Worker Misclassification Questions Dominate California Legal Landscape

In the wake of California’s enactment of Assembly Bill (AB) 5—legislation that threatens to reclassify 2 million California independent contractors as “employees” under California labor and employment laws—legal questions about the law’s application, scope, and future continue to dominate California’s legal landscape. Two recent developments highlight the scope of the issues that remain unresolved.

What is the Scope and Purpose of the Law?

By way of brief background, AB 5 purports to codify the California Supreme Court’s 2018 Dynamex decision, and adopt the so-called “ABC test” for determining whether a given worker is an employee or independent contractor.  Under the ABC test, to maintain independent contractor status, an employer must prove that a given worker is:  (A) free from the direction and control of the employer in performance of contracted services; (B) not in the “usual course of business” as the employer; and (C) customarily engaged in an independently established trade, occupation, or business.  The ABC test is very difficult to satisfy, and will result in many workers currently classified as contractors being re-classified as employees.

Among the most important questions surrounding Dynamex and AB 5 are their purpose and application.  Put simply, the question is whether the ABC test is intended solely to determine whether a worker is properly classified as an independent contractor (versus an employee), or is it a broader test of who is an employer (or a joint employer) generally?  If the answer is the latter, many businesses could potentially be deemed joint employers of their contractors’ employees, meaning they could be liable under labor laws to employees of another company over whom they have little influence or control.

Joint Employment Considerations

Earlier this month, the U.S. Court of Appeals for the Ninth Circuit issued an opinion holding that the ABC test is intended solely to address issues of worker classification, not “joint employer” status.  In Salazar v. McDonald’s, employees of McDonald’s franchises alleged that they were, in fact, also employees of McDonald’s USA, the national franchisor, and that, accordingly, McDonald’s USA was liable for wage and hour violations committed by its franchises (the question was solely one of joint employment—there was no allegation that these franchise workers were misclassified as contractors).  The Ninth Circuit held that under those circumstances, where worker classification was not at issue, the ABC test was inapplicable, and questions of joint employer status should be decided under pre-Dynamex case law (which use a generally more nuanced test). Specifically, the Ninth Circuit concluded:

Plaintiffs also call our attention to Dynamex Operations West, Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018). There, the California Supreme Court adopted a new test for distinguishing employees from independent contractors under California wage orders. That case has no bearing here, because no party argues that Plaintiffs are independent contractors. Plaintiffs are [the franchisee’s] employees; the relevant question is whether they are also McDonald’s’ employees.

On October 30, 2019, the McDonald’s plaintiffs asked the Ninth Circuit to reconsider its decision, or, alternatively, certify several questions of law to the California Supreme Court.  Specifically, they asked the Ninth Circuit to review or certify the following questions:

  • Does Patterson v. Domino’s Pizza, LLC (a pre-Dynamex case) create a special franchisor exemption to the “control over wages, hours, or working conditions” test for determining employer status under California wage-and-hour law? 
  • Under California wage-and-hour law, does employer status turn exclusively on the ability to hire and fire, or does that test impose wage-and-hour liability where the defendant fails to prevent work under unlawful conditions?
  • Does the California Supreme Court’s most recent construction of the “suffer or permit” test in Dynamex apply to the joint-employer analysis, or have no bearing in the joint employer context?
  • Does California law preclude all liability for wage-and-hour violations based on ostensible agency principles?

These are not the first ABC test questions that the California Supreme Court may be called upon to answer.  Last month, the Ninth Circuit certified to the court the question of whether the Dynamex decision applies retroactively.  The California Supreme Court is not required to answer these questions, but may do so if it chooses.  These answers will have profound consequences for employers in all segments, and millions of independent contractors operating in the Golden State.  Particularly in the context of the franchising, if the ABC test is adopted as a broad test of joint-employer status, many franchisors may face dramatically increased liability and a threat to their very model of business.

Ballot Challenge

Separately, on October 29, 2019, three platform-based service providers unveiled a campaign to adopt an exception to AB 5 for platform workers.  These companies had previously pledged to devote $90 million to an effort to ensure that the ABC test is not applied to platform workers, and have proposed a ballot initiative to be decided by California voters to do so.

Dubbed the “Protect App-Based Drivers and Service Providers Act,” this initiative—if approved next year by California voters—would preserve independent contractor status for app-based drivers and service workers, if certain conditions are met.  In addition, the proposed law would require rideshare and delivery network companies to offer new protections and benefits for app-based rideshare and delivery drivers, including minimum compensation levels, insurance to cover on-the-job injuries, automobile accident insurance, healthcare subsidies for qualifying drivers, protection against harassment and discrimination, and mandatory contractual rights and appeal processes.  The full text of the proposed initiative may be found here.

Initiative supporters must now gather sufficient signatures to put the proposed initiative on the 2020 ballot.  While the fact of this effort is unclear, one thing is certain:  employers, platform services, and organized labor will continue to brawl over the scope of California labor laws for months, if not years, to come.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.