The recent trend in federal courts is to allow franchisors to avoid liability for employee wage claims. However, in California, franchisors may find themselves liable for franchisees' harassment of employees. Federal courts usually refuse to find a franchisor has acted as an "employer" for purposes of wage liability under the Fair Labor Standards Act (FLSA). This is true, even where a franchisee's employee tries to argue that the franchisee and franchisor were "joint employers." Reese v. Coastal Restoration & Cleaning Services, Inc., 2010 WL 5184841 (S.D. Miss. 2010). The Fifth Circuit Court of Appeals, in a case concerning claims by an employee against one of the members of the limited liability company that had employed him, held that a company and its members were not "joint employers" of the employee. Only the company would be held liable as an employer under the FLSA. Gray v. Powers, No. 10-20808 (5th Cir. Feb. 29, 2012).
The U.S. Department of Labor appears to be taking notice of the federal courts' strict definition of "employer" for purposes of wage claims. The Labor Department now pursues franchisees directly, without bothering to sue franchisors for employees' wage claims. Earlier this year, in Solis v. Franchise Equity Group, Inc., No. 8:12-cv-00527 (M.D. Fla. 2012), a consent judgment was entered against only the franchisee, where employees had not been paid for attending franchisor-mandated classes. In wage claims, the "joint employer" argument against franchisors does not appear to be very popular these days.
However, while franchisors appear to have distanced themselves from franchisees' employees in the context of wage claims, California courts remain willing to hold franchisors liable for other types of claims. In Patterson v. Domino's Pizza, LLC, No. B235099 (Cal. App. Jun. 27, 2012), the California Court of Appeal sitting in Los Angeles found that a franchisor could be liable for a franchisee's sexual harassment of an employee. The court said that a franchisor "may control its trademarks, products and the quality of its services. But the franchisor may be subject to vicarious liability where it assumes substantial control over the franchisee's local operation, its management-employee relations or employee discipline." The fact that the franchise agreement states that the employees are not employed by the franchisor is not enough. If the franchise agreement gives the franchisor control over employees or operations, the franchisor can be held liable for the wrongful acts of franchisees.
The law concerning franchise relationships continues to evolve. While franchisors appear to have avoided being classified as "employers" for purposes of paying employees, they may still be liable for franchisees' mistreatment of employees. Businesses operating through franchise agreements should consult with their Masuda Funai relationship attorney concerning their potential liabilities to the employees of their franchisees.