Blurred Lines: Maintaining Separateness Between Companies publications

Posted on December 4, 2014

By: Laura C. Hess

An issue that sometimes arises in the employment cases we handle concerns whether an employer/employee relationship really exists between the parties. The reason this comes up is because the employee sues not only the employer, but also all of the companies who are affiliated with the employer, such as parent companies, franchisors, or other businesses owned by the same family. The employer wants to carve these affiliated entities out of the case and shield them from the lawsuit.

Unless the companies are the alter egos of one another, the employee can only sue the affiliated entity if he or she can establish an employer/employee relationship with it. The question of whether an employer/employee relationship exists comes down to how much control that company exerts over the employee.

A recent case highlights the importance of this determination. In Patterson v. Domino's Pizza, LLC (2014) 60 Cal.4th 474, a Domino's Pizza employee sued for sexual harassment. She sued both the franchisee and the franchisor, under the theory that the harassing supervisor acted as the agent of the franchisor.

The case made its way all the up to the California Supreme Court. The issue was whether the franchisor can be held liable as a matter of law for the actions of its franchisee's supervisor. The Supreme Court focused its inquiry on the amount of control that the franchisor exerts over the day-to-day aspects of the employment and workplace behavior of the franchisee's employees. In determining the franchisor was not liable, the Court noted the franchisor did not hire, supervise, or set the sexual harassment policies for the franchisee's employees. If the franchisor did so, or retained the ability to do so, then the result would likely have been different.

The employer/employee lines blur in situations where a parent company is set up as a separate entity on paper, but it still exerts some control over a subsidiary's policies and procedures (for instance, where the parent company provides the subsidiaries with a common employee handbook.) Another scenario we see is where a family owns multiple businesses, but the employees of one sometimes perform duties for the other. Examples of this are a centralized human resources department or a shared in-house attorney.

We can provide you with advice and counsel if you have concerns about whether you are truly maintaining separateness between companies. Please contact us if you have any questions.

Laura Hess is a Partner of Kring & Chung, LLP's Irvine, CA office. She can be reached at (949) 261-7700 or lhess@kringandchung.com.