Employment Law Daily ABC independent contractor test from Dynamex applies retroactively to franchisee suit against Jan-Pro
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Friday, May 3, 2019

ABC independent contractor test from Dynamex applies retroactively to franchisee suit against Jan-Pro

By Ronald Miller, J.D.

In a case that sent shudders through the California employer community, the ABC test adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court for determining whether workers are independent contractors or employees under California wage orders was applicable to a class claim filed by workers for a “three-tier franchising” model.

Rejecting Jan-Pro Franchising’s arguments for claim preclusion and against retroactive application of the California Supreme Court ruling in Dynamex Operations West, Inc. v. Superior Court, the Ninth Circuit vacated a district court’s dismissal of a class claim seeking to determine whether janitorial workers who purchased unit franchisees were independent contractors or employees. The plaintiffs in this case were not in privity with the plaintiffs in the First Circuit case of Depianti v. Jan-Pro Franchising International, Inc., because their suit had been severed. Moreover, California appellate courts apply intervening state supreme court rules retroactively when reviewing cases, even if the judgment in the trial court was entered prior to the supreme court ruling (Vazquez v. Jan-Pro Franchising International, Inc., May 2, 2019, Block, F.).

In 2008, a putative class action was filed against Jan-Pro Franchising. Ultimately, claims were filed by plaintiffs from a number of states, including California, who alleged that Jan-Pro, a janitorial cleaning business, had developed a sophisticated “three-tier” franchising model to avoid paying its janitors minimum wages and overtime compensation by misclassifying them as independent contractors. The California plaintiffs’ claims were severed.

Multi-level franchise model. Under Jan-Pro’s franchise model, it contracts with “master franchisees” or “master owners,” who are third-party entities to whom it sells the exclusive right to use the “Jan-Pro” logo. The master owners, in turn, sell business plans to “unit franchisees.” Jan-Pro and the master owners are separate corporate entities, each with their own staff. Master owners have their own entity names, internal business structures, and are responsible for their own marketing, accounting, and general operations. Master owners may sell or transfer their individual businesses without Jan-Pro’s approval. However, Jan-Pro reserves the right to inspect any premises serviced by either a master owner or any master owner’s franchisee.

Retroactive application of Dynamex. Because Dynamex postdated the district court’s decision, the Ninth Circuit ordered the parties to brief its effect on the merits of this case. Jan-Pro posited two arguments to avoid application of Dynamex: (1) that the final judgment in Depianti v. Jan-Pro Franchising International, Inc., is entitled to preclusive effect in this litigation under either the principle of res judicata or the doctrine of law of the case; and (2) that Dynamex should not be applied retroactively. The Ninth Circuit rejected both arguments, vacated the district court’s grant of summary judgment to Jan-Pro in light of Dynamex, and remanded the matter to the district court.

Res judicata. With regard to res judicata, Jan-Pro asserted that the plaintiffs were in privity with Depianti because they (1) raise the same factual and legal issues; (2) Depianti’s claims were considered a “test case” for related misclassification claims; and (3) the same counsel represented the plaintiffs and Depianti, asserted identical legal theories, and relied on similar evidence. However, the Ninth Circuit concluded that none of these circumstances sufficed to establish privity under Massachusetts Law.

Although the plaintiffs were initially parties in Depianti, they were severed from the Massachusetts case. Massachusetts has repeatedly held that “mere alignment of interests is insufficient to support preclusive effect against a nonparty.” Therefore, although the plaintiffs’ interests and Depianti’s interests may align, that overlap was insufficient to establish privity for preclusion purposes. Finally, binding the plaintiffs to the Massachusetts litigation would not accord with “due process and common-law principles of fairness.”

Retroactivity. Jan-Pro’s argument that Dynamex should not be applied retroactively was based largely on California law. However, the Ninth Circuit concluded that California law calls for the retroactive application of Dynamex.

Appellate courts in California apply intervening state supreme court rules retroactively when reviewing cases, even if the judgment in the trial court was entered prior to the ruling from the California Supreme Court. Because the Ninth Circuit was convinced that California law required it to apply Dynamex retroactively, that result could only be avoided if there was a constitutional reason that it could not do so. Applying Dynamex retroactively was neither arbitrary nor irrational. The California Supreme Court explained that “wage orders are the type of remedial legislation that must be liberally construed in a manner that services its remedial purpose.” Thus, by applying Dynamex retroactively, the appeals court ensured that the California Supreme Court’s concerns were respected.

Merits. Turning to the merits of the dispute, the district court granted summary judgment to Jan-Pro, dismissing the plaintiffs’ class claim seeking to determine whether janitorial workers were independent contractors or employees. The district court recognized that “no binding decision ha[d] addressed the standard applicable to determining whether a franchisor is an employer of a franchisee,” and “in the absence of controlling authority” it applied the standard from Martinez v Combs, with the gloss of Patterson v Domino’s Pizza, LLC .

In particular, it merged the Martinez “exercise of control” standard with “the right to control” standard of Patterson. With this standard in mind, the district court concluded that the unit franchisees “failed to raise a genuine dispute of fact about whether Jan-Pro directly or indirectly exercised control over their activities or whether it had the right to control their day-to-day activities.” This holding doomed the plaintiffs’ claim under the third prong of Martinez since they “failed to establish an employment relationship” with Jan-Pro.

Suffer or permit. Dynamex expanded the definition of “suffer or permit” for California wage order cases. Before Dynamex, this term was understood to mean that a putative employer had “knowledge of and fail[ed] to prevent work from occurring.” Under Dynamex, a “hiring entity” (the putative employer) “suffers or permits” a putative employee to work if it cannot overcome the “ABC test.”

Under the ABC test, for a worker to be properly classified as an independent contractor, the hiring entity must establish that the worker meets three independent criteria: (A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of work and in fact; and (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The district court had no opportunity to consider whether the plaintiffs were employees of Jan-Pro under the Dynamex standard, and neither party had the opportunity to supplement the record with regard to the Dynamex criteria. Accordingly, the judgment of the district court was vacated and the case was remanded for further proceedings.

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