Franchisor Not Liable for Wrongful Conduct of Franchisee’s Employee

There are many legal considerations that are involved in the creation of a franchisor/franchisee legal relationship. However, a recent California Supreme Court decision has demonstrated that there are limitations on liability if the franchisor did not assume or retain a general right of control over the employees that were hired by the franchisee.

The case of Patterson v. Domino’s Pizza, LLC, 60 Cal. 4^th 474, 177 Cal. Rptr. 3d 539 (2014) arose out of a sexual harassment claim brought by a female employee, Taylor Patterson, against her male supervisor. The assistant store manager allegedly touched her inappropriately and made lewd comments to her. Patterson reported the inappropriate actions to the franchise owners while Patterson’s father brought the actions to the attention of the police, as well as the human resources department of the franchisor, Domino’s Pizza. After these reports were made, Patterson, who was an hourly employee, had her scheduled work time reduced. She believed that this was a direct result of reporting the harassing behavior.

The franchise owner, Sui Juris, spoke with a representative of the Domino’s Pizza about the situation and was allegedly informed that he needed to terminate the employment of the assistant store manager. There also were conversations about the training procedures surrounding sexual harassment and that were in place at the franchise store and whether there would be any additional training.

Patterson brought suit pursuant to the California Fair Employment and Housing Act (FEHA) against the franchisor, Domino’s Pizza, LLC, in addition to the franchisee, Sui Juris, LLC, and the male supervisor who allegedly sexually harassed the employee. The basis of the legal claims were the actual sexual harassment, the fact that the franchisee failed to take appropriate actions to remedy the harassing behavior, and that the reduction in hours was a retaliatory response to Patterson’s report. The claims were brought against the franchisor under the legal theories that the franchisor was the actual employer of the plaintiff and the assistant store manager or, in the alternative, that the franchisee was the agent of the franchisor, meaning that the franchisor ultimately was responsible for the actions of the male supervisor.

The legal history of this case involves several reversals. Initially, the lower court ruled that the franchisor was not liable for the actions of the franchisee’s employee under the legal theories of agency or that there was an actual employment relationship and granted Domino Pizza’s motion for summary judgment. The appellate court subsequently reversed the determination of the lower court, finding that there were triable questions of fact. The appellate court based this decision of the operational and marketing standards that were part of the franchise agreement, which the appellate court determined created operational control over the day-to-day activities at the franchisee’s location. The court found that these operational standards, plus the comments of the Domino’s representative to Sui Juris that the franchise had to get rid of the assistant manager, arguably created an agency relationship, potentially subjecting Domino’s Pizza to vicarious liability. The California Supreme Court now has reversed the holding of the appellate court, finding that the operational and marketing plans that are part of the franchise agreement do not create agency or employment relationships with those individuals who are hired by the franchisee.

The Supreme Court held that the only way that a franchisor would be liable under FEHA pursuant to the franchise relationship is if the franchisor assumed general control over the management of the franchisee’s employees. The Court found that there was no evidence that the franchisor exercised general control over the day-to-day activities of the employees at the franchise location. The Supreme Court determined that in order to be vicariously liable for the wrongful actions of the employees, it was necessary to demonstrate control over actions such as hiring and firing, disciplining employees, providing direction and supervision, and managing other activities and workplace behavior. The Supreme Court relied on the fact that the franchise agreement at the heart of the suit required Sui Juris to develop its own training program and policies surrounding the response to sexual harassment. In addition, the franchise agreement specifically disclaimed any creation of an agency relationship between Domino’s Pizza and its franchisee and was clear that the franchisor was not responsible for the actions of Sui Juris’ employees.

This decision makes it clear that franchisees and franchisors should very carefully craft agreements in order to be clear where liability falls in the event of specific situations. Although the Supreme Court did find on behalf of the franchisor, the analysis was driven by the unique facts of this case and did not effectuate sweeping changes to the legal principles applicable to franchise agreements and relationships. It is unclear from the Patterson decision whether the operational standards imposed by a franchisor on a franchisee could create liability for a franchisor for claims arising out of violations of wage and hour laws.

If you are a franchisor, franchisee, or are considering becoming involved in a franchise agreement, contact the employment attorneys at Nassiri Law Group, practicing in Orange County, Riverside, and Los Angeles. Call (949) 375-4734.