Recent Franchisor/Franchisee Employee Court Ruling - Restaurant CPA

In March 2017, a ruling in a federal court in California made an impact in the franchisor/franchisee world in regards to employees. In the Salazar v. McDonald’s Corp case, the court found that McDonald’s does not control the wages paid to employees at its franchises, and is not responsible for any alleged wage and hour violations.

Outcomes of Salazar v. McDonald’s

Typically, the franchisor licenses its trademark and sets standards relating to quality and products, but the franchisee is solely responsible for all employee decisions. Employee decisions include hiring, scheduling, supervising, and paying wages. Franchisors are usually not liable as joint employers unless they exert significant control over the franchisee’s daily operations.

The decision ends a lawsuit brought by 1,200 current and former McDonald’s employees at Northern California franchise locations that claimed they were underpaid and denied meal and rest breaks, which is a violation of California labor laws. The employees claimed they believed both the employees and the franchisees worked for McDonald’s. Last year, the court held that McDonald’s was not an employer under Labor Codes because it did not exercise direct or indirect control over the employees’ working conditions. The court rejected the argument that the franchise agreement between McDonald’s and the franchise owners established a right to control the terms and conditions of the workers’ employment. The court has also rejected the workers’ claim that McDonald’s is liable because McDonald’s ostensibly controlled workers’ wages through an agent. Instead, the court ruled that California’s wage-and-hour laws apply only to employers who control wages and workplace conditions.

The court agreed that McDonald’s did not function as the crew members’ employer. The franchisee solely possessed the power to hire and fire its workers, set their wages and hours, and tell them when and where to report to work. While McDonald’s could exert pressure on the franchisee because it could theoretically withdraw its business, it could not directly or indirectly set wages, hire, terminate, or regulate daily working conditions. The court determined that being able to apply influence through a franchising relationship is not enough to support liability.

Franchisor/Franchisee Liability

Although this is an important decision for franchisors and franchisees, employees’ attorneys plan to appeal this lower district court decision.

In recent years, there has been a multitude of efforts to expand franchisor liability for working conditions at franchise locations. But for now, the responsibility and liability for employees and working conditions falls on the franchisees. It is important to note the franchisees must abide by cross-company special pay rules such as overtime being worked by a single employee at multiple locations. An employee needs to be paid overtime when the franchisee’s ownership, and/or management are the majority or same across locations even if each location has a different LLC.

For more information and guidance in labor laws and franchises, please contact us.

» Find out how our Restaurant Consulting services can benefit you.