The issue of whether a corporation is an employer of an employee alleging labor code violations is more complicated than it would seem. As more and more companies franchise their businesses, the question of whether the franchisee, the franchisor or both are the employer arises more often. This causes confusion, finger pointing and often issues of indemnification.
Most recently, McDonald's Corporation felt the sting of joint employment when employees in California brought a complaint for numerous labor code violations including failure to provide meal and rest periods. These suits not only allege McDonald's was liable for alleged violations in corporate stores but also in franchisee owned stores. McDonald's alleges it has no control of the day-to-day operations of its franchises. However, under the theory of joint employer liability a court may be able to determine otherwise.
The California Supreme Court in Martinez v. Combs held that one may only be deemed an employer if it has: (1) exercised control over the plaintiffs' hours, wages or working conditions; (2) suffered or permitted plaintiffs to work; or (3) "engaged" plaintiffs thereby creating a common law employment relationship. Martinez's three- part test was specifically designed to capture situations where more than one entity functions as the employer for wage-hour issues. A Court of Appeals case, Futrell v. Payday California further set forth in order to have "control" of worker's wages, an entity must negotiate and set an employee's rate of pay. Regardless of the facts, a plaintiff-employee is likely to include a franchisor in his claims and allow the court to decide if they were properly included.
It is unknown at this juncture what evidence will be presented to link McDonald's to its franchisees. The Complaints allege that McDonald's exercised rigid control over its franchises including requiring a time keeping system that alerts managers when labor costs are exceeding store sales. Plaintiff-employees will argue this type of control qualifies McDonald's as an employer under the law.
The other major issue that may arise in a joint employer matter is often there is some form of indemnification clause in a franchise agreement. An indemnification clause would require the franchisee to provide a defense for the franchisor; potentially even pay for separate counsel raising the cost of litigation drastically. When signing a franchise agreement, franchisees should have competent legal counsel review the agreement and verify their insurance will aid in any indemnification that may be necessary.