UPDATE:  On September 24, 2019, the 9th Circuit certified the question of whether Dynamex applied retroactively to the California Supreme Court.

UPDATE:  On July 22, 2019, the 9th Circuit Court of Appeals granted Jan-Pro Franchising's petition for rehearing and withdrew its May 2 Decision in Vazquez v. Jan-Pro Franchising International, Inc. Instead, the Court indicated that it would certify the question of whether Dynamex applied retroactively to the California Supreme Court in due course.

A year ago the California Supreme Court in Dynamex sent California businesses scrambling to justify their independent contractor arrangements under the stricter ABC Test. Dynamex threw out the long relied on judicial test for analyzing worker classification under California’s Wage Orders, which regulate overtime, meal periods, and rest breaks for workers. As referenced in our May 3, 2018 and April 30, 2019 client advisories, the Court replaced the multi-factor “right to control” test with the tougher “ABC Test.” Matters got far worse earlier this month when the 9th Circuit Court of Appeals on May 2, 2019, ruled in Vazquez v. Jan-Pro Franchising International, Inc., that Dynamex applies retroactively.

Under the ABC Test, an individual is an employee for purposes of California’s Wage Orders unless the hirer can prove each of the following three elements:

A. The worker is free from the control and direction of the hirer in connection with the performance of the work both practically speaking and as a matter of the parties’ contract;

B. The worker performs work that is outside the usual course of the hiring entity’s business (i.e., the work that the worker performs must be different from what the hirer’s business does); and

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity (i.e., that what the worker does for the hirer is what the worker typically does for work).

Undoubtedly, the 9th Circuit’s determination that Dynamex applies retroactively will spark an increase in wage and hour claims against California employers who utilize independent contractors.

Vazquez is especially problematic for franchisors with California franchisees. The ABC Test shifts the burden of proof for wage claims to the franchisor to demonstrate that, despite the franchising overlay, it is not an employer of its franchisees or their workers. Prong B, in particular, presents franchisors with an insurmountable hurdle for when is the franchisees’ work not necessary to the franchisor’s business or not regular or continuous, and when is a franchisor not in the same business as its franchisees? As to the last point, Vazquez dismissed Jan-Pro’s claim to being in the “franchising” business, not the janitorial business, calling the purported distinction a “modified Ponzi scheme.” (2019 WL 1945001, at *19, quoting Awuah v. Coverall North America, Inc., 707 F. Supp. 2d 80, 84 (D. Mass. 2010)).

To add an exclamation point to Vazquez, the day after the 9th Circuit ruling, the California Division of Labor Standards Enforcement (“DLSE”) issued this opinion letter, announcing that the DLSE will apply the ABC Test to Wage Orders and the Labor Code sections that enforce the obligations that arise under the Wage Orders. To complicate the chaos, a number of dueling bills are now pending before the California legislature seeking to either overrule or codify Dynamex and the ABC Test with various exceptions.

Vazquez grew out of related class actions under other state laws litigated for the last decade over the proper classification of Jan-Pro franchisees. The Jan-Pro franchise system is a three-tier franchising model where the defendant master franchisor (Jan-Pro Franchising International) awards franchise rights to intermediary master franchisees that allow the intermediary master franchisees to sell Jan-Pro franchises in a designated geographic area to unit franchisees with ongoing duties to train and support them. Despite the lack of any contract between the master franchisor, Jan-Pro, and unit franchisees, the California unit franchisees claimed Jan-Pro was their employer under the Dynamex ABC Test, which, they argued, should be applied retroactively to them.

The 9th Circuit in Vazquez agreed. Dynamex, it said, did not articulate a new legal standard for who is an employee in California for wage claims but was the logical extension of prior rulings, “‘faithful’ to the history of California’s employment classification law ‘and to the fundamental purpose of the wage orders.’” 2019 WL 1945001, at *11 (quoting from Dynamex, 4 Cal. 5th at 964). Moreover, California had a “general tradition” strongly favoring the retroactive application of judicial decisions. 2019 WL 1945001, at *9. Applying Dynamex retroactively, it held, did not violate Jan-Pro’s due process rights.

Vazquez refused to be bound by the legal standard articulated by the California Supreme Court five years earlier in Patterson v. Domino’s Pizza, LLC, 333 P.3d 723 (Cal. 2014) for when a franchisor is an employer of a franchisee. Patterson, it held, was not a wage and hour case but arose in the “tort context” and addressed when a franchisor might be liable for a sexual assault committed by an employee of a franchisee. 2019 WL 1945001, at *15. Vazquez saw “no reason that the tests for employee status must necessarily be the same in wage order cases as in vicarious liability tort cases.” Id.

Vazquez leaped past the lack of a direct contract between Jan-Pro and the unit franchisees in ruling the Dynamex ABC Test was the proper legal standard for determining the unit franchisees’ wage claims. 2019 WL 1945001, at *17. The 9th Circuit did not stop there. In vacating the lower court’s dismissal of the class action against Jan-Pro and remanding the case to the lower court to reconsider the Dynamex ABC Test, the 9th Circuit openly doubted Jan-Pro could prove it was not an employer under Prong B, which would ultimately expose Jan-Pro to up to four years of unpaid wages to class members.

In light of the seemingly ever-changing independent contractor landscape in California, it is essential that California employers act quickly to reevaluate their independent contractor relationships and determine if any require reclassification under the Dynamex ABC Test. Should you have any questions about how to analyze independent contractor classifications or approach a risk assessment in light of Dynamex and Vazquez, please do not hesitate to contact us.