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At Last Vote, the Gig May Be Up as Franchisors Fight for Exceptions to California’s AB-5

All eyes were on the California Senate Appropriations Committee as they voted in favor of a bill (AB-5)[i] that takes the joint-employer labor law one step closer to a headache of epic proportions for franchisors in the state. On Friday, August 30th, the committee decided that the bill touted as a rallying cry for gig workers, would move on to the floors of the house and the senate, one step closer to becoming law of the land for businesses operating in the state.

Most of the attention around this bill has been from gig workers, or sub-contractors, who want to identify as employees in order to benefit as such – work hours, wages, and the ability to organize. The buzz from labor unions has brought presidential nominee candidates to the arena, placing an even bigger spotlight on the controversial legislation as democrats line up to support it, adding it to their list of talking points. There are some industry specific exceptions[1] to the bill, but as of now the interests of franchisors aren’t being considered as part of that list.

In addition to AB-5, a pending case in the Ninth Court of Appeals has franchisors on edge.  Vasquez v. Jan-Pro International,[2] is the latest joint-employer proverbial fence that the franchise industry is balancing on. The decision for this case may decide, possibly once and for all, whether a franchisor and its franchisees can exist in the state of California under the current model which defines them as a franchise organization.

In Vasquez, franchisees state that they are employees of the franchisors. The biggest factor for this case, is whether the court allows the 2018 Dynamex case (Dynamex Operations West Inc. v. Superior Court[3] ) to set precedent. Dynamex is responsible for the implementation of the ABC test, a set of criteria that tests the classification (or misclassification) of a worker (See Below).

Further, if the court consults another case which resulted in a second set of criteria regarding hours and wages (Martinez v. Combs[4] and the three-prong Martinez test (See Below)), chances are favorable that franchisors will be considered joint-employers in the state of California and subject to all labor laws, and held liable for franchisee-employee disputes. It isn’t difficult to see how the outcome of Vasquez, and the passing of AB-5 spell trouble for the franchising industry in California.

  • The Dynamex ABC Test: the hiring entity must prove (A) that the worker is free from the control and direction of the hiring entity, (B) that the worker performs work that is outside the usual course of the hiring entity’s business; (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
  • The Martinez Test: (Martinez v. Combs), suggests the following criteria be met in order to prove joint-employer status. A joint employer must: (1) exercise control over wages, hours, and working conditions; (2) suffer or permit to work; and (3) engage such that a common-law employment relationship was formed. It’s the second and third prongs that give franchisors something to worry about.[5]

It comes down to which test, that which defines wage/hours, or that which decides worker status as sub-contractor vs. employee, will predominantly be used as precedence in future matters. If it’s the latter, and in all intents and purposes that is what we are seeing as favorable with California legislators, then the question becomes whether franchises can even exist, in their current state under the very model in which they are built, in the state of California.

Additionally, despite an urgent letter to legislators from the International Franchise Association and a long list of its members, if AB-5 passes congress, and then is signed into law by the Governor of California (as expected)[6], what will become of the more than 75,000 franchise locations supporting 728,000 jobs?[7]

[Sidebar] Other joint-employer cases of interest:

1989 Borello & Sons, Inc. v. Department of Industrial Relations. Whether a worker was an employee or independent contractor. As it stood, good for franchisors.

2014 Patterson v. Dominoes. Whether a franchisor was vicariously liable as a joint employer of one of its franchisee’s supervisors. Ruled in favor of the franchisor.

2017 Salazar v. McDonalds Corp. Whether the ABC test is the appropriate standard for determining employer status and joint liability generally under California’s wage orders even in the absence of any claimed misclassification.

Harold L. Kestenbaum, Esq. Partner, Spadea Lignana Attorneys at Law
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