McDonald’s Agrees to Settle Joint Employer Case after a California Court Certifies a Class Action Lawsuit Alleging Indirect Joint Employer Liability against McDonald’s

On October 31, 2016, McDonald’s reportedly agreed to settle a class action lawsuit brought by former and current employees of one of its franchisees. The underlying class action lawsuit centered on claims brought by the franchisee’s employees against McDonald’s under the theory of “joint employer” liability. As described in previous posts the National Labor Relations Board (“NLRB”) Office of the General Counsel issued similar complaints under the joint employer theory of liability against McDonald’s in 2014.

The Class Action Lawsuit, Ochoa v. McDonald’s

The class action lawsuit, which asserted certain California Labor Code claims, was brought by Stephanie Ochoa, et al. as representatives of a class of current and former employees of a McDonald’s franchisee, The Edward J. Smith and Valerie S. Smith Family LP. Although the plaintiffs worked for the franchisee, the plaintiffs named McDonald’s as a defendant under the theory of joint employer liability, arguing that because the franchisor exerted a high level of control over the franchisee and its operations, the employees were jointly employed by McDonald’s. The Court rejected the plaintiffs’ claim that McDonald’s was a joint employer of the franchisee, holding that there were no facts to support the claim that McDonald’s had the authority to hire or fire the franchisee’s employees or make wage and staffing decisions on behalf of the franchisee. The Court reasoned that certain facts, including McDonald’s status as the primary owner or leaseholder for its franchisees’ locations and McDonald’s detailed recommendations on crew scheduling and staffing, were insufficient to establish McDonald’s liability as a joint employer.

The Court, however, precluded summary judgment on the claim that McDonald’s might be liable as a joint employer on the theory of ostensible agency. As the Court noted, “[o]stensible agency exists where: (1) the person dealing with the agent does so with reasonable belief in the agent’s authority; (2) that belief is ‘generated by some act or neglect of the principal sought to be charged,’ and (3) the relying party is not negligent.” The plaintiffs presented certain facts, including that they had to “wear McDonald’s uniforms, serve McDonald’s food in McDonald’s packaging, receive paystubs and orientation materials marked with McDonald’s name and logo, and, with the exception of Ms. Rodriguez, applied for a job through McDonald’s website,” as evidence of McDonald’s joint employer status under the theory of ostensible agency. Because the Court determined that, on similar facts, “a number of courts have found that the test for ostensible agency is met,” the Court denied summary judgment on the issue.

Subsequently, on July 7, 2016, the Court certified the class of plaintiffs in the lawsuit against McDonald’s on an ostensible agency theory. Almost four months later, McDonald’s agreed to settle the case out of court. Although McDonald’s settled this case, the joint employer cases with the NLRB are still ongoing.

What does this mean for Franchisors?

Although there is still a great deal of uncertainty around the issue of joint employment in franchising, there are certain steps franchisors can take to protect themselves against a finding of joint employer liability based on ostensible agency:

  • Franchisors should require franchisees to include a statement in their employment applications and employment agreements that employees are employed by the franchisee and not the franchisor. Additionally, the franchisee can ask each employee to sign a separate acknowledgement to this effect.
  • Franchisors should also require franchisees to mark all employee paystubs with the name of the franchisee entity and a statement clarifying that the franchisee is an independently owned business.
  • Signs at the franchised locations should also prominently display similar language.
  • Franchisors should consider including language in training manuals provided to franchisees and their employees that:
    • clarifies the limited role of franchisors with regard to labor-related issues, such as payment of wages, and
    • acknowledges that franchisees are not the franchisor’s agents.
  • For more steps that franchisors can take to protect themselves from joint employer liability, see our previous posts.

Craig J. Knobbe

Chair, Business Section

Craig J. Knobbe