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San Diego Franchise Law: Ideas on Handling the Ostensible Agency Doctrine

This article will discuss what is known in franchise law as the “ostensible agency” doctrine. Ostensible agency is a legal doctrine used by courts to decide who is considered the “employer” with respect to employees of the franchisee. Ostensible agency can create great legal and financial risk for franchisors.

In the ideal franchise relationship, franchisors desire and intend that any employee hired by the franchisee will be an employee of the franchisee. If accomplished properly, this places on the franchisee the responsibility for payment of wages and complying with state and federal labor laws. The difficulty is that sometimes, workers do not adequately distinguish between or understand the difference between the franchisor and the franchisee in terms of who is responsible for payment and for complying with various laws such as minimum wage laws. Under some circumstances, courts in California have used the doctrine of ostensible agency to hold the franchisor liable for unpaid or underpaid wages and for other labor law violations.

Ostensible agency can be found by a court if a franchisor, through acts or omissions, causes employees of the franchisee to reasonably believe the franchisee is the agent of the franchisor. As noted, this is a dangerous legal doctrine for franchisors. First, the standard is vague. In general, agency is a murky concept under the law. Second, ostensible agency is based on what the employee believes — a subjective standard beyond the control of the franchisor. Third, the doctrine is dangerous because the main factor used by courts to find ostensible agency is a “uniform system of branding, trademark, and promotion.” Of course, a uniform system of branding and trademark use is the very definition of a franchisor-franchisee relationship. On this basis, every franchisor is at risk of franchisee employees believing that the franchisor is the employer.

A recent case involving a Merry Maids home cleaning franchise illustrates the dangers. See Cruz v.MM 879, Inc., Case No. 1:15-cv-01563-TLN-EPG (US Dist. E.D. California January 18, 2019). In that case, various employees of the franchisee, Merry Maids of Fresno, filed a class action lawsuit alleging various violations of state and federal labor laws. The employees alleged, for example, that they were not paid minimum wage, did not receive proper meal breaks, etc. They sued the franchisee and the various franchisor companies. The main franchisor was/is Merry Maids, LP with a couple of subsidiary and affiliated entities.

With respect to the franchisor, the employees sued under the ostensible agency doctrine. The employees argued that the franchisor, Merry Maids, LP, created a reasonable belief in their minds that the Fresno Merry Maids franchisee was operating as a mere agent of the franchisor because of the systematic use of the “Merry Maids” trademark. For example, each of the class action representatives gave statements wherein they testified that they received employee handbooks, pay stubs, training materials, and uniforms that bore the words “Merry Maids.” These materials, according to the employees, made them believe that they were employees of the main Merry Maids franchisor which, according to their beliefs, owned or at least substantially directed the franchise in Fresno where they worked.

The franchisor and the Fresno franchisee responded by pointing out that the handbooks actually said, “Merry Maids of Fresno.” The handbooks also identified the names of two local Fresno businessmen as the owners of the franchisee. Based on this, the franchisor, Merry Maid, LP, sought to be dismissed from the case.

However, the trial court refused to dismiss the franchisor. The court held that fact questions existed as to whether the belief of the employees was reasonable and, as such, whether the franchisor was liable under the doctrine of ostensible agency. The class was certified and the case will proceed to the next stages of litigation.

What to do?

As can be seen, ostensible agency is dangerous. The case is a now a class action and class action lawsuits are expensive, but there are a few contractual and practical steps that can be taken to lessen the chances of being held liable under the doctrine. An experienced San Diego franchise lawyer can help. In the franchise agreements, the following should be included:

  • Indemnification and hold harmless provisions running from the franchisee to the franchisor
  • Provisions requiring the franchisee to disclose and document to their employees the distinction between franchisor and franchisee
  • Provisions requiring franchisees to train their employees on this issue of who is their employer
  • Provisions requiring the franchisee to have a distinct corporate name (not using the franchise trade name) and that pay documents reflect that distinct corporate name
  • Provisions requiring prominent reference to the fact that the employer is a franchisee on various employment documents (such as on the cover of the employee handbook)

Contact San Diego Corporate Law

For more information, contact franchise law attorney Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has extensive experience helping San Diego residents buy and sell their franchises. Mr. Leonard can be reached via email or by calling (858) 483-9200. San Diego Corporate Law proudly provides legal services to business owners in San Diego and the surrounding communities. Like us on Facebook.

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