The Franchise Memorandum

The U.S. Court of Appeals for the Ninth Circuit announced an onerous standard that could potentially make all franchisors liable to California franchisees for wage-and-hour claims in Vazquez v. Jan-Pro Franchising Int'l, Inc., 923 F.3d 575 (9th Cir. 2019). The case arose over a decade ago when unit franchisees claimed that Jan-Pro was their employer and had failed to comply with state wage-and-hour laws. Originally filed as a putative class action in Massachusetts federal court, the claims by California unit-franchisees were severed and transferred to California, while the Massachusetts court adjudicated and dismissed one unit franchisee “test case” based on the preclusive effect of a Georgia decision that Jan-Pro was not the unit franchisee’s employer. Jan-Pro moved for summary judgment in the California lawsuit, arguing that the California Supreme Court’s decision in Patterson v. Domino's Pizza, LLC, 333 P.3d 723 (Cal. 2014), required the court to consider the unique characteristics of franchising. The district court agreed, applying a “Patterson gloss” to California wage-and-hour laws, and granted summary judgment in favor of Jan-Pro.

While the franchisees’ appeal of that decision was pending, the California Supreme Court issued an employment law decision that departed from the focus on a defendant’s control of the alleged employee’s work under prior precedent. Dynamex Operations West, Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), involved claims by non-franchise delivery drivers who, prior to 2004, had been classified as employees. Pointing to public policy concerns, the court in Dynamex embraced a new standard that presumes workers are employees for purposes of wage-and-hour claims unless the putative employer can prove each of the following: (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.

In light of the ruling in Dynamex, the Ninth Circuit determined that this new “ABC test” should apply retroactively to the Jan-Pro case and reversed summary judgment in favor of Jan-Pro. The Ninth Circuit instructed the district court to disregard the rulings in Massachusetts and Georgia that Jan-Pro was not the unit franchisee’s employer, and to also disregard the Patterson decision that guided the original ruling. According to the Ninth Circuit, no “Patterson gloss” should be applied on the new ABC test because Patterson’s analysis of the franchise model was mere “dicta” that had “little to do with the rationale for wage orders.” Although it remanded for further proceedings at the district court level, the Ninth Circuit further indicated that it thought Jan-Pro’s defense would likely fail under prong “B” of the new test because (1) JanPro’s business relies on janitorial work performed by unit franchisees; (2) unit franchisees continuously perform cleaning services; and (3) Jan-Pro’s website says it is a cleaning company. Jan-Pro is expected to petition the Ninth Circuit to rehear the appeal en banc. The California legislature is also considering dueling legislative proposals, one of which would restore the old multi-factor test that focused on an entity’s actual control of alleged employees, while the other would codify Dynamex.