by Sayema Hameed
Is a franchisor liable for the wrongful acts of a franchisee employee? The short answer is, “It depends.” The longer answer involves an analysis of whether the franchisor demonstrates the characteristics of an “employer” under California law.
In a recent case, Patterson v. Domino’s Pizza, LLC (Cal. Sup. Ct. Case No. S204543, filed August 28, 2014), the California Supreme Court held that a franchisor, Domino’s Pizza, LLC, did not satisfy the criteria to be deemed an “employer” and was, therefore, not vicariously liable for alleged sexual harassment by a franchisee employee (a male supervisor) against another franchisee employee (a female subordinate employee).
Specifically, the franchisor here was not involved in the day-to-day decisions involving hiring, supervision, and discipline of the employees, and nothing in the franchise agreement contractually required or allowed the franchisor to make or control such employment decisions.
In this case, a company named Sui Juris, LLC acquired an existing Domino’s Pizza franchise in Southern California. There was a signed franchise agreement between Sui Juris, LLC (“Sui Juris” or “the franchisee”) and Domino’s Pizza Franchising, LLC, which is related to Domino’s Pizza, LLC and Domino’s Pizza, Inc. (collectively, “Domino’s” or “the franchisor”).
In June 2009, a female employee who had resigned from this franchise following alleged sexual harassment by her male supervisor filed a lawsuit against her supervisor, Sui Juris, and Domino’s. Her complaint alleged three causes of action under the California Fair Employment and Housing Act (“FEHA”) for sexual harassment, failure to take reasonable steps to avoid harassment, and retaliation for reporting harassment. The complaint also asserted common law causes of action for intentional infliction of emotional distress, assault and battery, and constructive termination in violation of public policy. The complaint maintained that Domino’s was the “employer” of both the plaintiff and the supervisor, and each defendant was described as the agent, employee, servant and joint venturer of the others.
In November 2010, Domino’s filed a motion for summary judgment, arguing that it was not an “employer” and could not be vicariously liable for the supervisor’s misconduct. Domino’s acknowledged that it enforced broad standards for selling its trademarked pizza brand, so that customers received a similar experience each time they ordered from a franchised store. Domino’s maintained, however, that the franchisee, Sui Juris, was a separate business that selected, managed, and disciplined its employees and that Domino’s lacked the day-to-day control needed for an employment relationship with the franchisee employees.
The trial court granted summary judgment for Domino’s on all counts, finding that Domino’s did not control day-to-day employment practices, and dismissed the suit. On appeal, the Court of Appeal disagreed and reversed the trial court’s decision, finding that evidence that Domino’s policies and procedures were much broader than food preparation and that Domino’s did involve itself in the franchisee’s employment decisions.
On further appeal, the Supreme Court sided with the franchisor Domino’s. The Supreme Court found that the Domino’s lacked control over the franchisee’s day-to-day employment decisions. Rather, the evidence showed that the franchisee made the day-to-day decisions involving the hiring, supervision, and disciplining of employees.
In addition, the franchise agreement stated that the persons who worked in the franchisee’s store were the employees of the franchisee (Sui Juris) and that no employment relationship existed between those employees and Domino’s. Nothing in the franchise agreement gave Domino’s the right or obligation to perform any functions typically performed by employers. Those functions, including “recruiting, hiring, training, scheduling for work, supervising and paying” employees, were exclusively allocated to the franchisee Sui Juris.
Moreover, the contract also stated that Domino’s had no duty to operate the Sui Juris store. Nor did Domino’s have the right to direct Sui Juris’s employees in store operations. There was also no policy or procedure for Sui Juris employees to report complaints to Domino’s.
In a 4-3 decision, the Supreme Court found that [blockquote]Domino’s had no right or duty to control employment or personnel matters for Sui Juris. In other words, Domino’s lacked contractual authority to manage the behavior of Sui Juris’s employees while performing their jobs, including any acts that might involve sexual harassment.[/blockquote]
By unilaterally acting on the plaintiff’s complaint of sexual harassment – including suspending the supervisor and starting an investigation – the franchisee acted with the understanding that the decision of whether and how to discipline the supervisor was the franchisee’s decision alone. The Court found no basis on which to find an employment relationship existed between the employee and the franchisor Domino’s.
The Court finally concluded that [blockquote]A franchisor will be liable if it has retained or assumed the right of general control over the relevant day-to-day operations at its franchised locations that we have described, and cannot escape liability in such a case merely because it failed or declined to establish a policy with regard to that particular conduct.[/blockquote]
Three justices dissented from the majority, arguing that “the majority places too much emphasis on the terms of the franchise agreement and not enough on the parties’ real world interaction” and that the contract language should be only one factor considered in determining if the franchisor is an employer. The dissent fears that franchisors will use contract language to shield themselves from employment-related claims even where the evidence shows the franchisor in practice retaining and exercising power over employment decisions, in particular the power to terminate franchisee employees.