Executive Summary: In 2018, the California Supreme Court adopted the “ABC test” for determining whether workers are independent contractors under California wage orders (the Dynamex decision). For a discussion of that decision, please see our May 3, 2018 Alert. The ABC test makes it more difficult in many cases for companies to classify a worker as an independent contractor than under the prior generally-applied common law test. As such, the adoption of the ABC test increases many California employers’ exposure for minimum wage, overtime, meal and rest periods, and other benefits owed to employees but not to independent contractors. On May 2, 2019, in Vasquez v. Jan-Pro Franchising International, Inc., the Ninth Circuit concluded that the ABC test should be applied retroactively to situations that arose before the Dynamex decision came out.
Background: In 2008, janitors in several states filed a putative class action alleging that Jan-Pro Franchising International, Inc.’s franchising model deprived them of minimum wage and overtime compensation by misclassifying them as independent contractors. After acknowledging that the standard for determining whether a franchisor is an employer of a franchisee was unclear, the trial court granted summary judgment in Jan-Pro’s favor because the plaintiffs could not show that Jan-Pro exercised control over their activities or had the right to control their day-to-day activities.
After the trial court made its decision, the California Supreme Court issued its decision in Dynamex Operations West Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018). Dynamex adopted the so-called “ABC test” for claims brought under California’s Wage Orders, which in many cases expanded the definition of who qualifies as an employee and generally made it more difficult for employers to classify workers as independent contractors. Under Dynamex, a hiring entity (the franchisor in this case) is presumed to be an employer unless it can establish all three of the following elements: (1) that the worker is free from the control and direction of the hiring entity regarding the performance of the work (both under the contract and in reality); (2) that the worker performs work outside the usual course of the hiring entity’s business; and (3) the worker is customarily engaged in an independently-established trade or business.
In Jan-Pro, the Ninth Circuit held that even though the California Supreme Court decided Dynamex after the trial court granted Jan-Pro’s motion for summary judgment, the Dynamex standard must be applied retroactively. As such, the Ninth Circuit sent the case back to the trial court so the parties could present evidence addressing the ABC test’s factors.
The Ninth Circuit also provided guidance to the trial court as to how it should apply the ABC test. First, the Ninth Circuit noted that “the franchise context does not alter the Dynamex analysis” and warned the trial court not to rely on cases analyzing the employer status of franchisors in non-wage and hour contexts. Second, the Ninth Circuit noted that other courts have already examined Jan-Pro’s franchise structure under the ABC test. Third, the Ninth Circuit noted that Part B of the ABC test (which asks whether the worker was engaged in the same business as the hiring entity) “may be the one most susceptible to summary judgment.”
Bottom Line for Employers: Businesses – and franchisors in particular – subject to California law, should review the classification of all independent contractors to confirm they meet the ABC test.