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Franchise Groups Plan to Sue Over California Gig Worker Law (1)

Nov. 16, 2020, 7:28 PM; Updated: Nov. 16, 2020, 9:52 PM

California’s rigid worker classification standard threatens relationships between franchise owners and their brands, business groups said in announcing the latest legal challenge to the state’s controversial Assembly Bill 5.

The International Franchise Association, along with several other groups and companies such as the Asian American Hotel Owners Association, Dunkin’ Donuts, and Supercuts, said they will file a lawsuit Tuesday in the U.S. District Court for the Southern District of California, in San Diego.

They want the court to stop the state from enforcing A.B. 5 against franchises, arguing that federal law governs franchise relationships and preempts California’s law.

The state law, which went into effect in January, codified a three-part “ABC test” that makes it harder for some businesses to label workers as independent contractors. Gig companies like Uber Technologies Inc. and Lyft Inc. recently escaped the reach of the law through a voter-approved ballot measure that allows their drivers to be classified as contractors instead of as employees.

Ongoing Litigation

Workers’ rights groups have argued in ongoing litigation against companies—including commercial cleaning franchises such as Jan-Pro Franchise International Inc. and Jani-King International Inc.—that businesses can use the independent contractor label to exploit low-income workers and avoid liability and having to pay certain workplace benefits.

The franchise groups, represented by DLA Piper partner Norman Leon, argue that the codification and wide-ranging application of the ABC test could turn franchise owners, who license a name and operating system from an established brand, into employees of that company. Employees are entitled to rights such as minimum wages and overtime, and such a relationship would widen liability for franchisers.

“A brand company must set standards that apply to operations of all individual owners that ensure consistency within each brand to make one franchise look and feel like others,” Robert Cresanti, president and CEO of the International Franchise Association, said at a press conference announcing the suit. “The ABC test requires that workers are free from direction or control, and that’s impossible for franchise brands.”

The groups say the law should be preempted by existing federal laws that regulate franchising, including the Federal Trade Commission Act and the Lanham Act, a statute that governs trademarks and unfair competition.

Even though the ABC test has been in place since April 2018, when the California Supreme Court created it, business groups and their attorneys said no new litigation has been filed against franchise models.

However, courts have used the test in ongoing litigation, including against Jan-Pro, Jani-King, and Coverall, as well as 7-Eleven Inc.—all of which received rulings in favor of the franchiser, DLA Piper’s Leon said during the press call.

‘Ideological Dispute’?

Some of those decisions were vacated and remanded for consideration on whether the ABC test applied, Leon said.

“The proof is in the pudding for impact to franchise businesses,” he said.

The ABC test is aimed at companies that improperly classify workers as independent contractors, rather than as employees, and isn’t directed at traditional franchise relationships, said Catherine Ruckelshaus, general counsel and legal director at the National Employment Law Project. The group has filed friend-of-the-court briefs on behalf of workers in litigation involving franchise companies in the cleaning sector, including Jan-Pro.

The California law that codified the ABC test doesn’t say franchise owners are employees; but, rather, that the employment status of individual workers must be governed by the test, she said. As such, she added, the state law shouldn’t undermine franchise business models.

“This seems like an ideological dispute with the law,” she said. “Franchisors don’t always have independent contractors. There aren’t very many structures in the franchise context where that’s the case.”

(Updated with additional reporting throughout.)

To contact the reporter on this story: Erin Mulvaney in Washington at emulvaney@bloomberglaw.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com; John Lauinger at jlauinger@bloomberglaw.com

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