Over 90 percent of McDonald’s restaurants in the United States are franchises. Franchising has many benefits for both the franchisor (who saves substantial operating expenses) and the franchisee (who can leverage the franchisor’s brand name and startup resources). But there are serious drawbacks to the franchise model for employees, whose legal recourse against a franchisor for labor law violations is often limited. Recently, in Salazar v. McDonald’s Corp., the Ninth Circuit held that McDonald’s is not liable for labor law violations at its franchisees’ restaurants due to its lack of control over the “day-to-day operations” of the franchises. This ruling has troubling implications for employees’ access to relief for labor law violations, and should lead courts to consider alternative theories of franchisor liability in future cases.
The plaintiffs in Salazar were crew members at several McDonald’s franchises in Oakland, California owned and operated by the family-run Haynes Corporation. In 2014, they brought a putative class action in the Northern District of California against both Haynes and McDonald’s, claiming several violations of the California Labor Code’s wage-and-hour regulations. The plaintiffs alleged that Haynes and McDonald’s, as their joint employers, refused overtime pay, denied meal and rest breaks, and mandated off-the-clock work. They also brought claims against McDonald’s under “ostensible agency” and negligence theories. The class reached a settlement with Haynes, and McDonald’s moved for summary judgment on all claims.
The district court granted McDonald’s motion on all claims (except the “ostensible agency” claim, which it dismissed in a later order). It held that as franchisor, McDonald’s was not an “employer” under California law: it did not directly or indirectly control the plaintiffs’ hiring, firing, payment or working conditions, did not “suffer or permit” the plaintiffs to work, and did not have an actual or ostensible agency relationship with Haynes. It also held that the plaintiffs’ negligence claims were precluded by California’s “new-right exclusive remedy” doctrine.
The Ninth Circuit affirmed. Writing for the majority, Judge Graber held that McDonald’s did not meet any of the three definitions of “employer” under California Wage Order No. 5-2001, § 2(H), as interpreted in Martinez v. Combs. On the first definition – exercise of control over wages, hours and working conditions – she agreed with the trial court that McDonald’s involvement with the operations of its franchises extended only to “quality control” and ensuring the maintenance of brand standards, and that decisions involving personnel and working conditions were exclusively made by Haynes. Second, she rejected the plaintiffs’ contention that McDonald’s “suffered or permitted” the labor law violations through its use of standardized human resources and point-of-sale software that allowed Haynes to deny breaks and overtime pay. She noted that although McDonald’s was arguably aware of the violations, it did not “suffer or permit” the plaintiffs to work because it could not prevent the plaintiffs from working; only Haynes could make hiring and firing decisions. Nor was McDonald’s an “employer” under the common law definition for franchisors in Patterson v. Domino’s Pizza, which was essentially equivalent to the “control” definition. Lastly, Judge Graber dismissed the plaintiffs’ actual and ostensible agency claims, holding that Haynes was not an “agent” under the Wage Order’s definition, and the negligence claim, finding the plaintiffs could prove neither damages nor duty.
Chief Judge Thomas concurred in part and dissented in part. He agreed with the majority that McDonald’s was not an “employer” under the “control” or common law definitions, and that the agency and negligence claims were properly rejected. However, he found a genuine dispute of fact existed as to whether McDonald’s “suffered or permitted” the plaintiffs to work, arguing that this definition was implicated because McDonald’s “failed to prevent” unlawful working conditions by not adjusting its automated work scheduling software to comply with California wage-and-hour laws, and because of evidence showing McDonald’s was aware of Haynes’ violations.
In shielding franchisors from liability for their franchisees’ labor violations, the Ninth Circuit’s holding severely restricts practical access to relief for plaintiffs in wage-and-hour cases. This is because many franchisees barely have the cash flow to stay afloat, let alone pay damages; as just one example, Subway franchisees’ financial troubles recently made headlines in the New York Times.
The courts’ distributional choice here is not between franchisor and franchisee, since with franchisors immunized and franchisees often judgment-proof, workers bear the costs. Indeed, foreclosing suits up the chain may make plaintiffs’ chances at full recovery depend as much on the ownership structure of their particular location as on the merits of their legal claims – a disparity that should not prevail regardless of its doctrinal justification. But avoiding this unjust result might not require courts to abandon the “control” definition entirely. A recent proposal by Professor Kati Griffith, for example, argues for an “intermediary theory” of joint employment that would base franchisors’ liability for labor violations on the franchisors’ control over a franchise’s shift managers, who are often far more legally entwined with the parent company. The Salazar rule’s undermining of workers’ access to justice should occasion courts to consider such alternatives in future franchisor liability cases.