You Say Franchisor, I Say Employer.

Posted in Employee Rights, Employer Rights, Employment Law, News on August 29, 2014

CA Supreme Court opinion on franchise law

Yesterday, the California Supreme Court addressed the circumstances under which a franchisor may be deemed to be the employer of a franchisee’s employees for purposes of the Fair Employment and Housing Act (FEHA).  The case, Patterson v. Domino’s Pizza, LLC, (Cal., Aug. 28, 2014, S204543) 2014 WL 4236175, involved a pizza delivery driver’s claim that she was sexually harassed by her manager.  The Court’s conclusion was that Domino’s Pizza LLC, the franchisor, had no liability for the harassment under California law because it was not the driver’s employer.[1]  That privilege belonged to the franchisee proprietor who filed for bankruptcy, leaving his employee without legal redress.

The most notable aspect of the majority’s decision is its lengthy and seemingly deferential discussion of the history and economic significance of franchise programs in the United States.  Otherwise, the decision—its analysis and holding—breaks little new ground.  The Court’s conclusion—that “a franchisor enters this arena, and becomes potentially liable for actions of the franchisee’s employees, only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees”—is unremarkable.  Slip Op. at 30-31.  Indeed, both the majority and the vigorous dissent agree that the test for employee status under FEHA in the franchise context is no different from the test in any other context.  Slip Op.at 32 (“nothing we say here is materially at odds with the analysis that would apply if we examined plaintiff’s three FEHA claims in terms of principles developed under this statutory scheme outside of the franchising context”). But the decision does provide an interesting segue into a related issue not directly by this decision: when is the franchisee itself an employee of the franchisor under California law?

When is a franchisee actually an employee under California law?

Patterson does not directly address if and when a franchisee may be an employee of its franchisor, but the decision gives us some clues on how the Court might approach that question.   Most significant is the Court’s statement, noted above, that the analysis of employer status in the franchise context is no different than any other context.  Meaning, it “turns foremost on the degree of a hirer’s right to control how the end result is achieved.” Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522, 528 (citing S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 350).  As a logical imperative, then, a person classified as a “franchisee” may actually be an employee of the franchisor under California law if the franchisor retains sufficient right of control over the manner and means that the franchisee uses to perform his or her work.

Certainly, courts have reached that very conclusion in other cases. For example, in Massachusetts, which like California has a law against misclassification of employees as independent contractors, several courts have found janitorial, distribution, and transportation-related franchisees to have been misclassified as independent contractors. See, e.g., Awuah v. Coverall North America, Inc. 707 F.Supp.2d 80 (D. Mass. 2010) (holding that the Massachusetts Coverall franchisees were misclassified as independent contractors); Labor Code Section 226.8 (making it unlawful to willfully misclassify an employee as an independent contractor).

Read this way, Patterson may be in tension with at least one California federal district court decision. In Juarez v. Jani-King of California, Inc., a case examining janitorial franchises, a California federal district court held that California law’s normal “presumption” in favor of employee status (Narayan v. EGL, Inc., 616 F.3d 895, 900 (9th Cir.2010)) “does not apply in the franchise context,” and required the plaintiff to show that the franchisor exercised “control beyond that necessary to protect and maintain its interest in its trademark, trade name, and good will” to establish a prima facie case of an employer-employee relationship.  Juarez v. Jani-King of California, Inc. (N.D. Cal., Jan. 23, 2012, 09-3495 SC) 2012 WL 177564.  To the extent such a presumption exists under California law (as the Ninth Circuit says it does), nothing in Patterson suggests that it should not apply in the franchise context.

What Are the Factors to Consider in Evaluating Whether a Worker is Misclassified?

Given the above, it is fair to conclude that the same factors applicable to the independent contractor/employee analysis, apply to the franchisee/employee analysis. The “right to control the manner and means of accomplishing the result desired…” is still the most important factor in determining whether a franchisee has been misclassified.  S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 350. And the same secondary factors apply, including:

• Whether the worker may be terminated at will;
• Whether the worker engages in an occupation or business distinct from the employers;
• Whether the type of work performed is usually done under the employer’s direction or by a specialist without supervision;
• The skill required in the particular occupation;
• Whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
• The length of time for which services are to be performed;
• The method of payment, whether by the time or by the job; and
• Whether or not the work is part of the regular business of the principal

SeeRuiz v. Affinity Logistics Corp (9th Cir. 2014) 754 F.3d 1093, 1100

What do I Do If I Have Been Misclassified As A Franchisee?

As we have discussed before, the effects of misclassification are significant.  Workers who have been misclassified as franchisees have the right to seek reimbursement for all the business expenses they have had to bear and may be eligible for other benefits of employment denied to them.  Franchisees who believe that they may have been misclassified as independent contractors should contact an attorney for an evaluation of their claim.

See also: Job Hopping: a CA right

[1] There is also federal law to think about. Just last month, the National Labor Relations Board Office of the General Counsel allowed complaints of unfair labor practices brought by McDonald’s workers to proceed against McDonald’s USA LLC as a joint employer. That determination sent shockwaves across the franchise industry and has certainly led franchisors to more closely examine their relationships with franchisees and their employees.