[Contractor Compliance Alert] Stringent California “ABC” Test Applies Retroactively

Vazquez v. Jan-Pro Franchising International, Inc.

Ninth Circuit Holds Stringent California “ABC” Test Applies Retroactively

On May 2, 2019—a year and two days after the California Supreme Court issued its landmark decision in Dynamex Operations West, Inc. v. Superior Court (Dynamex), adopting the stringent “ABC” test for purposes of determining employment status under the California wage orders—the Ninth Circuit Court of Appeals held the Dynamex decision applied retroactively.

In Vazquez v. Jan-Pro Franchising International, Inc. (Vazquez), a class of janitorial cleaning franchisees claimed they were misclassified as independent contractors in a sophisticated “three-tier” franchising model.

The Ninth Circuit vacated the district court’s dismissal of their complaint on summary judgment and remanded the matter back to the lower court, holding, among other things, that Dynamex applied retroactively, and offering guidance to the district court on how to apply the ABC test.
In analyzing whether Dynamex should be applied retroactively, the court found both that California law required it, and that doing so would not violate Jan-Pro’s due process rights. The court quoted prior California Supreme Court decisions holding that it is basic California legal tradition that judicial decisions are given retroactive effect. The Ninth Circuit agreed with plaintiffs’ argument that, in Dynamex, the California Supreme Court had denied a petition to modify the opinion to clarify that the decision applied only prospectively. The Ninth Circuit explained that, by denying the petition, the California Supreme Court had “strongly suggested” that the usual retroactive application should apply to its newly announced rule, which was an important data point to consider in light of California’s general tradition that judicial pronouncements have retroactive effect.

The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; 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 that involved in the work performed.

In this business model, Jan-Pro organized commercial cleaning franchises throughout the United States, and contracted with intermediary “master owners”—regional, third-party entities to whom it sold exclusive rights to use the “Jan-Pro” trademarked logo. Jan-Pro and the master owners were separate corporate entities with their own staff. The master owners, in turn, sold business plans to “unit franchisees,” who provided janitorial cleaning services to clients.

This communication is provided solely for informational purposes, and should not be considered legal or tax advice. It is always recommended to seek qualified legal counsel before taking action.