Franchisor Not Liable for Sexual Harassment of Franchisee's Employee
 
May 1, 1999
 
Mark G. Alexander- Jacksonville

Restaurant owners can be liable for the bad acts of their customers, but the franchisor of a restaurant has some level of protection for the unlawful employment practices of its franchisees. In a recent case from the Tenth Circuit in Lockard v. Pizza Hut, Inc. (10th Cir. 1998), a female waitress of a franchisee-owned pizza restaurant suffered sexual harassment by two male customers of the restaurant. The employee sued her employer, the franchisee, for sexual harassment, and also sued the franchisor, Pizza Hut, Inc. In this case the court considered two questions. First, is an employer liable for the sexual harassment by customers of its employees? Second, is the franchisor liable for the sexual harassment of the employees of its franchisee?

The waitress claimed that she was required by the restaurant manager to wait on two crude and rowdy male customers who grabbed her hair, grabbed her breast, and put his mouth on her breast. The jury returned a verdict in favor of the employee against both the franchisee and the franchisor and awarded $200,000 in compensatory damages. The trial court and the jury considered the franchisee and the franchisor to be a single employer for purposes of employment practices and held them both liable.

On appeal, the court held that an employer can be held liable for the customer's sexual harassment of its employees. The court commented that customer harassment is very similar to harassment by co-workers and should be evaluated under similar standards. In this case, the facts supported a finding that the employer should be liable for the sexual harassment committed by the customers.

However, the court held that the franchisor, Pizza Hut, was not liable for the sexual harassment because the franchisor was not the employer of the waitress. The court rejected the employee's argument that the franchisee and the franchisor were a single employer for purposes of unlawful employment practices. For this reason, the jury verdict was reversed as to the franchisor, but was affirmed as to the franchisee.

The court held that the critical question in deciding whether the franchisor (or parent company), is liable for the unlawful employment practice of the franchisee (or subsidiary company), is which company made the final decisions regarding the employment matter related to the person claiming discrimination or harassment. The court stated that in some situations, the parent corporation or the franchisor might be liable for the unlawful employ ment practice of a subsidiary or franchisee, but not under the facts in the Lockard case.

Corporate decision makers should not assume that separate corporate structures automatically assure limits on liability from unlawful employment practices such as sexual harassment. Employers who operate through franchise or subsidiary corporate structures can be found liable for the unlawful employment practices of a franchisee or a subsidiary.

The Lockard case demonstrates that decisions on whether the parent corporation is liable for the employment practices of a subsidiary corporation turn on the facts and the relationship between the corporations in a given situation.

For more information please call Mark G. Alexander at 1-888-688-8500.