On May 2, 2019, the Ninth Circuit ruled in Vazquez v. Jan-Pro Franchising International, holding that the new independent contractor test established by the California Supreme Court in its 2018 decision in Dynamex v. Superior Court applies retroactively to franchisors. As a result of this decision, employers and franchisors who have classified workers as independent contractors may see an increase in wage and hour class actions alleging that the workers are or have been misclassified. Additionally, the decision has serious implications for any California companies that operate under a franchise business model.

For nearly two decades, California employers relied on the flexible Borello test, which evaluated 11 factors to determine whether a worker was an independent contractor or an employee. Each of the factors were equally weighted, and no single factor was dispositive. Then, in Dynamex, decided in April 2018, the California Supreme Court upended the Borello test and replaced it with the three-pronged “ABC test.” For a detailed discussion of Dynamex and the ABC test, review our blog post on the case here. To briefly recap, the ABC test shifts the burden on the employer to establish all three prongs, as follows:

(A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

(B) the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The issues presented to the Ninth Circuit in Vasquez were two-fold: (1) whether the ABC test applied to franchisors and (2) whether the ABC test could be applied retroactively to periods pre-dating the Dynamex ruling. The Ninth Circuit answered both questions affirmatively.

With respect to the franchise issue, the Ninth Circuit held that the ABC test applies to a company’s independent contractor arrangements irrespective of its franchise business model. Even in a three-level model like Jan-Pro’s, the top tier franchisor could be treated as the employer of the bottom tier franchisee despite the indirect relationship between the two if the franchisor does not satisfy each of the three requirements in the ABC test.

As for the retroactive application, the Ninth Circuit reasoned that Dynamex did not change the prior existing law; instead, it provided clarification of that law. Moreover, the Ninth Circuit relied on the general rule that California Supreme Court decisions are presumed to have a retroactive effect, and it pointed to the fact that the California Supreme Court declined to take up the issue when it had the opportunity to do so.

The implications of the Ninth Circuit’s ruling on the franchise business model are serious because the decision essentially equates the normal structure of a franchise (such as earning profits from the franchisee’s business or advertising the services that are performed under its trademark) with an employment relationship. Moreover, the decision could lead to liability for time periods predating the 2018 Dynamex decision even though the ABC test did not exist during those time periods. Given these developments, companies who currently classify workers as independent contractors, including those that operate under a franchise business model, should ensure that their independent contractor arrangements satisfy the ABC test.