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Employees May Pursue California Labor Code Claims against McDonald’s on Theory of Ostensible Agency

SAN FRANCISCO - A federal court in California issued a ruling in the pending employee class action, Ochoa v. McDonald's Corp. et al. in September. Its finding was that the employees of a McDonald's franchisee may pursue claims at trial against McDonald's on the theory that the franchisee is McDonald' ostensible agent.

Attorney Leo A. Bautista of Lewis Brisbois Bisgaard & Smith reported in this month's Franchise Law Update article that after McDonald's filed a motion for summary judgment seeking dismissal of California Labor Code claims against the franchisor on the grounds that the company was not a joint employer, the court agreed. It stated that the undisputed facts established that McDonald's was not a joint employer, but also found that there were sufficient disputed facts regarding whether the employees reasonably believe the franchisee to be the agent of McDonald's to require a trial on that issue.

Thus, the court has granted summary judgment dismissing the claim that McDonald's was the employees' actual joint employer, but denied summary judgment on the issue of McDonald's employer liability on ostensible agency grounds. Neither side as yet sought to appeal the ruling.

Employees, present and past, filed the lawsuit in U.S. District Court in Northern District of California against franchisees in Oakland and Richmond, and against McDonald's Corporation entities. The suit has not yet received class status.

Allegations include failure to pay overtime and minimum wages; failure to provide meal and rest breaks; failure to provide legally adequate earnings statements; and failure to reimburse employees for time required to maintain their uniforms, pursuant to the California Labor Code. McDonald's Corporation moved for summary judgment asserting that they cannot be liable because they are not employers of the franchisee's staff at the restaurants.

In its analysis, the court confirmed that the McDonald's Corporation entities are potentially liable under the employees' California Labor Code only if they are employers of the suing employees and the putative class under the standards established by the California Supreme Court in Martinez v. Combs. The high court decision asserted in Martinez that an "employer" is a person or entity who "directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person."

Attorney Bautista states that the employees in the Ochoa case argued that McDonald's meets the "exercise control" prong of the Martinez test based in part on the declaration of a former franchisee. The store owner stated that she believes McDonald's can control franchisees through the power to terminate franchise agreements, decline to renew existing franchise agreements or enter into new ones, and impose technology, personnel and training requirements on franchise operations." Bautista writes,

The [employee] plaintiffs also submitted the declaration of an expert who opined that 'McDonald's is able to exercise a greater degree of control over its franchisees' restaurants than other franchisors' through control over growth and renewals, and the ability to terminate franchise agreements for deviation from its standards. The expert further opined that McDonald's terminates franchise agreements far more frequently than its competitors Burger King and Wendy's; that termination of a franchise agreement is potentially devastating for a franchisee and that McDonald's pays more attention to its franchisees' balance sheets than most other franchisors. The employees also submitted "a mountain" of document regarding the relationship between McDonald's and the franchisees.

The Los Angeles lawyer said the court found that "taking this evidence in the light most favorable to the employees, it is clear that McDonald's has the ability to exert considerable pressure on its franchisees." He said the court further found,

It [McDonald's] can try to influence a franchisee in many ways, up to and including termination of the business relationship. But the evidentiary showings about McDonald's strength as a franchisor do nothing to negate or call into question the dispositive fact that the authority to make hiring, firing, wage, and staffing decisions at the Smith restaurants lies in Smith and its managers -- and in them alone."

Bautista said this conclusion was not altered by the facts that McDonald's provided the employee timekeeping software that the franchisees used in their restaurants, hired business managers who monitored data from the franchisees' restaurants and spoke to managers about staffing levels, and was the primary leaseholder or owner of the land. The court stated that based on the Martinez case and other legal authority, the court found that these facts did not make McDonald's the joint employer of the franchisees' employees.

However, Bautista explains, after finding that the undisputed facts clearly established that McDonald's was not a joint employer, the court also noted that as an alternative to a theor based on a true agency relationship, McDonald's could also be liable to the employees based on a theory of ostensible agency. He said,

The court determined that "ostensible agency exists where (1) the person dealing with the agent does so with reasonable belief in the agent's authority; (2) that belief is generated by some act or neglect of the principal sought to be charged, and (3) the relying party is not negligent.

The attorney said the employees submitted declarations stating that they believed McDonald's was their employer, in part because they wear McDonald's uniforms, serve McDonald's food in McDonald's packaging, receive paystubs and orientation materials marked with McDonald's name and logo, and, applied for a job through McDonald's website. The court noted that other courts have found similar facts to meet the test for ostensible agency. Bautista concluded saying,

The court thus found that a jury could reasonably conclude from this evidence presented that McDonald's and the Smiths shared an ostensible agency relationship. The court thus denied summary judgment on McDonald's potential liability as a joint employer under ostensible agency, and ruled that the issue must be resolved at trial.

Jones Day of Silicon Valley is representing McDonald's Corporation and its entities. Freeman Mathis and Gary is representing franchisees Edward J. Smith and Valerie S. Smith Family Limited Partnership. The employees, Stephanie Ochoa, Ernestina Sandoval, Jasmine Hedgepeth and Yadira Rodriguez are represented by Atshuler Berzon.

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Order Re: Summary Judgment (Ochoa v McDonald's)

 

 

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About Janet Sparks

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.