The lower Court in Vazquez v. Jan-Pro Franchising International, Inc. (9th Cir. 17-16096 5/2/19) had rendered a decision in a decade-old class action. Subsequently, last year in April 2018, the California Supreme Court decided Dynamex Operations West v. Superior Court (SC S222732 4/30/18). The landmark Dynamex decision severely limited businesses’ classification of an independent contractor in the California wage and hour context.

On May 2, 2019, the United States Court of Appeals for the Ninth Circuit in Vazquez et al. v. Jan-Pro Franchising International, Inc. strengthened the Dynamex decision by applying it retroactively. This makes it more difficult for businesses to classify a worker as an independent contractor and opens the floodgates to liability for multiple years of back wages and overtime pay.

Dynamex:

If a worker passed the “ABC” test under Dynamex, the worker can properly be considered an independent contractor. Dynamex requires only three elements: (A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) the worker performs work outside the usual course of the hiring entity’s business, and (C) the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity. In the wage and hour context, the worker who meets all three requirements is an independent contractor; the worker who does not meet one of these elements is an employee. The consequences of hiring an “employee” as opposed to an independent contractor are: The employers bear the burden of federal Social Security and payroll taxes, unemployment insurance taxes, state employment taxes, providing workers’ compensation insurance and state and federal regulations governing the wages, hours and working conditions of employees. The business that hires an independent contractor does not bear any of those costs or responsibilities and is not liable for wage and hour benefits such as non-exempt employees’ breaks and lunch periods and overtime.

What does this mean to business owners?

With regard to franchisors: The liability of a franchisor for tort liability such as sexual assault against an employee of the franchisee is not at issue in this case. Dynamex is about wage orders. Patterson v. Domino’s Pizza, LLC (2014) 60 Cal.4th 474 addresses vicarious liability for franchisors in the tort context.

A second note to top-level franchisors: Do not design or implement the contractual framework whereby a third-party worker can be misclassified and beware of liability to third-party workers employed by bottom-level franchisees, even if there is no contract between the franchisor and the third-party worker. Jan-Pro could be Plaintiff’s employer under the ABC test even though it is not a party to any contract with Plaintiffs. Here is the example the Ninth Circuit provides: Company A (i.e. a franchisor/Jan-Pro) contracts with Company B (i.e. a franchisee) for services, and Company B enters into arrangements with third parties (i.e. third-level franchisee – here Plaintiff Vasquez) to perform work under its contract with Company A. Ordinarily Company A would not be liable for misclassification of third-party workers. Ordinarily, Company B is liable for any misclassification. However, in this case, Jan-Pro as Company A designed and implemented the contractual framework under which the third-party workers were misclassified as independent contractors. The lack of a contract between the third-party workers and Jan-Pro does not itself preclude liability.

For further details about the complexities of independent contractors and employees, please join us in our Tressler Talks employment law series in September 2019 near our Irvine or Century City Tressler offices. Subscribe to our blog here and stay tuned for details.

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