Trial News

The so-called ABC test for whether a worker is an employee or independent contractor as decided by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles applies retroactively, the Ninth Circuit has held. In a case involving a cleaning company and its franchisees, the court determined that applying a judicial decision retroactively aligned with established practices and did not violate the defendant’s due process rights. (Vazquez v. Jan-Pro Franchising Int’l, Inc., 2019 WL 1945001 (9th Cir. May 2, 2019.))

Defendant Jan-Pro franchised individual cleaning operations based on a three-tiered system through which it granted exclusive rights to the franchise in a regional area to “master franchisors,” who then submitted bids for cleaning services to individual unit franchisees to accept. Unit franchisees also could solicit their own cleaning accounts. Jan-Pro had agreements with the master franchisors that dictated many business operations, such as use of logos and trademarks, insurance minimums, training, and sales quotas. Although the master franchisors could set their own contract terms with their unit franchisees, Jan-Pro had authority to enforce agreements and to unilaterally issue policies and procedures for all franchisees to follow, as well as the right to assume the unit franchisees if a master franchisor terminated its contract with Jan-Pro.

The plaintiffs purchased unit franchises from a master franchisor in California. They sued Jan-Pro for wage-and-hour violations, alleging that they were employees not independent contractors. The district court dismissed the plaintiffs’ claims because, at the time, there was no binding test for what standard applied to evaluate whether a franchisee was an employee of the franchisor. Based on existing wage-and-hour case law, the court applied a three-prong test to define employment as “to exercise control over the wages, hours or working conditions or to suffer or permit to work or to engage, thereby creating a common law employment relationship.” The “suffer or permit to work” prong depended on “the defendant’s ‘knowledge of and failure to prevent the work from occurring.’” The district court found that the plaintiffs did not raise a dispute of material fact on any of the three prongs and dismissed the case. The plaintiffs appealed to the Ninth Circuit.

As Trial News previously reported, the California Supreme Court in Dynamex, however, expanded the parameters for “suffer or permit to work” and used the so-called ABC test that a defendant must overcome to prove that a worker is not an employee: (A) the hiring entity does not control or direct work performance, (B) the worker’s duties are outside the defendant’s usual course of business, and (C) the worker customarily works “in an independently established trade, occupation, or business of the same nature as the work performed.”

Since the district court here could not analyze the plaintiffs’ claims under the Dynamex standard, the Ninth Circuit remanded for a fact-intensive review on the merits, but it provided some guidance on how Dynamex should apply. The court noted that a previous California Supreme Court case on the “special features” of franchise relationships should not affect the Dynamex analysis because that case did not involve wage-and-hour issues. It also distinguished the analysis for imposing vicarious liability on a parent company for a tort from wage-and-hour claims, explaining that the latter “eschew[s] reliance on control over the performance of the worker as a necessary condition for an employment relationship.”

The Ninth Circuit also addressed whether Dynamex should apply retroactively and whether doing so violates the defendant’s due process rights. There is a strong presumption in favor of judicial decisions having retroactive effect, although there is an exception when the decision alters a settled rule on which the parties have relied. That exception did not apply here, the Ninth Circuit determined, because the Dynamex court made clear that it was clarifying an already-existing test for employment relationships and that the ABC test is “faithful . . . to the fundamental purpose of [California’s] wage orders.”

As to due process, the court followed the rational basis test, requiring a showing that applying Dynamex retroactively would be “arbitrary and irrational.” The court found that it would not because of the remedial nature of the decision, as well as relevant policy objectives to ensure that companies are engaging in fair practices and that workers are adequately compensated and can provide for themselves and their families.

Catherine Ruckelshaus, general counsel for the National Employment Law Project, which submitted an amicus brief in favor of the plaintiffs, said, “Too many janitors like the workers in this case are required to become individual ‘franchisees’ to get a job cleaning buildings. They are charged exorbitant start-up fees by the companies and end up barely making ends meet, and sometimes not at all. The workers in this case didn’t even earn minimum wage or the basic overtime pay, despite working long hours. In no understanding were they truly running their own businesses—they worked in Jan-Pro’s cleaning business. This should not have been a close call regarding the employment status of these workers, but the Dynamex decision made it clearer that these workers should be and are covered by basic worker protections that most take for granted.”

Ruckelshaus also noted that the Ninth Circuit’s ruling could have a wider impact. “I hope it means that more companies that misclassify their employees as ‘independent contractors’ will correct these arrangements and start treating employees properly. I’m not at all sure this will lead to an onslaught of claims, as some have claimed, because our system relies on workers to come forward and complain. Immigrant and low-wage workers face high barriers to coming forward, including fear of retaliation, and most companies calling their workers ‘independent contractors’ today also require those same workers to sign waivers forcing them into individual arbitrations, away from the public and alone, with class and collective waivers. Enforcement is a constant challenge, and the companies that want to cheat will continue to do so.”