PEOs, Hamburgers, and Joint Employment

Happy Monday!  Re-publishing this fantastic update from Mike Miller regarding joint employment.

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Who would have thought that PEOs would have anything in common with McDonald’s, Hamburger University, and joint employment? Well, earlier this month a three judge panel of the United States Court of Appeals for the 9th Circuit issued a decision interpreting California law regarding a joint employment issue that PEOs will be able to utilize with regard to the bourgeoning number of wage claim cases in California and elsewhere that have been filed against PEOs. In this California case, the Plaintiffs, among other allegations, alleged that they were denied proper overtime premiums, meal and rest breaks, and other benefits in violation of the California Labor Code. Most significantly, the Plaintiffs also alleged that McDonald’s and its franchisee are joint employers and that McDonald’s is, therefore, liable for the wage violations. The district court had held that McDonald’s is not a joint employer of the franchisee’s employees and was not liable for these wage claims and had dismissed these claims in a summary judgment action. On appeal, the 9th Circuit affirmed the lower court ruling.

Similar to how PEOs operate, the franchisee, and not McDonald’s, selects, interviews, hires, trains, supervises, disciplines and fires its employees. The franchisee also sets the employees’ wages and their work schedules and monitors their time entries. There was no evidence that McDonald’s performed any of these functions. Interestingly, evidence in the record, if viewed in a manner most favorable to the Plaintiffs (as must be done in a summary judgment proceeding), would have permitted a finding that McDonald’s could have prevented some of the alleged wage-and-hour violations but did not do so, and yet this did not impact the Court in its decision.

Under the franchise agreement, McDonald’s required the franchisee to use its Point of Sale (“POS”) and In-Store Processor (“ISP”) computer systems every day. Managers of the franchisee took various courses at McDonald’s Hamburger University and then trained other employees on topics such as meal and rest break policies. The franchisee also voluntarily used the McDonald’s computer systems for scheduling, time keeping, and determining regular and overtime pay through applications that came with the IPS software.

Under the applicable California Wage Order, an employer is defined as one “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.” In construing this Wage Order, the California Supreme Court has set forth three alternative definitions as to what it means to “employ” someone. These three alternative definitions, any one of which can establish an entity as an employer, are as follows:

(a) to exercise control over the wages, hours or working conditions, or (b) to suffer or permit to work, or (c) to engage, thereby creating a common law relationship.

With regard to whether McDonald’s exercises “control over the wages, hours or working conditions” of the employees of the franchisee, the 9th Circuit pointed out that McDonald’s does not “retain ‘a general right of control’ over ‘day-to-day aspects’ of work at the franchises.” The Court held that McDonald’s involvement with the workers did not represent control over wages, hours, or working conditions.

With regard to the “suffer or permit to work” definition of employer, here too McDonald’s did not meet the test for being an employer. In one of the more significant aspects for how this case may impact PEOs, the Court stated:

The question under California law is whether McDonald’s is one of Plaintiffs’ employers, not whether McDonald’s caused Plaintiffs’ employer to violate wage-and-hour laws by giving the employer bad tools or bad advice.

I have written previously about the importance of not referring to the manner in which PEOs do business in California as being the “leasing of employees.” The 9th Circuit gave credence to this position when it referred to a staffing agency supplying employees to another entity and having such a manner of doing business fit under the “suffer or permit to work” standard for being an employer. Clauses found in PEO Service Agreements stemming from the early days of the industry such as the PEO shall have the power to “withhold employees’ services from the client,” not only is not an accurate representation of the realities of the PEO/client relationship in 2019, but also is a worrisome clause. As the 9th Circuit pointed out in this decision, the determination of whether an entity is an employer under the “suffer or permit to work” standard turns in part on whether an entity has “the power to prevent plaintiffs from working.” Consequently, in California, a PEO’s not retaining or assuming “a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisee’s employees” is crucial in avoiding the determination of employer status under California law.

Lastly, with regard to the third part of the test, “to engage, thereby creating a common law relationship,” the Court concluded that according to California common law “[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” The Court stated that while perhaps arguably there was evidence that McDonald’s was aware that its franchisee was violating California’s wage-and-hour laws with respect to the franchisees employees, there was “no evidence” that McDonald’s had the requisite level of control over the Plaintiffs’ employment to establish a joint employer relationship.

While the Court went on to dispose of other peripheral issues, the Court’s discussion did not change the fact that McDonald’s did not have sufficient control to make it an employer. I have talked for many years about making sure your service agreements are 21st century service agreements and this case drives home the importance of updating service agreements.

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Sharlie Reynolds

Sharlie Reynolds

Executive Vice President at Libertate Insurance, LLC

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