Legal Update

May 9, 2019

Ninth Circuit Expands Reach of Dynamex, Holding ABC Test Retroactive

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Seyfarth Synopsis: In 2018 the California Supreme Court issued its radical Dynamex decision, discussed in our One Minute Memo here. Now the Ninth Circuit has piled on, holding in Vazquez v. Jan-Pro Franchising, International, Inc. that Dynamex applies retroactively, and that the ABC test of employee status applies in the franchisor-franchisee context.

The Background Facts

Jan-Pro Franchising, International, Inc. operates a three-tier franchising structure that offers cleaning and janitorial services. Jan-Pro sold exclusive rights to use its trademark and name to entities known as regional master franchisees, which then became responsible for the Jan-Pro business in a defined geographic territory and possessed the exclusive right to sell Jan-Pro cleaning franchises in that territory. Regional master franchisees sold “unit franchises,” pursuant to which the franchise purchasers gained the exclusive right to service accounts provided to them by their regional master franchisees.

Jan-Pro unit franchisees could purchase franchises in their individual capacities, operate under fictitious names, or form partnerships or corporations with employees to service the accounts assigned by the respective regional master franchisees. Regional master franchisees provided unit franchisees with business plans, some initial training, and then continued to provide business development, billing and collection, and revenue disbursement services. Unit franchisees, however, performed the actual cleaning and janitorial services under the Jan-Pro trademark.

A Brief History of the Vazquez Litigation

The Vazquez litigation sprang from a 2008 Massachusetts case filed against Jan-Pro by an individual named Depianti. Joining Depianti in this suit were unit franchisees from nine states, including California. The plaintiffs in Depianti, and later in Vazquez, all alleged that Jan-Pro used its three-tier franchising model to avoid paying minimum wages and overtime pay by misclassifying unit franchisees as independent contractors. (Regional master franchisees were not named as defendants in either case, which the courts noted was likely because their agreements with the unit franchisees contained mandatory arbitration clauses.)

Due to conflicting state laws at issue in Depianti, the Vazquez plaintiffs (all based in California) were severed from the case, and their action was sent to the Northern District of California. The Vazquez plaintiffs were all individuals who purchased unit franchises either in their individual capacities or as business partners, and they alleged that they should have been classified as employees of Jan-Pro rather than as independent contractors.

Judge Alsup granted Jan-Pro’s motion for summary judgment in Vazquez in May 2017, finding that the plaintiff unit franchisees were not employees of Jan-Pro under the standards set forth in Martinez v. Combs, 49 Cal. 4th 35 (2010) and Patterson v. Domino's Pizza, LLC, 60 Cal. 4th 474 (2014), because Jan-Pro did not itself control the Plaintiffs or suffer or permit them to work, as Jan-Pro did not have any contractual or other relationship with the Plaintiffs. Instead, Jan-Pro had a direct relationship only with the regional master franchisees that did not apply to the unit franchisees.

Relevant Issues Before the Ninth Circuit

Plaintiffs appealed from summary judgment in favor of Jan-Pro. They argued that Judge Alsup erred in (1) finding no triable issues about whether Jan-Pro was the unit franchisees’ employer and (2) in analyzing the employee-employer relationship on the basis of Jan-Pro’s status as a “franchisor.”

Jan-Pro argued that the dismissal of Depianti (by both the Georgia Court of Appeals and the First Circuit) should govern Vazquez under res judicata or the law of the case, and that the California Supreme Court’s decision in Dynamex Ops. W. Inc. v. Superior Court (issued while the Vazquez appeal was pending) should not apply retroactively to the Plaintiffs’ claims. Jan-Pro also argued that Judge Alsup correctly applied California law in holding that the unit franchisees’ were not employees of Jan-Pro.

The Ninth Circuit Decision

On May 2, 2019, the Ninth Circuit issued its decision in Vazquez v. Jan-Pro Franchising, International, Inc., rejecting Jan-Pro’s arguments that the earlier decisions in the Depianti litigation applied here. The Ninth Circuit reasoned that the First Circuit did not reach the merits of applying the ABC test to underlying claims, and the Depianti plaintiffs were not in privity with the Vazquez plaintiffs for purposes of applying res judicata.

The Ninth Circuit also held that Dynamex—adopting an ABC test to determine employee versus independent contractor status—must be applied retroactively. The Ninth Circuit thus vacated the summary judgment order entered prior to Dynamex, and remanded for further proceedings. The Ninth Circuit emphasized that the California Supreme Court characterized its Dynamex ruling as a “clarification” of existing law, rather than a departure from existing law.  Accordingly, the Ninth Circuit rejected the arguments of Jan-Pro and industry groups that applying Dynamex retroactively would violate the due-process rights of companies that, in establishing contractor relationships, have reasonably relied on the legal standard in place since the California Supreme Court decided in S.G. Borello & Sons, Inc. v. Department of Industrial Relations in 1989.

The Ninth Circuit further concluded that the strict ABC employment classification test should apply in the franchisor-franchisee context for claims arising under the California wage orders, even where the putative employee and alleged hiring entity are not parties to the same contract and the putative employee only indirectly provides a service to the defendant—a ruling that is the first of its kind in California.

Jan-Pro has already confirmed it will petition for re-hearing of the decision by a full panel of the Ninth Circuit. Jan-Pro has also, of course, raised substantial constitutional questions about retroactivity that may find their way to the United States Supreme Court.

What Vazquez Means for Businesses

The Ninth Circuit’s opinion may have major implications for companies that utilize independent contractors, including many companies operating in the gig economy space, and for companies involved in franchisor-franchisee relationships. Particularly significant for companies like Jan-Pro are the potential implications on the traditional divisions and protections created through use of the franchise model, which Vazquez erodes, at least in the context of claims arising from California’s IWC Wage Orders.

Companies thus must take a thorough look at how their contractual arrangements—including with entities or individuals they may have indirect or franchise relationships with—fit into the prongs of the ABC test, and evaluate whether (A) workers are free from the control and direction in connection with the performance of the work, both under the contract for the performance of the work and in fact, (B) workers perform work that is outside the usual course of the hiring entity’s business, and (C) workers are customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Companies should particularly take heed of how they describe their business, both to the public and their contractors. For instance, companies must weigh whether their business model centers on an app service that connects providers and end users, or licenses trademarks and provides business plans to workers, or whether they are actually “in the business of” providing the underlying services that the workers provide.

Employers can take some solace that the ABC test adopted in Dynamex, and now applied in Vazquez, still explicitly applies only to claims arising under the California IWC Wage Orders, and not claims arising in tort, as the Ninth Circuit went to great pains to explain. Nonetheless, companies should take heed of this recent expansion of Dynamex, and the prospects of pending legislation that would codify the ABC test for determining employee status. Seyfarth will continue to keep its readers informed of all developments in this space.