Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Ariz.: Franchisor not liable for discrimination by franchisee employee, (Jul 30, 2013)

By Jody Coultas, J.D.

A restaurant employee could not hold a restaurant franchisor vicariously liable for the discriminatory actions of a franchisee’s employee, the federal district court in Phoenix has held (Courtland v. GCEP-Surprise, LLC, July 29, 2013, Snow, G.).

The restaurant employee filed claims against the restaurant franchisor and franchisee based on sexual discrimination, harassment, and retaliation by a restaurant manager. The franchisor argued that it could not be held liable for employment discrimination because it was not the manager’s employer and because the franchisee was not its agent for purposes of vicarious liability.

The franchisor could not be held liable as a joint employer with the franchisee, according to the court. Two or more employers may be considered “joint employers” if both employers control the terms and conditions of employment of the employee. The Ninth Circuit applies an economic reality test to determine the existence of a joint employment relationship. The test considers the nature and degree of control of the workers; the degree of supervision, direct or indirect, of the work; the power to determine the pay rates or the methods of payment; the right, directly or indirectly, to hire, fire, or modify employment conditions; and preparation of payroll and the payment of wages.

A franchisor is not a joint employer unless it has significant control over the employment relationship. Here, the franchisor did not have the right to hire, supervise, or fire employees; did not compensate employees; and did not deal with payroll, scheduling, and employee recordkeeping. The franchisor’s power to terminate the franchise relationship was insufficient to create a joint employment relationship.

The court also held that the franchisor could not be held vicariously liable under an agency theory because it did not have control over the instrumentality of harm in this case. The “predominant test” for holding a franchisor vicariously liable is whether it “controls or has the right to control the daily conduct or operation of the particular ‘instrumentality’ or aspect of the franchisee’s business that is alleged to have caused the harm.” Vicarious liability attaches for employment discrimination if the franchisor exerts daily control over the hiring, firing, and supervision of franchisee employees.

The franchisor worked with and trained the restaurant’s managerial staff only to the extent necessary to protect its brand name and dictate product presentation. It did not mandate employee-related policies, was not involved in the daily staff management, and did not address employee grievances. It also did not monitor whether managerial staff complied with employment laws or how they supervised employees. Therefore, the franchisor did not control the conduct at issue in the employee’s case.

There was also insufficient evidence to suggest that the employee believed that the franchisor was her employer, according to the court. Apparent authority is created by a person’s manifestation that another person had authority to act with legal consequences for the person who makes the manifestation, when a third party reasonably believes the actor to be authorized and the belief is traceable to the manifestation. A franchisee’s use of a brand name demonstrates a franchise relationship, but the existence of a franchise alone does not create an agency. Use of signage and advertising, without more, is also insufficient. The employee’s paycheck named the franchisee as her employer and never mentioned the franchisor.

The case is No. CV-12-00349-PHX-GMS.

Attorneys: Dan M. Durrant (Gillespie Shields & Durrant) for Angela Courtland.

Cases: FranchisingDistribution ArizonaNews