This May, in Vazquez v. Jan-Pro Franchising International, Inc., 923 F.3d 575 (9th Cir. May 2, 2019), the Ninth Circuit Court of Appeal held that the California Supreme Court’s landmark independent contractor decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), applies retroactively.

This means that companies who classified their workers as independent contractors pre-Dynamex, based on the pre-Dynamex legal standard (the multi-factor test in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 38 Cal. 3d 341 (1989)), are now vulnerable to misclassification lawsuits..

Background on Jan-Pro’s Business Model and Case History

Jan-Pro is a janitorial cleaning franchisor that operates under a “three-tier” business model. Under that model, Jan-Pro contracts with so-called “master owners” (or “master franchisors”) and gives them the right to use Jan-Pro’s intellectual property, including its name and logo. These master owners do not hire any janitors themselves. Instead, they have their own separate franchise businesses. The master owners contract with janitorial “unit franchisees” and provide them with business plans. The unit franchisees, in turn, are expected to hire janitors. Id. at 580-581.

Jan-Pro’s contracts with the master owners are more than mere intellectual property licenses. Jan-Pro also maintains standards of work and expressly retains the right to inspect any premises serviced by any of the master owners’ franchisees to make sure they are meeting Jan-Pro’s standards. Jan-Pro also provides its master owners’ with a “model franchise agreement.” Id. at 581.

The master owners’ involvement in the unit franchisees’ business is somewhat greater. Master owners provide franchisees with a beginning book of business, equipment and supplies, and a training program. The master owners agree, e.g., to help provide staff to cover service emergencies the franchise cannot cover (by contacting other unit franchisees); to assist with invoicing and billing; and to advance funds if needed. Id. at 581.The agreements state that the unit franchisees are independent contractors that are in business for themselves, with the sole right to hire and fire workers and to determine their wages and hours. Id.

The Jan-Pro case was first filed in federal court in Massachusetts in 2008 as a putative class action; it later grew to include plaintiffs from other states including California. Due to differences in state law, the District of Massachusetts severed the California plaintiff’s case and sent it to the Northern District of California. Id. at 579. The District of Massachusetts, and later the First Circuit, went on to find no employment relationship based on res judicata principles, relying on a Georgia case against Jan-Pro that had found on the merits in the interim that the unit franchisees and their employees were not Jan-Pro’s employees. Id. at 582-583.

Back in California, the trial court granted summary judgment for Jan-Pro against plaintiffs Vazquez and Roman in May 2017. Roman v. Jan-Pro Franchising Int’l, Inc., No. C 16-05961, 2017 WL 2265447 (N.D. Cal. May 24, 2017). Because the California Supreme Court’s Dynamex decision had not yet been issued, the parties disputed which standards should apply to an independent contractor in the franchise context. Plaintiff argued that Martinez v. Combs, 49 Cal. 4th 35 (2010) applied, under which a hiring company is an employer if it (1) “exercise[s] control over the wages, hours, or working conditions; or (2) “suffer[s] or permit[s] to work”; or (3) “engage[s], thereby creating a common law employment relationship.” Roman, WL 2017 WL 2265447 at *2 (quoting Martinez, 49 Cal. 4th at 64).  

Jan-Pro, on the other hand, argued that the applicable law was that pertaining to franchisor and franchisee relationships – not employment decisions. Specifically, Jan-Pro claimed that, as a franchisor, it could not be vicariously liable for the conduct of its franchisee “unless it ‘enter[ed] the arena’ of overseeing the day-to-day operations of the franchise.” Jan-Pro, 923 F.3d at 592 (quoting Roman, 2017 WL 2265447, at *2; and Patterson v. Domino’s Pizza, LLC, 60 Cal. 4th 474, 498 (2014)).)

The Northern District of California chose to apply Martinez, but with a “gloss” of Patterson. Id. at 592. To accomplish this, the court cobbled together Martinez’s requirement that an employer “exercise” control over hours, wages, and working conditions, with Patterson’s language holding franchisors liable if they had the “right to control” franchisee operations. Id. The court granted summary judgment to Jan-Pro on the ground that the plaintiffs could not establish an employment relationship, because the written agreements were clear and left no question of fact as to whether Jan-Pro “directly or indirectly exercised control over their activities or whether it had the right to control their day-to-day activities.”

On appeal, Defendant argued that the Massachusetts and First Circuit decisions were res judicata barring consideration of Plaintiff’s claims. Defendant also argued that Dynamex should not be retroactive, but interestingly, it only devoted two pages of its sixteen-page brief on Dynamex to the merits of the case. Id. at 580.

The Ninth Circuit disagreed with Defendant’s res judicata argument, finding that none of the prerequisites for res judicata were met. There was no privity of the parties, because Vazquez’s case was severed and sent to California before the District of Massachusetts made its decision. Also, the Massachusetts district court and the First Circuit made no findings at all on the merits – those decisions relied on the Georgia opinion as res judicata and did not actually decide whether Jan-Pro misclassified its workers as independent contractors. In order for the First Circuit’s decision to be binding as res judicata, a decision on the merits would have been necessary. Jan-Pro, 923 F.3d at 584-586.

The Ninth Circuit’s Retroactivity Analysis

The Ninth Circuit then went on to evaluate whether the Dynamex decision could be applied retroactively to Vasquez v. Jan-Pro, given that Vasquez’s filed his lawsuit and the Northern District of California granted summary judgment for Jan-Pro before the California Supreme Court decided Dynamex.  

The appellate court found that Dynamex does apply retroactively, citing these three primary reasons: (1) the general rule of retroactivity; (2) the unworkable nature of “reliance” as a factor justifying an exception; and (3) the Dynamex test was not truly “new” law, thus no exception was warranted. Id. at 586-588.

