Franchisors and franchisees are closely watching California courts to see what the repercussions of the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018) are. The Dynamex decision represented what some have called a “sea change” as to when independent contractors should be characterized as employees. A recent decision by the Eastern District of California, Western States Trucking Assoc. v. Schoorl, 2019 WL 1426304 (E.D. Cal. Mar. 29, 2019) potentially forecloses some arguments a franchisor might make challenging the application of Dynamex.
Challenging the Dynamex Standard
The Dynamex decision set forth an “ABC test” for determining whether an individual or entity is an employee or independent contractor. A hiring entity bears the burden of establishing that an independent contractor classification is proper under the “ABC test.” To do so, the entity must prove all of the following three factors:
- 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;
- that the worker performs work that is outside the usual course of the hiring entity’s business; and
- that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
In Western States, a trucking association challenged the Dynamex standard as applied to Wage Order No. 9, the applicable state wage order governing the transportation industry. Western States is a nonprofit trade association representing over 1,000 member trucking companies and 5,000 affiliated members.
Western States claimed that Dynamex’s ABC test is preempted by the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”) and the Federal Motor Carrier Safety Regulations (“FMCSA”). Western States further claimed that it violated the dormant Commerce Clause. The Court adjudicated the issues on a motion to dismiss.
Court Finds Dynamex Applicable to Trucking Companies
The Court first decided that Western States had standing under the Declaratory Judgment Act to bring its claims. Western States pointed to the fact that many class actions were being filed in the wake of the Dynamex decision. Thus, Western States was at risk that any one of the workers of its member companies could file a class action. The Court found this persuasive along with its observation that application of the ABC test could fundamentally affect these trucking companies’ business model, which largely relied on independent contractors.
The Court next considered whether the FAAAA preempts the ABC test adopted in Dynamex. The FAAAA contained an express preemption clause restricting any state from enacting or enforcing a law “related to a price, route or service of any motor carrier…with regard to transportation of property.” 49 U.S.C. § 14501(c)(2). In deciding preemption, courts are guided by congressional intent. Here, the intent behind the FAAAA, was to prevent laws and regulations which impeded the free flow of trade, traffic, and interstate commerce. The key point was that preemption was only applicable where a law was directly aimed at the carriage of goods or had a significant impact on carrier rates, routes, or services.
Although Western States argued that Dynamex specifically targeted the transportation industry through Wage Order No. 9, the Court noted that it also applied across the board as to all wage orders and thus many industries. Since Dynamex and the ABC test were equally applicable across all industries, its impact, to the extent there was any, on transportation prices, routes, and services, was only indirect. The mere fact that increased costs may result did not trigger preemption. Thus, the Court found that any effect on transportation issues was simply too remote to justify preemption.
The Court similarly dispelled with Western States’ other preemption argument regarding the Federal Motor Carrier Safety Regulations. Those regulations, codified at 49 C.F.R. §§ 300- 399, regard safety in the motor carrier industry. The Court held that at best Dynamex’s interpretation of California wage orders had a tangential impact on safety concerns. Thus, as it did not conflict with and largely did not concern safety regulations, there was no preemption.
Franchisors Will Face An Uphill Battle Arguing that The Dormant Commerce Clause Overrides Dynamex
Western States then argued that Dynamex invalidated the use of independent contractors as truck drivers and thus discriminated against interstate commerce. The Court noted that Dynamex did not prevent the use of independent contractors but instead provided a framework for deciding when an individual should be deemed an employee or an independent contractor. Further, the Court found that it did not facially discriminate against interstate commerce as it set out generally applicable requirements that applied equally to in-state, multi-state, and out-of-state employers within California. Finding all of Western States’ arguments unavailing, the Court granted the motion to dismiss.
Franchisors would likely face a similar uphill battle to argue the application of the dormant Commerce Clause or that, for example, the Federal Trade Commission’s Franchise Rule preempts Dynamex. The general applicability of Dynamex makes these arguments difficult to make. That being said, California courts have yet to completely consider the franchisor-franchisee relationship in light of Dynamex. And the question still remains whether the franchisor-franchisee relationship warrants different treatment.
* Originally published in shorter form in the California Lawyers Association, Business Law Section, Franchise Law Committee, Case Report, April 2019
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