When a franchisor provides a California franchisee with detailed instructions about how to operate the franchise business, but allows the franchisee to manage its own workforce, can the franchisor be held liable for the franchisee’s wage and hour violations? The California Court of Appeals found the answer to be no under the facts in Curry v. Equilon Enterprises, LLC, 2018 WL 1959472 (Cal. Ct. App. Apr. 26, 2018). There, the Court of Appeals concluded Equilon Enterprises, LLC, doing business as Shell Oil Products US (“Shell”), was not liable for the alleged wage and hour violations of the company that operated its Shell-branded gas stations throughout California.

Operating Agreements Dictated Certain Aspects of Business Operations

ARS, the franchisee, leased and operated several Shell-branded gas stations pursuant to operating agreements it entered into with Shell. Under the operating agreements, ARS retained all profits from the stations’ convenience stores and car washes, but Shell owned the gasoline that was sold to customers, unilaterally set fuel prices, and received all revenue from the fuel sales. Shell required ARS to complete daily gasoline price surveys from competing gas stations, submit that information to Shell, and then change the fuel prices as directed by Shell.

Shell also controlled other aspects of the business operations. Shell required that (i) the gas stations remain open at all times, (ii) ARS track on a daily basis the amount of fuel stored in Shell’s tanks against the amount sold to customers, (iii) ARS maintain certain records, (iv) ARS transmit specified reports to Shell on a daily basis, and (v) ARS transmit convenience store and car wash sales information to Shell on a monthly basis. The operating agreements also provided that ARS “shall remove any . . . employee promptly upon [Shell’s] request for good cause shown,” while also stating that ARS had the right to select, hire, and discharge employees.

Plaintiff Curry Alleged She Was Misclassified and Sued ARS and Shell

Sadie Curry was a multi-site manager hired by ARS. In her lawsuit, Curry alleged she was misclassified as exempt from overtime, meal breaks, and rest breaks, and was therefore owed unpaid overtime and meal and rest break premiums. Curry further alleged that ARS and Shell were joint employers, and jointly liable, for purposes of her wage claims.

The Court Concluded that Shell Did Not “Employ” Curry

Shell moved for summary judgment, arguing that it did not employ Curry and could not be liable for Curry’s wage claims. In analyzing this issue, the Court noted that IWC Wage Order No. 7-2001, which applied to Curry’s employment, had three alternative definitions of what it means to “employ” someone for purposes of the wage order:

1. To exercise control over the wages, hours, or working conditions;

2. To suffer or permit to work; or

3. To engage.

1. Control over wages, hours, or working conditions. Applying the first definition, the Court concluded that Shell did not control Curry’s wages, hours, or working conditions. The parties did not dispute that ARS was responsible for hiring, firing, disciplining, training, and compensating Curry; ARS alone determined that Curry would be exempt, where Curry would work, when she would work, and the compensation and health benefits she would receive; and ARS maintained control over what Curry did on a daily basis. Although the operating agreement between ARS and Shell required that ARS perform certain tasks, Shell could not direct Curry to perform any particular task. These facts showed that ARS, and not Shell, controlled Curry’s wages, hours, and working conditions.

2. Suffer or permit to work. Turning to the second definition, the Court explained that the basis for liability under the “suffer or permit” definition is that the employer “permit[s] by acquiescence” or “suffer[s] by a failure to hinder.” This definition did not apply to Shell, because Shell did not have authority to hire or fire Curry, and, thus, it did not acquiesce to Curry’s employment. Similarly, although Shell had authority to request Curry be removed “for good cause shown,” the good cause clause was never triggered, so Shell did not have the ability to hinder (or fail to hinder) Curry’s employment.

3. Engage. The Court determined that “to engage,” in the context of the wage orders, referred to the common law test of whether a worker is an employee or an independent contractor. The Court then applied a multi-factor test and determined that nearly all of the factors supported the conclusion that Curry was not employed by Shell. For instance, Curry was engaged in a distinct occupation, she was not supervised by Shell, Shell did not require a particular skill set for individuals hired by ARS, Shell did not determine Curry’s length of employment or compensation, and Shell was engaged in a different business than Curry.

Importantly, the California Supreme Court recently announced a new “ABC” test for determining whether an individual is an employee or an independent contractor under the California Wage Orders, and that new ABC test would likely be used today to determine whether Shell “engaged” Curry for purposes of determining liability under the applicable Wage Order. You can find our blog post on the California Supreme Court’s decision and the new ABC test here. This recent change notwithstanding, the Curry decision still provides a helpful overview of how California courts address joint employer issues in the context of alleged wage and hour violations. Franchisors (and similar businesses) with locations in California may benefit from reviewing whether any of the three Curry definitions of “to employ” could create an employer-employee relationship with their franchisees’ employees.