In enacting Assembly Bill 5 earlier this year, the California Legislature’s intent was to protect workers who were the functional equivalent of employees but did not receive the same benefits and protections as other employees.
While the law’s goal was just, AB 5 as presently written may distort traditional contractual relationships between numerous entities.
For the franchise industry, AB 5 poses a risk because it discounts both the state and federal laws upon which the franchise model operates. The new law means franchisees and their employees may be considered employees of the franchisor corporation — posing a substantial threat to California’s franchise model.
What was AB 5’s intent?
The Legislature passed AB 5 to codify a 2018 decision by the California Supreme Court, Dynamex Operations West Inc. v. Superior Court of Los Angeles.
The court found that the test to determine whether an individual is an “independent contractor” or an “employee” should change because certain employers were taking advantage of precedent and failing to provide employee benefits and workplace protections.
With this rationale in mind, the court found that a worker should only be classified as an independent contractor if the worker satisfies all three elements under its new “ABC” test:
A. He or she is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
B. He or she performs work that is outside the course of the hiring entity’s business.
C. He or she is customarily engaged in independently established trade, occupation or business of the same nature as the work performed.
Agreeing with the court’s rationale, the Legislature codified the ABC test with the aim of addressing businesses engaged in California’s burgeoning “gig economy,” such as Uber and Lyft. The ride-hailing companies provide workers with the flexibility to take on as many “gigs” as they desire. But these workers are generally classified as independent contractors and are not provided the workplace protections or benefits that an ordinary employee would be due.
How does AB-5 work in reality?
Although AB 5 limits the ability of gig employers to classify their employees as independent contractors, the sheer breadth of its ambiguous language has collateral damage.
As with any ambiguity in the law, AB 5’s uncertainty invites plaintiffs to warp the intent of the Legislature and claim that virtually all independent contractor relationships are impermissible unless one of AB 5’s few enumerated professions apply. While AB 5 does include a catch-all exemption for business-to-business relationships, even this exemption is ambiguous.
AB 5’s ambiguity may have the most detrimental impact on the franchise industry.
In California, there are more than 75,000 franchise establishments that employ more than 725,000 workers, have a payroll of more than $28 billion and — in keeping with the intent of both the court and the Legislature — offer the same worker protections and follow the same California employment laws as other small businesses in the state.
However, because AB 5 does not account for how state and federal franchise law requires the franchise model to operate, there is a risk that franchisees and their employees could be misconstrued as employees of the franchisor corporation.
What’s next for AB 5?
The franchise industry and others are asking the Legislature to clarify AB 5 to ensure it does not have the unintended consequences of fundamentally changing the way these businesses have lawfully operated for decades or forcing these businesses to defend against lawsuits that misconstrue the Legislature’s just intent.
While there is some hope that the Legislature will make the necessary clarifications, in the interim, businesses should discuss AB 5 and its broad ramifications with their attorneys to determine if any exemptions apply to them, if any of their businesses relationships put them at risk and if there are any actions that they can take to further delineate their contracting relationships to satisfy the ABC test.