California Assembly Bill 5 Becomes Effective

By Kent Franchise Law Group

California Assembly Bill 5 (“AB5”), also known as the “gig worker bill,” was signed into law in September 2019. AB5 became effective on January 1, 2020. The bill codifies and expands a ruling made in a case that reached the California Supreme Court in 2018, Dynamex Operations West, Inc. vs. Superior Court of Los Angeles.

In the Dynamex case, the California Supreme Court ruled that companies must use a three-pronged test, referred to as the “ABC Test,” in determining whether to classify workers as employees or independent contractors. This test assumes that workers are employees unless the company that hires them can prove that the arrangement meets the following three requirements:

1. The worker is free to perform services without the control or direction of the company;
2. The worker is performing work tasks that are outside the usual course of the company’s business activities; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB5 codifies the Dynamex holding, and requires the ABC Test to be applied by employers when classifying their California workers. The stated purpose of the legislation is to provide so-called “gig workers” the right to an “employee” classification, and the benefits that come along with such classification, such as minimum wage, overtime pay, expense reimbursements, employee benefits, required breaks, paid time-off, etc.

Impact on Franchising

AB5 has the potential to impact both franchisees and franchisors. First, the most pressing risk is to franchise systems where franchisees rely on independent contractors as opposed to an employee-classified workforce. If any franchisees rely on independent contractors to provide goods or services to customers, those relationships should be examined to determine whether the ABC Test is satisfied, and reevaluated if it is not. Failure to reclassify independent contractors as employees if the ABC Test is not satisfied will subject franchisees to labor law violations in California.

Second, the risk that has raised significant franchise industry concern for franchisors is whether AB5 and the ABC Test will be used to determine whether a franchisor is a joint employer of franchisee’s employees in California. As stated above, AB5 codifies the California Supreme Court’s decision in Dynamex. In May 2019, the Ninth Circuit held that the ABC Test (from Dynamex) should be applied in determining joint employer liability in Vazquez v. Jan-Pro Franchising International, a case involving a master franchise relationship. The Vazquez case is still pending, and thus, the impact of AB5 on franchising in California has not yet materialized. However, applying the ABC Test to decisions regarding joint employer liability in the franchise industry could amount to a significant expansion of franchisor joint employer liability.

AB5 includes a list of industries that are exempt from its mandates, but franchising, as a whole, is not currently included. As AB5 gained traction, the IFA and other franchise-industry supporters noted the effect it may have on the franchise industry, and petitioned the California legislature to amend the bill. Specifically, the petition asked the California legislature to clarify that, despite the passing of AB5, franchisees would not be classified as employees of the franchisor. However, as of the date of this publication, no such amendment has been accepted or passed. As AB5 becomes effective, we will monitor whether it is applied to franchise businesses and the result of any subsequent litigation.

Future Considerations

Critics of AB5 note that there will be many unintended consequences.  For example, “gig workers” typically choose how often, how long, and when they work. The flexibility of this type of employment has been popular, as evidenced by the number of workers driving for services such as Uber and Lyft. If employers are required to classify workers as employees, then they may begin to exercise more control over schedules, hours worked, etc. The states of Illinois and New York have already begun discussing similar legislation in their jurisdictions. If this legislative trend continues to take shape across the country, it may have far-reaching consequences to the franchise industry. We will continue to monitor the effects of AB5. Please contact us with any specific questions about how AB5 may affect your business.