California's relentless effort to expand contractor 'misclassification' laws to joint employment and franchising

The debate over the California Supreme Court's 2018 Dynamex decision -- in which the state's highest court adopted the so-called "ABC test" for determining whether a worker is properly classified as an independent contractor or as an employee -- and the California Legislature's subsequent codification of Dynamex via Assembly Bill 5, has dominated the legal landscape of California employment law. See Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903. California courts are currently adjudicating a range of challenges to AB 5 from truckers to freelance writers to platform "gig" companies, while at the same time grappling with the scope and effect of the Dynamex decision itself. "Misclassification" and judicial and legislative attempts to address these thorny issues have drowned out most other employment and labor law matters.

What has received less attention is the persistence of the plaintiffs' bar in seeking to expand the application of Dynamex (and presumably its codification by way of AB 5) to encompass not merely cases of alleged misclassification of independent contractors, but also issues of joint employment -- and joint liability under California's draconian and byzantine wage and hour laws -- generally. In doing so, plaintiffs' attorneys have also made clear their attempt to link the use of the franchise model to joint-employer status, potentially threatening the use of the franchise business model in California (and, as discussed below, perhaps in more states to follow).

The plaintiffs' bar has doggedly urged courts to use the ABC test not simply as a matter of determining whether an individual is properly classified as an employee rather than an independent contractor, but rather to determine whether one company is the joint employer of another company's workers. Put another way, they are attempting to "reverse engineer" the ABC test to be a test of employee status broadly (thus increasing potential employer liability), rather than as a tool for distinguishing an employee from a contractor. In so doing, they seek to invalidate California case law recognizing that the franchising model, due to its very nature, presents unique issues where joint employment is concerned. They have particularly targeted a 2014 decision of the California Supreme Court, Patterson v. Domino's Pizza LLC, 60 Cal. 4th 474, which recognized the special considerations that joint employment in the franchise model presents, and rejected an attempt to hold the national pizza franchisor liable for sexual harassment by one of its franchisee's employees.

This effort has been most evident in the case of Salazar v. McDonald's, 2019 DJDAR 9415. In that case, plaintiffs, who work at various McDonald's franchise restaurants and are the undisputed employees of the franchisee/owner, brought a class action alleging they were denied overtime premiums, meal and rest breaks, and other benefits in violation of the California Labor Code. The McDonald's plaintiffs have alleged that not only are they employees of the franchisee/owner, but also of McDonald's USA, the national franchisor. Specifically, they argue that by virtue of the alleged control that McDonald's USA exercises over its franchisees' operations by way of brand and quality controls, that company should be deemed a "joint employer" and held equally liable for alleged violations of wage and hour law (notwithstanding the undisputed fact that McDonald's USA never so much as issued any of these employees a single paycheck).

Where the McDonald's plaintiffs have gone farther than others is that they have repeatedly urged the court to ignore favorable precedent such as Domino's Pizza, and instead pressed the court to use the ABC test and Dynamex to deem McDonald's USA a joint employer of its franchisee/owner's workers (it bears repeating that there has never been a dispute that these plaintiffs were W2 employees of the franchisee/owner, thus fully protected under state wage and hour law, and have never been suggested to be independent contractors by either the franchisee/owner or McDonald's USA).

In December 2019, the 9th U.S. Circuit Court of Appeals flatly rejected this effort, explaining that Dynamex "has no bearing here, because no party argues that Plaintiffs are independent contractors." At the same time, in denying plaintiffs' motion for rehearing of the case, the court declined to certify questions concerning joint employment and the role of Dynamex to the Supreme Court of California, which should have put this issue to rest. Emphasis on "should."

The 9th Circuit's complete rejection of the effort to misuse Dynamex notwithstanding, the plaintiffs' bar remains undeterred, pressing its arguments for Dynamex expansion in another case presently before the California Supreme Court. By way of brief background, in May 2019, in a separate wage and hour/alleged worker misclassification case, Vazquez v. Jan-Pro Franchising International, Inc., 923 F.3d 575, the same appellate court held that Dynamex was retroactive in its application to a class of janitorial franchise workers, potentially exposing putative employers to years of wage and hour liability. In July 2019, the 9th Circuit withdrew its decision, indicating that it would instead ask the Supreme Court of California to decide the question of Dynamex's retroactivity. In September, the 9th Circuit certified the sole question of retroactivity to the California Supreme Court, which granted review.

Despite that only the single issue of retroactivity has been certified to the California high court, plaintiffs are again attempting to interject issues of joint-employer status. In their opening brief filed in January of this year, the Jan-Pro plaintiffs (who coincidentally supported the effort to expand Dynamex made by the McDonald's plaintiffs), have asked the California Supreme Court not only to address the question of retroactivity, but also opine:

• Does Patterson create a special franchisor exemption to the "control over wages, hours, or working conditions" test for determining employer status under California wage and hour law?

• Under California wage and hour law, does employer status turn exclusively on the ability to hire and fire, or does that test impose wage and hour liability where the defendant fails to prevent work under unlawful conditions?

• Does the California Supreme Court's most recent construction of the "suffer or permit" test in Dynamex apply to the joint-employer analysis, or have no bearing in the joint employer context?

• Does California law preclude all liability for wage and hour violations based on ostensible agency principles?

It remains to be seen whether the California Supreme Court will take plaintiffs' bait and decide to consider questions beyond the single issue of Dynamex retroactivity presented. What seems abundantly clear, however, is that the plaintiffs' bar will continue to press its argument for the migration of Dynamex and expanded liability under California labor laws at every turn.

A final word of caution -- it is not only Golden State employers that should be concerned. Efforts around the country to adopt variations of the ABC test are already well underway. In New Jersey, efforts to adopt an AB 5 test very similar to California's stalled in the state's lame duck legislative session last fall. Legislation has already been introduced by the leader of the New Jersey state senate to revisit the issue. In neighboring New York, Gov. Andrew Cuomo's recent executive budget proposal for the 2021 fiscal year included proposed legislation to create the Digital Marketplace Worker Classification Task Force, which would be charged with making recommendations to the Legislature on how New York might regulate independent contractors in the gig economy in a manner akin to California. And at the federal level, in early February, the U.S. House of Representatives approved the so-called "PRO Act," which would adopt the ABC test for classifying independent contractors under the National Labor Relations Act on a nationwide basis. We fully expect these trends, particularly in so-called "trifecta" states where all branches of government are controlled by Democratic majorities, to continue. 