Domino’s Falls the Right Way, but FedEx Fails to Deliver

California Supreme Court Rejects Vicarious Liability Claim by Franchisee’s Employee against Franchisor While Ninth Circuit Court of Appeals Holds Delivery Drivers Are Employees not Independent Contractors under California Law

One month after the NLRB’s General Counsel announced that he would pursue complaints against McDonald’s regarding alleged unfair labor practices at McDonald’s franchisees (see our alert here) , two cases from the West Coast – decided within a day of each other – addressed the related hot-button issues of: (1) When can a franchisor be held vicariously liable for the torts of its franchisee’s employees? and (2) When is a worker an employee versus an independent contractor?

Domino’s

In the first case, Patterson v. Domino’s Pizza, LLC, et al., the California Supreme Court reversed a lower appellate court’s ruling and held that Domino’s was not vicariously liable for sexual harassment allegedly committed by an assistant manager of one of Domino’s franchisees. In reaching its decision, the Court did several things:

  • The Court concluded that focusing on whether a franchisor has the “right to control the means and manner” of operation of the business generally is inconsistent with the franchise business model – because most franchise chains rely on a comprehensive system of operating methods and procedures. As a result, a franchisor’s use and enforcement of uniform operating standards is insufficient on its own to create an “agency relationship” between the franchisor and its franchisees or their employees (and, in turn, to impose vicarious liability upon the franchisor for its actions).
  • In deciding whether Domino’s could be liable for its franchisee’s employee’s alleged harassment, the Court adopted the more focused analysis of whether or not Domino’s had retained (or assumed) a right of control over personnel decisions and the relevant day-to-day aspects of the behavior of its franchisee’s employees. This analysis, the Court noted, is similar to the test adopted by other states, which looks as whether the franchisor has control over the “instrumentality,” the conduct, or the specific aspect of the franchised business that caused the alleged injury.
  • The Court gave significant weight to the franchise agreement in deciding that Domino’s had no control over the franchisee’s employment or personnel decisions – and had not mandated sexual harassment policies to its franchisee or provided any sexual harassment training to his employees. As a result, Domino’s could not be deemed an employer of the franchisee’s employees or be vicariously liable for their actions.
  • Also important to the Court was the franchisee’s own testimony that he had sole control over hiring and firing decisions, had developed his own sexual harassment policy, instructed his employees to bring any harassment claims to him for resolution, and made the ultimate decisions with respect to the plaintiff’s allegations.
  • The Court discounted the contractual control that Domino’s retained regarding employee dress code and personal grooming, concluding that those controls related to system uniformity, not control over personnel issues. The Court also downplayed advice given by Domino’s field representatives about how the franchisee should handle certain personnel matters (including the complaint at issue) because it did not believe the franchisee was compelled to follow that advice.

The Patterson decision was not unanimous. Three of the seven justices would have upheld the lower court decision and allowed the case against Domino’s to go to trial. Importantly, though, the dissenting justices did not criticize the Court’s legal standard; rather, they objected to the majority’s application of that standard to the facts. In particular, the dissenters complained that the majority had afforded the contract too much weight rather than considering what it deemed to be a factual dispute about the actual control Domino’s exerted over the employment decisions of its franchisee.

In general, however, the Patterson decision offers useful guidance on the standards that franchisors may want to adopt to steer clear of liability for their franchisees’ actions.

FedEx

The day before the Patterson decision, the US Court of Appeals for the Ninth Circuit issued its decision in Alexander, et al. v. FedEx Ground Package System, Inc. In Alexander, the Court concluded that under California law, FedEx delivery drivers were employees of FedEx, not independent contractors. In reaching this conclusion, the Court relied upon the same “right to control” analysis that the Patterson court decided was insufficient to assess franchisor vicarious liability. In contrast to Patterson, the Alexander court found disclaimers of an employment relationship found in FedEx’s contract with its drivers to be inconsequential compared to the control – both contractual and otherwise – that FedEx exercised over almost every aspect of a driver’s “business,” including driver schedules; package pick-up and delivery times and manner of package delivery; detailed driver and delivery truck appearance requirements; and driving standards. Although FedEx did not have “absolute control” the Court found that its extensive control over its drivers was sufficient to establish an employer-employee relationship.

Lessons

So what do we learn from the Patterson and Alexander decisions? Several things:

  1. In vicarious liability cases, California appears to have joined a growing majority of states that examine whether a franchisor actually exercises control over the instrumentality, conduct, or specific aspects of the franchisee’s business that caused the alleged harm. That’s a good thing in that California courts should no longer hold a franchisor liable – or keep it as a defendant in a case – simply because the franchisor has and enforces system standards regarding the operation of franchised businesses. Rather, there must be some evidence that the franchisor controlled the part of the operation that actually caused the harm. Certainly, the Patterson decision is better precedent than the lower court decision that it overturned.
  2. The adoption of this new test may have another benefit. The Alexander court based its decision that FedEx employed its drivers, in large part, on the “right to control” analysis that, before Patterson, had been the test used to determine if a franchisor was vicariously liable. In other words, previously a franchisor could have only been vicariously liable for its franchisees’ acts in California if the franchisor essentially met the standard for being deemed the employer of that franchisee. At first blush, having the same test for determining whether a relationship is one of employment and determining whether to impose vicarious liability would seem to insulate franchisors from the imposition of vicarious liability because (in most circumstances) they are not employers. However, the flip-side is that if a court chose to impose vicariously liability under the “right to control” standard, then the franchisor would have been potentially susceptible to a claim that it was also the employer of its franchisees under that standard. By changing the test in vicarious liability cases to focus on control over the instrumentality, the California Supreme Court – perhaps unintentionally – has divorced these two analyses. In our view, a rule that franchisors should never be vicariously liable for the actions of their franchisees makes more sense because franchisors are not employers and because direct liability can address situations in which the franchisor actually does control the “instrumentality” of the harm.
  3. The Patterson court’s emphasis on the contractual allocation of rights and duties (in the franchise agreement) and the franchisee’s retention of actual day-to-day management of employment and personnel issues arguably suggests that the franchisor’s “control” must be contractually derived and more than just a generalized authority to find liability. For example, Patterson suggests that a contractual right to inspect a franchised business periodically to ensure, among other things, cleanliness, would not be sufficient to render the franchisor liable for a slip-and-fall that resulted from a franchisee’s failure to clean up a spill. Franchisors should ensure that their franchise agreements clearly allocate day-to-day management activities, particularly with respect to personnel issues, to the franchisee.
  4. The employer versus independent contractor and vicarious liability questions are still factual inquiries, which means franchisors will likely be obligated to litigate those issues through to summary judgment rather than dispensing with them at the motion to dismiss stage. And, in some cases, the view of the Patterson dissent (or more ominously, the Alexander court) may prevail, and a franchisor will be found to be an employer or forced to proceed to trial on the factual question of the franchisor’s actual control over the specific aspect of the business that caused the alleged harm. In either case, to avoid a determination that they are employers or vicariously liable, franchisors should avoid taking actions that could be deemed to be exercising control over aspects of day-to-day management, regardless of what the contract says.

Vicarious liability and the divide between employer-employee versus independent contractor remain issues of great import for the franchising industry. Please contact us at 703-774-1200 if we can provide assistance to you on these issues.

This client alert is only for the sake of information and discussion, is not meant to be relied upon, and does not constitute legal advice.