The Ninth Circuit’s decision in Vazquez v. Jan-Pro Franchising International, Inc., 2019 WL 1945001 (9th Cir. May 2, 2019), represents the latest skirmish in the ongoing battle about how to classify workers in the franchising context. In Vazquez, the Plaintiffs are individual janitorial employees who claimed that Jan-Pro, a major international franchisor of janitorial cleaning businesses, had developed a sophisticated “three-tier” franchising model to avoid paying them minimum wages and overtime pay by misclassifying them as independent contractors.
Jan-Pro contracts with intermediary entities known as master franchisees or master franchise owners to whom it sells exclusive rights to the use of the “Jan-Pro” logo and marks. The master franchise owners, in turn, sell business plans and individual franchises to unit franchisees, like the Vazquez Plaintiffs. Thus, the unit franchisees only have a contract with the master franchise owner, not Jan-Pro. However, Jan-Pro retains authority to enforce any agreement between the master franchisee and its respective unit franchisees.
The master franchisees agree to provide the unit franchisees with an initial book of business, start-up equipment and supplies, and certain training, among other things. Like many other franchisors, Jan-Pro requires that master franchisees have certain terms in their agreements with unit owners, reserves the right to unilaterally promulgate binding policies and procedures that pertain both to the businesses of the master franchisees and individual unit owners, and reserves the right to inspect the business of both master and unit franchisees to ensure the Jan-Pro standards are being maintained. The unit franchise agreements describe the unit franchisee as an independent contractor and disclaim any employment relationship with the master franchisee or Jan-Pro. Master franchise owners pay Jan-Pro 10% of the franchise fee paid to them by unit franchisees as well as 4% of the revenues that they collect from unit franchisees’ customers for their cleaning services.
This case is a putative class action that found its way to the Northern District of California after more than ten years of litigation and stops in Massachusetts and Georgia along the way. In mid-2017, the district court granted summary judgment in favor of Jan-Pro, finding that the plaintiff individual unit franchisees were independent contractors and not employees of Jan-Pro. The Jan-Pro master franchisees were not named as defendants because their contracts with the unit franchisees contained mandatory arbitration provisions. The district court’s analysis centered on the three alternative definitions of “to employ” set forth in a prior case, Martinez v. Combs, 49 Cal. 4th 35 (2010): (i) to exercise control over the wages, hours, or working conditions, or (ii) to suffer or permit to work, or (iii) to engage the person to work.
The district court also considered how the case, Patterson v. Domino’s Pizza, LLC, 333 P.3d 723 (Cal. 2014), might apply to the discussion of classifying workers in the franchising context. Patterson, a vicarious liability tort case, is well-known to franchisors in California. In that case, the plaintiff was employed by a franchisee and alleged that she was subject to sexual harassment by one of the franchisee’s supervisors. She sought to hold the franchisor vicariously liable. The California Supreme Court held that “a franchisor could not be held liable vis-à-vis its franchisee unless it ‘enter[ed] the arena’ of overseeing the day-to-day operations of the franchise,” because “[a]ny other guiding principle would disrupt the franchise relationship.”
In Vazquez, the district court concluded that none of the Martinez definitions of “to employ” were met, so the Jan-Pro franchisees were independent contractors. Regarding the first definition, the district court merged the “exercise of control” standard in Martinez with the “right of control” standard from Patterson. Thus, in its own words, the district court applied “the Martinez standard, with the gloss of Patterson” when determining that the Plaintiff unit franchisees were not employees of Jan-Pro.
But, then, Dynamex Operations West v. Superior Court, 4 Cal. 5th 903 (2018), happened. In that case, the California Supreme Court adopted the so-called ABC Test for determining whether workers are independent contractors under California wage orders. Specifically, Dynamex expanded the definition of “suffer or permit” for California wage order cases to adopt a framework used in other jurisdictions. Under the ABC Test, a hiring entity must establish all of the following three elements in order to disprove employment status:
- 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 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.
The burden is on the hiring entity to prove that a worker is an independent contractor who was not intended to be included within the wage order’s coverage. In order to meet this burden, the hiring entity must establish all of the above prongs in its favor. A finding of any prong against the hiring entity directs a finding of an employer-employee relationship and application of the wage orders. As the Ninth Circuit noted, the ABC Test is “exceptionally broad,” and it may be difficult for franchisors to meet – especially the second prong.
