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California’s New Standard For Determining Workers’ Status Widens

Last year, the California Supreme Court abruptly changed the standard for determining whether a worker is an employee or independent contractor of the hiring company.  In Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018), a case involving delivery drivers for a package company, the Court unanimously held that a new test would now be used.

That test, the “ABC test,” requires that a company which asserts that its workers are independent contractors, not employees, must satisfy all three prongs of the test:  (A) the worker is free from the direction and control of the company in the performance of the work, both under the contract and in fact; (B) the worker performs work outside the company’s usual business; and (C) the worker is customarily engaged in an independently established trade, occupation or business in the same nature as the work performed for the hiring company.

Although strictly speaking the Dynamex decision was decided based on whether the drivers were improperly categorized as independent contractors under California’s Wage Orders regulations, it jarred many businesses that had been relying on hiring independent contractors as their workers.  Among the questions raised but left unanswered were whether the ruling would (1) be applied retroactively; (2) extend beyond the delivery driver context into other business sectors, including franchising operations; and (3) be limited to the wage orders.

In the year since Dynamex was decided, it has been hotly contested, including in three important cases, Western States Trucking Ass’n. v. Schoorl, Alvarez v. XPO Logistics Cartage LLC and California Trucking Ass’n. v. Su.  Each raised questions regarding the scope of Dynamex.

A case just decided by the federal Ninth Circuit Court of Appeals, Vazquez v. Jan-Pro Franchising International, filed on May 2, 2019, has begun to answer some of the questions raised by these and other cases.  Vazquez involved plaintiffs who purchased office cleaning franchises from “master franchisors” who were in turn licensed by Jan-Pro, a company that the Court described as an “international business that had developed a sophisticated ‘three-tier’ franchising model.”  Plaintiffs, claiming that they were improperly classified as independent contractors, sued Jan-Pro directly.

Setting aside the complex procedural history which explains why a federal court is interpreting California law, the case addresses the three questions identified above.  First, Dynamex’s ABC test, when it is appropriately applied, is retroactive.  The Court held that the general rule in California is that judicial decisions apply retroactively, even when they overrule former precedent.  The Court also held that the limited exception to that general rule didn’t apply.

Second, in sending the case back to the District Court, the appellate court offered “aid” to the District Court as it considered Jan-Pro’s inevitable arguments that the ABC test shouldn’t apply to the franchising business, even to what the Court somewhat dismissively terms “third tier” relationships.  It said that the ABC test “applies to a dispute between a putative employee and a hiring entity even if they are not parties to the same contract.”  That is, inserting a “master franchisor” between the ultimate franchisor and the people who do the work does not preclude the finding that the worker is the employee of the ultimate franchisor, particularly where the ultimate franchisor “designed and implemented the contractual framework under which (the workers) were misclassified” as independent contractors.

Moreover, the Court suggested that Prong “B” of the ABC test – the hiring entity must not be engaged in the same usual course of business as the putative employee – applied.  The Court  observed that Jan-Pro was engaged in the cleaning business, not the franchise business, because it earns its revenue from people who perform cleaning services and in fact holds itself out, on its website and elsewhere, as “a leader in the commercial cleaning industry.”

The third area where the Jan-Pro Court provides additional clarification is more encouraging to businesses that rely on independent contractors, however.  The Court clearly limited its “guidance” to the District Court to cases in which compliance with Wage Orders is at issue.  It distinguished holding a business liable for compliance with wage orders under the ABC test as an expressed public policy – wage orders are concerned with creating incentives for businesses “to internalize the costs of underpaying workers – costs that would otherwise be borne by society” – from vicarious liability for a tort case, such as a claimed sexual assault brought against an employee of the franchisee.

The Jan-Pro case certainly moves the Dynamex ABC test further into franchising businesses, but suggests that it might be limited to wage and hour claims.  In any event, the Dynamex case has been, and promises to continue to be, hotly contested.