Ninth Circuit Finds Franchisors Not Joint Employers of Employees of Franchisees Absent Direct Control Over Wages, Hours and Working Conditions

Q.  As a franchisor, could I potentially be held liable for the wage and hour violations committed by franchisees of my organization against their employees?

A.  On October 1, 2019, a three-judge panel of the Ninth Circuit Court of Appeals ruled that McDonald’s Corporation was not liable as a joint employer for any alleged wage and hour violations committed against its California franchisee’s employees because McDonald’s did not exercise enough control over them.

In Salazar v. McDonald’s Corp., a class of approximately 1,400 restaurant workers at McDonald’s franchises in California alleged that they were denied overtime premiums, meal and rest breaks, and other benefits in violation of the California Labor Code. They argued that McDonald’s and itsCalifornia franchisee were joint employers such that McDonald’s should be held liable for the violations. In support of their joint employer theory, the restaurant workers conveyed that McDonald’s required the franchisees to use specific computer systems for timekeeping which allegedly caused them to miss out on receiving overtime pay, and to send their managers to McDonald’s-sponsored trainings, which included topics on wage and hour policies. On the other hand, the facts also showed that the California franchisees were solely responsible for setting wages, interviewing, hiring, firing, supervising, and paying all of its employees.

The Ninth Circuit ultimately determined McDonald’s was not a joint employer of its franchisees’ workers for purposes of wage and hour liability. Its decision narrowly focused on the California Supreme Court’s 2010 ruling in Martinez v. Combs, which addressed three alternative definitions for determining whether an employment relationship exists: (1) exercising “control” over employees’ wages, hours, or working conditions; (2) “suffering or permitting” employees to work; or (3) creating a common law employment relationship. Under the “control” definition, the Ninth Circuit held that McDonald’s did not have the necessary control over “day-to-day aspects” of working conditions, such as hiring, direction, supervision, or discharge; rather, McDonald’s only had direct control over quality, such as operational branding. It also found that McDonald’s did not fall under the “suffer or permit” definition, which “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.” For similar reasons, the Ninth Circuit panel held that McDonald’s could not be considered an employer under California common law because its quality control and maintenance of brand standards was not evidence that it had the requisite level of control over the workers’ employment to be deemed a joint employer.

The Ninth Circuit also rejected plaintiffs’ novel legal argument that McDonald’s was liable for wage and hour violations under an ostensible-agency theory, as it noted the term “agent” under state law only applies to an employer that exercises control over the wages, hours, or working conditions of workers, which was not the case here. In addition, the Court ruled that the workers’ negligence claim based on McDonald’s alleged failure to prevent the violations failed, as the claim was preempted by California’s wage and hour statutes and plaintiffs could prove neither the damages nor the duty elements required under a negligence theory of liability.

The Ninth Circuit ruling is significant for franchisors and other affiliated companies of employers, as it clarifies that a joint employment relationship under California wage and hour laws primarily depends on whether the company exerts direct control over day-to-day working conditions, such as hiring, direction, supervision, and discharge. The decision was issued only one week after a California appellate court ruled that Shell Oil Products US was not a joint employer for purposes of California wage and hour violations based on the same test employed by the Ninth Circuit. In April 2019, the U.S. Department of Labor proposed the enactment of a similar control test for determining joint employer liability under the Fair Labor Standards Act. Nonetheless, companies are advised to consult with experienced labor and employment attorneys in order to stay abreast of the evolving tests used to determine joint employment liability.

Jonathan Gilman

 

NLRB Proposes New Rule on Joint Employer Standard

Q.  What is the current rule for determining whether two employers are considered to be “joint employers” under the National Labor Relations Act?

A.  On September 14, 2018, the National Labor Relations Board (NLRB) proposed a new regulation that would make it more challenging to establish joint employer status under the National Labor Relations Act. The proposed rule dictates that two entities will be joint employers only if each exercises substantial direct and immediate control over employees.

As we reported previously, in 2015, the NLRB significantly relaxed the standard for proving that two entities are joint employers in Browning-Ferris Industries of California, Inc. d/b/a BFI Newby Island Recyclery, 362 NLRB No. 186 (2015). In Browning-Ferris, decided during the Obama administration, the NLRB ruled that entities could be joint employers even if one had only indirect, limited and routine control or the unexercised right to control employees’ terms and conditions of employment. The NLRB reversed course in December 2017 during the Trump administration, overruling Browning-Ferris and reinstating the standard for joint employer status that had existed previously – that entities are joint employers only if each has exercised direct and immediate control over employees. See Hy-Brand Industrial Contractors, Ltd., 365 NLRB No. 156 (2017). The Hy-Brand ruling was short-lived, however. The NLRB vacated that ruling earlier this year due to the conflict of interest of one of the NLRB’s members who participated in the decision. In the meantime, a petition for review of Browning-Ferris is pending in the D.C. Circuit Court of Appeals.

Now, the NLRB seeks to establish a stricter joint employer standard by regulation. Doing so would add more permanence to the joint employer standard than interpreting it through case law, which often changes from one presidential administration to the next. The NLRB explained in its Federal Register notice that it would benefit from public comment on the joint employer standard “given the recent oscillation on the joint-employer standard, the wide variety of business relationships that it may affect (e.g., user-supplier, contractor-subcontractor, franchisor-franchisee, predecessor-successor, creditor-debtor, lessor-lessee, parent-subsidiary, and contractor-consumer), and the wide-ranging import of a joint-employer determination for the affected parties.”

The NLRB’s proposed rule enunciates the following test for joint employer status:

An employer, as defined by Section 2(2) of the National Labor Relations Act (the Act), may be considered a joint employer of a separate employer’s employees only if the two employers share or codetermine the employees’ essential terms and conditions of employment, such as hiring, firing, discipline, supervision and direction. A putative joint employer must possess and actually exercise substantial direct and immediate control over the employees’ essential terms and conditions of employment in a manner that is not limited and routine.

The NLRB included 10 examples with the proposed rule “to help clarify what constitutes direct and immediate control over essential terms and conditions of employment.” For example, the NLRB concluded that the following scenario reflects one company’s direct and immediate control over another company’s employees: Company A supplies labor to Company B and, pursuant to the contract between them, Company A is required to pay a particular wage rate. In that situation, Company B exercises direct and immediate control over wage rates. In another example, a franchisor requires its franchisee to operate the franchisee’s store between specified hours. The franchisor does not exercise direct and immediate control over the essential terms and conditions of employment of the franchisee’s employees because the franchisor is not involved in scheduling the franchisee’s employees or in determining shift durations.

The NLRB’s proposed rule will now go through the time-consuming rulemaking process. As employers wait for the publication of a final rule, companies can minimize the risk of joint employer status by avoiding involvement in decisions regarding another company’s employees, including decisions regarding pay, hiring, discipline or termination.

–Susan K. Lessack