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Lovin' It: Ninth Circuit Rules McDonald's is Not a Joint Employer with Franchisee in California

In a case that should grab the attention of franchisors across the country, a panel of the US Court of Appeals for the Ninth Circuit has ruled that McDonald’s Corporation is not the joint employer of the employees of a California Bay Area franchisee. Salazar et al. v. McDonald’s Corp., No. 3:14-cv-02096-RS (Oct. 1, 2019).

The panel affirmed the district court’s summary judgment in favor of McDonald’s Corp. in a class action brought by a franchisee's employees alleging that they were denied overtime premiums, meal and rest breaks, and other benefits in violation of the California Labor Code.

The plaintiff class members worked at McDonald’s franchises in the Bay Area operated by the Haynes Family Limited Partnership (“Haynes”). Haynes operated eight McDonald’s franchises in Oakland and San Leandro, California. The franchise agreements required Haynes to pay fees to McDonald’s. To maintain the franchise, Haynes had to meet certain standards, such as serving McDonald’s products.

Haynes selects, interviews, and hires employees for its franchises. It trains new employees and sets their wages, which are paid from Haynes’ bank account. Haynes sets employees’ schedules and monitors their time entries. Haynes also supervises, disciplines, and fires employees such as Plaintiffs. There was no evidence that McDonald’s performs any of those functions.

Nonetheless, according to the Court, evidence in the record, viewed in Plaintiffs’ favor, would permit a finding that McDonald’s could have prevented some of the alleged wage-and-hour violations but did not do so. Under the franchise agreement, McDonald’s required Haynes to use its Point of Sale (“POS”) and In-Store Processor (“ISP”) computer systems every day to open and close each franchise location of McDonald’s. Managers of the Haynes McDonald’s franchises took various courses with McDonald’s at Hamburger University and then trained other employees on topics such as meal and rest break policies. At least one McDonald’s-trained manager was required to be present during each shift at the Haynes franchises.

On appeal, the Court considered whether McDonald’s could be considered an employer or joint employer under three different tests under California law. Under California Wage Order No. 5-2001, section 2(H), an “employer” is 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.” In construing Wage Order No. 5-2001, the California Supreme Court has provided three alternative definitions for what it means for a person or entity to “employ[]” someone: “(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.”

The panel held that the district court properly ruled that McDonald’s was not an employer under the “control” definition, which requires “control over the wages, hours, or working conditions.” According to the panel, “[a]y direct control that McDonald’s asserts over franchisees’ workers is geared toward quality control . . .”  McDonald’s does not retain “a general right of control” over “day-to-day aspects” of work at the franchises. Notably, the Court reasoned that “[f]ranchisors like McDonald’s need the freedom to ‘impose[] comprehensive and meticulous standards for marketing [their] trademarked brand and operating [their] franchises in a uniform way.’ . . .” Moreover, “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 panel also held that the district court correctly concluded that McDonald’s did not meet the “suffer or permit” definition of employer. “Plaintiffs’ focus on responsibility for the alleged violations of wage-and-hour laws is misplaced, because the ‘suffer or permit’ definition pertains to responsibility for the fact of employment itself. 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.”

Finally, the panel held that under California common law, McDonald’s cannot be classified as an employer of its franchisees’ workers. According to California common law, “[t]he principal test 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.”

The Court repeated its observation that 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. Thus, McDonald’s could not be classified as an employer of its franchisees’ workers under the common law definition.

The panel concluded that although there was arguably evidence suggesting that McDonald’s was aware that Haynes was violating California’s wage-and-hour laws with respect to Haynes’ employees, there was no evidence that McDonald’s had the requisite level of control over plaintiffs’ employment to render it a joint employer under applicable California precedents.

Addressing a relatively novel legal argument, the panel held that McDonald’s cannot be held liable for wage-and-hour violations under an ostensible-agency theory. “By its plain terms, the reference to an ‘agent’ 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. McDonald’s does none of those things.”

The panel also rejected plaintiffs’ claim that McDonald’s owed them a duty of care, which it breached by supervising Haynes’ managers inadequately and failing to prevent the alleged hour-and-wage violations. The panel held that plaintiffs met neither the damages nor the duty elements required to prove negligence.

Takeaways

Although California is admittedly a unique state when it comes to employment law, the Ninth Circuit is very influential, so employers can expect that other courts in other circuits will adopt the reasoning in the McDonald’s case. Thus, franchisors should make sure that their franchise arrangements and operations do not cross any of the lines discussed in this case.

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