When the California Supreme Court issued its ruling in Dynamex, the Vazquez case was already on appeal. The Ninth Circuit therefore ordered the Vazquezparties to brief the effect of the Dynamex ruling on their case, as well as the question of whether Dynamex and the ABC Test should be retroactively applied. As an initial matter, the Ninth Circuit determined that California law requires retroactive application of the Dynamex holding and that applying Dynamexretroactively is consistent with Due Process.
On the merits, the Ninth Circuit remanded to the district court the question of whether Plaintiffs are employees of Jan-Pro using the retroactively applied Dynamex test because of the fact-intensive nature of the inquiry – particularly the first and third prongs. Perhaps more frightening for franchisors than the retroactive application of Dynamex, however, are the Ninth Circuit’s comments regarding the impact (or lack thereof) of Patterson, and the “observations and guidance” offered to the district court.
First, the court shrugged off the “special features of the franchise relationship” discussed extensively in Patterson, and opined that there is no reason for the tests for employee status to be the same in wage order cases and vicarious liability tort cases. In so doing, the Court minimized the day-to-day operational control requirement at the heart of Patterson in favor of a much broader and less favorable framework to determine employment status under Dynamex. The Ninth Circuit also referenced numerous cases favorably cited in Dynamex where the ABC Test was applied in the franchising context, including to find an employment relationship existed. Ultimately, the Vazquez Court found nothing special or unique about the franchise context that would alter the Dynamexanalysis and expressly stated that the district court need not look to Patterson and the control standard when applying the ABC Test.
Second, the Ninth Circuit discussed at length the second prong of the ABC Test: whether the worker is performing work that is outside the usual course of the hiring entity’s business. When evaluating this prong, courts will consider the following factors: (i) whether the employee’s work is necessary to or merely incidental to that of the hiring entity; (ii) whether the employee’s work is continuously performed for the hiring entity; and (iii) what business the hiring entity proclaims to be in. The Ninth Circuit opined that the second prong may be the one most susceptible to summary judgment and provided detailed “guidance” to the district court on remand.
Concerning the first factor, the Ninth Circuit reflected that the inquiry of whether an employee’s work is necessary or merely incidental to the hiring entity’s business may, in some cases, be answered by a common-sense observation of the nature of the business. For instance, the court noted that “floor measurers” are necessary to the business of a carpet retailer, and, thus, were in the same business. But, “highly specialized restoration work” was not a “key component” of a general contractor’s business and, thus, was merely incidental.
The court also looked at the “necessary” versus “incidental” distinction in economic terms. That is, does the hiring entity earn an economic benefit from the employee’s work? The Vazquez Court discussed the example of chauffeurs leasing limousines from a rental company and paying a percentage of their earnings to the company. There, the owners of the limousine company derived profits from the chauffeurs’ earnings, so their work was necessary to the success of the limousine company. But, when taxi cab operators paid a flat fee to lease taxicab medallions, the drivers’ work was merely incidental to the operations of the medallion lessors because their revenues were not affected by how much the taxi cab drivers worked.
Both approaches inform how the relationship between a franchisor and franchisee or its workers may be viewed. Specifically, as to Jan-Pro, the Ninth Circuit opined that its business ultimately depends on someone performing cleaning services and that work is only done by the unit franchisees. Also, Jan-Pro earns a percentage of the unit franchisees’ revenues, which are ultimately payments from franchisee customers for cleaning services. Accordingly, the court indicated that Jan-Pro is not indifferent to how much work unit franchisees do and how their work is performed. Put another way, the court believed that Jan-Pro was not simply renting out its trademark and goodwill to independent entities, but rather is actively and continuously profiting from the performance of cleaning services by franchisees as they are being performed. As such, the franchisees’ work may be necessary to the franchisor’s work.
Regarding the second factor, the Ninth Circuit observed that the district court should consider whether Jan-Pro’s business model relies on unit franchisees continuously performing cleaning services. The court’s tone and tenor here suggests that it would answer this question in the affirmative. For the third factor, the court reflected on how Jan-Pro describes itself to determine whether it is in the same business as its unit franchisees. Jan-Pro, like many franchisors, describes itself in the business of “franchising,” and argued that only the unit franchisees are in the business of cleaning. The Ninth Circuit, however, was openly skeptical of this description and further noted that other courts and arbitrators have been equally skeptical of such characterizations. Franchisors may want to take heed and consider further how their business models are described as distinguished from that of franchisees.
Many practical considerations flow from the Vazquez decision as well as likely the future decision by the district court on remand. Franchisors should examine their business operations and consider how this case could impact the classification of workers as independent contractors.