In a recent decision, the California Court of Appeal in Patterson v. Domino's Pizza, LLC, 2012 Cal. App. LEXIS 753 (June 27, 2012), held that the trial court erred in granting summary judgment to a franchisor.The franchisor had contended it could not be held liable in a lawsuit filed by a then-16-year-old girl who worked for a Domino's Pizza franchisee (the "franchisee") and claimed that she was sexually harassed and assaulted by the franchisee's assistant manager. The Court of Appeal held that there were triable issues of material fact as to whether the franchisor had sufficient "control" over the franchisee to find the franchisor liable in a sexual harassment lawsuit brought by a franchisee's former employee.

The young girl, in the above cited case, claimed that she was sexually harassed and assaulted by the franchisee's assistant manager. She resigned from her job, and filed a lawsuit against the assistant manager, the franchisee and the franchisor. During litigation, the franchisee filed for bankruptcy.

The franchisor filed a motion for summary judgment, arguing that it could not be liable to the plaintiff because: (1) the franchisee was an independent contractor pursuant to the written franchisee agreement; and (2) there was no principal-agent relationship between itself and the franchisee. The trial court held that the franchisee was an independent contractor, and thus the franchisor could not be vicariously liable for plaintiff's wrongful termination claims.

The Court of Appeal reversed the trial court, and held that for purposes of summary judgment there was sufficient evidence that the franchisor exercised "substantial control" over the franchisee, and thus could be vicariously liable on the plaintiff's employment claims. In reaching this conclusion, the court relied on two sets of facts: (1) the franchisor's day-to-day control over the franchisee as set forth in the franchise agreement; and (2) the franchisor's significant involvement in the franchisee's personnel decisions.

The franchisor argued that, under the franchise agreement, the franchisee was "responsible for recruiting, hiring, training, scheduling for work, supervising and paying the persons who work in the Store and those personnel [were the franchisee's] employees and not [the franchisor's] agents or employees," not the franchisor. The Court of Appeal noted that "for the purpose of a summary judgment motion, a franchisor's actions speak louder than words in the franchise agreement." The court concluded that the franchise agreement was not dispositive of the issues, relying on what it considered to be evidence that the franchisor exerted "complete or substantial control" over its franchisees' employees. Such evidence included that the franchisor:

1) provided guidelines about the employees he could hire, the employees had to "look and act a certain way," and the franchisee implemented those policies when he hired applicants;

2) provided guidelines and policies on employee "attendance" and sexual harassment. The franchisee testimony suggested that the franchisor's oversight of the franchise was extensive;

3) sent inspectors to verify compliance, "called the store on the sly," and used "mystery shoppers" to determine whether the franchisee was following its procedures. The franchisee testified: "I was getting ticky-tacked to death by inspectors.... [T]he way they changed the operating agreement made it easier for them to put you out of business by how they could write you up and how they graded their inspections;"

4) the franchisor's area franchisee told the franchisee which of his employees should be terminated, and the franchisee testified that he had no choice but to comply. The franchisee testified that the area franchisee told him to fire one employee who was not following procedures relating to the use of bags. The franchisee further testified that he "had to pull the trigger on the termination, [and] it was very strongly hinted that there would be problems if I did not do so. [Domino's] area leaders would pull you into your office ... and tell you what they wanted. If they did not get what they wanted, they would say you would be in trouble.... I never said 'no' intentionally to an area leader."

Based on all of this the Court of Appeal held that the franchisee's "testimony, if believed by a trier of fact, supports reasonable inferences that there was a lack of local franchisee management independence. [The plaintiff] met her burden to show triable issues of fact involving the extent of [the franchisor's] control over [the franchisee]."

Additionally, the Court of Appeal questioned the franchisor's contention that the franchisee had the freedom to conduct its "own independent business" under the franchise agreement. The Court of Appeal found that there was a "reasonable inference" supporting the plaintiff's claim that the franchisee was not an independent contractor, noting the following:

1. provisions of the agreement substantially limit franchisee independence in areas that go beyond food preparation standards. The franchisee's computer system is not within its exclusive control. The franchisor has "independent access" to its data. The franchisor has the right to audit the franchisee's tax returns and financial statements;
2. the franchisor also determines the franchisee's store hours, its advertising, the handling of customer complaints, signage, the e-mail capabilities, the equipment, the furniture, the fixtures, the décor, and the "method and manner of payment" by customers;
3. the franchisor regulates the pricing of items at the counter and home delivery, and it sets the standards for liability insurance;
4. the franchisee's liability insurance policies must name the franchisor as "additional insureds;"
5. the franchisor also decides the franchisee's book and record keeping methods;
6. the franchisor may determine the franchisee's location and right to re-locate and may send inspectors to monitor its operations;
7. the franchisor controls whether the franchisee may "engage, or own any interest, in any other business activity" or "be employed by any other business;"
8. the franchisor requires franchisees to report "weekly" on sales, and to provide it with their state and local business tax returns "for any period" and "such other information as [the franchisor] may reasonably require....;" and,
9. the franchisor specifies the standards a franchisee is expected to maintain as "minimum guidelines for the operation of all Domino's Pizza stores....", including a variety of requirements in a variety of areas, such as: bank deposits, safes, "front till" cash limits, type of credit cards that must be accepted, mobile phone use, store closing procedures, store records, refuse removal, radar detectors, phone caller identification requirements, security, delivery staffing, holiday closings, stereos, tape decks, wall displays, franchisee web sites, "in-store conversations," and literature that is "allowed in a store."

Based on the foregoing elements, the Court of Appeal held that these "requirements raise reasonable inferences supporting [plaintiff's] claim that [the franchisee] is not an independent contractor."