Last year, the California Supreme Court announced a new standard, known as the “ABC” test for determining whether a worker is an employee or independent contractor in wage and hour cases. (Dynamex Ops. W. Inc. v. Superior Court (2018) 4 Cal. 5th 903). Two weeks ago, the Ninth Circuit Court of Appeals held the Dynamex test applies retroactively in Vasquez v. Jan-Pro Franchising International, Inc. (2019 WL 1945001). As discussed below, the Vasquez decision could have far-reaching economic implications.
The Underlying Litigation
The Vasquez case was severed from a decade-old putative class action filed in the District of Massachusetts in 2008, involving nine janitors who claimed Jan-Pro, a major international cleaning business, developed a sophisticated three-tier franchise scheme to avoid paying its janitors minimum wages and overtime compensation by misclassifying them as independent contractors. After one of the claims was resolved in favor of Jan-Pro, in a parallel case pending in Georgia, the Massachusetts court dismissed the remaining claims on res judicata grounds but severed the three California claims which were then sent to the Northern District of California (where the three California plaintiffs resided). The Ninth Circuit District Court granted summary judgment in favor of Jan-Pro before the Dynamex decision. Plaintiffs appealed and the Ninth Circuit Court of Appeals ordered the parties to brief the effect the Dynamex decision had on the merits of the case.
Jan-Pro’s franchise system was a three-tiered system. The first tier was between Jan-Pro and regional third-party entities known as master franchisees or master owners who intern contract with unit franchisees. In consideration of a franchise fee, the Master Owner provides an initial book of business, start-up equipment, cleaning supplies, and provides training to its unit franchisees. In the test case brought in Massachusetts, the plaintiff alleged he paid his Master Franchisor the sum of $23, 400 and was promised $100k in gross annual billings by the Master Franchisor. The test case plaintiff alleged his status as a unit franchisee was a “farce” and he was actually a direct employee of Jan-Pro.
High Stakes Economics
The Vasquez court noted the high stakes involved in its decision at the outset observing Jan-Pro’s financial interest in “not opening the floodgates to nationwide liability for multiple years of back wages and overtime pay.” (Vasquez, supra, at p. 3). The court also recognized the broader ramifications of its decision as informed by the heated rhetoric in amicus briefs filed in support of plaintiffs and Jan-Pro. (Ibid.). The National Employment Law Project submitted an amicus brief in support of the plaintiffs asserting a strong interest because of the impacts Jan-Pro’s franchising scheme has on low-wage immigrant workers and their communities. (Ibid.). On the other hand, the International Franchise Association submitted a brief in support of Jan-Pro railing against the application of the ABC test adopted by the California Supreme Court because it would “sound the death knell for franchising in California” with impacts not only to the California economy but for “national economies.” (Ibid.).
On Appeal, Jan-Pro argued application of Dynamex retroactively violated its Due Process rights based on reliance and fundamental fairness. The Court of Appeals did not agree. In analyzing the issue under California law, the Court of Appeals noted the general rule that judicial decisions operate retrospectively and statutes only operate prospectively. (Vasquez, supra, at p. 8). The Court of Appeals also noted the California Supreme Court has allowed exceptions to retroactivity based on the parties’ reliance on the former rule, whether the change is substantive or procedural, impact on administration of justice, and the purposes to be served by the new rule. (Ibid., citing Claxton v. Waters (2004) 34 Cal. 4th 367). Ultimately, the Court of Appeals concluded the Dynamex ABC test was not a new rule but rather a clarification of established wage order law and given the strong presumption of retroactivity in California and the absence of any indication California courts are likely to hold Dynamex only applies prospectively, held Dynamex applies retroactively. (Vasquez, supra, at pp. 9-10).
The Court of Appeals remanded the matter back to the district court for further development of the record and reconsideration of Jan-Pro’s summary judgment motion based on the Dynamex ABC test, which is now the standard for wage and hour cases in California. (Vasquez, supra, at p. 16). The Court of Appeals noted the distinction between the more stringent “ABC” test used in wage order cases as opposed to the common law test for independent contractors still used in the tort vicarious liability context. Wage orders, observed the court, “have more to do with incentivizing economic entities to internalize the costs of underpaying workers –costs that would otherwise be borne by society.” (Ibid.).
From a micro perspective, it will be interesting to see how the District Court decides Jan-Pro’s summary judgment motion under the new ABC test in the context of the franchisor-franchisee relationship. From a macro perspective, the 9th Circuit holding that Dynamex applies retroactively is tantamount to opening the floodgates to wage and hour claims. Whether it will have a chilling effect on franchising in California remains to be seen. However, we expect the Vasquez decision is not the last word on this issue, which could eventually make its way to the U.S. Supreme Court.