Can Uber Avoid Labor Laws With A Franchise Model? Doubtful
By James M. Mulcahy and Allard Chu on September 11, 2020
As detailed in “Where Uber Is In California And Where It Is Going” of Mulcahy LLP’s multi-part series, Uber is currently appealing a state court preliminary injunction requiring Uber to reclassify its drivers as employees pursuant to Assembly Bill-5.
The New York Times recently reported that one interesting idea contemplated by Uber—and one highly concerning for franchisors—to avoid classification of its drivers as employees is for Uber to restructure as a franchise system. Mulcahy LLP attorneys Jim Mulcahy and Phil Carrillo recently spoke with the Daily Journal regarding Uber’s exploratory plans. However, even if Uber switches to a franchise model, Uber may not be able to escape liability to its drivers. Moreover, Uber’s attempt to bootstrap a rideshare platform into a franchise structure is likely to antagonize current franchisors, who see Uber’s business model as inherently distinct from the franchise system.
Uber as a Potential Franchisor
Franchisors are particularly concerned with Uber’s consideration of franchising because of the potential implications and fall out of joint liability of franchisors and the employees of franchisees. This is a contentious issue for franchisors, with a New York District Court recently striking down a federal Department of Labor rule that limited when two businesses shared liability to the same worker. (Mulcahy LLP has discussed the court opinion separately.)
At its core, franchising is a licensing of intellectual property from a franchisor so that a franchisee can operate a business under the brand name of the franchisor. Broadly, the three factors that define a franchise in California can be thought of as (1) the licensing of intellectual property, (2) a common marketing scheme, and (3) payment of an initial franchise fee. See Cal. Corp. Code § 31005. In real world applications, the franchisor usually provides the brand name and teaches techniques to the franchisees. The franchisee then independently operates the business while adhering to the franchisor’s marketing plan. The franchisee is in charge of hiring, firing, and daily operations. That is, the franchisee makes their own business decisions in operating their franchise.
In the case of Uber, it likely can structure its agreements with drivers to meet the plain language definition of a franchise. But Uber’s model where the Uber App dictates the work of its drivers does not appear to provide the independence traditionally associated with franchisees. Additionally, a franchise model with Uber’s business, either under a fleet model or an individual driver model, still appears to raise issues with liability by Uber.
Moreover, there is concern that Uber’s potential usage of franchising to sidestep labor laws will harm the public’s perception of the franchising model as a whole, even though legitimate franchisees must comply with applicable labor laws for their employees. The concern for franchisors is that public perception will shift and lead to onerous liability issues for legitimate franchisors who are removed from daily operations of their franchisees.
The Fleet Model Franchisee
As reported in the New York Times, an Uber spokesman stated Uber was “not sure whether a fleet model would ultimately be viable in California.” It appears that Uber would use such a model to claim that the drivers are solely the employees of the fleet franchisees. Although a franchise system using a fleet model would attempt to make the drivers employees of a fleet franchisee rather than Uber, Uber may still run into issues with liability as a joint employer for the drivers.
Although franchisors provide the brand name and are usually removed from employment matters of their franchisees, franchisors do still have concerns with liability as a joint employer for their franchisees’ employees. Ultimately, the issue of whether the franchisor is a joint employer in California rises and falls on the franchisor’s control over an employee. Under the federal Fair Labor Standards Act, determination of a joint employer may be broader under an economic dependence test, as touched upon by Mulcahy LLP in another article.
In Salazar et al. v. McDonald’s Corp., et al., the Ninth Circuit evaluated whether McDonald’s was a joint employer of a franchisee’s employees for purported violations of California wage-and-hour statutes. Salazar et al. v. McDonald’s Corp., et al., 944 F.3d 1024 (9th Cir. Oct. 1, 2019). There, the court looked to the California Supreme Court’s decision in Martinez v. Combs to analyze whether the franchisor would be an employer. Martinez v. Combs, 49 Cal.4th 35, 64 (2010). In Martinez, the California Supreme Court noted three alternative definitions of an employer under the Industrial Welfare Commission‘s wage orders: (a) exercising control over the wages, hours or working conditions, to suffer or permit to work, or (c) the creation of a common law employment relationship. Id.
Regarding the exercise of control, the court in Salazar affirmed that McDonald’s was not an employer because it did not “retain ‘a general right of control’ over ‘day-to-day aspects’ of work at the franchises.” Salazar at 1030. With regards to suffer or permit, the court of Salazar explained that the basis of liability would be the franchisor’s knowledge of and failure to prevent the work from occurring. Id. at 1031. Regarding the creation of a common law employment relationship, the principal test is whether the franchisor “has the right to control the manner and means of accomplishing the result desired.” Id. at 1032. In regards to a common law employment relationship, the Ninth Circuit has also found that this test “cannot stand for the proposition that a comprehensive [franchise] system alone constitutes the ‘control’ needed to support vicarious liability.” Patterson v. Domino’s Pizza, LLC, 60 Cal.4th 474, (2014).
In Uber’s case, it appears that the ultimate control over the drivers may still be by Uber and not the franchisee. Although the franchisee may be able to set hours and even driving patterns while drivers are waiting for passengers, it is the Uber App that matches drivers with passengers currently. Not only does the Uber App match the drivers with passengers, the Uber App also provides the destination and routing navigation. Additionally, the Uber App is currently how payments are collected by Uber and distributed downstream back to the drivers.
Unless there are significant changes to the entire operational model of the Uber App, Uber may still be subjected to arguments that it is ultimately in control of the drivers of its franchisees in a fleet model.
The Individual Driver Franchisee
Alternatively, if Uber attempts to franchise drivers individually, Uber would likely run into the same issue whether it has control over the franchisee drivers sufficient to be an employer. Without significant changes to the operating model, the Uber App’s current control over passenger assignments and routing appear to show control by Uber.
Even if Uber attempts to restructure with a franchise system, franchising may not help Uber avoid liability for the drivers as employees. Moreover, there may be repercussions in the franchising industry if Uber attempts to force its operating model into the statutory definition of a franchise.
Part 1: Where Uber Is In California And Where It Is Going
Part 3: Affirmation Of The State In Uber’s Appeal Against AB-5
Part 4: Resolution For Uber But Precedent Set For Others
This article was prepared by James M. Mulcahy (firstname.lastname@example.org) and Allard Chu (email@example.com) of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.