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California Justices Asked if ‘ABC Test’ Covers Joint Employment

Dec. 9, 2019, 10:51 AM

The California Supreme Court could settle an unresolved area of law if it decides to clarify whether a rigid test used to determine who is an independent contractor should apply broadly to franchises and joint employer relationships.

In three separate cases, the justices have been asked to review the scope of the state high court’s 2018 ruling that created a a three-part “ABC test” that makes it harder for employers to classify workers as contractors instead of employees. The test has the potential to upend business models that rely on independent contractors, including gig companies such as Uber Technologies, GrubHub, and Lyft Inc.

Attorneys in those cases want the court to decide whether that worker classification test should also be used to determine if two or more businesses should share liability for labor and employment violations when they’re in a subcontractor relationship or a franchiser and franchisee relationship. The three cases involve classification or joint employer disputes, with McDonald’s Corp., Shell Oil Co., and national cleaning franchise JanPro International as defendants.

Such questions have rankled the business community and have been a central issue in the Labor Department, the National Labor Relations Board, and courts for years. They take on particular significance in the wake of the California high court’s decision in Dynamex West Operations Inc. v. Superior Court. A state law, known as Assembly Bill 5, codified that ruling, but didn’t offer clarification on many of the questions raised in the wake of the new test.

“Some courts have made clear the ABC test is only for independent contractor analysis but other courts have what appears to be a different view,” said Michael Lotito, Littler Mendelson shareholder and co-chair of the Workplace Policy Institute. “Definitive clarification is necessary. There are many legitimate unclear issues under AB5: Joint employment should not be one of them.”

The ABC test replaced a previous, more flexible test and lays out instead three specific criteria employers must meet in order to classify its workers as contractors: Companies must show the workers have freedom from control over how to perform the services provided; that the services are outside the businesses’ normal variety or work; and that the workers are engaged in an independently established role.

Conflicting Decisions

There have been conflicting court decisions regarding the scope of Dynamex, said Boston-based attorney Shannon Liss-Riordan, who represents workers in classification cases around the country. She represents the workers in the Shell Oil and JanPro cases sent to the California Supreme Court.

“Both issues raise extremely important questions under California law,” Liss-Riordan told Bloomberg Law, referring to whether the ABC test should apply to joint employers and franchises.

The state court’s answer to the questions would potentially have broad impact. The ABC test makes it more difficult for companies to classify workers as contractors. Unlike employees, contractors are not entitled to minimum wage, overtime and other benefits.

The U.S. Court of Appeals for the Ninth Circuit used the ABC test to side with a group of workers suing JanPro for misclassification. The court said the test should apply to joint employment relationships and franchises. In that case, the workers purchased cleaning franchises, but under the new state law, the appeals court said they should have been considered employees and entitled to benefits.

The case raises the joint employer issue because JanPro doesn’t contract directly with the workers. The California Supreme Court already agreed to consider the JanPro case on the question of whether Dynamex should apply retroactively.

In another case, a state appeals court held that the ABC test shouldn’t apply to workers for a subcontractor of Shell Oil. The Ninth Circuit also issued an opinion in a case against McDonald’s that said Dynamex didn’t apply in the joint employer context. The workers in the Shell Oil case filed a petition for California Supreme Court review in November. Workers attorneys in the McDonald’s case also asked the court for clarification.

Such conflicting decisions show there is a lack of “uniformity on the question under California law,” Liss-Riordan told the court.

Moment of Clarity

There is no guarantee that the California Supreme Court will take up these questions. The court rejected nearly a third of cases with questions from the Ninth Circuit between 1998 and 2012, according to records kept by Stanford Law School.

The business community wants clarity on these issues, as well. Major business and franchise groups have warned there would be a negative impact if the court were to apply the test broadly, and businesses in the state would be harmed.

The California Supreme Court rightly ruled previously that franchisers have a legitimate right and duty to enforce their brands, trademarks, and system standards at franchise locations, but that isn’t evidence of liability, said Matthew Haller, the International Franchise Association’s senior vice president for government relations and public affairs.

Haller said reversing a previous decision “will throw the franchise model into utter chaos in California.”

Liss-Riordan said when it comes to franchise relationships, there should be no special exception that would exempt such businesses from the test. She noted that the California Supreme Court cited two franchise decisions when it ruled in the Dynamex case to illustrate the application of the ABC test. Both were brought against a national cleaning franchise business Coverall in Massachusetts.

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

To contact the editors responsible for this story: Karl Hardy at khardy@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com

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