Franchisors, developers, and general contractors are facing enhanced litigation exposures in claims brought by employees of their franchisees and subcontractors. In light of the types of arguments successfully raised in Patterson v. Domino’s Pizza, Inc. (Cal.App., June 2012), Charter v. Waterford Marriot Hotel (W.D.Ok., June 2012), and Hall v. AIMCO, 2011 WL 940185 (N.D. Cal., 2011), summary dismissal from such lawsuits may become more difficult to obtain unless special precautions are taken.

As a general rule, franchisees and subcontractors are “independent contractors” (“ICs”) whose acts or omissions cannot result in liability imposed on the franchisor or an involved developer/general contractor (“Principal”). In the employment context, this general rule of non-liability can be avoided when the Principal becomes actively involved in a franchisee’s employment-related decisions. Purposeful and affirmative Principal involvement in decision making includes designating who can be hired, fired, promoted, or disciplined; how individual employees will perform their jobs or be compensated; or what employment policies or practices must be adopted and implemented. Depending on the extent of its involvement, the Principal may face liability as an “aider and abetter” to the IC’s wrongful employment conduct or as a “joint employer.” The Principal may also unexpectedly find, as was the case in Hall, that the “administrative exhaustion” defense is unavailable even though the IC’s employee did not name the Principal in the required pre-suit EEOC/DFEH filing. In Hall, the Court held that the employee’s administrative complaint filed only against the IC was sufficient because it asserted alleged wrongful acts that involved the Principal.

Particularly when an IC is no longer in business or is facing significant financial difficulties, a “deep pocket” Principal becomes a more likely litigation target for IC employees or employee groups. Principals should therefore proactively consider protective policies and employee training in order to maintain appropriate “boundaries” between the ICs’ employment policies or decisions and the Principals’ business operations.