California Court Of Appeal Holds That The ABC Test From Dynamex Does Not Apply To The Joint Employer Context
By Filemon “Phil” Carrillo on November 14, 2020
California Lawyers Association, Business Law Section
Franchise Law Committee Case Report, November 2019
For the October 2019 Case Report, we detailed the Ninth Circuit’s opinion in Salazar et al. v. McDonald’s Corp., et al., 939 F.3d 1051 (9th Cir. 2019). There, the court upheld a trial court’s order granting summary judgment in favor of McDonald’s, finding that it was not the joint employer of one of its franchisee’s employees. The Salazar court addressed the holding in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018) in passing, holding that because no one argued that the plaintiffs were independent contractors, the ABC test in Dynamex was not implicated.
Shortly after the Salazar opinion came down, the California Court of Appeal addressed a similar claim in Henderson v. Equilon Enterprises, LLC, 40 Cal.App.5th 111, 253 Cal.Rptr. 738 (2019). But the Henderson court went further and examined the applicability of Dynamex to the joint employer context.
In Henderson, the Plaintiff Billy R. Henderson was a station manager of gasoline stations for Danville Petroleum, Inc. He managed several Shell-branded gas stations for Danville but was never directly employed by Shell.
The relationship between Danville and Shell was governed by a franchise agreement for a few years but was later changed to a Multi-Site Operator (MSO) structure, whereby Shell supplied the stations with fuel products and set fuel prices. Danville provided various services to Shell, such as collecting payments for fuel purchases. They also entered into a lease under which Danville operated convenience stores, car washes, and quick service restaurants on Shell station sites.
Shell also required Danville to operate the gas station in conformity with Shell’s operational standards and provided operation manuals. Danville directed its employees, including Henderson, as to how to comply with the manuals. Danville also had some discretion as to the method of complying with the manuals. Danville at all times interviewed, hired, managed and fired its own employees. And, although Shell retained the right to ask Danville to remove an employee for good cause, it never exercised this right.
After he was fired in 2008 following an accusation of sexual harassment, Henderson filed suit against Danville asserting various wage and hour claims. He named Equilon Enterprises, LLC (Shell Oil Products US) as a defendant based on his allegation that Shell was his joint employer. The trial court granted Shell’s motion for summary judgment after it found that Shell was not Henderson’s joint employer. The plaintiff appealed.
The Court of Appeal analyzed whether Shell was Henderson’s joint employer under the test set forth in Martinez v. Combs, 49 Cal.4th 35 (2010), interpreting the definition of “employer” under California Wage Order No. 5-2001. Under Martinez, there are three alternative definitions of an employer under the Wage Order: (i) the exercise of control over the wages, hours or working conditions, (ii) to suffer or permit to work, or (iii) the creation of a common law relationship.
Unfortunately for Henderson, the California Court of Appeal had already addressed the same claims against Shell in Curry v. Equilon Enterprises, LLC, 23 Cal.App.5h 289 (2018). There, another station manager filed a class action against her employer and named Shell under the joint employer doctrine—the Henderson court noted that the relationship between the employer and Shell involved the same MSO structure as between Shell and Danville.
The court’s analysis applied all three definitions under Martinez and ultimately held that Shell was not Henderson’s joint employer essentially because Shell did not exercise control over Henderson. This analysis mirrored the analysis in Curry. And, it was in line with the Ninth Circuit’s analysis in Salazar. Together, the Salazar, Curry, and Henderson cases illustrate that a franchisor (or licensor) can avoid joint employer liability even if it establishes guidelines or manuals for the operation of a licensed business, so long as they do not exercise control over the franchisee’s employees or take part in the hiring and firing decisions.
During the briefing of the Henderson appeal, the California Supreme Court issued its opinion in Dynamex Operations west, Inc. v. Superior Court 4 Cal.5th 903 (2018). Henderson took the opportunity and asked the court to apply the ABC test to find that Shell could not establish that Henderson was not its employee. After finding that Shell was not his joint employer under Martinez, the court next examined whether Dynamex should be applied to the joint employer context.
By way of background, Dynamex involved a putative class action by delivery drivers claiming that Dynamex misclassified them as independent contractors and alleged that they were employees that should be subject to the Labor Code and Wage Order. The California Supreme Court concluded that the “suffer or permit to work” definition of employment could be used to evaluate whether a worker had been misclassified.
The Dynamex court noted that the suffer or permit to work test had its roots in addressing irregular working arrangements and was consistent with the the wage orders, which had the purpose of protecting the health and welfare of workers. It was meant to prevent the circumvention of labor laws—to ensure workers received the protection of these laws notwithstanding the misclassification by the putative employer.
However, the court recognized that a literal application of the suffer or permit to work test “would characterize all individual workers who directly provide services to a business as employees.” Henderson, 253 Cal.Rptr.3d at 751. As such, it adopted the ABC test to distinguish employees from independent contractors.
“The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfied each of three conditions: (a) that 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 the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity's business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” Dynamex, 4 Cal.5th at 955-56.
The Henderson court noted that Dynamex addressed the problem of businesses misclassifying workers as independent contractors to obtain an economic advantage by avoiding the obligations imposed by labor laws.
After examining the purpose and aim of the ABC test, now codified by AB-5, the Henderson court noted that the policy concerns addressed by Dynamex were not present in the joint employer context. In the joint employer context, the worker is the admitted employee of one of the entities and is seeking to impose liability on a second company, like in Salazar, Curry, and Henderson. The worker already enjoys the protection of the labor laws. As such, the policy concerns underlying Dynamex are non-existent.
The Henderson court went further to explain that parts B and C of the ABC test do not fit analytically with joint employer claims. It noted that part B, which asks whether the worker is rendering services that would ordinarily be seen as part of the putative employer’s usual business, is already established as the worker performs work that furthers the interests of the primary employer. The inquiry relevant for establishing the second putative employer’s liability is whether it has the power to control the details of the working conditions or to prevent the work from occurring.
Similarly, part C of the test is concerned with whether the worker is an independent contractor who has chosen the burdens and benefits of self-employment. But, in the joint employer context, the worker is admittedly an employee of the primary employer.
Based on the differing policy concerns and the analytical disconnect it observed, the Henderson court concluded that “the Dynamex ABC test does not apply in the joint employment context, and the governing standard is found in Martinez.”
The Henderson court made one important observation concerning the ABC test. It stated: “As a practical matter, applying Part B [of the ABC test] to claims of joint employer liability might result in the end of many service contracts or other joint venture agreement between two business entities that happen to be in the same line of work. We do not believe that was the intended effect of Dynamex.” Many believe that the ABC test places franchising, as a business model, in jeopardy. But, the Henderson court’s observation can apply equally to franchising. Dynamex was intended to address policy concerns with misclassification of employees to avoid the cost of the benefits provided by labor laws. The elimination of franchising as a business model does not fit with the intention of Dynamex.
This case report was prepared by Filemon Carrillo (firstname.lastname@example.org) of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark trade secret, unfair competition, and distribution laws.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an attorney experienced alcohol and distribution law. For specific technical or legal advice on the information provided and related topics, please contact the author.