Although Merlin/NF2 was discovered two decades ago as a tumor suppressor underlying Neurofibromatosis type II, its precise molecular mechanism remains poorly understood. Recent studies in Drosophila revealed a potential link between Merlin and the Hippo pathway by placing Merlin genetically upstream of the kinase Hpo/Mst. In contrast to the commonly depicted linear model of Merlin functioning through Hpo/Mst, here we show that in both Drosophila and mammals, Merlin promotes downstream Hippo signaling without activating the intrinsic kinase activity of Hpo/Mst. Instead, Merlin directly binds and recruits the effector kinase Wts/Lats to the plasma membrane. Membrane recruitment, in turn, promotes Wts phosphorylation by the Hpo-Sav kinase complex. We further show that disruption of the actin cytoskeleton promotes Merlin-Wts interactions, which implicates Merlin in actin-mediated regulation of Hippo signaling. Our findings elucidate an important molecular function of Merlin and highlight the plasma membrane as a critical subcellular compartment for Hippo signal transduction.