It has been well established in case law that an employer may be liable for sexual harassment of one employee against another employee, if the employer was placed on notice of, ratified or condoned the behavior of the alleged harasser. An employer is held strictly liable for the actions of a supervisor harassing a subordinate, whether or not there was notice, ratification, or condoned behavior. But who is the employer for an employee working at a franchise and who can be held liable?

A recent decision in Patterson v. Dominos (CA2/6 B235099A 6/27/12) considered whether a franchisor, such as Dominos Pizza, could be held vicariously liable for the actions of a supervisor for one of their franchisees. The answer is maybe.

Domino’s Pizza, among other defendants, was named in a action pursuant to Government Code Section 12940 (Fair Employment and Housing Act). The action was filed by an employee of one of Dominos’ franchisees, Sui Juris LLC, where the employee claimed she was sexually harassed and assaulted at her job, by her supervisor. If the employee was successful in proving the harassment took place, her employer, Sui Juris, would be held strictly liable. The question is, what about the franchisor, Domino’s Pizza?

In determining whether a Motion for Summary Judgment by Domino’ Pizza was proper, the Court held that, despite a franchise agreement between Domino’s Pizza and Sui Juris, which noted that Sui Juris was responsible for “supervising and paying the persons who worked in the Store” there was enough control exercised by Domino’s Pizza over Sui Juris, that Domino’s Pizza could be held vicariously liable for the actions of Sui Juris’ supervisors.

In its decision the Court stated that whether a franchisor can be held vicariously liable to a franchisee’s employee depends on the nature of the relationship between the franchisor and franchisee. As a general rule, where a franchise agreement gives the franchisor the right to complete or substantial control over the franchisee, an agency relationship exists. An agency relationship may be found to exist even where there is an agreement that states that the franchisee is an independent contractor.

Factors the Court cited in finding that there was an agency-principal relationship between Domino’s Pizza and Sui Juris, included Domino’s Pizza setting the “qualifications” and standard of demeanor for Sui Juris’ employees, the requirement for Sui Juris to install a specific computer system for training employees, Domino’s Pizza providing a Manager’s Reference Guide which described specific hiring requirements for all employees and standards of grooming for all employees.

Domino’s Pizza argued that the agreement granted Sui Juris the freedom to conduct its own independent business. However, the court noted that the computer system, which was accessible by Domino’s Pizza, was not within Sui Juris’ exclusive control. Domino’s also determined, among other things, store hours, advertising, dealing with customer complaints, signage, furniture, fixtures, pricing, and even standards for liability insurance.

The Court, in determining the nature of the relationship, will look at the provisions of the franchise agreement, but the provisions are not necessarily controlling, and the court will consider the totality of the circumstances. This means that even if the language of the agreement states that a franchisee is an independent contractor, that is not necessarily dispositive of the relationship that exists. While the provisions are relevant as to the relationship, it is not the exclusive evidence.

The Court ultimately found that the employee (plaintiff) had shown that Domino’s exercised extensive local management control over Sui Juris, it has control over employee conduct and discipline, a Domino’s area leader was deciding which Sui Juris employees should be fired, Domino’s ordered the franchisee to terminate the alleged harasser, and that the franchisee had no choice but to comply given the extent of the control Domino’s exercised over the franchisee. Domino’s Pizza could be held vicariously liable for the actions of its franchisee’s supervisors.

This decision is important as it shows how a company or employer can be exposed to liability, despite an understanding or agreement which would suggest otherwise. Many employers also have “independent contractors” working for them with the understanding that the employer is not liable for the contractors’ actions. However, as this case has shown, a employer may be more exposed than they realize.