Selling franchise rights is tricky. On the one hand, it’s an opportunity for both parties to expand and grow their businesses in a mutually beneficial way. On the other hand, because they’re both operating under the same brand, they both bear some responsibility for the way the business under the franchise is run. This is why franchisors include training in their franchise agreements: to make sure the franchisee runs the business in ways that are consistent with the brand.
After a recent decision by a California federal judge, companies may want to include education on employment laws and regulations in the training they provide for their franchisees.
The lawsuit involved a class of employees who worked at five different McDonald’s locations in the San Francisco Bay Area. The plaintiffs allege they were denied the proper compensation when they worked overtime, the wages they did receive did not include all the hours they spent working, and they were not compensated for the time and money they spent on maintaining the uniforms they were required to wear to work. They also alleged they were denied meal and rest breaks, both of which are required by California labor law, but the judge dismissed those charges.
The McDonald’s locations in question were owned and operated by The Edward J. Smith and Valerie S. Smith Family Limited Partnership and that company settled with the class of plaintiffs for $700,000.
Although the California court had previously determined McDonald’s was not a joint employer with the franchisee, the federal judge certified the class of plaintiffs, allowing their claims against the fast food giant to move forward in the courts. The successful class certification only means the judge determined the claims of the plaintiffs were sufficiently similar to justify combining them into one lawsuit. It is not a judgment on McDonald’s guilt.
McDonald’s initially said it was going to appeal that decision to the Ninth Circuit Court, but rather than spend the time and money pursuing a circuit court ruling that might not go their way, McDonald’s decided to settle the lawsuit instead.
Under the terms of the settlement agreement, McDonald’s will pay $1.75 million to the more than 800 class members to cover their claims of alleged missed payments and underpayments. McDonald’s has also agreed to pay approximately $2 million to cover the attorneys’ fees and legal costs of filing the lawsuit, although that amount is allegedly only half the actual costs of filing the lawsuit.
Nevertheless, counsel for the plaintiffs have said they feel the agreement is fair and reasonable to cover the claims filed by their clients. Assuming the settlement agreement receives final approval from a federal court judge, the attorneys for the plaintiffs will have received sure payment for their clients, as well as non-financial benefits. The counsel pointed out that McDonald’s has agreed to create a training program for its franchisees in order to prevent such violations from occurring in the future.
Despite having agreed to provide compensation for the workers’ claims, McDonald’s continues to insist it is not a joint employer with its franchisee and that it did nothing wrong. By settling the lawsuit outside of court anyway, it is avoiding the expense and hassle of pursuing the legal dispute, when those resources could be put to better use elsewhere in the company.
Our Chicago employment, non-compete agreement and business dispute attorneys have defended high level executives in covenant not to compete and trade secret lawsuits. A case in which our firm defended a former Motorola executive was covered in Crain’s Chicago business. You can view that article by clicking here.
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DiTommaso Lubin Austermuehle a Chicago business litigation law firm represents both plaintiffs and defendants in such cases, and can also help stop litigation before it starts by reviewing contracts to look for covenants and clauses that could create problems later. Our firm has also handled many shareholder and LLC disputes between owners of closely held corporations, and LLCs.
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