Court Considers “Joint Employer” Test in Franchise Case

Recently, a California court decided whether the franchisor is liable as a “joint employer” in the context of a franchising relationship.

The Joint Employer Test Defined.

Ultimately, the United States District Court for the Northern District of California determined that a franchisor may be held liable only when:

(1) the franchisor exercises control over the wages, hours, or working conditions of the franchisee’s employees; (2) the franchisor has knowledge that and fails to prevent the franchisee’s employees’ work from occurring; or, (3) the franchisor has engaged the franchisee’s employees, and created a separate employment relationship with the employees.
Ochoa v. McDonald’s Corp., Case No. 14-cv-02098-JD

A finding of any of the three is sufficient to create an employment relationship, and thus create liability for the franchisor.

Ochoa v. McDonald’s Corp: The Court’s Determination Using the Joint Employer Test.

In Ochoa v. McDonald’s Corp., McDonald’s moved for summary judgment in which the Court granted in part and denied in part.

The Court determined that McDonald’s can not be held liable, as a “joint employer,” for their franchisee’s violation of California’s labor laws because McDonald’s did not have control over the “‘hiring or firing, rate of pay, work hours and conditions.’” McDonald’s lacked direct employer control even when they provided both an In-Store Processor (“ISP”) as well as a point of sale (“POS”) system. In fact, “[a]ll McDonald’s franchised are required to use a POS system, and franchisees are required to use the ISP for opening and closing the POS system,” yet the court found that it is “not enough to convert McDonald’s into an employer.” In addition, a “joint employer” relationship was neither created when McDonald’s provided the franchisee with a business consultant that provided advice on how to improve their specific restaurant, nor created through McDonald’s property ownership practices where they either own or are the “primary leaseholder of the land on which each franchisee’s restaurant is built.”

The court also determined that McDonald’s cannot be held liable as a “joint employer” because they did not possess the control required in order to permit the franchisee’s employees to work. Thus, even though McDonald’s implemented a monitoring system within the franchisee’s restaurant, they are not in control of the hiring and firing of the franchisee’s employees.

Finally, McDonald’s extensive recommendations concerning the restaurant’s operations and employment was merely suggestive and not a form of engaging the employees. Therefore, the recommendations about staff levels or staffing on a holiday “d[id] not support imposition of “joint employer” liability on the [franchisor].”

Thus, using the “Joint Employer” test (commonly known as the Martinez test throughout the case), the Court granted McDonald’s summary judgment in part because they would not be liable under any of the three prongs.

But Wait! There is Still a Possibility that the Franchisor is an Ostensible Agent.

However, the court concluded that there was still a possibility that McDonald’s would be liable as a joint employer to the franchisee’s employees through an ostensible agency relationship. “Ostensible agency exists where (1) the person dealing with the agent does so with reasonable belief in the agent’s authority; (2) that belief is ‘generated by some act or neglect of the principal sought to be charged,’ and (3) the relying party is not negligent.” Thus, a franchisee’s employees may ultimately believe that its true employer is merely a ‘manager’ and the franchisor (i.e., McDonald’s) is their employer. In Ochoa, the plaintiffs’ claimed that they truly believed that McDonald’s was their employer “because they w[ore] McDonald’s uniforms, serve[d] McDonald’s food in McDonald’s packaging, receive paystubs and orientation materials marked with McDonald’s name and logo, and . . . applied for a job through McDonald’s website.” Therefore, the court denied McDonald’s Motion for Summary Judgment, in part, because there is a possibility that there existed an ostensible agency relationship in which McDonald’s would be liable as a joint employer.

How Does This Impact Franchises?

This decision ultimately may affect the franchising industry because there is potential for finding of a joint employment relationship where the line between franchisor and franchisee is so blurred that employees cannot discern a separation. In fact, under an ostensible agency theory, a franchisor that assists in nation-wide advertising, provides a uniform method of organizing the business, or allows for the franchisees to reap the benefits of a globalized website for hiring purposes, may be considered a “joint employer” if the franchisee’s employees truly believe that the commonly known name that the franchisee embraces is the true employer, and the franchisee is just a higher-level supervisor.

The lesson from Ochoa is that care should be taken to emphasize in manuals, paychecks, job application forms, and other employment documents, the distinction so employees are clear as to who their employer truly is.

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