In acknowledging the modern reality of the franchise business model in California and in the U.S., the California Supreme Court earlier this year recognized and reaffirmed the contractual benefits received by both parties to a franchise relationship while further defining the limits of liability for employment claims brought by store employees who seek to name the franchisor as a defendant.

In Patterson v. Domino’s Pizza LLC, the issue at hand was whether Domino’s was liable for sexual harassment claims brought by a store employee, Taylor Patterson, against her individual supervisor and her employer, the franchisee. The case offers lessons for other franchise companies and the relationship they establish with their franchisee base.

In a set of facts readily recognizable to the franchise community and that are hallmarks of a modern franchise relationship, Domino’s pointed out it had no ownership or partnership with its franchisee and that under the franchise contract, the store maintained property and liability insurance at its own expense. Most importantly, the store was solely responsible for recruiting and hiring employees to operate its store. While the franchisee’s owner had agreed to undergo training with Domino’s as a condition of opening and operating the store, the franchise agreement removed from Domino’s any right or duty to implement a training program for the franchisee’s employees.

The franchise agreement also identified the parties as independent contractors. While it did require compliance with a separate “Manager’s Reference Guide” (MRG) and provide for initial training by Domino’s—as well as detailed uniform dress policies that the store’s employees were required to follow—the ultimate decision to hire and fire was left with the franchisee.

“Review your franchise agreements to ensure they explicitly define the franchise relationship, in both legal and functional terms, such that it is clear that store employees are not employees of the franchisor.”

Patterson argued that because Domino’s exercised detailed control over the franchisee’s general operations, liability for personal harm sustained in the course of the store’s business should be borne by Domino’s. Domino’s countered by pointing out that neither the contract nor the MRG gave Domino’s the authority to establish a sexual harassment policy or training program for its franchisee’s employees. Moreover, there was no procedure by which the store’s employees could report such complaints to Domino’s, nor did Domino’s have a procedure for monitoring or reporting sexual harassment complaints between its franchisees and their employees.

The court highlighted the economic changes in the franchising world over the last 50 years and pointed out that older decisions dealing with “vicarious liability” are not aligned with the present day reality of a franchising business relationship. In concluding that Domino’s Pizza LLC was not Patterson's employer, the court held that a franchisor’s enforcement of uniform marketing and operational plans on its franchisees cannot automatically create an employer/employee relationship. Instead, liability for a franchisor must be based on a finding that the franchisor retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the store’s employees. The court found that “any other guiding principle would disrupt the franchise relationship” and would essentially turn the franchise business model “on its head.”

Review your franchise agreements to ensure they explicitly define the franchise relationship, in both legal and functional terms, such that it is clear that store employees are not employees of the franchisor.

Guidelines and/or day-to-day operating manuals should clearly note that it is the franchisee that has the sole power and responsibility to implement day-to-day workplace behavior policies and decisions.

The actual practice and implementation of these policies must be consistent with these critical provisions of the franchise agreement and operating manuals.

While clarified by the Patterson decision, the line between providing for detailed operational requirements to protect the brand name and exercising control over employment decisions still leaves room for potential legal challenges for both a franchisee and a franchisor. Employee-friendly courts will likely use the totality of the circumstances standard to determine whether a franchisor did in fact have the power to force a store to terminate its employees or make other employment decisions. In addition, agencies such as the National Labor Relations Board are seeking to expand the definition of joint employer to encompass a wider scope of franchisor activity.

Notwithstanding the court’s decision, serious risk management challenges remain, as acts taken by franchisee employees can damage the goodwill and operations of a franchisor’s brand, yet the options for managing those risks are increasingly narrow. The line between protecting a franchisee’s business interests and property and limiting franchisor liability for the acts of a store’s employees will continue to be a tested, thus the roles and responsibilities of both must be clearly defined and strictly followed.

Jesse Jauregui is a partner at law firm Alston & Bird’s Los Angeles office. He has a developed practice in matters involving employment law, telecommunications law, and civil litigation.
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