The Franchise Memorandum

The California Supreme Court has held that its Dynamex decision applies retroactively, answering a question certified to it by the Ninth Circuit in Vazquez v. Jan-Pro Franchising Int’l, Inc., --- P.3d ---, 2021 WL 127201 (Cal. 2021). Although the case involved a franchise relationship, the court explicitly declined to address the applicability of Dynamex to franchise relationships. Jan-Pro is a franchisor whose franchisees offer cleaning and janitorial services. It licenses its marks to master franchisees, who in turn license unit franchisees. In 2008, a group of unit franchisees sued Jan-Pro, alleging that they had been improperly classified as independent contractors and were entitled to employee rights such as minimum wages and overtime. Following changes of plaintiffs and venue, Jan-Pro prevailed on summary judgment. That decision was vacated by Vazquez v. Jan-Pro Franchising, 923 F.3d 575 (9th Cir. 2019) (summarized in this June 2019 post). There, the Ninth Circuit concluded that California courts would apply retroactively the California Supreme Court’s adoption in Dynamex Operations W. v. Superior Court, 416 P.3d 1 (Cal. 2018) of the “ABC test” to distinguish independent contractors from employees in the wage and hour context. Jan-Pro successfully petitioned the Ninth Circuit for panel rehearing, the court withdrew its earlier decision and certified the retroactive application question to the California Supreme Court.

The basic holding of Dynamex was that the ABC test should be used to determine whether a worker is an independent contractor exempt from the wage and hour laws or an employee subject to them. To show that a worker is an independent contractor, the hiring entity must show that the worker (A) is free from the control of the hirer in performing the work, both under the contract for the work and in fact; (B) performs work that is outside the usual course of the hiring entity's business; and (C) is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. Before the California Supreme Court, Jan-Pro argued that Dynamex should not apply retroactively because it had reasonably relied on the broader, balancing-of-factors test established for the workers’ compensation context in S. G. Borello & Sons, Inc. v. Dep't of Indus. Relations, 769 P.2d 399 (Cal. 1989), and could not have anticipated application of the ABC test in the wage and hour context. JanPro also said that public policy, fairness concerns, and due process precluded retroactive application. The court rejected these arguments, pointing to the difference in regulatory context between Dynamex and Borello and the difficulty of reasonable reliance on a complex balancing test involving numerous factors — which itself includes the three ABC test elements. Further, various intervening California Supreme Court decisions had observed that the question of the appropriate test in the wage and hour context remained open. The court further concluded that Dynamex was consistent with the history and purpose of California’s wage orders, that it did not establish new law but merely interpreted the “suffer or permit to work” language used in the wage orders, and that the deeper unfairness was to employees who would be deprived of the protections of the wage orders were Dynamex not to apply retroactively.