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The Question of Whether a Franchisor Is an Employer of Its Franchisees or a Joint Employer of Its Franchisees’ Employees

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Under what circumstances is a franchisee considered an employee of the franchisor? The Ninth Circuit may be answering that question shortly in Vasquez v. Jan-Pro Franchising International, Inc. The case was argued on December 18, 2018, and a decision should be forthcoming. During oral arguments and in supplemental briefing, the Ninth Circuit focused on whether and how to apply the “ABC” test from Dynamex to Jan-Pro franchisees.

The Open Question of the ABC’s Test Application to Franchising

The California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018) held that, in some circumstances, the “ABC” test applied to the determination of whether delivery drivers were employees or independent contractors. When applying the “ABC” test, a worker is presumed to be an employee unless the employer proves:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Since the Dynamex decision, there has been an open question of how broad its holding is and its applicability in the franchise context. Interestingly, it might be the Ninth Circuit that answers these questions before the California Supreme Court.

Looking at How the Ninth Circuit Has Addressed the Misclassification Question in California

In Vasquez, the District Court entered summary judgment for the franchisor. See Roman v. Jan-Pro Franchising International, Inc., No. C 16-05961 WHA, 2017 WL 2265447 (N.D. Cal. May 24, 2017). There, the cleaning business franchisees had argued that they were employees rather than independent contractors of the franchisor Jan-Pro. However, the District Court focused on the fact that the franchisees’ agreements were with regional master franchisees who were not defendants in the case. The District Court found that those agreements did not set out any rights for Jan-Pro and that there was no evidence of either Jan-Pro’s right to control the franchisees’ day-to-day activities or exercise of such control.

In its supplemental brief to the Ninth Circuit, Jan-Pro argued that Dynamex did not disturb the California Supreme Court’s decision in Patterson v. Domino’s Pizza, LLC, 333 P.3d 723 (2014). In Patterson, the court held that the franchise context warranted different treatment, and the mere fact that a franchisor has reserved the right to require or suggest uniform workplace standards intended to protect its brand is not alone sufficient to impose “employer” or “principal” liability on the franchisor for statutory or common law violations by one of the franchisee’s employees. The Patterson court recognized the “contemporary realities” of franchising, namely that franchisors need to impose comprehensive and meticulous standards for marketing the brand and operating the franchises. The court noted that it is the franchisees who implement the operational standards on a day-to-day basis, hire and fire store employees, and regulate workplace behavior. The Patterson court concluded that a franchisor becomes potentially liable for the actions of its franchisees’ employees only if it has retained or assumed a general right of control over factors such as hiring, direction, supervision, discipline, discharge, and relevant day-to-day aspects of the workplace behavior of the franchisees’ employees.

Consistent with Patterson, Jan-Pro argued that a franchisor has to exhibit actual control over its franchisees’ employees to be potentially liable and that here the evidence was undisputed that Jan-Pro did not. Jan-Pro argued that there was no evidence that (1) Jan-Pro controlled the franchisees under a contract or in fact; (2) that Jan-Pro’s usual course of business was the same as the franchisees; or (3) that the franchisees were not independently operated businesses. Jan- Pro also argued that as Dynamex represents a significant shift in the law, it should not be applied retroactively, an issue with significant damages ramifications.

The Jan-Pro franchisees argued that under Dynamex they were employees. They noted that the Dynamex court had specifically cited to two Massachusetts franchise cases wherein applying the same “ABC” test, the courts had held that a cleaning franchisee was an employee of the franchisor. See Coverall North America v. Div. of Unemployment, 447 Mass. 852, 857 N.E.2d 1083, 1087 (2006); Awuah v. Coverall North America, 707 F. Supp. 2d 80, 82-84 (D. Mass. 2010). The franchisees argued under prong B that they were in the same business as Jan- Pro, providing cleaning services as opposed to Jan-Pro simply being in the franchising business. Under prong C, the franchisees argued that they did not operate independent businesses as they only operated under Jan-Pro. The franchisees also argued that the Patterson holding was limited to the tort context for purposes of vicarious liability as opposed to misclassification. Lastly, the franchisees argued that the general rule that judicial decisions are given retroactive effect should apply in the case of Dynamex.

Since the District Court’s decision came prior to the Dynamex decision, the Ninth Circuit may simply remand with an instruction to the District Court to consider the applicability of Dynamax. Or the Ninth Circuit may rule for a party as a matter of law based on the evidence that was presented at the summary judgment stage.

Looking at How the Ninth Circuit Has Addressed the Joint Employer Question in California

The 9th Circuit is also currently considering an appeal in Salazar v. McDonald’s Corp., 2017 WL 950986 (N.D. Cal. Mar. 10, 2017). Salazar involves the issue of whether McDonald’s, the franchisor, is a joint employer of its California franchisees’ employees for purposes of purported wage-and-hour violations. In 2017, the District Court found on summary judgment that McDonald’s did not control wages at its franchisees and thus wasn’t liable for labor statute violations. The court ruled that the workers failed to support their arguments that the labor code’s definition of an employer extends to franchisors who “ostensibly” control workers’ wages through an agent, here franchisees. Instead, California’s wage laws only apply to employers who actually control workers’ wages and workplace conditions.

The same District Court had in 2016 rejected the workers’ joint employer argument finding that McDonald’s did not have the contractual right to direct its franchisees’ employees in their work. Further, the mere fact that a franchisor had reserved the right to require or suggest workplace standards were not sufficient for imposing joint employer liability on the franchisor. Salazar was argued on October 17, 2018, and thus is also awaiting a decision.

The Ninth Circuit did recently decide Haitayan v. 7-Eleven, Inc., 2019 WL 968927 (9th Cir. Feb. 27, 2019) but left open the prior questions. There, the District Court had granted judgment on the pleadings for the franchisor. The franchisees had argued that 7-Eleven misclassified them as independent contractors rather than employees in violation of the Fair Labor Standards Act and the California Labor Code. The Ninth Circuit held that the District Court erred when it considered the persuasiveness of the plaintiffs’ factual allegations rather than the plausibility of the plaintiffs’ legal claims. Further, the court erred by focusing on the language of the franchise agreement as opposed to the allegations regarding 7-Eleven’s actual control. The District Court was also advised to consider the effect of Dynamex on the plaintiffs’ claims. But the Ninth Circuit cautioned that the District Court may want to stay consideration until after the ruling in Vazquez.

The Ninth Circuit also considered the issue of a mandatory release that 7-Eleven was requiring its franchisees to sign. The Ninth Circuit found that the fact that the franchise agreement required a general release upon renewal was irrelevant as California prohibits contractual waiver of wage-and-hour claims. Thus, the denial of preliminary injunctive relief was vacated and the District Court was advised to consider the issue again.

The Ninth Circuit’s suggestion of a stay in Haitayan may foreshadow that a broad decision is forthcoming in Vasquez. Both the Vasquez and Salazar decisions will likely have large ramifications on franchising in California. At stake will be whether and under what conditions a franchisor is either an employer of its franchisees or a joint employer of its franchisees’ employees.

* Originally published in shorter form in the California Lawyers Association, Business Law Section, Franchise Law Committee, Case Report, March 2019

Concerns About Misclassification? A Franchise Attorney Can Help

At Luther Lanard, PC, we have a single goal: to solve franchise legal issues. Misclassification can profoundly impact your business, so it’s important to address the issue head-on and find the right solution. If you are an employee misclassified as a franchisee, a franchisee lawyer can help. Whether you are in Orange County, San Diego, Southern California, or beyond, contact us today to learn more about how we can help.