By Martin Keane
One of the unique aspects of the franchise business model has long been that many franchisees are considered independent contractors. However, a new franchise law set to take effect in California looks to fundamentally change that. California Assembly Bill 5 (AB-5) was signed into law last month and is set to become effective on January 1, 2020. Specifically, AB-5 now sets the standard for determining whether a worker is an employee or an independent contractor in California. The bill adopts the “ABC Test,” articulated by the California Supreme Court in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County in April of 2018. Under AB-5, the burden is now on employers to show each of the following in order to successfully claim a worker is an independent contractor and not an employee:
- (A) 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 such work
- (B) the worker performs work that is outside the usual course of the hiring entity’s business
- (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity
AB-5’s backers believe it will provide workers who were previously classified as contractors minimum wage, overtime, sick leave, unemployment and other benefits. Opponents see significantly increased labor costs, potentially including under Obamacare due to increased employee counts as well as reduced flexibility for workers.
While the targets of AB-5 are “gig economy” companies such as Uber and Lyft, AB-5 nevertheless is a potentially significant issue for the franchise community because franchisors in California could be required to satisfy each element of the standard employment “ABC Test.” In response to the AB-5’s passage, the Ninth Circuit reinstated its decision in Vazquez v. Jan-Pro, which makes it unclear that if a franchisor licenses its trademark to a franchisee whether the franchisor incurs the liabilities of an employer.
Florida is one of nine states (along with AL, CA, CO, GA, IA, IN, KY & TN) to consider legislation that defines the term “marketplace contractor” to classify certain on-demand workers as independent contractors. Further, in December of 2015, the Florida Department of Economic Opportunity issued a final order stating that, for purposes of re-employment assistance, an Uber driver is an independent contractor and not an employee. This decision was affirmed by the Third District Court of Appeal in McGillis v. Department of Economic Opportunity. Accordingly, Florida seems to take a much less restrictive in deciding whether workers are employees or independent contractors. However, this topic bears watching as issues surrounding the exploding “gig economy” and its workers continue to bubble to the surface, with potentially significant ramifications for businesses.
