DLA Piper IPT partners Barry Heller, John Verhey and John Hughes recently conducted a webinar reviewing 2014’s top franchise decisions. Three significant 2014 matters are summarized below.

1.  In Patterson v. Domino’s Pizza, LLC,1 the California Supreme Court provided welcome clarity regarding the controls a franchisor can safely exercise without being held vicariously liable for the torts of its franchisees’ employees. In a 4-3 decision, the court examined the line between a franchisor’s business system and the independent business operated by the franchisee and held a franchisor must exhibit the traditionally understood characteristics of an “employer” to be held vicariously liable for the acts of one franchisee employee against another. 

The case involved a sexual harassment claim filed by a franchisee employee against the franchisee, another franchisee employee (who allegedly committed the sexual harassment), as well as the franchisor, Domino’s. After considering extensive evidence, the court concluded Domino’s had not “retained or assumed the traditional right of general control an ‘employer’ or ‘principal’ has over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees.” The court held there was no basis to find liability against Domino’s on vicarious liability grounds.

While the case is a victory for franchisors, particularly because it recognizes key aspects of the franchise relationship, it does not mean franchisors are immune from vicarious liability claims. In fact, the court warned its conclusion did not mean franchisors could never be held accountable for sexual harassment at a franchised location, nor that they could escape liability by declining to establish a sexual harassment policy.

2. In Orozco v. Plackis,2 the US Court of Appeals for the Fifth Circuit considered whether Craig Plackis, owner of a franchised restaurant chain, was responsible for a franchisee’s alleged failures to pay one of its employees overtime and minimum wage as required by the Fair Labor Standards Act. Applying the economic reality test, the Fifth Circuit reversed the lower court’s denial of Plackis’ motion for judgment as a matter of law, holding there was insufficient evidence for a reasonable jury to conclude Plackis was the plaintiff’s employer.

Although the franchise agreement demonstrated Plackis had a certain degree of control over the franchised location, the Fifth Circuit determined this was insufficient to support the jury verdict. The Fifth Circuit considered the language in the franchise agreement requiring the franchisee to follow “policies and procedures promulgated by the franchisor for ‘selection, supervision, or training of personnel’” to be an “innocuous statement” that did not suggest Plackis hired or fired employees, supervised or controlled employee work schedules or employment conditions, or determined the plaintiff’s rate and method of payment.

Given the recent climate surrounding joint employer issues, this decision is a relief for franchisors. However, the Fifth Circuit warned that its decision “did not suggest that franchisors can never qualify as the FLSA employer for a franchisee’s employees.”

3. Perhaps the most significant development in 2014 was the National Labor Relations Board decision to issue complaints against McDonald’s asserting McDonald’s is a joint employer,along with its franchisees, of the franchisees’ employees.

In June 2014, in an amicus brief in a pending case, the NLRB’s General Counsel urged the NLRB to “abandon its existing joint-employer standard” and replace it with a new joint employer standard, pursuant to which “an entity could be a joint employer if it exercised direct or indirect control over working conditions, had the unexercised potential to control working conditions, or where ‘industrial realities’ otherwise made it essential to meaningful collective bargaining.”

In December 2014, the NLRB General Counsel issued 13 complaints, involving 78 unfair labor practice charges, against McDonald’s franchisees and their franchisor, McDonald’s USA, LLC, as joint employers. While the complaints fail to specify McDonald’s USA, LLC’s involvement in the alleged unlawful conduct, the allegations are framed in such a way that by merely “possessing” control – as compared to exercising control – over a franchisee’s labor relations policies, a franchisor is a joint employer.

If the view of the NLRB were to be adopted, and possessing control were enough, it would upset years of authority to the contrary and create major problems for franchisors.