California Labor Lar Code

In November 2017, four convenience store franchisees brought suit in federal court against 7-Eleven, Inc., alleging that they and all other franchisees were employees of 7-Eleven. The case was filed in the United States District Court for the Central District of California, entitled Haitayan, et al. v. 7-Eleven, Inc., case no. CV 17-7454-JFW (JPRx).

In alleging that they were 7-Eleven’s employees, the franchisees brought claims for violation of the federal Fair Labor Standards Act (“FLSA”) and the California Labor Code, alleging overtime and expense reimbursement violations. The trial court granted judgment in 7-Eleven’s favor, concluding that 7-Eleven was not the four franchisees’ employer under California law or federal law.

The court noted that the franchisees’ “basic legal theory underlying [their] claims [wa]s that 7-Eleven’s restrictive policies and practices created an employment relationship between the parties.” The court concluded that because the franchisees could not establish an employment relationship, each of their claims failed.

For example, while 7-Eleven required the franchisees to keep their stores open 24 hours per day, 364 days per year, the court was persuaded by the fact that the franchisees themselves were not “actually required to work at the stores a particular number of hours or on particular days” – they could hire employees to meet these requirements. And while the franchisees argued that 7-Eleven controls the payment of all wages and instructs franchisee on pay practices, performance appraisals, and disciplinary actions, including worker terminations, that did not persuade the court because “the fact that a franchisor pays a franchisees’ employees’ wages does not create an employment relationship,” and the franchisees admitted that they have unfettered discretion to hire and fire employees and set wages.

Because the franchise agreements explicitly provided that franchisees “control the manner and means of the operation” of their stores and “exercise complete control over and all responsibility for all labor relations and the conduct of [franchisees’] agents and employees, including the day-to-day operations” of franchisees’ stores and employees, the court concluded that such minimal control was insufficient to make franchisees common law employees of 7-Eleven.

The federal court’s decision is a welcome one for franchisors that have sound franchise agreements and practices in place. It is certainly possible that the court would have reached a different conclusion had 7-Eleven’s franchise agreement or practices provided for 7-Eleven to have a greater right to exercise control over franchisees.  In light of this decision, franchisors should review their agreements and practices to ensure they do not have a right to control the wages, hours, or working conditions of franchisees.

By Michael S. Kun and Aaron F. Olsen

Earlier this week, the California Court of Appeals issued a ruling in Iskanian v. CLS Transportation Los Angeles, LLC that illustrates how the legal landscape in California has shifted in favor of enforcing arbitration agreements with class action waivers.   This, of course, is a welcome development for employers with operations in California, which have been besieged by class action lawsuits alleging wage-and-hour violations for the past 10+ years.

In 2006, the plaintiff in Iskanian filed a putative class action complaint against his employer alleging various California Labor Code violations.  The plaintiff had signed an arbitration agreement agreeing to arbitrate any claims arising out of his employment.  The arbitration agreement contained a class and representative action waiver in which the plaintiff agreed that he would not bring any claims as a class action or as a representative action.

In March 2007, the trial court granted the employer’s motion to compel arbitration.  However, the plaintiff appealed the decision in light of the California Supreme Court’s   decision in Gentry v. Superior Court, which held that a class action waiver provision in an arbitration agreement should not be enforced if “class arbitration would be a significantly more effective way of vindicating the rights of affected employees than individual arbitration.” Thus, the California Court of Appeals in Iskanian ordered the trial court to reconsider its ruling.  Accordingly, the defendant withdrew its motion to compel arbitration, and the parties proceeded to litigate their case.  In October 2009, the Court granted Plaintiff’s motion to certify the case as a class action.

In April 2011, several years after the Court of Appeals had ordered the trial court to reconsider its prior order granting defendant’s motion to compel arbitration, the United States Supreme Court decided AT&T Mobility, LLC v Concepcion, which reiterated the rule that the principal purpose of the Federal Arbitration Act (“FAA”) is to ensure that arbitration agreements are enforced according to their terms and held that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”  Shortly thereafter, the Iskanian defendant renewed its motion to compel arbitration and to dismiss the class claims, arguing that Concepcion  was new law that overruled Gentry.  This time, the California Court of Appeals agreed with the defendant and held that the arbitration agreement and the class and representative action waivers were effective.  Thus, the Court of Appeals upheld the trial court’s order granting the defendant’s motion to compel arbitration and dismissed the plaintiff’s class claims.

Importantly, in Iskanian, the California Court of Appeals expressly declined to follow the NLRB’s controversial decision in D.R. Horton, wherein  the NRLB held that an employers’ mandatory agreement requiring that all employment-related disputes be resolved through individual arbitration (and disallowing class or collective claims) violated the National Labor Relations Act.   In rejecting the plaintiff’s argument, the Iskanian Court noted that Concepcion made no exception for employment-related disputes.

Importantly, the Iskanian Court also held that representative claims brought under California’s Private Attorneys General Act (“PAGA”) – sometimes referred to as the “Bounty Hunter Law” or the “Sue Your Boss Law” –can be waived in arbitration agreements.  The California Court of Appeals disagreed with the opinion in Brown v. Ralphs Grocery Store, which held that Concepcion does not apply to representative actions under PAGA.  Once again, this is a welcome development as many plaintiff’s lawyers have attempted to minimize Concepcion by arguing that even if employees can waive their right to bring a class action, they cannot waive their right to bring representative actions.  However, the disagreement between the Iskanian and Brown Courts about PAGA claims seems to guarantee that the issue will have to be resolved by the California Supreme Court.