Franchisor May Be Liable in Sexual Harassment Suit

A plaintiff-employee of a tax preparation business franchisee sufficiently alleged that a franchisor exercised sufficient control over the franchisee's employees to be a "joint employer" of the plaintiff for purposes of her alleged sexual harassment claims, a federal district court in Philadelphia has ruled. Thus, the franchisor's motion to dismiss the plaintiff's claim on the ground that the plaintiff's "joint employer" theory was actually an attempt to characterize the franchisor and the franchisee as a "single employer" for Title VII purposes was denied. In addition, under theories of agency, the franchisor could be vicariously liable for the harassment, according to the court.

The employee resigned her employment and brought suit shortly after an employee of the franchisee wrote in a performance evaluation of her that she "should experience what Nicole Brown Simpson did." In the Third Circuit, a joint employment relationship could exist when one employer, contracting in good faith with an otherwise independent company, retained sufficient control of the terms and conditions of employment of the employees who were employed by the other employer.

The district courts in the Third Circuit distilled the joint employer analysis to three factors: (1) authority to hire and fire employees, promulgate work rules and assignments, and set conditions of employment, including compensation, benefits, and hours; (2) day-to-day supervision of employees, including employee discipline; and (3) control of employee records, including payroll, insurance, taxes and the like. No single factor was dispositive, the court noted.

The amended complaint included allegations that the franchisor had the authority to promulgate work rules and set the conditions of employment. The plaintiff alleged that she was covered by the franchisor's sexual harassment and other workplace policies and that the franchisor had the authority to require the franchisee's managers to submit to training and to obey all applicable laws. The franchisor's code of conduct also required that franchisees terminate their employees in certain circumstances. Moreover, the franchise agreement's disclaimer of any responsibility on the franchisor's part to train franchise employees and statement that the franchisee had exclusive authority over hiring and personnel decisions were factors weighing against plaintiff's joint employment claim. With respect to the second factor, the plaintiff alleged that the franchisor participated in the daily supervision of the franchisee's employees by reviewing all tax returns prior to filing, by assisting employees with problems with tax returns and the computer system, by requiring that she undergo specific training, and by monitoring the completion of such training. As to the third factor, the plaintiff alleged that the franchisor assumed some degree of control over franchisee employee records. The plaintiff also alleged that she was told, and believed, that she was an employee of the franchisor.

Vicarious Liability

The employee sufficiently alleged that the franchisee was the actual and apparent agent of the franchisor such that the franchisor was vicariously liable for the sexual harassment in order to survive the franchisor's motion to dismiss, the court determined. According to the plaintiff, the franchisor required that the franchisee and its employees submit to training by the franchisor, required the franchisee to implement a "zero tolerance" policy for certain employee behavior, and published mandatory codes of conduct that included policies on diversity and non-discrimination. Although the franchise agreement specifically stated that franchisees were not agents of the franchisor, such disclaimers were not dispositive of the existence of an agency relationship when the franchisor retained significant control over the franchisee's activities, the court decided.

As to apparent agency, the plaintiff could establish that the franchisor was her employer provided that she showed that, as a result of some representation by the franchisor, she believed the franchisee or its employees to be agents of the franchisor with the authority to create an employment relationship between her and the franchisor. The franchisor unsuccessfully argued that the amended complaint alleged no facts that could have given rise to a reasonable belief that the franchisee was acting as the franchisor's agent for the purposes of employment. However, the plaintiff alleged that she received communications from the franchisor itself, including the contents of the franchisor's published training materials and employee codes of conduct. Those materials addressed the reader as an "employee" of the franchisor, the court noted.