In late August, the California Supreme Court held in Patterson v. Domino’s Pizza, Inc., that Domino’s is not vicariously liable for the inappropriate conduct by a franchisee’s employee. Specifically, the court held that the Franchisor is not responsible for sexual harassment by the assistant manager of a franchised location. The Patterson decision is, of course, consistent with hundreds of earlier decisions across the United States, but it at least helped to sooth the legitimate fears about the end of franchising reverberating through the industry. A wave of recent case filings have directly challenged the traditional and essential premise that franchisors are not the employers of their franchisees or franchisee employees, and that franchisors are not generally responsible for the wrongful conduct of their franchisees. This wave of new case filings includes:

  • Cases filed by workers seeking to hold McDonald’s jointly responsible for wage and hour violations.
  • Claims brought against 7-Eleven by franchisees claiming they are really misclassified workers of 7-Eleven.
  • A case brought by the Washington Department of Labor and Industries charging that a franchisor is responsible for its franchisees’ (and their employees’) industrial insurance premiums.
  • And, of course, the NLRB’s announcement in July that it authorized the filing of administrative complaints against McDonald’s for unfair labor practices involving workers at franchisee-owned restaurants.

While the Patterson decision is comforting, it is important to remember that the case was decided by the slimmest of margins; three Justices dissented from the fou-Justice majority opinion. And it is at least interesting to contrast the California Supreme Court’s decision in Patterson with a pair of cases decided by the Ninth Circuit within 24 hours of the Patterson decision. Specifically, on August 27, the Ninth Circuit ruled in a pair of cases (filed in California and Oregon) against FedEx, determining as a matter of law that FedEx had misclassified delivery truck drivers as independent contractors, when they were in fact employees. (Alexander et al. v. FedEx Ground Package System Inc., Nos. 12-17458 and 12-17509 (California); Slayman et al. v. FedEx Ground Package System Inc., case numbers 12-35525 and 12-35559 (Oregon).)

The FedEx cases were not “franchise” cases, but FedEx’s contractual relationship with companies hired to deliver packages on behalf of FedEx shared many attributes of a franchise. Like many franchise agreements, the package delivery drivers’ contracts licensed the use of the FedEx’s trademark, specified the territory in which drivers could operate, and obligated drivers to conform to standards designed to protect FedEx’s trademark to ensure a level of consistent service to customers. As such, drivers were required to properly display trademarks, use and outfit trucks that conformed to FedEx’s requirements, use a FedEx uniform, make pick-ups and deliveries of packages in a timely fashion, follow FedEx’s “safe Driving Standards,” and follow FedEx’s general appearance and personal grooming standards (i.e., drivers must be “clean shaven, hair neat and trimmed, free of body odor.”). FedEx (like franchisors) also provided training for drivers on job performance and interacting with customers in order to “[f]oster the professional image and good reputation of FedEx.”

The Ninth Circuit concluded in both cases that this evidence of FedEx’s “extensive control” over its drivers demonstrated that the drivers were employees, and not independent contractors. The court also noted that the entrepreneurial rights granted drivers’ under their contracts with FedEx – the ability to take on multiple routes or territories, the right to hire third-party helpers, the right to sell routes – were irrelevant under California and Oregon law, at least were the exercise of such rights by a driver required FedEx’s consent.

Patterson provides hope that if a franchise agreement is carefully drafted, and a franchisor does not involve itself in the operational details of those aspects of the business ceded to the franchisee under the franchise, it will not be held liable for franchisee’s conduct. But the forces pushing for expanded franchisor liability still remain, and as the FedEx cases illustrate, as long as the issue of expanded liability turns on a right of control test, the outcome in any given case is far from settled. Expect choppy waters ahead before this issue is finally resolved.