  • Caselaw Is Presumed to Apply Retroactively

The Ninth Circuit in Jan-Pro relied on the “basic” presumption within California law that “judicial decisions” apply retroactively. Id. at 586 (quoting Newman v. Emerson Radio Corp, 48 Cal. 3d 973 (1989)). Federal law is the same. Id. (citing United States v. Sec. Indus. Bank, 459 U.S. 70, 79 (1982), quoted in Evangelatos v. Super. Ct., 44 Cal. 3d 1188 (1988).

The Jan-Pro court found that California courts’ approach toward Dynamex to date supported retroactive application. Two California state decisions and one California federal decision had already applied Dynamex retroactively. Id. at 587 (citing Garcia v. Border Transp. Grp., LLC, 28 Cal. App. 5th 558 (2018); Johnson v. VCG-IS, LLC, No. 30-2015-00802813, 2018 WL 3953771 (Cal. Super. Ct. July 18, 2018); and Juarez v. Jani-King of Cal., Inc., No. 4:09-cv-03495, Dkt No. 240,  (N.D. Cal. Dec. 14, 2018)). Jan-Pro protested that the defendant in Garcia failed to challenge retroactivity, and that the other two decisions carried no precedential weight.  Id. at 587-588. Yet the Ninth Circuit considered these cases to be important data points favoring retroactivity, especially Garcia. Id. at 588.

Another “data point” the Ninth Circuit found useful was the fact that the California Supreme Court had denied a petition by the California Employment Law Council to modify Dynamex to state that it was not retroactive. Id. at 587. Although Jan-Pro asserted that the Supreme Court’s refusal to hear the petition was not a ruling on the merits, the Ninth Circuit found that “actions sometimes speak louder than words” and that the California Supreme Court’s denial of the petition “strongly suggested that the usual retroactive application, rather than the exception, should apply to its newly announced rule.” Id.

  • A Defendant’s “Reliance” on the Former Legal Standard Does Not Warrant an Exception to Retroactivity

California caselaw has recognized an exception to the usual rule of retroactivity. That exception applies “when a judicial decision changes a settled rule on which the parties below have relied.” Id. at 586 (quoting Williams & Fickett v. County of Fresno, 2 Cal. 5th 1258, 1282 (2017)).  Another California Supreme Court decision, Claxton v. Waters, 34 Cal. 4th 367, 378-79 (2004), explained that “the reasonableness of the parties’ reliance on the former rule” is one of the factors favoring an exception to retroactivity. (Other factors included whether the change was substantive or procedural, the effect on the administration of justice, and the purpose of the rule.) Id. at 586-587.

The Ninth Circuit in Jan-Pro rejected the “reliance” aspect of California’s retroactivity exception as unworkable.  Jan-Pro urged the Ninth Circuit to remand so the district court could decide as a question of fact whether Jan-Pro relied on pre-Dynamex caselaw. Id. at 587. The court said no, calling the reliance standard “conceptually problematic,” because it “could lead to the surprising result that Dynamex applies retroactively to some parties but not to others.” Id. Retroactivity could not be selective.

  • The Dynamex “ABC” Test Arises From Existing Law

Dynamex has already caused major upheaval in the hiring practices of businesses ranging from trucking companies to gentlemen’s clubs. In February, the Los Angeles Times reported that the Dynamex decision has removed exotic dancers’ ability to choose whether they want to remain independent contractors.

The previous “multi-factor” test made it possible for businesses to hire independent contractors that worked in the same type of business, as long as other criteria were met. So, for example, a transportation company could lawfully hire drivers as independent contractors as long as other aspects of their relationship met the standard. After Dynamex, it appears that only workers who have a different kind of business – like a plumber hired to fix a toilet in a trucking company’s main office – qualify as independent contractors. Dynamex, 4 Cal. 5th at 959-960.

Under Dynamex, factors “A” and “C” were similar to the previous test.  Id. at 955-56. Part “A” is a hirer’s control over the worker and the work, similar to the “suffer or permit to work” standard in Martinez, 49 Cal. 4th at 64, and the control factor in Borello, 48 Cal. 3d at 350-351. Dynamex’s Factor “C” asked whether the worker was in an independent trade or business.  Id. at 960-963. Factor “B,” however, asks whether the worker is working “in the hiring entity’s business?” Id. at 959 (citing Martinez, 49 Cal. 4th at 69). Although this factor was relevant to joint employment in Martinez, and was one of many factors that could be weighed under Borello (and could theoretically be ignored in favor of other factors), Dynamex made this factor mandatory.

Despite the real-world changes Dynamex has caused, the Ninth Circuit in Jan-Pro found it was not that different from the prior cases. Jan-Pro, 923 F.d at 587-588. It pointed to language in Dynamex explaining how its decision was “faithful… to the fundamental purpose of [California’s] wage orders.” Id. at 588 (citing Dynamex, 4 Cal. 5th at 964). Jan-Pro rejected the defendant’s due process argument for similar reasons.  Id. at 588-589.

Remand and Guidance

The Jan-Pro court then remanded to the District Court to determine if the unit franchisees were employees, giving guidance for the District Court’s review.  The District Court is now supposed to consider whether the unit franchisees are “essential” to Jan-Pro’s business, whether they “continuously” work in Jan-Pro’s business, and whether Jan-Pro “holds itself out as a cleaning business.” Id. at 597-599.

Assuming the answers to these questions are “yes,” janitorial services specifically, and maybe franchising generally, could change dramatically in California under Dynamex.

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