Some good news for Franchisors. In the case of Salazar v. McDonald's Corp., a federal District Court recently ruled that McDonald's Corp. was not responsible for its franchisee's alleged failure to pay wages and provide meal and rest periods to its employees. This case has significant implications for franchisors facing claims that they are responsible for a franchisee's alleged wage and hour violations. We explain below.

In 2014, plaintiffs --more than 2,000 current and former employees --filed suit against McDonald's Corp. and the franchisee of eight restaurants in Northern California. Under the franchise agreement, McDonald's set the general operational standards, while the franchisee was placed in charge of personnel. Notwithstanding the language of the franchise agreement the plaintiffs argued that McDonald's oversight of the operator's compliance with stated operating standards amounted to "control" over the employees and workplace conditions, forming a basis for McDonald's liability to the employees.

McDonald's filed a motion asking the Court to dismiss the claims against it, arguing that it really had very little control over the employees or workplace conditions and thus it could not be held liable for the Franchisee's alleged labor violations.

In August 2016, the District Court granted the motion in part and denied it in part. Significantly, the Court held that McDonald's was not an "employer" of the franchisee's workers under the California Labor Code because it did not retain or exert direct or indirect control over the workers' hiring, firing, wages or working conditions. In particular, the court concluded that McDonald's did not directly or indirectly control the plaintiffs' employment, permit plaintiffs to work, or engage in an actual agency relationship with the plaintiffs.

However, the court determined that there was a genuine issue for trial regarding whether a so-called ostensible agency relationship existed. An ostensible agent is a person who has been given the appearance of acting for another, which would make anyone dealing with the ostensible agent reasonably believe that person was the other's agent. The court determined that there was considerable evidence that the employees of the franchisee could reasonably believe that they worked both for the franchisee and McDonald's.

Following the August 2016 ruling, McDonald's filed a second motion to knock out the ostensible agency theory. This time, the Court agreed with McDonald's on the issue of ostensible agency, reasoning that the Industrial Welfare Commission's Wage Orders define the employment relationship and which entity would be liable for violations of the Labor Code. In particular, IWC Wage Order 5 requires that an employer employ or exercise control over the workplace environment. The Court concluded that the IWC's definition of an employer was inconsistent with and took precedence over whatever ostensible agency theory the workers' attorney might claim. The Court granted McDonald's motion, effectively barring the workers from pursuing their wage and hour claims against McDonald's. 

This is a notable decision that will impact legal claims against franchisors brought in California by franchisees' employees. Although the analysis in the present case was focused on interpretation of the definition of employer found in the Wage Orders, it provides a victory to franchisors and deals a blow to franchisee employees seeking to impose joint employment liability on franchisors.

This case likely will be appealed but, as it stands, it's a huge victory for franchisors.

If you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at (818) 508-3700 or visit us online at www.brgslaw.com .