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Franchisors Should be Wary After McDonald’s Settlement

Fast food giant McDonald’s recently agreed to pay $3.75 million to settle a lawsuit for wage and hour violations allegedly committed by one of its California franchisees. The federal lawsuit, filed in 2014 by franchisee employees, alleged that McDonald’s was liable as a joint employer under California law.

McDonald’s Lawsuit

The lawsuit stems from a McDonald’s franchisee operating five restaurants in the San Francisco Bay Area. The employees alleged managers edited or deleted time records, required off-the-clock work, and failed to pay meal periods or rest periods, among other things. The employees sued both the franchisee and McDonald’s alleging that the two jointly employed the franchisee’s workers. Earlier this year, McDonald’s attempted to get itself dismissed from the lawsuit arguing that because it did not exert direct or indirect control over the hiring, firing, wages, hours, or material working conditions of the employees that it was not a joint employer with the franchisee. Interestingly, in a ruling in August, the court agreed that McDonald’s was not a joint employer under California law. Regardless, the court allowed the lawsuit to proceed on an alternative legal theory of “ostensible agency” – in other words, that it appeared to the employees that they were employed by McDonald’s. Following the court’s decision, McDonald’s faced the difficult decision of proceeding to trial or settling the lawsuit. McDonald’s chose the latter resulting in the current settlement.

Impact on Franchise Industry

Perhaps the most important aspect of the settlement is the fact that McDonald’s agreed to pay out a significant sum of money just to avoid the costs of trial because of the alleged unlawful acts of its franchisee. The mere fact that McDonald’s risked liability was enough.

This potential risk of liability emphasizes for franchisors how important it is to refrain from exercising control over franchisee employees. In particular, franchisors need to make sure that they do not exercise direct control over employee training, discipline, wages, hours, or other terms and conditions of employment. To the extent that language can be included in franchisee agreements, employee applications and/or agreements, or other documents, it should be clearly stated that employees are employed by the franchisee and not the franchisor. Although this will not guarantee the franchisor cannot be held liable under a joint employer theory (or ostensible agency theory), with the current legal atmosphere prudent franchisors should take every precaution to distinguish themselves from franchisees.

It is clear that joint employer liability is becoming an ever-increasing concern not only for the franchise business model but also for all companies that potentially exert direct or indirect control over employees of another company. This is particularly true considering recent decisions by federal agencies such as the National Labor Relations Board (currently embroiled in its own litigation with McDonald’s) and the Department of Labor that have broadened the standards to find joint employer status under various federal statutes. All employers should continue to monitor this issue and consider whether they are susceptible to a joint employer lawsuit of their own.

Image credit: Pixabay

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