Weekly Law Resume - July 26, 2012: Independent Contractor or Agent? A Franchisor’s Actions Speak Louder Than Words

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[author: Mandy Arjmand]

Taylor Patterson v. Domino’s Pizza, LLC, et al.
California Court of Appeal, Second Appellate District (June 27, 2012)

This case raises the question: When an agreement between a Franchisor and Franchisee depicts an independent contractor relationship, if the Franchisor exercises “substantial control” over the operations of the Franchisee, can a principal-agent relationship be inferred?

California courts have concluded that while the provisions of a franchise agreement are relevant, they are not the exclusive evidence of the relationship between the franchisor and franchisee. Instead, a “totality of the circumstances” approach is applied. (Postal Instant Press, Inc. v. Sealy, 43 Cal.App. 4th 1704 (1996)). “Substantial Control” is, inherently, a fine-line contention. Historically, a franchisor maintains an interest in its reputation and the method by which it is represented through its franchisee. Thus, the franchisor can exercise “certain controls” over its enterprise without running the risk of transforming the independent contractor status of the franchisee into an agent. See Cislaw v. Southland Corp., Cal.App. 4th (1992). Items that a franchisor typically controls are trademarks, products and the quality of services. However, when a franchisor assumes “substantial control” over the franchisee’s day to day operations, such as the decision to hire or fire an employee, a line is crossed. Even if the franchisor-franchisee agreement states that the franchisee is an “independent contractor,” a principal-agent relationship can be inferred based on the actions of the parties.

Taylor Patterson, a teenaged employee of a Domino’s Pizza franchise, (“Dominos”) brought suit against Domino’s Pizza, LLC, Sui Juris, a Domino’s franchisee, and Renee Miranda, the assistant manager at the restaurant. Ms. Patterson alleged sexual harassment in violation of FEHA, failure to prevent discrimination, retaliation for exercise of rights, infliction of emotional distress, assault, battery, and constructive wrongful termination. She claimed that Sui Juris, the Franchisee, and Domino’s, were Miranda’s employers and thus were vicariously liable through the doctrine of Respondeat Superior.

In their motion for summary judgment, Domino’s argued that Sui Juris was an independent contractor pursuant to the written franchise agreement, and that there was no principal-agency relationship between Domino’s and Sui Juris. Domino’s strongest contention was that it played no part in the “hiring, supervision, or training” of any Sui Juris employees, including Miranda.

In granting Domino’s motion for summary judgment, the trial court relied primarily on the franchise agreement between Domino’s and Sui Juris, which provides that Sui Juris was responsible for “supervising and paying persons who work in the Store.” The trial court further argued that no questions of fact remained as Domino’s did not play a role in Sui Juris’ employment decisions.

The Court of Appeal reversed the trial court’s decision. The Court of Appeal pointed to the deposition testimony of Daniel Poff, the Sui Juris owner, in which Mr. Poff testified that a Domino’s “area leader” Claudia Lee ordered him to fire Miranda. Interestingly, Mr. Poff further testified that he had to comply with the wishes of Domino’s area leaders; otherwise he would be out of business “very quickly.” Ms. Lee also instructed that Mr. Poff fire another employee who was deficient in handling bags. Domino’s even went so far as to send undercover shoppers to the franchise to determine quality controls, and constantly sent inspectors to verify compliance with Domino’s guidelines. Mr. Poff’s testimony painted a picture that revealed tight control over the franchisee’s day to day operations by Domino’s area leaders. This constant control by Domino’s supported a reasonable inference that there was a lack of local franchisee management independence.

According to the Court of Appeal, whether a franchisor is vicariously liable for injuries to a franchisee’s employee depends upon the “nature of the relationship.” Relying upon Cislaw, it is the right to control the “means and manner” in which the result is achieved that is significant in determining whether a principal-agency relationship exists. The critical issue, then, is substantial control over the local operations of the franchisee. The Court of Appeal found that, despite the language in the agreement that vested employment and training protocol in Sui Juris, other aspects of the agreement and Domino’s actions spoke otherwise.

Namely, the franchise agreement contained a Domino’s Manager’s Reference Guide that specified employment hiring requirements and influenced the day to day operations of the franchise in considerable detail. For example, the franchisee was required to disclose the identities of employees to Domino’s prior to operating a store. The franchisee also had to install a specific computer system designated by Domino’s to train its employees. Appearance, demeanor, dress, jewelry, and facial hair, and the method by which employees punched in and out of work were also controlled by Domino’s. The agreement went so far as to control the subject of “in store conversations,” and determined the literature allowed in the store. Relying on Miller v. McDonalds Corp., Or.Ct.App. (1997), the Court of Appeal held that a manual describing how a franchisee must carry out its business in “considerable detail” supports a claim of agency.”

Finally, the Court of Appeal noted that the trial court inappropriately applied a negligence standard. Since Miranda was the Restaurant Manager and Patterson’s immediate supervisor, and considering Patterson’s minor status as a sixteen-year-old, a strict liability standard should have been applied. As stated by the Supreme Court, “Under FEHA, an employer is strictly liable for all acts of sexual harassment by a supervisor.” See State Dept. of Health Services v. Superior Court, 31 Cal. 4th 1026 (2003).

COMMENT

In determining whether an independent contractor or agent-principal relationship exists between a Franchisor and Franchisee, Courts will apply a “totality of the circumstances” approach and examine, in detail, the level of control a Franchisor exerts over the training, hiring, supervising, and methods by which employees perform their duties. Agreements alone will be relevant, but not conclusive.

For a copy of the complete decision see:

http://www.courtinfo.ca.gov/opinions/documents/B235099.PDF

 

Published In: General Business Updates, Franchise Updates, Labor & Employment Updates, Personal Injury Updates

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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