The California Supreme Court recently ruled that Domino's Pizza is not liable for the sexual harassment claims of a franchisee's employee in Patterson v. Domino's Pizza, LLC, S204546 (Cal. Aug. 28, 2014).
In Patterson, the Plaintiff alleged that she was sexually harassed by her manager shortly after she started work. After leaving the job, the teenage Plaintiff filed suit against the franchisee, as well as the franchisor related entities, Domino's Pizza, LLC, Domino's Pizza, Inc., and Domino's Pizza Franchising, LLC ("Domino's") asserting that both Domino's and the franchisor for whom she worked were her employers and responsible for the manager's actions. The trial court found that the franchisee was an independent contractor and that therefore the manager was not an employee or agent of Domino's "for purposes of imposing vicarious liability".
The California Court of Appeal, citing the numerous means that Domino's had to control the franchisee's business in the franchise agreement and an operations manual, including that Domino's had access to the computer system and personnel data, reversed the trial court. Based upon this and the fact that a Domino's employee suggested that the franchisee fire the manager for his alleged actions, the Court of Appeal held that Domino's controlled the "means and manner" in which the franchisee operated its business rendering it Domino's agent, and vicariously liable for the franchisee failing to prevent that manager from sexually harassing the Plaintiff.
The California Supreme Court, apparently respectful of the franchise model, reversed and reinstated the trial court ruling in favor of Domino's, albeit in a close 4-3 decision. That Domino's maintained significant control over the franchisee's business operations was, in the court's opinion, designed to ensure uniformity of the customer experience at franchised locations and benefited both parties as "chain-wide variations...affect product quality, customer service, trade name, business methods public reputation and commercial image" and, therefore, the value of the brand itself. The court noted that these types of extensive controls are present in almost all franchise relationships and these, in and of themselves, did not "constitute the 'control' needed to support vicarious liability claims like those raised here."
The court noted that most franchise agreements, including Domino's, allocate personnel issues almost exclusively to the franchisee and held that as long as the franchisor honors the franchisee's exclusive right to make personnel decisions, it should not be liable for a franchisee's employment practices stating that a "franchisor...becomes potentially liable for actions of the franchisee's employees, only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge and relevant day-to-day aspects of the workplace behavior of the franchisee's employees." The court also stated "Any other guiding principle would disrupt the franchise relationship."
The court also examined the parties' actual course of dealing based on the record in recognition that the "parties' characterization of their relationship in the franchise contract is not dispositive." But found that Domino's never "retained or assumed the traditional right of general control an 'employer' or 'principal' has over factors such as hiring, direction, supervision, discipline, discharge and relevant day-to-day aspects of workplace behavior of the franchisor's employees" because the franchisee was solely responsible for interviewing and hiring its employees, created its own sexual harassment policy, was responsible for handling complaints of harassment, and had made the determination to suspend the manager.
Given the NLRB's recent announcement that it will assert wage and hour claims against McDonald's under joint employer theories and the controversy regarding minimum wages in many locations, this decision and the standards it articulates regarding when a franchisor is liable for the employment practices of its franchises could be significant even outside of California.