Federal Court Serves Up Satisfying Seconds For California Franchisors: No Ostensible Agency Liability For Franchisees’ Alleged Labor Code Violations

by Seyfarth Shaw LLP
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Seyfarth Synopsis: A federal court in California recently held that a franchisor cannot be held liable for labor code claims where it did not exercise control directly, or through an actual agency relationship with the employer, over the terms and conditions of the workers’ employment. The decision limits claims against independent businesses based on an “ostensible” or perceived agency relationship between the employer and the independent business.

On March 10, 2017, a federal judge handed a Franchisor—a Fast-Food-Giant (FFG) who franchises with independent restaurant owners—a second straight summary judgment win, ruling that the FFG could not be held liable under an ostensible agency theory for workers’ California wage claims arising out of their employment with the franchise restaurants. As we explained earlier this year, three fast-food workers from Oakland sued a family-owned company that operated eight franchise restaurants in Northern California. They brought the FFG along for the ride under a joint employment theory, serving up a complaint chock full of California Labor Code, Private Attorneys General Act (PAGA), and negligence claims.

Last August, a federal judge dismissed the claims against the Franchisor, in part, after finding that the FFG did not control the workers’ employment directly or through an actual agency relationship with their employer, and was therefore not a joint employer. But the judge didn’t toss out the workers’ claims completely, opining that a jury could be persuaded that the FFG was liable under an “ostensible agency” theory—namely that the franchisee might have created an impression that it was acting as the franchisor’s agent (even if it was not), and the employees may have relied on that impression to their detriment.

Recently, the FFG moved for dismissal of all claims against it, arguing that it could not be held liable for the workers’ wage and labor code claims because—by definition—it is only an “employer” if it exercised “actual” control over their employment (and the court had already ruled that was not the case in its prior grant of summary judgment). The workers countered that liability could be premised on ostensible agency because the California Wage Order defines an employer to include anyone who “directly or indirectly, or through an agency or any other person, employs or exercises control over the wages, hours, or working conditions of any person.”

But the court didn’t buy the workers’ argument, noting that the Wage Order’s second phrase—“exercises control over”—limited the scope of agency liability to actual agency or actual control over their employment. The Wage Order’s specific, limited definition of an “employer” meant that the conflicting ostensible agency provisions were not a viable basis for the workers’ claims. The court was also not persuaded by the workers’ resort to policy arguments that adopting a broader interpretation would advance the protective purpose of the Wage Order, stating “[t]o ignore [lawmakers’] decision to limit the definition of ‘employer’ to those who, through an agent, control workplace conditions would be to rewrite the law.”

This decisions is good news for franchisors and other similar types of entities that do not exercise actual control over employees. This case takes California law at the language of its text and prevents employees from pursuing entities that are not joint employers. However, the take-away order for franchisors continues to be to stay out of the kitchen when it comes to the relationship between franchisees and their employees.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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