In a victory for franchisors, the California Supreme Court has ruled that Domino’s Pizza (Domino’s) was not liable as an employer or as a principal in a sexual harassment lawsuit filed by an employee of a Domino’s franchisee. Patterson v. Domino’s Pizza LLC, No. S204543, 2014 WL 4236175 (Cal. Aug. 28, 2014). The plaintiff worked in a Domino’s Pizza franchise store operated by Sui Juris, LLC. She claimed that shortly after she began working, her supervisor sexually harassed her whenever they worked the same shift. She complained to the franchisee, who suspended the supervisor pending an investigation. Despite the supervisor never returning to work, the plaintiff resigned and filed a lawsuit, bringing multiple claims under the Fair Employment and Housing Act (FEHA) for sexual harassment, failure to prevent discrimination, retaliation, and constructive discharge, among others.

The plaintiff brought suit against the supervisor and the franchisee, and also Domino’s, alleging, first, that Domino’s was the supervisor’s employer and was strictly liable under FEHA for the supervisor’s actions, and second, that because Domino’s retained control over its franchisees general store operations (e.g. pizza-making, store operations, and delivery procedures), the franchisee was Domino’s agent and Domino’s was vicariously liable for its agent’s tortious conduct. The court rejected plaintiff’s argument on both counts. Specifically, the court held that in tort causes of action, a franchisor’s vicarious liability is determined by examining the amount of general control a franchisor exerts over day-to-day operations at its franchisees’ stores, and not based solely on the fact that the franchisor retains operational control over its brand and image.

The court found that both the franchise agreement and the franchisor’s actual conduct supported this finding. In the franchise agreement, Domino’s expressly disclaimed any liability for damages arising out of store operations, and also disclaimed any relationship with the franchisee’s employees. In addition, the franchisee was solely responsible for its own recruiting and hiring. The court also examined the parties’ conduct, finding that, consistent with the agreement, Domino’s did not exercise any control over the franchisee’s employment or personnel matters. For example, Domino’s was not included in the franchisee’s hiring process, and while Domino’s provided a new employee orientation program, the trainings were solely focused on maintaining uniformity of Domino’s brand and image. The franchisee also developed and implemented its own sexual harassment policy and training, along with other policies addressing employee conduct. Finally, while Domino’s conducted store inspections and provided suggestions regarding store operations, the hiring, firing, and discipline of store employees was solely within the franchisee’s control. In light of this, the court found that Domino’s lacked “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.” Therefore, Domino’s was held to be neither an employer nor a principal and not liable for any alleged tortious conduct.

This decision provides franchisors with guidance on their ability to impose and enforce broad standards for chain wide brand and image uniformity, without becoming vicariously liable under traditional agency principles. Under this decision, franchisors in California, and possibly in other jurisdictions as well, can minimize the risk of liability from franchisee employee lawsuits by refraining from exercising control over the franchisee’s employment practices and decisions. For more information about this decision or its implications, please contact any member of Schiff Hardin’s Labor and Employment Group.