I admit I was among the scores of franchise lawyers whose blood pressure skyrocketed with passage of California’s AB 5. If a Franchise Agreement establishes an independent contractor relationship between franchisor and franchisee, will the A-B-C test render the franchisor the employer of the franchisee? And if that’s the case, how is the franchisor NOT the employer of the franchisee’s employees? Absent a statutory exemption for franchises, AB 5 invited those dark queries.

I’m exhaling now, and my blood pressure has subsided. The Ninth Circuit’s opinion in Salazar v. McDonald’s Corp., issued October 1^st, supplies the exemption that AB 5 lacks. Rejecting the plaintiffs’ argument that the 2018 decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court controlled the employment analysis, the Ninth Circuit wrote that the “case has no bearing here, because no party argues that the Plaintiffs are independent contractors.”

The opinion provided further good news on the joint employer front. Although McDonald’s provided training, required use of its POS system, offered the franchisee use of its HR package software, and required the franchisee’s workers to wear uniforms, McDonald’s was not the joint employer of the franchisee’s employees. The franchisee, not McDonald’s, controlled hiring, firing, and work conditions. Importantly, the Court applied established California precedent, including Patterson v. Domino’s Pizza, Curry v. Equilon and S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations to guide its analysis.

We can walk back from the ledge, despite the vagaries of AB 5. That is, unless you or your client is a franchise system in which the franchisee depends on the services of independent contractors. The independent contractor model is common in some service industries, and the Ninth Circuit’s language will do little to calm nerves in that sector. Implicit in the Court’s pronouncement that Dynamex (and by extension AB 5) has no bearing “because no party argues that the Plaintiffs are independent contractors,” is that Dynamex (and AB 5) will apply when franchise workers are independent contractors.

McDonald’s naturally leads to the observation that franchisors whose systems use an independent contractor model for franchisees’ workers should consider restructuring to incorporate an employment model. Of course, that might be easier said than done. And there are still open issues to keep us on edge. For example, how safe is a franchisor where the franchisee’s workers are individuals operating under a DBA or single owner LLC? Or where, like the Vasquez v. Jan-Pro case (still winding its way through the California courts after being remanded by the Ninth Circuit,) there is a multi-layered franchise system with a regional and then a national franchisor? The impact of the new law on those models is still in play.

So exhale cautiously.

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