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CALIFORNIA JOINS OTHER STATES IN MAKING FRANCHISOR POTENTIALLY LIABLE AS FRANCHISEE'S "EMPLOYER"

by Gregg A. Rubenstein
 


How much control is too much control? In California, a court has ruled that a franchisor’s right to set standards for franchisees’ employees' appearance and its involvement in hiring and firing decisions may be enough to make it an "employer" liable for an employee's alleged sexual harassment.



California has joined Massachusetts, Oregon, Connecticut, Pennsylvania and Florida in holding that a franchisor may be deemed a franchisee’s “employer” for certain purposes. On June 27, 2012, California’s Second Appellate Division issued its opinion in Patterson v. Domino’s Pizza, LLC reversing the trial court and holding that Domino’s could be liable for sexual harassment of a franchisee’s employee. 2012 Cal. App. LEXIS 753. While the case may ultimately be limited to its facts, franchisors with units in California should carefully evaluate their franchise agreements, operations manuals and current operations in California to avoid potential liability.

The Patterson case

Patterson involves a sexual harassment claim by a franchisee’s employee. The employee, Patterson, claimed that her assistant manager sexually harassed and assaulted her while at work. Patterson then filed suit naming her real employer, the franchisee, and Domino’s liable for the sexual harassment. Patterson argued that both the franchisee and Domino’s were the supervisor’s “employers,” and therefore vicariously liable for his actions. Id. at * 2.

The franchisee initially answered the complaint, but thereafter filed for bankruptcy. Although out of the case, the franchise owner was nonetheless deposed and made several troubling statements at his deposition. First, he testified that a Domino’s “area leader” told him to fire the supervisor. He complied with this demand because “if you didn’t, you were out of business very quickly.” Id. He further testified that the area leader had instructed him to fire another employee for poor bag handling performance. The franchisee followed this directive also, he said, because Domino’s inspectors routinely monitored his location and their decision determined whether he would be allowed to stay in business. Despite this testimony, Domino’s successfully moved for summary judgment on the basis that it was not Patterson’s “employer” due to the specific disclaimers in the franchise agreement of any employment relationship. Patterson then appealed.

The appeal

The appellate court began its analysis by recognizing that a “franchisor’s interest in the reputation of its entire system allows it to exercise certain controls over the enterprise without running the risk of transforming its independent contractor franchisee into an agent.” Id. at 5. (citation omitted). Despite this, the court quickly pivoted to state “the franchisor may be subject to vicarious liability where it assumes substantial control over the franchisee’s local operation, its management-employee relations, or employee discipline.” Id.

On appeal, Domino’s again relied on the provisions in its franchise agreement putting sole responsibility for hiring and firing with the franchisee. The agreement provided that the franchisee “shall be solely responsible for recruiting, hiring, training, scheduling for work, supervising and paying all persons who work in the Store and those persons shall be your employees, and not Domino’s agents or employees.” Id. at 6. Despite this provision, the Patterson Court found other provisions in both the franchise agreement and operations manuals that raised doubts about the level of control that Domino’s retained. For example, Domino’s had the contractual right to set the “qualifications” for franchisees’ employees and the standards for their “demeanor.” The Operations Manual also described the specific hiring requirements for delivery employees and what must be kept in their personnel file. The Manual further detailed standards for hair, facial hair, jewelry, tattoos, fingernails, nail polish, shoes, socks, jackets, belts, gloves, watches, hats, skirts, visors, body piercings, and undershirts. Id. at 7.

Beyond the Agreement and Manual, the franchisee’s testimony also strongly suggested that Domino’s area representative exercised real and significant control over day-to-day hiring and firing at the franchise. If the franchisee did not do what the area representative instructed, he stood to lose his franchise. Viewing the evidence in the light most favorable to Patterson, the appellate court reversed summary judgment and remanded the case for trial.

What are the implications of the Patterson decision?

While it is too early to tell the full the impact of Patterson, it is yet another example of courts’ willingness to recognize an employer-employee relationship between franchisor and franchisee. See e.g., Myers v. Garfield & Johnson Enterprises, Inc., 2010 U.S. Dist. LEXIS 3468 (E.D. Pa. Jan. 14, 2010) (holding franchisor potentially liable for sexual harassment as an employer based on franchisor promulgating a sexual harassment policy, engaging in day-to-day supervision of franchisee’s operations, and assuming some control over employee records by providing a computer-based employee records system); EEOC v. Papin Enterprises, Inc., 2009 U.S. Dist. LEXIS 30391 (M.D. Fla. Apr. 7, 2009) and 2009 U.S. Dist. LEXIS 69787 (M.D. Fla. Jul. 28, 2009) (holding franchisor potentially liable for religious discrimination as an employer based on franchisor’s no-facial-jewelry policy); Awuah v. Coverall N. Am., Inc., 707 F. Supp. 2d 80 (D. Mass. 2010) (applying MA wage act to hold franchisor to be franchisee’s employer). Establishing such a relationship makes franchisors potentially liable for both employment discrimination claims and third-party tort claims. Franchisors should therefore monitor this continuing development closely to determine if there are any specific steps they can take to minimize risk to their system.

Recommendations for franchise companies

While there is no single thing that a franchisor can do to ensure it will not be its franchisees’ employer, there are several steps a franchisor can take to mitigate the likelihood. First, franchisors should ensure that their franchise agreement contain a specific disclaimer of any employment relationship. Franchisors should recognize, however, that “the label the parties attach to their relationship is informative but not dispositive.” Kerl v. Rassmussen, 682 N.W.2d 328, 341 (Wis. 2004). Second, franchisors can require franchisees to incorporate and run their businesses as such. By requiring a franchisee to incorporate, the franchisor can then deal at arm’s length with a separate legal entity. Third, franchisors should carefully review their operations manuals to determine what standards must be mandatory and what can be only recommendations. For purposes of determining vicarious liability, franchisor-enforced mandatory operational requirements are treated differently from discretionary recommendations. See Townsend v. Goodyear Tire & Rubber Co., 249 Fed. App’x. 327, 329 (5th Cir. 2007) (“Merely exercising or retaining a general right to recommend a safe manner for the independent contractor’s employees to perform their work is not enough to establish liability.”). Again, while there is no “silver bullet,” franchisors can and should take those steps available to them to minimize their risk.

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Nixon Peabody Franchise Law Alert, Jul 12, 2012.
Reprinted with permission.

 
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Gregg Rubenstein, Partner
Gregg Rubenstein is a commercial litigator who focuses his practice in the areas of franchise and distribution, trade secrets, probate and estate and labor and employment matters. Mr. Rubenstein represents some of the world’s largest franchises in a variety of nationwide forums. Past representations include enforcement of post-termination covenants not to compete, enforcement of arbitration agreements and franchise terminations. Mr. Rubenstein also represents clients in a variety of probate and estate litigation matters including will contests and trust administration.

Nixon Peabody LLP is a full-service law firm that helps clients navigate complex challenges in litigation, real estate, corporate law, and finance. With approximately 700 attorneys throughout the U.S., Europe, and Asia, the firm has the ability to handle matters anywhere in the world, ensuring that clients get the right attorneys, right where they need them.

Email:
grubenstein@nixonpeabody.com
Internet:
www.nixonpeabody.com

 
 
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