Franchisor 101: Franchisor Can Be Liable as “Employer” for Missclassifying Workers

Lewitt HackmanThe Ninth Circuit sent shockwaves through the franchise industry in ruling that last year’s California Supreme Court decision broadening who may bring wage misclassification claims (Dynamex v. Superior Court) applied retroactively to a franchisor, and that a franchisor can be liable for misclassification committed by its franchisee.

Jan-Pro operated a three-tiered franchise structure that offered cleaning and janitorial services. The franchisor sold exclusive rights to “regional master franchisees” for a Jan-Pro business in specific geographic regions. The regional master franchisee then sold “unit franchises.”
Unit franchisees, including plaintiffs, had the exclusive right and obligation to service accounts provided by the regional master franchisee, and to bring in their own accounts. Plaintiffs claimed that, despite this franchise structure, they were employees of Jan-Pro, and were misclassified under a three-tiered franchise relationship.
The district court dismissed the lawsuit against Jan-Pro, finding that Jan-Pro did not have the necessary level of control over unit franchisees to make Jan-Pro an employer. The California Supreme Court (a state court) handed down its ruling in Dynamex while the unit franchisees appealed the dismissal to the Ninth Circuit (a federal court).
The Ninth Circuit reviewed the Dynamex decision, which adopted a test called “ABC” for analyzing if a worker has been misclassified. To prove a worker is not an employee, a business has the burden to show all of the following: (A) the worker is free from control over how to perform the services; (B) the services are outside the business’s usual course; and (C) the worker is in an independently established role. The Ninth Circuit held that the ABC test applied retroactively. Since the district court did not have the opportunity to apply the Dynamex ABC test to Jan-Pro, the Ninth Circuit reversed and remanded the case for that determination.
The Ninth Circuit also provided “guidance” about applying prong B of the ABC test. The court rejected Jan-Pro’s position that its business was franchising as opposed to cleaning services since “franchising is not in itself a business.” The court held that unit franchisees were likely “necessary and incidental” to Jan-Pro’s business of cleaning services because Jan-Pro benefitted by taking a percentage of profits, and Jan-Pro’s business model likely relies on unit franchisees performing cleaning services.
Retroactivity of Dynamex subjects employers to liability for misclassifying workers as independent contractors for as long as California’s statute of limitations allows. Even traditional franchise structures may fall under scrutiny of the retroactive ABC test. In March 2019, the Ninth Circuit reversed judgment in favor of 7-Eleven as to whether franchisees were misclassified as independent contractors and advised the district court to stay proceedings until resolution of Jan-Pro. Haitayan v. 7-Eleven, Inc. (9th Cir. 2019) 762 Fed.Appx. 393.
Now that the ABC test applies to franchisees and a parent franchisor when deciding if workers were misclassified as independent contractors, franchisors face increased exposure in employee misclassification and other wage and hour claims. Time will tell the ultimate reach of Jan-Pro’s application to franchisors. However, it behooves franchisors to encourage California franchisees to resolve such claims at the outset, at the risk of the franchisee having to indemnify and defend their franchisor in such claims.

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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