Franchisor 101: California’s Dynamex/ABC Test is Retroactive

Lewitt Hackman

In 2019, the U.S. Court of Appeals for the Ninth Circuit held that the ABC Test announced in a California Supreme Court decision, Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018) could apply to franchise relationships in California. The Ninth Circuit then withdrew its opinion, and certified a question to the California Supreme Court: whether Dynamex applied retroactively, before franchisors and franchisees knew the ABC Test could apply to them.

The California Supreme Court answered, Yes. The Court applied the general rule that judicial decisions are given retroactive effect. The Court found no exception applied. The ABC Test applies as the rule of decision in all cases pending when Dynamex became final.

The Supreme Court was silent about applying the ABC Test to franchises, stating in a footnote, that although the case arose in the context of a franchise, the question of law asked by the Ninth Circuit “does not involve any inquiry into the general relationship or applicability of the Dynamex decision to franchise agreements or arrangements, and we do not address that subject.”

There is a growing split among courts about applying the ABC Test to franchises. The Ninth Circuit suggested the ABC Test applies. On the other hand, a federal court in Massachusetts held that state’s ABC Test did not apply to 7-Eleven franchisees, finding that franchisors are expected and by regulation are allowed to exert significant control over franchisees’ method of operation without becoming employers. A lawsuit in a California federal court brought by the International Franchise Association and independent franchise associations seeks a declaratory judgment that franchisors and franchisees alike are exempt from AB 5’s sweeping ABC Test.

While case law remains in flux about applying the ABC Test to franchises, it is now clear that in California, Dynamex and its ABC Test apply retroactively. Misclassification claims that predate the 2018 Dynamex decision may fall under the ABC Test depending on timing and pendency of suit, and whether the trial court finds the ABC Test appropriate. Franchisors with franchisees in California should consult California franchise attorneys with questions on this developing area of law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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