The Joint Employment Conundrum

Signed into law on September 18, 2019 by Governor Gavin Newsom, Assembly Bill 5 (commonly known as AB-5), took effect on January 1, 2020. AB-5 codified the California Supreme Court’s June 2018 decision in Dynamex Operations West v. Superior Court of Los Angeles, a decision that horrified the franchise industry, in which the Court rejected a long-held understanding of workers who could be considered independent contractors rather than employees. The Court, and then the Legislature, adopted a three factor test for employment that created a likely-insurmountable presumption that franchisors are the employers of both their franchisees and their franchisees’ employees.

As a reminder, a worker is deemed an employee, and not an independent contractor, unless the putative employer can demonstrate all of the following:

  1. The company must not be able to control or direct what the worker does, either by contract or in actual practice;
  2. The worker must perform tasks outside of the hiring entity’s usual course of business; and
  3. The worker must be engaged in an independently established trade, occupation or business.

There is broad agreement that the typical franchisor-franchisee relationship can never escape the employment label under this test. And, despite promises by some legislators that franchise exemptions would be favorably considered in the legislative session following enactment of AB-5, nothing has changed.

Reported cases applying AB-5 in a franchise context are not yet plentiful, but in at least one, Hiatayan v. 7-Eleven, a federal court in California declined to apply the law to extend vicarious tort liability to Shell Oil, the franchisor of a franchisee-operated convenience store at which the plaintiff manager worked. The Court relied upon language in the Dynamex decision limiting application of the ABC test to provisions of the California Labor Code, Unemployment Insurance Code and IWC wage orders. If other courts follow this approach, the effects of AB-5 may be limited. But that’s a big IF.        

NEXT: Part 3 – The Unkindliest Cut of All – the FAST Act