By: Kerry Friedrichs and Elizabeth MacGregor

Seyfarth Synopsis:  The Ninth Circuit’s recent decision in Salazar v. McDonald’s Corporation is welcome news for entities facing concerns about joint employment status under California law, and in particular, for franchisors. In Salazar, the Ninth Circuit held that the plaintiffs, who were employed by a McDonald’s franchisee, were not also employed by McDonald’s under California law. In an opinion that acknowledged the business realities of the franchisor-franchisee relationship, the court recognized that franchisors must retain some control over quality and brand standards, even where that control indirectly impacts a franchisee’s employees. This type and degree of control, the court concluded, was not enough to create a joint employer relationship.

The plaintiffs in Salazar v. McDonald’s Corporation worked for Haynes Family Limited Partnership (“Haynes”), a McDonald’s franchisee. Haynes selected, interviewed, and hired employees for its franchise restaurants.  It also trained new employees, supervised, disciplined, and fired employees. Haynes set employee schedules, monitored their time entries, and set and paid their wages. McDonald’s did not perform any of these functions.

Under the franchise agreement, Haynes was required to meet certain quality standards and serve McDonald’s products. Haynes managers were also trained by McDonald’s on topics such as meal and rest break policies. Haynes management voluntarily used McDonald’s computer system for scheduling, timekeeping, and determining regular and overtime pay.  Haynes employees also wore McDonald’s uniforms.

The Salazar plaintiffs filed a class action alleging various wage and hour violations against both Haynes and McDonald’s on a joint employment theory. After settling with Haynes, the plaintiffs continued litigating against McDonald’s. The district court then granted McDonald’s motion for summary judgment on the ground that McDonald’s did not employ the plaintiffs, and the plaintiffs appealed. In examining the question of joint employment status, the Ninth Circuit considered the three definitions for employment that the California Supreme Court applied to joint employment claims in Martinez v. Combs: (1) exercising control over wages, hours, and working conditions; (2) suffering or permitting work; or (3) engaging, thereby creating a common law relationship.

The Ninth Circuit first examined the extent of McDonald’s control over the franchisee’s employees. The court found that, although McDonald’s retained quality control over the franchise, it did not control the day-to-day aspects of the employees’ work, nor did it have control over their wages, hours, or working conditions. The court also found that there was no common law employment relationship, as McDonald’s exercised control only over quality and brand standards, not over the “manner and means” by which the franchisee employees performed their work.

The Ninth Circuit further found that McDonald’s did not “suffer or permit” the franchisee’s employees to work, as it did not have authority to hire or fire Haynes employees, nor did it have the power to prevent those employees from working. Plaintiffs’ argument that McDonald’s had the power to prevent the alleged wage and hour violations was not sufficient to find that it had “suffered or permitted” Haynes employees to work. The court also dismissed plaintiffs’ argument that Dynamex Operations West, Inc. v. Superior Court supported their position, noting that Dynamex applies in the independent contractor classification context and not to claims of joint employment.

The plaintiffs also attempted to argue that McDonald’s was liable for the alleged wage and hour violations under an ostensible agency theory. The court rejected this argument, as an “agent” applies only to an entity that actually employs the worker or exercises control over their wages, hours, or working conditions. As the court had already determined, McDonald’s did none of these things.

Salazar v. McDonald’s is welcome news for franchisors and other employers, as it affirms the principle that direct control, rather than reserved or indirect control, is the relevant factor. Although Salazar addressed the question of joint employment under California law, the decision nevertheless substantially aligns with Department of Labor’s proposed rule for joint employment status, released for comment earlier this year. That test would consider four factors, including whether the potential joint employer actually exercises the power to: (1) hire or fire the employee; (2) supervise and control the employee’s work schedules or conditions of employment; (3) determine the employee’s rate and method of payment; and (4) maintain the employee’s employment records.

The Ninth Circuit’s common-sense approach to evaluating joint employment in Salazar is very significant for franchisors and other entities that engage with other businesses that employ workers. It supports that these entities may apply quality and similar standards on the other business, even where such standards may indirectly affect the other business’s employees. It also affirms that franchisors may offer franchisees optional tools to assist franchisees with running their businesses, even where such tools may impact the franchisee’s employees’ wages, hours and working conditions. This decision thus recognizes the business realities of the franchisor-franchisee context, and also more broadly recognizes the principle that employment status is based on actual, direct control — not on actions that may indirectly impact another entity’s employees.