In an important wage-and-hour decision for franchisors, Salazar, et al. v. the McDonald’s Corp., et al., the Ninth Circuit Court of Appeals ruled that employees of one of the hamburger giant’s California-based franchisees were not jointly employed by McDonald’s Corp. and thus the franchisor, McDonald’s Corp., was not liable to the employees under California state wage- and-hour laws. Significantly, the court made this ruling even though it noted there was arguably evidence that the franchisor was aware that its franchisee might be violating the law. Although the Court of Appeals addressed claims under California state law, the opinion touches on legal issues that may also benefit franchisors facing claims of joint employment under the Fair Labor Standards Act.
The Facts and How the Lower Court Ruled
Guadalupe Salazar and her coworkers filed a class action lawsuit alleging that they had been denied overtime premiums, meal and rest breaks, and other benefits guaranteed under the California Labor Code. These plaintiffs sued the owner of the restaurants at which they worked, the Haynes Family Limited Partnership, as well as the franchisor — McDonald’s Corp. and others. The district court granted summary judgment in the franchisor’s favor, ruling that the franchisor was not the employer, and the plaintiffs appealed.
How the Ninth Circuit Ruled
The Court of Appeals affirmed the lower court summary judgment ruling, holding that the district court properly ruled that McDonald’s Corp. is not an employer of the franchisee’s workers under the “control” definition, the “suffer or permit” definition or the “common law” definition of employer.
The Control Test. The Appeals Court found that the plaintiffs were not employees under the control test. Under that test, an employer must exercise “control over the wages, hours, or working conditions” of the workers. The court held that any direct control that McDonald’s asserts over franchisees’ workers is geared toward quality control and it does not retain “a general right of control” over “day-to-day aspects” of work at the franchises. The court noted that “franchisors like McDonald’s need the freedom to impose [their] comprehensive and meticulous standards for marketing [their] trademarked brand and operating [their] franchises in a uniform way.” The court went on to say that:
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.
The Suffer or Permit Test. In addressing the “suffer or permit” test, the Court of Appeals held that the plaintiffs improperly focused on McDonald’s responsibility for preventing the alleged wage-and-hour violations. The court noted that the correct test is whether the franchisor is one of the plaintiffs’ employers, not whether the franchisor caused the plaintiffs’ employer to violate wage-and-hour laws by allegedly giving the employer bad tools or bad advice as the plaintiffs had argued.
The Common Law Test. Finally, the court found that McDonald’s Corp. was not a joint employer under the common law test. Under the common law test, the principal test of an employment relationship is the right to control the manner and means of accomplishing the desired result. On this issue, the court again held that the corporation’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. Thus, McDonald’s cannot be classified as an employer of its franchisees’ workers under the common law definition.
A Few Takeaways
At a time when the legal trend has been an expansion of the joint employment concept, this ruling, from a traditionally employee-friendly federal circuit court, provides some good news for franchisors. The opinion validates a franchisor’s ability to control general standards and operating procedures of franchisees without assuming responsibility for a franchisee’s employees.
The opinion also serves as a reminder for franchisors that there are limits to the role a franchisor can play in the business of its franchisees without assuming the unintended position of joint employer. Had McDonald’s Corp. controlled or directed daily employment activities or set wages or hours of work for the franchise workers, the ruling almost certainly would have been different.
Finally, the court commented, in a footnote, that it offered no opinion as to whether the franchisee in the case might have a legal action against the franchisor relating to the provision of advice or tools relating to employment. This footnote provides a reminder to both franchisors and franchisees of the need to address allocation of risk and responsibility in the franchise agreement.
