Franchisor is liable as a joint employer for labor litigation

This article originally appeared on DLA Piper.

In Ochoa, et al. v. McDonald’s Corp. et al., the United States District Court for the Northern District of California recently certified a class of more than 800 current and former employees of a McDonald’s franchisee in the San Francisco Bay Area to pursue wage, overtime and maintenance-of-uniform claims (as well as derivative claims) against McDonald’s USA, LLC and McDonald’s Corporation (collectively, McDonald’s).

The plaintiffs alleged the franchisee had violated various California labor laws by miscalculating wages, incorrectly reporting timecards, not reimbursing them for time and expenses for maintaining uniforms, and failing to pay overtime and minimum wage.  In their suit, the current and former employees named McDonald’s as co-defendant on a theory of direct and vicarious liability alleging that McDonald’s and the franchisee were joint employers.

In September 2015, the court entered summary judgment in favor of McDonald’s and against plaintiffs on plaintiffs’ claims that McDonald’s was directly liable as a joint employer with the franchisee.  The court held, however, that there were issues of fact regarding whether McDonald’s might be indirectlyliable as a joint employer if the franchisee was the ostensible agent of McDonald’s.

Class certification and ostensible agency

Under California law, 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.

McDonald’s argued that allegations of ostensible agency are incapable of being resolved on a class-wide basis because ostensible agency involves individualized questions of personal belief and reasonable reliance on an agency relationship.

The court rejected McDonald’s argument, and held that “[n]othing in ostensible agency marks it as forbidden territory under Rule 23.”   The court stated that it must weigh “the balance between individual and common issues” and test “whether proposed classes are sufficiently cohesive to warrant adjudication by representation.”

Because there was no bar to class certification in ostensible agency cases, the court examined the facts of the case to determine whether the particular facts allowed for class-wide adjudication.  The court found that the plaintiffs had tendered “substantial and largely undisputed evidence that the putative class was exposed to conduct in common that would make proof of ostensible agency practical and fair on a class basis.”  The plaintiffs had submitted evidence that they (i) were required to wear McDonald’s uniforms, (ii) packaged food in McDonald’s boxes, (iii) received paystubs, orientation materials, shift schedules and time punch reports all marked with McDonald’s name and logo, and (iv) in most cases, applied for a job through the McDonald’s website.  The court also found “informative” the fact that each employee “spent every work day in a restaurant heavily branded with McDonald’s trademarks and names.”

Although the ostensible agency theory implicates issues of reasonable belief or reliance, the court held that ostensible agency “may be implied from circumstances.”  The court held that the plaintiffs had identified a common course of conduct which made possible the implication that class members reasonably believed that the franchisee was McDonald’s ostensible agent.  The plaintiffs also had submitted declarations stating that they in fact did believe that McDonald’s was their employer.  The court also found it significant that McDonald’s had submitted “no evidence at all” indicating that any named plaintiff or putative class member did not believe McDonald’s was their employer or that they were unjustified or unreasonable in relying on that belief.

Rule 23 analysis: some claims appropriate for certification

After rejecting McDonald’s categorical objection to class certification based on ostensible agency, the court conducted a traditional Rule 23 analysis on plaintiffs’ claims.  The court held that plaintiffs’ claims for miscalculated wages, overtime claims, and maintenance-of-uniform claims (and any claims derivative of those claims) were appropriate for certification.  The court denied class certification regarding the claims for meal period and rest breaks, however, finding that those claims lacked commonality due to the role of each manager’s discretion about an employee’s breaks.

McDonald’s petition for leave to appeal

On July 21, 2016, McDonald’s filed a petition for leave to appeal the decision to the Ninth Circuit.  In its petition, McDonald’s once again argued that class certification was improper where liability depends on subjective and individual mental states regarding whether the plaintiffs actually believed that McDonald’s was their true employer and reasonably relied on that misimpression to their detriment.  McDonald’s argued that the court incorrectly held that McDonald’s had not provided evidence that the employees did not believe that McDonald’s was their employer or that they were unjustified in relying on that belief, noting that McDonald’s had submitted “a raft of evidence” that the belief was false or at least negligent, including that all of the named plaintiffs had signed one of several disclosures acknowledging that each was “an employee-at-will of an independently owned and operated McDonald’s franchise.”

McDonald’s also argued that the court’s reliance on “ubiquitous features of every franchise arrangement” could lead to every class properly certified against an individual franchisee being automatically certified against the corporate franchisor as well.

Takeaways for franchisors

Although the District Court made clear that it was not addressing the merits, stating “[i]t may well be that the proposed class has the ‘fatal similarity’ of a failure of proof of ostensible agency,” the case is important for several reasons:

  1. Although the court could have closed the door on class actions dealing with ostensible agency claims, it kept the door wide open for courts to certify such classes in the future so long as the claims can satisfy the traditional Rule 23 analysis.
  2. Many of the facts that the court found significant in analyzing whether the plaintiffs were “exposed to conduct in common that would make proof of ostensible agency practical and fair on a class basis” – such as the fact that the employees worked in a heavily branded restaurant – are facts that are common in virtually all franchise systems.
  3. Franchisors may want to consider including in their franchise agreements a requirement that the franchisee obtain from each employee a statement that such employee is employed by the franchisee and not the franchisor.  While not dispositive (and McDonald’s argued that the court failed to credit or even acknowledge the evidence in Ochoa) the statement may support an argument that any reliance on the belief by that employee that the franchisor is his/her employer (solely or jointly) is unreasonable and not justified.

For questions and advice on this topic, contact a ShindelRock tax professional today.