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Franchisor McDonald’s to Settle with Franchisee’s 800 Workers in Wage-Theft Lawsuit, Paying $3.75M

McDonald's workersPresumably for the first time, McDonald's Corporation has agreed to settle claims that it was liable for labor law violations by a franchisee because it was a "joint employer" of the workers at five franchised restaurants in California. Under the settlement, McDonald's will pay 800 employees $3.75 million for underpaid wages, of which $2 million will go to their attorneys.

While the district court granted preliminary approval of the settlement on August 31, 2016, the judge has not yet issued a written order confirming it.

U.S. District Judge James Donator in Northern California court has scheduled a hearing for December 15, 2016, regarding the proposed settlement for the lawsuit, Ochoa v. McDonald's Corp., filed in March of 2014 and certified as a class in May 2015. If it is approved, McDonald's will dodge the proverbial "joint employer" bullet. Currently, the hamburger chain is in other legal actions pertaining to unfair wages, two brought by the National Labor Relations Board, Wage and Hour division, again arguing that it is not a joint employer with franchisees on labor violations, court decisions that could result in the franchisor having to bargain with unionized employees.

After the judge granted class certification for the lawsuit, McDonald's filed a motion for summary judgment, challenging workers' theories of joint and derivative liability. The court granted in part and denied in part McDonald's motion, concluding that the franchisor was not liable as a joint employer "with direct control over class members." But it allowed the workers to proceed against McDonald's on an ostensible agency theory.

Last July, the court again granted in part the employees' motion for class certification, holding that they could pursue their "miscalculated wages, overtime payments, and uniform maintenance payments claims on a class-wide basis against McDonald's on an "ostensible agency" theory. McDonald's appealed the decision to the Ninth Circuit, and additional motions were filed by both parties. As the requests were being considered, the judge scheduled the trial for December 5, 2016.

Settlement discussions begin

The parties had begun settlement talks in December 2015, and the court granted a preliminary approval for the franchisee, the Edward J. Smith and Valerie S. Smith Family Limited Partnership, also named in the lawsuit. They reach an agreement, resolving all class member claims against the Smith entity, resulting in a final oral approval by the court on August 31, 2016, not yet confirmed.

Regarding the class action suit against McDonald's, after a conference took place in September 2016, only attended by the workers' counsel and McDonald's, a mutually agreeable settlement was "memorialized in a written memorandum of understanding," superseded by the parties' recent signed settlement agreement.

The settlement, detailed in a Declaration by [the workers' attorney] Barbara J. Chisholm in Support of the Plaintiffs' Motion for Preliminary Approval of Class Action Settlement with McDonald's Defendants, signed on October 28, 2016, reveals that Chisholm and her co-counsel Michael Rubin of Alshuler Berzon in San Francisco constructed the settlement with the help of Magistrate Judge Jacqueline Scott Corley.

The attorney's declaration states, "Without admitting or conceding any liability or damages, McDonald's has entered into this settlement to fully, finally, and forever resolve this litigation as to the claims between the parties. McDonald's will also, as part of the settlement, provide training for all Smith Family franchisee store supervisors and managers. The training will also cover use of McDonald's software programs on scheduling and timekeeping, including employee meal periods and rest breaks to ensure employees are paid correctly.

But the declaration states that "nothing in the [settlement] agreement shall preclude McDonald's from making clear . . . that McDonald's does not directly, indirectly, or through an agent employ the workers in the Smith restaurants, and that Smith's use of Software . . . is optional, and not required by McDonald's.

Attorney Chisholm states in her declaration, "To the knowledge of my co-counsel and me, this is the first ever employment class action with McDonald's involving a certified class of crew members working in franchise-operated stores."

Chisholm said the settlement provides a payment of $1.75 million to be made to the 800 named plaintiff workers, members of the certified class, and the California Labor and Workforce Development Agency. It also provides that McDonald's will also pay up to $2 million for the workers' counsels' "statutory attorneys; fees and costs." She states, "Plaintiffs' counsel negotiated this amount separately from the amount of the recovery for class members." Because of that, Chisholm states the settlement agreement "provides that, should this Court award less than $2 million in fees and costs, the difference will be returned to McDonald's."

The McDonald's settlement agreement states that the Smith Family Partnership [franchisee entity] settlement includes injunctive relief that establishes certain parameters regarding scheduling and/or timekeeping. It says McDonald's is not a party to the Smith settlement agreement and McDonald's is not agreeing to be bound by the injunctive relief provisions of the Smith settlement.

McDonald's spokesperson Terri Hickey stated last Monday that the company is not a joint employer of franchise workers. She was quoted by Business Insider saying, "We entered into this mutually acceptable resolution to avoid the costs and disruption association with continued litigation."

Other NLRB legal action against McDonald's

In another recent decision, Salazar v McDonald's Corp., involving McDonald's that is also from a federal district court in California, a court again granted summary judgment on labor law claims against McDonald's as a joint employer with its franchisee, but it denied summary judgment on a claim that McDonald's was liable for the franchisee as an ostensible agent. The case is pending.

In October, 15 female workers filed complaints against McDonald's Corporation and franchisees with the Equal Employment Opportunity Commission. EEOC defines sexual harassment as a form of sex discrimination that violates Title VII of the Civil Rights Act of 1964. And in a National Labor Relations Board case, union-backed "Fight for $15" claims McDonald's is a joint employer of franchise workers who allege they faced retaliation for joining nationwide strikes.

McDonald's Corporation firmly denies the accusations in these cases.

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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 or at 303-799-7398.