Companies doing business in California and elsewhere scored a victory yesterday in one of the fastest growing areas in employment law: joint employment claims. In a significant opinion, the U.S. Court of Appeals for the 9th Circuit ruled that McDonald’s Corporation was not liable as a joint employer for the alleged wage and hour violations of its franchisees. The ruling is important not just for companies that operate using a franchise model, but for any company with business relationships with other entities that could expose it to joint employer claims.
The case’s outcome turned on what McDonald’s requires its franchisees to do and (as importantly) not to do under the terms of its franchise agreement. In particular, the franchisees (and not McDonald’s) are responsible for interviewing, hiring, training and paying all of their employees. The franchisees are also responsible for the employees’ work schedules, and for all hiring and disciplinary decisions. In contrast, McDonald’s requires the franchisees to use specific computer systems, and further requires franchisees to send managers to McDonald’s-sponsored trainings, including on wage and hour laws. On top of this, the plaintiffs argued that certain timekeeping anomalies in McDonald’s computer system caused them to miss out on overtime pay.
The 9th Circuit held that these facts did not create an employment relationship. In doing so, the panel analyzed the three ways the California Supreme Court has held a joint employment relationship might be determined—through “control” of the workers, by “suffering or permitting” the workers to work and by creating a common-law employment relationship. And, although it did not expressly acknowledge it was doing so, the federal appeals court largely collapsed those potentially discrete inquiries into an analysis of control over day-to-day employment conditions such as hiring, direction, supervision, discharge or other aspects of workplace behavior. The fact that McDonald’s exercised control over quality and maintenance of brand standards, the panel reasoned, was insufficient to find an employment relationship under any theory of joint employer liability. Notably, the panel affirmatively rejected application of the “ABC” test set forth in the California Supreme Court’s Dynamex decision from last year, reasoning that the test applied only in the independent contractor context.
Finally, the panel rejected the “ostensible agency” theory advanced by the plaintiffs. The plaintiffs had argued that the applicable Wage Order requires a finding of liability when an “agent” of the putative employer employs or exercises control over the wages, hours or working conditions of any person. But the panel concluded the Wage Order narrowly permitted agency liability only where the putative employer actually employed or actually exercised control over the worker through the agent—and since the panel had already rejected these arguments, it concluded the plaintiffs’ agency claim failed as well.
One member of the three-judge panel dissented, writing that he would have concluded that a fact question as to whether McDonald’s “suffered or permitted” the franchisee’s employees to work precluded summary judgment.