California’s Landmark Employment Bill Imposes “ABC” Test

On September 18, 2019, California Governor Newsom signed into law Assembly Bill 5 (AB5), a landmark employment bill imposing the “ABC” test on California businesses and workers to determine whether a worker is an employee or independent contractor. AB5 will retroactively reclassify some California workers as employees. Those newly classified employees will then be subject to California’s labor laws and regulations along with local municipal ordinances and rules resulting in potential back pay claims for misclassification.

Sometimes referred to as the “Uber law,” discussion around AB5 has focused primarily on the impacts on the gig economy, but the law extends to companies not directly associated with the gig economy, including franchisors.

When does AB5 become effective?

AB5 takes effect on January 1, 2020 and will apply retroactively.  Starting July 1, 2020, any individual who is an employee under the ABC test must be covered by workers’ compensation insurance.

What does AB5 do?

AB5 imposes the “ABC” test set forth in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 416 P.3d 1 (Cal. 2018) on California businesses and workers in evaluating whether a worker is an employee or an independent contractor for purposes of labor protections under California law, including the California’s Labor Code, Unemployment Insurance Code, Wage Orders, and Workers’ Compensation Code.

The ABC test provides that a worker is presumed to be an employee of an alleged employer unless the worker is performing work free from control of the hiring entity, that the work is “outside the usual course of the hiring entity’s business,” and the person is customarily engaged in independent trade.   Dynamex addressed simply whether workers were appropriately classified as employees for purposes of California’s wage and hour laws.

How does AB5 impact franchisors with California units?

The impact of AB5 on franchisors as it relates to the franchisee’s employees is not clear and will be heavily litigated

AB5 excepts certain workers and situations but not franchisors.  If applied to franchisors, AB5 could potentially subject franchisors to misclassification damages claims by franchisees and franchisee employees. 

Some argue that the ABC test is the appropriate standard for determining employer status and joint employment under California labor law, even without a misclassification claim.  The ABC test has not yet been applied to determine whether a franchisor is vicariously liable for the actions of its franchisee. Rather, in Patterson v. Domino’s Pizza, Inc., 60 333 P.3d 723 (Cal. 2014), the California Supreme Court applied the “means and manner” control test to determine whether a franchisor possessed the right to control the relevant day-to-day activities of the franchisee’s employees.  In Patterson, the court determined that a franchisor’s right to impose operating standards on its franchisees is not the type of control that subjects a franchisor to vicarious liability. Therefore, a franchisor was not a joint employer subject to vicarious liability for the alleged wrongdoing of its franchisee’s employee.

After Dynamex in 2018, some have urged courts to expand the ABC test beyond misclassification claims to reshape the law of joint employment and vicarious liability.

At least one pending case threatens to expand Dynamex in the franchise context.  In Vazquez v. Jan-Pro Franchising Int’l, Inc., 923 F.3d 575 (9th Cir. 2019) (opinion withdrawn), a formerly published Ninth Circuit decision, the court essentially held that franchise relationships are subject to the ABC test. The Ninth Circuit granted a petition for panel rehearing and the May 2019 opinion has been withdrawn pending a final decision. 

Such expansion efforts, however, will not necessarily change the law of joint employment and vicarious liability in the franchise context as set forth in Patterson.  Fresh off the press is the Ninth Circuit’s recent opinion in Salazar v. McDonald’s Corp., ___ F.3d ___, 2019 WL 4782760 (9th Cir. Oct. 1, 2019).  In Salazar, the court considered whether Dynamex should be applied broadly to the franchising model for the purposes of determining joint liability for alleged wage and hour violations committed by a franchisee.  The court refused to apply the ABC test because no party argued that the individuals at issue were independent contractors.  Instead, the opinion focused on whether the franchisee’s employees were also the franchisor’s employees and the court applied the Patterson “means and manner” test.  Because the franchisor’s “exercise of control over the means and manner of work performed at its franchises [was] geared specifically toward quality control and maintenance of brand standards,” the court determined that the franchisor could not be classified as an employer of its franchisees’ workers under the common law definition.

What does the future hold?

Unfortunately, AB5 leaves franchisors with more questions than answers. With a short timeline for implementation, franchise groups continue to lobby the California legislature for a common-sense exemption for the franchising industry and lawsuits will test the bounds of AB5 in the franchising context.

Robert A. Lauer, Maral M. Kilejian, Iris Gibson, and Jamee Munster are Attorneys at Haynes and Boone. Rob Lauer is a franchise lawyer who deals with domestic and international franchise matters; Maral Kilejian focuses her practice in the areas of franchise and distribution law, corporate law, trademark law, and advertising, sweepstakes and promotions; Iris Gibson focuses her practice on writing and on effectively telling her clients’ stories; Jamee Munster’s focus lies in areas of franchise and distribution law.

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