agency theory. Noting that it had little case law to go on, given the “highly unusual” use of the ostensible agency theory in this context (it is usually applied as to interactions with non-employees, and with respect to isolated, short-term contracts), the lower court had found that “ostensible agency is not a viable predicate on which to impute liability” for the employees’ Labor Code claims.

The Ninth Circuit agreed. It looked to Wage Order 5-2001, which defines “employer” as 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.” But “agent” in this context “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,” the appeals court observed. “McDonald’s does none of those things.”

Negligence claim fails. Finally, the appeals court rejected the franchisee employees’ negligence claim against McDonald’s. First, their negligence claim arose from the same facts as the wage-hour claims and, under California law, “where a statute creates a right that did not exist at common law and provides a comprehensive and detailed remedial scheme for its enforcement, the statutory remedy is exclusive.” And the Labor Code created new rights not previously existing at common law, the court said. The employees countered that, to the contrary, their negligence claim did exist at common law because it was a claim for negligent supervision of the franchisee. “But that theory cannot succeed unless Plaintiffs prove damages,” the appeals court said. “And Plaintiffs cannot prove damages except by establishing a statutory wage-and-hour violation, which brings us full circle to the exclusivity of the statutory remedy.”

The employees also contended that the corporate entities owed them a duty of care, which it breached by inadequately supervising Haynes’ managers and thus failing to prevent the Labor Code violations. There was some evidence in the record that would permit a finding that the corporate entity could have prevented some of the alleged wage-hour violations committed by the franchisee and failed to do so. Under California law, though, McDonald’s had no “supervisory” duties with respect to Haynes.

Partial dissent. Chief Judge Thomas dissented in part. Like the majority, he saw no genuine issue of fact as to whether McDonald’s was an employer under the “control” or common-law definitions. In his view, though, material fact questions remained as to whether McDonald’s was liable to the franchisee employees as a joint employer of Haynes under the “suffer or permit” definition. “The ‘remedial nature’ and legislative history of California wage-and-hour laws compel a broader reading of the ‘suffer or permit’ definition than the one the majority adopts today,” Thomas wrote.

The dissent specifically noted that McDonald’s ISP system—which the franchisor requires its franchisees to use, and which it expressly represented as compliant with applicable wage-hour laws—was a direct cause of the plaintiffs’ lost wages. “Reasonable inferences can be drawn that McDonald’s had the ability to prevent wage-and-hour violations caused by its ISP system settings yet failed to do so,” according to Thomas. And those reasonable inferences were to be drawn in the plaintiffs’ favor.

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