Executive Summary
Governor Newsom signs AB5 into law making it effective January 1, 2020. The law does not address many questions for the franchise industry. Franchisors and franchisees should not expect these questions to be resolved until they are before the California Supreme Court, which could be years.
Analysis
Only a day after the California Assembly voted to send AB5 to this desk for signature, on September 12, 2019, Governor Newsom signed AB5 into law. AB5 will take effect on January 1, 2020.
Looking Forward
Prior to 1989, the State of California and its courts had applied the common-law test for determining whether a worker should be classified as an independent contractor or an employee. In 1989, the California Supreme Court adopted the common-law test in the case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (“Borello”). That test, commonly called the Borello Multifactor Test, considers multiple factors–none of which is considered dispositive–to determine the amount of control over the manner and means a potential employer has over a worker including:
- Whether the worker performing services holds themselves out as being engaged in an occupation that is distinct from that of the potential employer;
- Whether the work is a regular or integral part of the potential employer’s business;
- Whether the potential employer or the worker supplies the instrumentalities, tools, and the place for doing the work;
- Whether the worker has invested in the business, such as in the equipment or materials required by their task;
- Whether the service provided requires a special skill;
- The kind of occupation, and whether the work is usually done under the direction of the employer or by a specialist without supervision;
- The worker’s opportunity for profit or loss depending on their managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job;
- Whether the worker hires their own employees;
- Whether the potential employer has a right to fire at will or whether a termination gives rise to an action for breach of contract; and
- Whether the worker and the potential employer believe they are creating an employer-employee relationship.
For the next 29 years, Courts cited the Borello Multifactor Test in hundreds of decisions and potential employers and workers structured their relationships accordingly.
On April 30, 2018, the California Supreme Court changed the employment landscape through its decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018). The new test for wage orders, commonly called the ABC Test, considers a worker an employee and not an independent contractor unless the potential employer satisfies all three of the following conditions:
- The worker is free from the control and direction of the potential employer in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the potential employer’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The California Supreme Court shifted the burden to the employer for a narrow question of law but explicitly left the Borello Multifactor Test in place for all other purposes.
AB5 was introduced in the Assembly by former labor organizer, Assemblywoman Lorena Gonzalez (D-San Diego), ushered through the Senate by a former labor leader, Senator Maria Elana Durazo, and sponsored by the California Labor Federation and SEIU California. Said differently, while AB5’s supposed intent was to “codify the decision in the Dynamex case and clarify its application,” the bill was a vehicle for organized labor to choose winners and losers in various industries with its primary target being the gig-economy. Indeed, through various amendments, the California legislature ignored the explicit instructions of the California Supreme Court and generally expanded the application of the ABC Test to the California Labor Code and Unemployment Insurance Code unless a potential employer is one of the excepted industries, under certain conditions, and while satisfying certain criteria.
In my opinion, these carve-outs and caveats were (i) created to satisfy industries that have their own lobbyist that can influence a progressive legislature and/or (ii) the industries that received reprieve are not a target of organized labor. In doing so, the legislature overruled the State’s jurists, created more contradictions than clarifications, and mutated the ABC Test into a weapon for labor that will inevitably result in its inapt application. Slippery slope arguments are generally hyperbolic but the long-term effects of AB5 are many:
- The District Court in Juarez v. Jani-King of Cal., Inc. and 9th Circuit Court of Appeals in Vazquez v. Jan-Pro Franchising International, Inc. have already provided their analysis of how the Dynamex decision may impact the janitorial sector of the franchise industry. While each industry and sector of franchising is unique (a fact that was seemingly lost on the legislature), it is likely that there will be conflict among various courts regarding when to apply the Borello Multifactor Test, when to apply the ABC Test prospectively, and/or when to ABC Test retroactively. It’s likely we won’t get clarity on those questions for several years.
- In the last amendment of AB5, the legislature added the following: “Nothing in this subdivision shall apply to the employment settings currently or potentially governed by collective bargaining agreements for the licenses identified in this paragraph.” The SEIU and other similarly situated labor units who have for years been trying to organize fast-food workers must be salivating at the chance to now say to franchisors and franchisees, “If you want out of this morass, enter into a collective bargaining agreement.” While each franchisor and franchisee should consult with their own labor counsel, the inclination to bring certainty to their employment relationships and capitulate to this demand should be considered scrupulously. To paraphrase Laura Numeroff and her excellent children’s story, if you give a mouse a cookie, it will ask for a glass of milk, a straw, a napkin, a mirror, nail scissors, a broom, ask to take a nap, have a story read to it, draw a picture, hang the picture on the refrigerator, ask for another glass of milk, and then ask for another cookie.
- The final bill’s language includes numerous accusations against businesses in California for the “erosion of the middle class,” “rise in income inequality,” “exploit[ation],” and “den[ying] [several million workers] these basic workplace rights that all employees are entitled to under the law.” These are powerful accusations that should sound familiar to the franchise industry since the inception of the “Fight for 15.” As such, and unfortunately, it is likely that labor’s long term strategy against the franchise model will include the same approach in the near future and the California legislature will be an integral part of their efforts to unionize franchising and change the law to wrongly consider franchisors and franchisees joint employers.
In sum, regardless of if you are a franchisor, franchisee, or franchise vendor, you should immediately consult with your legal counsel to determine how it may impact your business and what, if anything, you should do to plan for the future.
This article was originally published on the California Franchise Network.
As always, our team stands ready to assist your business with all of its franchising needs. If you have questions or need assistance, please contact the authors listed below.
Thomas O’Connell – Tom O’Connell is a Shareholder at Buchalter APC, where he serves as Chair of the firm’s Franchise Law Practice and Chair of Litigation for the firm’s San Diego office.
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