The hallmark of a franchise relationship is that the franchisor allows independent businesspeople to share in the good will represented by the trademarks in the distribution of goods or services. Franchisees historically have been considered independent contractors that own their own businesses allowed to operate consistent with the franchisor’s format and business methods. Traditionally, if the franchisor exercised sufficient control over the franchisee’s operation, such excessive control could trigger vicarious liability for the franchisor for torts committed by the franchisee. This vicarious liability exposure would only exist where the efforts of control could have limited the risk of the tort occurring. Labeling a franchisee an "employee," however, rarely occurred until recently.

Courts in the states of California, Massachusetts, Oregon, Connecticut, Pennsylvania and Florida have held that a franchisor may be deemed a franchisee’s "employer" and liable for employment discrimination when it exercises too much control over the day-to-day operations of its franchisees. In Patterson v. Domino’s Pizza, 207 Cal.App.4th 385 (2012), the California Court of Appeals, Second Appellate Division, reversed summary judgment for Domino’s and remanded for trial the issue of whether Domino’s exercised sufficient control over a franchisee to make it liable as an "employer" for alleged sexual harassment.

In Patterson, the franchisee’s employee alleged that her assistant manager sexually harassed and assaulted her while at work. No evidence exists that anyone from Domino’s participated in or knew of the alleged sexual harassment. Nevertheless, the California court held that Domino’s could be vicariously liable as the assistant manager’s "employer" because it "assume[d] substantial control over the franchisee’s local operation, its management-employee relations or employee discipline." The court based its decision on several facts common to many franchise systems, such as Domino’s contractual right to set the qualifications for franchisees’ employees, the standards for their demeanor, and provisions in the operations manual setting standards for employee appearance.

The Patterson case is similar to cases in other states where courts are willing to recognize an employer-employee relationship between franchisor and franchisee. In Myers v. Garfield & Johnson Enterprises, 2010 U.S. Dist. LEXIS 3468 (E.D. Pa. Jan. 14, 2010), the district court applied Pennsylvania law and held the franchisor potentially liable for sexual harassment as an employer based on the franchisor promulgating a sexual harassment policy, engaging in day-to-day supervision of franchisee’s operations and assuming some control over employee records by providing a computer-based employee records system. In EEOC v. Papin Enterprises, 2009 U.S. Dist. LEXIS 30391 (M.D. Fla. Apr. 7, 2009), and 2009 U.S. Dist. LEXIS 69787 (M.D. Fla. Jul. 28, 2009), a franchisor was held potentially liable for religious discrimination as an employer based on the franchisor’s prohibition on facial jewelry. In Awuah v. Coverall North America, 707 F. Supp. 2d 80 (D. Mass. 2010), a franchisor was held to be the franchisee’s employer under the Massachusetts Wage Act.

But the tide may be turning. In Aleksick v. 7-Eleven, 205 Cal. App. 4th 1176 (2012), the California Court of Appeals, Fourth District, Division One, held that 7-Eleven, the franchisor, had no liability for alleged violations of California Labor Code wage provisions by its franchisees. Kimberly Aleksick argued 7-Eleven’s payrolls services, provided to franchisees, violated both the "unlawful" and "unfair" prongs of the law because partial hours worked were converted from minutes to hundredths of an hour, allegedly shorting employees for a few seconds of time. The Superior Court of California, Imperial County’s decision found that using a decimal system, rather than a fractional system, is inherently reasonable and does not constitute a violation of the law.

On appeal, the court affirmed the decision to grant 7-Eleven’s motion, holding that the Labor Code wage claim on which Aleksick based her appeal was not asserted in the court below. The court additionally found that it would have upheld the trial court’s decision because the wage statutes govern only the employer-employee relationship and 7-Eleven as the franchisor was not the employer.

In Brown v. K-Mac Enterprises, No. 12-CV-55-TCK-FHM (N.D. Okla. Sept. 19, 2012), a franchisee’s employee asserted claims for disability discrimination, race and gender discrimination, age discrimination, workers’ compensation retaliation, and other assorted types of discrimination against the franchisee employer and the franchisor, Taco Bell. Taco Bell moved to dismiss based on its not being the plaintiff’s "employer" and there being no basis for vicarious liability. The court dismissed the claims against Taco Bell without extended discussion.

In Gray v. McDonald’s USA, 874 F. Supp. 2d 743 (W.D. Tenn. 2012), a franchisee’s employee was unsuccessful in holding McDonald’s liable for an alleged racial assault. The plaintiff claimed that he was assaulted by his supervisor while working at a McDonald’s franchise. He alleged McDonald’s was negligent for failing to ensure an adequately safe workplace, violations of the Tennessee Human Rights Act, discrimination and hostile work environment in violation of 42 U.S.C. § 1981, intentional infliction of emotional distress, negligent infliction of emotional distress, negligent training, supervision and discipline, and premises liability. McDonald’s moved for summary judgment dismissing all claims and succeeded.

The court held that McDonald’s was not the "employer" and therefore could not be liable. Applying the "single employer" test that considers "whether two entities are so interrelated that they may be considered a ‘single employer’ or an ‘integrated enterprise’ and therefore liable under Title VII," the court determined that McDonald’s and the franchisee did not have interrelated operations and did not share common management. Although McDonald’s provided discrimination and harassment training, no evidence existed that McDonald’s retained the ability to hire, fire or discipline an employee. The court concluded that the franchise agreement’s requirements concerning personnel pertaining to restaurant hours, supplies and uniforms were too general to constitute control rising to the level of employment.

Courts considering whether the franchisor should be liable as an employer should consider the practical realities of the franchisor/franchisee relationship, and the lack of controls franchisors have over the day-to-day activities of the franchisees, and of the franchisees over their employees. The cases will continue to be fact-driven, but more consideration should be given to the reality in the operation, and less on the general contractual language of the agreements. •

Craig R. Tractenberg is a partner in the Philadelphia and New York offices of Nixon Peabody and an adjunct professor teaching franchise law at Temple University’s Beasley School of Law.