Companies with operations in California can exhale slightly, with the Ninth Circuit Court of Appeal and another California appellate court recently concluding, separately, that the rigid “ABC Test” established in Dynamex v. The Superior Court of Los Angeles County does not apply in the joint employer context.

Last year, in Dynamex, the California Supreme Court adopted the so-called “ABC Test,” a strict test for determining whether a worker is an employee or an independent contractor under California’s wage orders.

As discussed here and in a recent post on AB 5 (here), under Dynamex, a worker is presumptively an employee unless the hiring company rebuts the presumption by establishing three factors:

1. That the worker is free from control and direction of the hiring entity in performing the work, both under the contract and in fact;
2. That the worker performs work that is outside the usual course of the hiring entity’s business; and
3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

While Dynamex addressed a narrow issue—misclassification of independent contractors—employees have urged courts to expand its scope into the joint employer context. So far, they have been unsuccessful.

For example, on the heels of Dynamex, the Fourth Appellate District, in Curry v. Equilon Enterprises, LLC, 23 Cal. App. 5th 289 (2018), rejected the argument that the ABC Test applied to the joint employer analysis. The First Appellate District followed suit on October 8, 2019 in Henderson v. Equilon Enterprises, LLC. Similarly, on October 1, the Ninth Circuit Court of Appeal also considered Dynamex inapposite to employees seeking to impose liability on a franchisor, as a joint employer, in Salazar v. McDonald’s Corp.

Henderson v. Equilon Enterprises, LLC

The facts in Henderson were similar to those in Curry:  the employee (Henderson) managed gas stations for his direct employer (Danville Petroleum, Inc.), a third party franchisee that operated Shell-branded service stations.  Henderson argued Shell’s control through the franchise agreements evidenced a third party employment relationship, and he pursued recovery for alleged wage and hour violations against both Danville and Shell. Relying on Curry, the First District rejected Henderson’s claim that Shell jointly employed him, based on the California Supreme Court’s interpretation of the definition of “employer” from the Industrial Welfare Commission wage orders, decided nearly a decade ago in Martinez v. Combs, 49 Cal.4th 35 (2010). Under Martinez, to “employ” means (a) to exercise control over the wages, hours, or working conditions, (b) to suffer or permit to work, or (c) to engage, thereby creating a common law employment relationship.

In Henderson, Danville alone set Henderson’s wages, established the payroll function, determined and monitored compliance with labor laws, set meal and rest break policies, enforced its own handbook, set Henderson’s schedules, and dictated Henderson’s daily tasks and the conditions under which he performed them. The court concluded that Henderson failed to show Shell could control his wages, hours, or conditions of employment.

Though the Henderson court recognized that Dynamex had considered the “suffer or permit to work” test from Martinez in formulating the ABC Test, the court still rejected Henderson’s argument that the test applied. The Henderson court considered both the policy reasons underpinning Dynamex and the absurd and unintended result from a “literal application” of parts B and C of the test—neither supported extending Dynamex to joint employment cases. The court held that the standard from Martinez governs, and the burden for establishing an employment relationship remains with the employee.

Salazar v. McDonald’s Corp.

Similarly, in Salazar, the Ninth Circuit also followed Martinez in determining McDonald’s, a franchisor, was not liable to employees for alleged wage and hour violations at franchise restaurants as a joint employer. McDonald’s had control over quality and brand standards, but not control over the hiring, direction, supervision, “day-to-day aspects” of the work, discipline, or discharge, so McDonald’s was not an employer under Martinez‘s “control” or “common law” definitions. It was also not enough that McDonald’s software systems allegedly caused employees to work overtime without receiving overtime pay. Because McDonald’s had neither the power to hire or fire the employees, it was not responsible “for the fact of employment itself”—i.e., it did not “suffer or permit” the work. The court easily disposed of the employees’ attempt to rely on Dynamex, concluding the decision “has no bearing” on the joint employer analysis where no party argues the plaintiffs are independent contractors. The relevant inquiry is only whether McDonald’s was also plaintiffs’ employer. The court affirmed it was not.

Key Takeaways

• The IWC’s wage orders and the Martinez interpretation continue to define the employment relationship and determine who may be held liable for wage and hour violations. The ABC Test and Dynamex remain limited to the misclassification of independent contractors.
• Neither a business relationship nor the existence of a contract between two entities establishes joint employer liability.
• The relevant factors for analyzing the existence (or absence) of a joint employer relationship include exercising control over wages, hours, or conditions of work; control over the hiring, firing, and day-to-day supervision of the employee; the power to employ or fire the worker; and control over the manner and means of accomplishing a desired result.
• Companies should evaluate language in existing agreements about responsibility for setting wages, hours, working conditions, hiring, firing, supervising, training, assigning tasks, and paying wages; compliance with wage and hour laws; and indemnification for employment-related claims.
• Also recall that, as discussed here, the US Department of Labor has proposed a “four-factor balancing test” to determine joint employer status under the Fair Labor Standards Act (FLSA). Though the final rule has not yet been issued, the comment period on this proposed rule has closed. Companies should stay on top of this development to ensure they do not risk joint employer liability under the FLSA.

Contact your Baker McKenzie employment lawyer to develop your compliance plan.