AB 5 could have an unintended impact on the franchise industry

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.

Thomas O’Connell is an attorney with Best Best & Krieger LLP in Riverside, focusing on business and labor and employment litigation and franchise formation. He can be reached at thomas.oconnell@bbklaw.com.

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Mail-in primary ballots arrive this week; here’s what’s happening

Primary election day is June 5 in California and local communities. But balloting actually begins May 7 — this Monday. That’s the start of voting by mail.

For people who have avoided thinking about politics for as long as they could, time’s up. Here’s a refresher about what’s at stake in the next month.

In this election between presidential elections, voters here will begin to decide who leads California, with primaries to select the two candidates to advance to the Nov. 6 general elections in races for governor, seven other statewide offices, every Assembly seat and half of the state Senate, and the state Board of Equalization. They’ll also begin to choose California’s representatives in Washington, D.C., with a U.S. Senate seat and all U.S. House seats in play. And they’ll start to select who’ll hold many municipal offices and judgeships.

Some themes will be pervasive.

The #MeToo movement, which hangs over several races for the state Legislature in Los Angeles County, has brought out a record number of women candidates, hoping to increase their numbers in Sacramento and Washington. Also, young voters — many who registered during pro gun control marches related to the Parkland shooting — are expected to turn out in higher numbers than usual, even as 84-year-old U.S. Sen. Dianne Feinstein seeks her sixth six-year term. And the partisan battle for control of the U.S. House, with Democrats targeting at least a half-dozen Republican-held seats in California, could energize voters of all stripes.

Donald Trump isn’t on any ballot — or you could say he’s on almost every ballot as Democratic candidates play up their opposition to the president whose record-low approval percentages nationally are even lower in California’s major cities.

“A lot of them [the elections] are about Trump, and the divisions that are so raw in this country among people who follow politics,” said Jaime Regalado, professor emeritus of political science at Cal State Los Angeles. “This doesn’t mean we’ll get record [voter] turnout, but there is a heightened sense that these elections matter.”

These are the contests likely to get the most attention in the weeks before election day:

GOVERNOR: Jerry Brown, now 80, is leaving office because of term limits. Lt. Gov. Gavin Newsom, another Democrat, has led the polls. It was long assumed the race would boil down to Newsom and Democrat Antonio Villaraigosa, a battle of former San Francisco and L.A. mayors. But some polls show Villaraigosa fighting for the second spot in the top-two primary against Democrat John Chiang and Republicans John Cox and Travis Allen.

CONGRESS: Democrats need a net gain of 24 seats in the 435-member House of Representatives to seize the majority and take control from Republicans. The districts they’re targeting include seven in California where voters in ’16 elected GOP representatives even as they picked Democrat Hillary Clinton over Trump for president. Five of those districts are in Southern California, including two in Orange County where incumbent Republicans (Dana Rohrabacher and Mimi Walters) are hoping to keep the seats, and two others in the county where long-time GOP representatives (Darrell Issa and Ed Royce) are retiring, and one in northern L.A. county where Republican Steve Knight hopes to keep the seat.

STATE LEGISLATURE: Sexual harassment scandals in state government hang over several races for the Legislature, all involving Democrat-controlled districts in L.A. County. Special elections will fill out the terms of Raul Bocanegra and Matt Dababneh, assemblymen from the San Fernando Valley who resigned after multiple accusations of sexual misconduct. (The race for Dababneh’s seat includes 19-year-old Republican Justin Clark, who could become the youngest known legislator in California history.) A special-election primary will fill out the term of Tony Mendoza, a senator from Artesia who resigned after being accused of sexual harassment, only to remain on the ballot for the special election.  Also, Assemblywoman Cristina Garcia, D-Bell Gardens, is running for re-election while on voluntary, paid leave during an investigation of sexual harassment charges against her.

Potentially confusing for many voters is this: The special elections to fill out remaining terms of resigning legislators occur on the same day as the primaries in the regular elections for the next full term of those same legislative offices.

In another unusual state legislative contest, Sen. Josh Newman, D-Fullerton, faces a recall election. Republicans started the recall drive after Newman voted in favor of California’s gas-tax increase.

State legislative election results in November will determine if Democrats regain their hold on two-thirds of the Assembly and Senate. Democrats currently are one seat short in each house of the two-thirds “supermajority” that would allow them to, among other things, pass tax increases without Republican members’ votes.

Voters have until May 21 to register to vote and until May 29 to request vote-by-mail ballots (see the sample ballot that comes in the mail). For those who have already requested mail-in ballots or have arranged for permanent vote-by-mail status, the ballots will be sent out starting May 7; so many Californians could fill out their votes in the next few days.

Mail-in ballots must be postmarked by June 5 and arrive at county election offices by June 8 to be counted.

The percentage of votes cast by mail in Californians has grown steadily in the past 50 years from the low single digits — back when, ostensibly, only people traveling out of town used what was known as “absentee voting.” The past six state election primaries have all seen more than half of the votes cast by mail, including 69.4 percent in the 2014 primary.

Southern Californians can get more information about voting from election officials in Los Angeles County at 800-815-2666 and www.lavote.net/home/voting-elections, Orange County at 714-567-7600 and ocvote.com, Riverside County at 951-486-7200 and voteinfo.net, and San Bernardino County at 800-881-VOTE and sbcountyelections.com.

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