In Lomeli v. Jackson Hewitt, Inc., the United States District Court in the Central District of California held that the plaintiff, Luis Lomeli (“Lomeli”), had submitted enough evidence to hold the franchisor (“Jackson Hewitt”) vicariously liable for potential class actions due to a franchisee’s preparation and submission of fraudulent tax returns. The most concerning part of this decision is that the Court held that Jackson Hewitt could be directly liable for the fraud claims. This decision is another lesson in the necessity of leaving a certain level of discretion to a franchisor’s franchisees.

Under the direct liability claim, the Court examined Jackson Hewitt’s level of involvement in the submission of a franchisee’s tax returns. Specifically, the Court noted that the franchisee was required to use Jackson Hewitt’s proprietary software to submit the fraudulent tax returns and that Jackson Hewitt controlled the software. Further, despite the fact that Jackson Hewitt had approved the submission of a tax return for Lomeli mere days before, Jackson Hewitt approved a second submission for Lomeli with a markedly different tax return. As such, Jackson Hewitt had and controlled the information that gave rise to the fraudulent filing of the tax returns. To make matters worse, Jackson Hewitt had recently run an advertising campaign touting its 100% accuracy guarantee and superiority to “mom and pop” tax preparers. The Court held that these affirmative statements to the public had the explicit purpose of engendering their trust. Further, Jackson Hewitt could not run these advertisements to convince consumers to use them and then immediately turn around and dismiss any reliance on them. As such, Lomeli could proceed with its fraud claim directly against Jackson Hewitt.

As a secondary claim if the direct liability claim fails, the Court examined the level of control Jackson Hewitt exerted over certain areas of the operation of the franchise to determine vicarious liability. In holding that Jackson Hewitt could be vicariously liable for Lomeli’s fraud claim, the Court highlighted Jackson Hewitt’s ability to hire, direct, supervise, discipline or discharge the franchisee’s employees, the required use of Jackson Hewitt’s Code of Conduct for employee relations and required attendance by franchisee’s employees at training sessions aimed at preventing the specific harm claimed by Lomeli. The Court noted that Jackson Hewitt’s control of the instrumentality that caused the harm, the hiring of tax preparers, directly contributes to its vicarious liability.

Unfortunately for Jackson Hewitt (and franchisors everywhere), Jackson Hewitt could be 100% liable for the filing of the inaccurate and fraudulent tax returns.

 

The fight against joint employment of franchisors and franchisees took a small hit when the Western District of Pennsylvania (“Court”) chose to allow a franchisee’s employee’s suit to proceed. In Harris v. Midas, et. al., the plaintiff, Hannah Harris (“Harris”), convinced the Court that she had proffered enough evidence to allege a plausible basis to hold the franchisor (“Midas”) as a joint employer and vicariously liable for the franchisee’s conduct with respect to Harris’ sexual harassment claims against her franchisee employer.

In the instant case, the Court looked at three factors commonly employed to evaluate joint employer liability. First, the Court examined Midas’ authority to hire and fire employees, promulgate work rules and assignments and set conditions of employment. While the Court noted that Midas did not have the authority to hire or fire employees, the Court held that Midas could establish work policies. Specifically, the Court pointed to the provisions of the Franchise Agreement that require franchisees to comply with all lawful and reasonable policies imposed by Midas. Those policies specifically include those policies governing the training of personnel. Further, Harris noted that Midas provided guidance to its franchisees on the creation of its employee handbook and the inclusion of a sexual harassment policy, further exerting its control to influence these workplace policies.

Second, the Court held that while Midas did not exert control over the day-to-day supervision of employees, under the Franchise Agreement, Midas had the authority to do so. Notably, the Court cited Midas’ ability to require employees to attend additional training programs. Further, Midas trained the franchisee who, in turn, trained its employees on the Midas system. Lastly, the Court noted Midas’ ability to visit and inspect the franchisee’s location as further evidence of Midas’ potential influence over the day-to-day supervision of the franchisee’s employees. The Court’s reliance on these provisions is worrisome because many franchisors use similar language to protect the uniformity of the brand.

The last factor, Midas’ control over employee records, the Court again made a stretch to connect the dots. The Midas Franchise Agreement stated that Midas has the right to audit and examine the franchisee’s books and records, which, the Court held, could be interpreted to include personnel files if read as broadly as possible.

Furthermore, Harris argued that Midas was vicariously liable for the franchisee’s conduct because the franchisee was essentially acting as Midas’ agent. The Court agreed holding that the terms of the Franchise Agreement are so generally phrased as to provide Midas broad discretionary power to impose nearly any restriction or control it deems appropriate.

While the case at hand is at the initial phase and will likely be subject to further scrutiny, it demonstrates another avenue that courts are using to impose joint employer liability. Here, the Court is relying upon the broad and sweeping provisions of the Franchise Agreement that Midas is using to protect its brand and franchise system. The fine line franchisors must continue to tread between exerting just enough control to ensure proper maintenance of the franchise system but not enough to cause joint employer liability continues.