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McDonald’s Avoids Joint Liability in Wage Suit at 9th Cir. (2)

Oct. 1, 2019, 6:42 PMUpdated: Oct. 2, 2019, 2:43 PM

McDonald’s Corp. didn’t exercise enough control over a Bay Area franchisee’s workforce to be liable for alleged violations of California wage law, a federal appeals court ruled Oct. 1.

A class of workers at franchises owned by the Haynes Family Limited Partnership failed to show the fast-food giant had control over their hours, wages, or working conditions, the U.S. Court of Appeals for the Ninth Circuit said. Any direct control McDonald’s exerted related to quality control of the product the franchisee delivered to the public, the court said.

That type of control “is central to modern franchising and to the company’s ability to maintain brand standards” and is unrelated to working conditions, Judge Susan Graber said.

The Ninth Circuit’s decision highlights the level of involvement a franchisor like McDonald’s can have in a franchisee’s operations without creating exposure to liability under California wage law.

Joint employment liability is also a high-profile issue at the federal level, with the Labor Department working on a regulation that would narrow exposure for franchisors and companies that outsource labor. The National Labor Relations Board also plans its own rule to limit joint employer liability.

The franchisee’s workers will likely ask for the case to be reconsidered by the three-judge panel or the entire Ninth Circuit, said their attorney, Michael Rubin of Altshuler Berzon. The panel decided several issues of first impression that should be sent to the California Supreme Court, he said.

“In fairness, that should be the court to decide the scope of California employment law’s protections,” Rubin said.

McDonald’s has made clear that it isn’t and “has never been a joint employer,” a company spokeswoman said. The fast-food giant is “pleased” that the Ninth Circuit recognized its status and ruled in its favor, the spokeswoman said.

Alleged Violations Via McDonald’s Computer System

The lawsuit arose from alleged violations of overtime and meal and rest break requirements at Haynes-operated McDonald’s locations in the Bay Area. Guadalupe Salazar, Genoveva Lopez, and Judith Zarate filed a class action on behalf of 1,400 other workers, suing Haynes and McDonald’s as joint employers.

McDonald’s computer system used for time-keeping allegedly contributed to the violations, they said. For example, the computer system set weekly overtime thresholds at 50 hours instead of 40 hours, which they say caused them to miss out on overtime pay.

McDonald’s induced Haynes to use the computer system and wouldn’t allow for changes to it that would have conformed to California law, the workers said.

Haynes settled with the workers for $235,000. The workers pursued their class action against McDonald’s, which was thrown out by a federal judge in San Francisco. The workers appealed.

No Joint Employer Liability

The Ninth Circuit’s ruling largely turned on an evaluation of McDonald’s joint employer liability under the California Supreme Court’s 2010 ruling in Martinez v. Combs. That decision provided three definitions for what it means to employ a worker:

  • to exercise control over wages, hours, or working conditions; or
  • to “suffer or permit” to work; or
  • to “engage,” thus triggering a common law relationship.

The fast-food company’s direct control over the workers is geared towards quality control and brand management, not the type of day-to-day aspects of the operation that would trigger liability, the Ninth Circuit panel said.

McDonald’s also didn’t meet the suffer-or-permit definition, according to the panel. The workers wrongly focused on McDonald’s responsibility for the wage violations, when the issue under California law is responsibility for the employment of the workers, the panel said.

“The question under California law is whether McDonald’s is one of Plaintiffs’ employers, not whether McDonald’s caused Plaintiffs’ employer to violate wage-and-hour laws by giving the employer bad tools or bad advice,” Graber wrote for the panel, which included Judges Sidney Thomas and Andrew Kleinfeld.

But Thomas dissented from the suffer-or-permit part of the ruling. A jury should decide whether McDonald’s exercised enough control to be liable under that theory, he said.

The Ninth Circuit panel also shot down the claim that McDonald’s was an employer under the common law definition. The fast-food giant didn’t have the required level of control over the workers, the panel said.

Ostensible Agency, Negligence

Additionally, the Ninth Circuit panel rejected the workers’ argument that McDonald’s was liable for wage violations under “ostensible agency.” That theory creates liability based on a plaintiff’s perception he or she was acting as an agent for a defendant.

California wage law is more specific about the definition of employer than the state’s agency principles, so McDonald’s can’t be held liable under the ostensible agency theory, the panel said.

The workers’ negligence claim—based on McDonald’s allegedly not preventing the wage violations—also failed, the panel said. The negligence claim was preempted by California’s wage-and-hour statutes, the panel said. There also was no proof McDonald’s owed the workers protection from the franchisee’s negligence, it said.

Evidence suggests McDonald’s could have prevented wage violations, the panel said, pointing out that it need not decide whether the company could be liable to Haynes.

Issue for California’s Top Court?

Rubin, the Altshuler Berzon attorney who represented the workers, said there were four separate issues of first impression under California law that “the Ninth Circuit panel took upon itself to decide.” The workers will likely urge the panel or the full Ninth Circuit to send those questions to the state high court to decide, Rubin said.

One issue is whether the suffer-or-permit standard only applies to employment, as the Ninth Circuit panel ruled, or does it also pertain to the unlawful conditions of work, Rubin said.

Another crucial legal question is if the control needed to trigger joint employer liability includes something like McDonald’s time-keeping software, which is focused on lowering labor costs and isn’t tied to branding or quality control, Rubin said.

The case also presents novel issues about ostensible agency and negligence theories in the workplace, he said.

Cohen Milstein Sellers & Toll also represents the workers. Akin Gump Strauss Hauer & Feld and Jones Day represent McDonald’s.

The case is Salazar v. McDonald’s Corp., 9th Cir., No. 17-15673, 10/1/19.

To contact the reporters on this story: Robert Iafolla in Washington at riafolla@bloomberglaw.com; Patrick Dorrian in Washington at pdorrian@bloomberglaw.com

To contact the editors responsible for this story: Jo-el J. Meyer at jmeyer@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com