Ninth Circuit Clarifies Joint Employer Classification

McDonald’s was not a joint employer of its franchisees’ workers, the U.S. Ninth Circuit Court of Appeals found recently in a decision that provides additional clarity to California franchisors. The Salazar v. McDonald’s Corp. decision turned on McDonald’s lack of direct and immediate control over the franchise workers’ wages, hours or working conditions. The decision represents a shift back to the traditional test for employer-employee classification, focusing on direct control as opposed to the franchisor’s potential ability to control the circumstances of a franchise worker’s employment.

The Salazar plaintiffs originally filed suit against McDonald’s alleging they were denied meal and rest breaks, overtime premiums and other required benefits under the California Labor Code. The plaintiffs argued that McDonald’s should be classified as a joint employer because the local franchisee was required to use McDonald’s computer systems (including a system for scheduling, timekeeping and determining overtime pay) to operate the local franchise. McDonald’s also allegedly required managers to attend trainings at “Hamburger University,” and required all employees to wear standard uniforms.

While McDonald’s provided software, training and official uniforms, the local franchisee interviewed and hired new employees, trained the employees, set employee wages and paid the employees from its own bank account. The franchisee also set the employees’ schedules, monitored time entries, and exercised hiring, firing and discipline authority over the employees. There was no evidence that McDonald’s performed any of these functions.

The Ninth Circuit rejected the plaintiffs’ arguments, and held that McDonald’s was not a joint employer because it did not exert direct or indirect control over the plaintiffs’ hiring, firing, wages, hours and working conditions. The court found that McDonald’s involvement with its franchisee’s workers was incidental to McDonald’s efforts to maintain its “brand standards” —similar to any franchise business. The local franchisee, conversely, exercised direct control over hiring, firing, wages, scheduling and all other aspects of the employee’s work, meeting the traditional employer-employee control test.

McDonald’s was also not held responsible for preventing wage and hour violations by the franchisee, even though the franchisee used McDonald’s computer systems. The plaintiffs argued that McDonald’s was responsible for the wage violations under the “suffer and permit” theory of employment. The court found this employment theory was also not applicable to the franchisee’s employees because McDonald’s was not responsible for the workers’ actual employment. The court clarified that a franchisor providing a franchisee with improper tools for wage and hour calculations or giving a franchisee bad advice does not create an employer-employee relationship with the franchisee’s workers.

What does this mean for franchisors?
The ruling in this case is a significant step back in the right direction for franchisors and franchisees. Per this ruling, efforts by franchisors to manage their brands, ensure quality control and to otherwise maintain their franchise standards should not, without more, be treated as direct and immediate control over the franchisee’s employees in California for wage and hour claims.

Unfortunately, further clarity is still needed. Nationwide, varying standards for joint employer liability continues to cause confusion. Until a nationwide, uniform standard is adopted for all claims that may affect franchisors and franchisees (i.e., wage and hour claims, National Labor Relations Act claims, etc.), franchisors should narrowly interpret this ruling and should ensure that the local franchisee is in charge of hiring, firing, discipline, wages, hours and scheduling.

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