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Court of Appeals Upholds Franchisor Victory in Joint Employment Class Action

Published by and on November 20, 2019

The U.S. Court of Appeals for the Ninth Circuit affirmed a grant of summary judgment in favor of McDonald’s Corp. in a wage and hour class action filed by McDonald’s franchise employees.

On October 1, 2019, the United States Court of Appeals for the Ninth Circuit issued an opinion in Salazar v. McDonald’s Corp., affirming the district court’s grant of summary judgment in favor of McDonald’s Corp. in a class action brought by franchise employees alleging that they had been denied overtime premiums, meal and rest breaks, and other benefits in violation of the California Labor Code, Case No. 17-15673 (9th Cir. Oct. 1, 2019). Plaintiffs further alleged that McDonald’s Corp. and its franchisee (Haynes Family Limited Partnership) were joint employers and that McDonald’s Corp. was liable for the alleged wage and hour violations. The Ninth Circuit held that the district court properly ruled that McDonald’s Corp. was not the plaintiffs’ employer under California law.

In Salazar, the plaintiffs alleged that although the franchisee hired, fired, trained, set wages, and paid the plaintiffs, McDonald’s Corp. was liable as a joint employer for the alleged wage and hour violations under California law. The district court held, and the Ninth Circuit affirmed, that McDonald’s Corp. was not a joint employer of workers at franchise locations because “it does not retain or exert direct or indirect control over plaintiffs’ hiring, firing, wages, hours, or material working conditions” and “does not suffer or permit plaintiffs to work, or engage in an actual agency relationship” with the franchisee. In so holding, the Ninth Circuit rejected plaintiffs’ argument that the Court should apply the California Supreme Court’s “ABC Test” for distinguishing employees from independent contractors as stated in Dynamex Operations West, Inc. v. Superior Court. 416 P.3d 1 (Cal. 2018).

The Salazar opinion is helpful to employers in the Ninth Circuit, as it highlights the level of involvement a franchisor like McDonald’s Corp. can have in a franchise’s operations without creating exposure to liability under California’s wage law. The Court ultimately agreed that McDonald’s Corp. did not exercise sufficient control over plaintiffs’ day to day working conditions. Even though McDonald’s Corp. did retain extensive quality control of the product the franchisee delivered to the public, and also provided the franchisee with computer systems to operate the store (including employee scheduling, timekeeping, and determining regular and overtime pay), the Court correctly found that this type of control did not create a joint employer relationship with the plaintiffs.

Welter Insight

While Salazar is helpful to employers in the Ninth Circuit, employers in other Circuits and states can take a note of best practices regarding franchisee worker relations. The Salazar Court placed emphasis on the fact that any direct control by McDonald’s Corp. over the franchisee’s workers was geared toward quality control and brand management, not the type of day-to-day aspects of store operation and management of employees that could trigger joint employer liability.

As joint employer liability remains a hot legal topic, franchisor employers should consider their own procedures for quality control and brand management over franchisees, and whether those procedures step over the line to create a joint employment relationship with the franchisee’s employees.

Franchisors should also monitor the U.S. Labor Department and the National Labor Relations Board for rules and regulations aimed to limit joint employer liability for franchisors and companies that outsource labor.

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