On October 1, 2019, the United States Court of Appeals for the Ninth Circuit handed McDonald’s Corp. a major victory in a joint employer case when it affirmed a lower court decision granting summary judgment in favor of McDonald’s in a wage-and-hour class action in which the plaintiffs claimed that McDonald’s was the joint employer of one of its California franchisee’s employees.

Brief summary of the decision

In Salazar v. McDonald’s Corp., plaintiffs alleged, in a case filed against McDonald’s and a Bay Area franchisee on behalf of a class of approximately 1,400 employees, that McDonald’s and its franchisee, as joint employers, denied the class members overtime premiums, meal and rest breaks and other benefits in violation of the California Labor Code.

The district court held that McDonald’s was not a joint employer of its franchisee’s employees and that plaintiffs’ ostensible-agency and negligence claims failed as a matter of law. The Ninth Circuit, closely analyzing California precedents concerning the definition of “employer” under California Wage Order No. 5-2001 and at common law (principally, Martinez v. Combs and Patterson v. Domino’s Pizza), held that although there was evidence that arguably suggested McDonald’s was aware its franchisee was violating California’s wage-and-hour laws and evidence that might have supported a finding that McDonald’s could have prevented some of the alleged violations from occurring, there was no evidence that McDonald’s had the requisite level of control over the fact of the plaintiffs’ employment to render it a joint employer.

The Ninth Circuit’s reasoning

Relying on the district court record, the Ninth Circuit observed that the relevant facts, viewed in a light most favorable to the plaintiffs, were that the McDonald’s franchisee alone selects, interviews, hires and trains its employees, and furthermore that the franchisee, without input from McDonald’s, sets and pays their wages, and supervises, disciplines and fires them. It also found evidence that would permit a finding that McDonald’s could have prevented some of the alleged wage-and-hour violations (but did not do so), because the franchisee voluntarily (with McDonald’s encouragement but not compulsion) used McDonald’s computer systems for scheduling, timekeeping and determining regular and overtime pay, and the system settings may have caused workers to miss out on overtime pay they had earned.

The Ninth Circuit noted that under California law, there are three alternative definitions for what it means for a person or entity to “employ” someone: “(a) to exercise control over the wages and hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law relationship.”

The “control” definition

Applying these definitions, the Ninth Circuit first concluded that the district court had properly found that McDonald’s is not an employer under the “control” definition, because any control that McDonald’s asserted over its franchisees’ workers was geared towards quality control, and that McDonald’s did not retain “a general right of control” over day-to-day aspects of work performed at the restaurants, noting that “McDonald’s involvement in its franchises and with workers at the franchises is central to modern franchising and to the company’s ability to maintain brand standards, but does not represent control over wages, hours, or working conditions.”

The “suffer or permit” definition

Moving to the “suffer or permit” definition of employer, the Ninth Circuit also agreed that the district court had correctly rejected plaintiffs’ argument that because McDonald’s allegedly induced its franchisee to use McDonald’s software while discouraging changes in the software that would have conformed to California wage-and-hour laws, McDonald’s met the “suffer or permit” definition. The court found that plaintiffs’ focus on responsibility for the alleged violations of wage-and-hour laws was misplaced, because the “suffer or permit” definition pertains to the responsibility for the fact of employment itself, and not whether McDonald’s caused its franchisee to violate the law “by giving the [franchisee] bad tools or bad advice.” Focusing on the fact of employment, the court found that, because there was no evidence that McDonald’s had any power over its franchisee’s actions as the employing entity in hiring or firing, that factor was dispositive.

The common law definition of employer

The court also affirmed the district court’s conclusion that McDonald’s was not an employer under the common law definition of employer, on the grounds that the controls over the franchised restaurant exercised by McDonald’s, which were geared specifically towards quality control and maintenance of brand standards, could not alone give it a right to control the manner and means of accomplishing work at the franchisee level, necessary to impose a common law liability on a franchisor as an employer of its franchisees’ workers under California law.

The ostensible-agency theory

The Ninth Circuit next rejected plaintiffs’ argument that McDonald’s was liable for wage-and-hour violations under an ostensible-agency theory pursuant to Wage Order 5 – 2001, because by the plain terms of the Wage Order, the fact that McDonald’s did not actually employ the workers or actually exercise control over wages, hours or working conditions precludes it from being held liable under an ostensible agency theory.

Finally, the Ninth Circuit held that the district court had correctly rejected plaintiffs’ negligence claim, finding that plaintiffs could not meet either the damages or duty requirements of a common-law negligence claim based on a wage-and-hour violation. The court found that plaintiffs could not establish damages except by establishing a statutory wage-and-hour violation, and if they were able to do so, such a claim would be exclusively covered by the statutory remedy, which the court had already found unavailing as against McDonald’s. And the court also found that plaintiffs could not prove that McDonald’s had a legal duty to supervise its franchisee’s satisfaction of the obligations imposed by labor statutes and wage orders absent a showing that it had retained or assumed the right of general control over the relevant day-to-day operations of the franchisee.

Finding the Dynamex test inapplicable

The Ninth Circuit summarily dismissed the plaintiffs’ suggestion that the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, adopting a new test for distinguishing employees from independent contractors under California wage orders, and subsequently codified as California AB-5, should be considered in addressing McDonald’s liability. It noted: “[t]hat case has no bearing here, because no party argues that Plaintiffs are independent contractors. Plaintiffs are [Franchisees’] employees; the relevant question is whether they are all still McDonald’s employees.”

Takeaways

Although the Ninth Circuit’s opinion in Salazar substantially undermines application of joint employer liability on franchisors based solely on imposition of comprehensive mandatory standards on their franchisees – at least when those standards foster quality control and uniformity – a cautionary note is in order. One member of the three-judge panel dissented in part, pointing to evidence that McDonald’s required its franchisee to use its computer software to open and close each franchise location for the day; that the settings in the system (which the franchisee allegedly had limited or no ability to change) may have caused violations of California wage-and-hours law; and that McDonald’s supposedly was aware that work was occurring under unlawful conditions but failed to prevent the violations. This, the dissenting judge noted, created a triable issue as to whether McDonald’s could be a joint employer under the “suffer or permit” definition.

While the dissenter’s attempt to justify an interpretation of the Wage Order defining an “employer” as any person in a position to avoid a statutory harm, rather than those persons having the power to cause employees to work or keep them from working, seems strained, a petition for en banc review seems likely, and the Salazar saga may continue.