United States: Could A Franchisor Be Liable For A Franchisee's Employment Decisions?

Last Updated: September 8 2016
Article by Matthew T. Anderson

Franchise agreements typically make clear that a franchisee is a separate entity from the franchisor and that the franchisor has no liability as an employer of anyone the franchisee hires and employs.  Indeed, traditionally franchisors have not been routinely deemed joint or co-employers with their franchisees.  This is because the franchisor usually does not control hiring, firing, wages, breaks, and other day-to-day operations of the franchisee to the extent necessary to create an agency relationship between a franchisee's employee and the franchisor.  A recent case decided by a federal court in California, however, might put that traditional thinking and legal relationship in doubt.

In this case, the court rejected McDonald's Corporation's assertion that it could not be held liable for a franchisee's violations of California wage and hour laws.  While the court recognized the franchise agreement and that there was no record of an agency relationship between the franchisee and the Corporation, the court still refused to dismiss the possibility that McDonald's could be liable its franchisee's actions.  The court held that an agency relationship could exist if a third party reasonably believed the franchisee is the agent of another party (in this case, McDonald's Corporation).  While this concept is not new to franchise litigation, such "ostensible agency liability" (as it is often referred to) has usually only been found in situations involving third parties with isolated or short-term contact with the franchisee where the third party would not know the extent of the arrangement between the franchisee and franchisor, and there was a reasonable basis to believe an agency relationship exists.  This recent California case marks the first time a court has entertained the idea that an employee could reasonably believe his employer was an agent of the larger franchising corporation.  The court found that evidence such as employees applying for jobs on McDonald's website, wearing a McDonald's uniform, preparing McDonald's food, regularly interacting with McDonald's consultants, and saying "I work at McDonald's" could lead a reasonable employee to believe McDonald's Corporation (the franchisor) was his ultimate employer, not the actual franchisee where he worked.

While the court did not entirely discount McDonald's evidence that this was (or would be) an unreasonable belief here, in particular because the employment applications explicitly stated they were for jobs to work at an independently owned and operated franchisee, a separate and distinct entity from McDonald's Corporation, the court held that it was a close call.  Since it found no precedent establishing that the plaintiffs' couldn't possibly win their argument, the court let the case move forward.

While the plaintiffs in this case may not ultimately prevail and McDonald's Corporation may not have any liability for any violation that might have been committed by the franchisee, the court's opinion offers a blue print for trying to assert franchisor liability for alleged employment-related wrongs of a franchisee.  Franchisors looking to avoid finding themselves held liable for the actions of their franchisees in the employment context must consider taking steps to make it abundantly clear to employees of the franchisee that the franchisor is not their employer.  A franchisee's employment application should clearly establish that the franchisor has no role in the hiring process, save for perhaps forwarding an application submitted to it to the appropriate local franchise.  Franchisors may want to take the additional step of not accepting any employment applications for jobs at franchise locations and giving franchisees complete control over the application process.  Franchisees need to also make clear to employees throughout their training that the franchisee, not the franchisor, is the employer.  Paystubs, handbooks, and other documentation should be careful with the use of the franchisor's name and markings, and instead should emphasize those of the franchisee.  If employees of the franchisee must interact with the franchisor, there should be clear indicators that this does not create an employment relationship between franchisee employees and the franchisor.  Essentially, any steps a franchisor can take to wall itself off from franchisee employees, making it clear to them there is no employment relationship, will help defeat claims that the franchisor is liable for employment law misdeeds of the franchisee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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