On May 2, 2019, the Ninth Circuit issued a ruling that has wide implications for California franchisors who rely on independent contractor relationships. In a unanimous decision, the Ninth Circuit held that the more rigid ABC test adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), applies retroactively. The Ninth Circuit also held that the ABC test applies to franchisor-franchisee relationships, remanding the case with guidance as to how the district court should apply it to Jan-Pro, a franchisor of commercial cleaning franchises. The case is Vazquez v. Jan-Pro Franchising International, Inc., --- F.3d ----, No. 17-16096, 2019 WL 1945001 (9th Cir. May 2, 2019).
Specifically, the Ninth Circuit held that a franchisor is the employer of its franchisees under California’s wage order laws unless the franchisor establishes all of the following to affirmatively disprove employment status:
- The franchisee is free from control and direction of the franchisor in the performance of work both under the franchise agreement and in fact.
- The franchisee performs work outside the usual course of the franchisor’s business.
- The franchisee is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
In examining the application of the ABC prongs to Jan Pro, the Ninth Circuit rejected the franchisor’s argument that the California Supreme Court’s decision in Patterson v. Domino’s Pizza, LLC, 333 P.3d 723 (Cal. 2014) differentiates a franchisor from other putative employers in wage claim cases. The Ninth Circuit’s skepticism as to whether Jan-Pro will ultimately be able to prove that it is not an employer under the ABC test has the potential to upend the fundamental structure of the franchise business model.
There are four takeaways for franchisors.
- The Franchise Business Model Alone Will Not Defend Against California Wage and Hour Claims by Franchisees in the Ninth Circuit
The California Supreme Court held in Patterson that the trademark-related controls necessary in a franchisor-franchisee relationship cannot, as a matter of law, expose the franchisor to vicarious liability for torts committed by the franchisee. Patterson recognized that “systemwide standards and controls provide a means of protecting the trademarked brand at great distances.” 333 P.3d at 733. Indeed, the Lanham Act requires that a franchisor control the use of its trademarks to avoid abandonment and help ensure the public is not deceived as to the quality of the goods or services bearing the franchisor’s trademarks.
However, in Jan-Pro, the Ninth Circuit concluded that “the franchise context does not alter the Dynamex analysis” and there is no “Patterson gloss” to the ABC test. (Slip Op. at 37, 40.) Patterson has no application to Dynamex, the court reasoned, because vicarious liability has different purposes than California wage orders. While vicarious liability incentivizes a supervising entity with a right of direct control to prevent tortious conduct, wage orders “creat[e] incentives for economic entities to internalize the costs of underpaying workers—costs that would otherwise be borne by society.” Accordingly...
