As reported here and here, California recently enacted new legislation – Assembly Bill 5 – that expanded the scope of an “employee” under state law.  Beginning January 1, 2020, the answer to whether a person providing services in California is an independent contractor (as opposed to an employee) under the California Labor Code, the Industrial Welfare Commission (“IWC”) Wage Orders, and the California Unemployment Insurance Code, will generally depend on whether they satisfy all three prongs of the so-called ABC Test:

1. The worker must be free from the control and direction of the hirer in connection with the performance of the work.

2. The worker must perform work outside the “usual course” of the hirer’s business.

3. The worker must be customarily engaged in an independent established trade, occupation, or business of the same nature as the work performed.

There are a myriad of occupational and industry exemptions to the application of the ABC Test, many of which are highlighted here.

Having tightened independent contractor classification standards, the next big target for the state legislature may be joint employer liability.

The Longstanding Standard of Joint Employer Liability

Under California law, “joint employer” liability entails a situation where one entity may be liable for various torts and violations of law that another entity – the actual employer –  caused to its employee.  Joint employer liability issues frequently arise in franchisor/franchisee relationships and in the staffing industry.

Historically, the legal analysis as to whether a worker was an employee or an independent contractor for statutory or tort purposes was different from whether two or more entities were liable under the joint employer theory of liability.  Prior to the California Supreme Court’s 2018 decision in Dynamex Operations W., Inc. v. Superior Court (“Dynamex”), California courts determined whether a worker was properly classified as an independent contractor through a multi-factor test that focused on whether a hiring entity had a “right to control” how services were performed, often called the Borello test and named after a 1989 California Supreme Court case, S. G. Borello & Sons, Inc. v Dept. of Industrial Relations.  In contrast, an entity may be considered to be a joint employer (and thus also be liable for another entity’s acts or omissions) if it (1) exercised control over the hours, wages, or workings conditions, (2) it could “suffer or permit to work,” or (3) it engaged, thereby creating a common law employment relationship.  These three criteria were formally recognized in a 2010 California Supreme Court case entitled, Martinez v. Combs (“Martinez”).

Dynamex Opened the Door to Assembly Bill 5 and Began the Drumbeat of Change

The Dynamex decision, in an unprecedent move, held that the boundaries of the Martinez test for joint employer liability were not restricted to that analysis, and could be applied to independent contractor classifications for wage claims that arise from an IWC Wage Order.  The California Supreme Court justified its decision by explaining in part that the Wage Orders were designed to protect workers and to ensure that they are paid at least the minimal wages and provided with the minimal work conditions that are necessary to subsist and to protect their health and welfare.  Thus, an “exceptionally broad” standard for independent contractor classification was warranted, and the California ABC Test was born.  The ABC Test, which is broader in scope than the test outlined in Martinez, was used instead of the Martinez test because the “suffer or permit to work” language in Martinez is a term of art from the early 1900s that would be unwieldy to apply in modern times.  Nonetheless, the ABC Test is a signal from the California Supreme Court that the blurring of the line between the respective analyses for joint employer liability and independent contractor classification is afoot.

Not to be outdone, the state legislature – through AB 5 – dramatically expanded the scope of Dynamex from IWC Wage Orders to all of the California Labor Code and the California Unemployment Insurance Code.  Curiously, AB 5 left the joint employer liability analysis untouched – at least from the four corners of the new law.  That omission, however, may be more consequential than seen at first blush.  Given the tightening of independent contractor standards through AB 5, joint employment liability issues may present themselves through various back doors.  One likely scenario may occur where a company uses a staffing agency that has misclassified workers under AB 5 (even if said workers were properly classified in the past).  In such a situation, absent an enforceable and comprehensive Master Service Agreement between the two entities that shifts the appropriate risk back to the staffing agency, that business relationship could expose the company to a claim of joint employment liability.  The company may not be able to prevent such a claim, but it may be able to shift the litigation risk onto the staffing company.

It is clear that the passage of AB 5 is not the end, but likely the beginning of things to come.

Is the state legislature’s silence the result of careful deliberation or oversight?  Will the courts step in and apply the ABC Test to determine joint employer liability?  Thus far, we have a tentative answer from the courts, and have heard a call to action directed toward the state legislature.

The Courts Have Showed Restraint, but Will the Legislature Step In?

Recently, the Ninth Circuit Court of Appeals, in Salazar v. McDonald’s Corp. (“Salazar”), indicated that it would not broaden the Dynamex/AB 5 ABC Test to the joint employer analysis.  The three-judge panel in Salazar was called to determine whether a fast food franchisor was a joint employer along with one of its franchisees.  The workers claimed that they were denied overtime premiums, meal and rest breaks, and other benefits in violation of the California Labor Code – they also argued that the appellate court should use the ABC Test instead of the Martinez test to determine whether joint employer liability existed.  The Ninth Circuit declined to expand AB 5 to the joint employer analysis.  Applying only the Martinez test, the appellate court held that the franchisor was not a joint employer of the workers.

Just a week after the Salazar decision, the California Court of Appeal, First District, in Henderson v. Equilon Enterprises, LLC (“Henderson”) similarly refused to expand the use of the ABC Test to the joint employer liability analysis.

The Salazar and Henderson decisions may prove to be a pyrrhic victory for franchisors, as the drumbeat for judicial and legislative change has already begun.  Proponents of change have made some of the same policy arguments that led to the passage of AB 5: fundamental notions of fairness and the protection of the worker; and the ability to extend liability, so as to ensure that labor violations are not shielded from redress because the employing entity is financially distressed or incapable of covering all potential costs.

Should the state legislature heed the call to action and further expand the ABC Test to the joint employer analysis (therefore replacing the Martinez test), entire industries may be severely impacted.  From franchises to staffing agencies, and from supply chain companies to manufacturers, the effect of expanding joint employer liability cannot be understated.  Many, if not most, of these entities will be unable to escape an ABC Test.  Almost all affected entities will have to re-evaluate their business practices.  Only time will tell whether the California state legislature will act.