As California franchise systems have struggled to assess the impact of recent cataclysmic changes in California labor law, the U.S. Court of Appeals for the Ninth Circuit handed down a decision that establishes a reasonable standard of analysis, less than a week after another panel of the same court had reissued an on-again, off-again opinion that disrupted the franchise business model.

The fundamental issue arises from the structure of franchised businesses. A franchisor enters into a commercial trademark licensing arrangement with a franchisee to operate the same kind of business at a particular location. A trademark can be licensed to a franchisee under the Lanham Act, but only if the franchisor controls its brand standards. Although the control over brand standards has been mistaken for the control of an employer, the California Supreme Court has held that a franchisor is liable as an employer or an agent, only when it retains general control over the hiring, direction, supervision and discipline of its franchisee's employees, often called the "Patterson gloss" after the case that strongly confirmed that right. See Patterson v. Domino's Pizza LLC, (2014) 60 Cal.4th 474.

In Vazquez v. Jan-Pro Franchising International, 923 F.3d 575 (9th Cir. 2019), subsequently withdrawn and de-published July 23 then republished Sept. 24, one panel of the Ninth Circuit issued an opinion that discounted Patterson as applicable to vicarious liability matters only, leaving franchisors scrambling to protect themselves from baseless employment claims. The Vazquez court further held that Dynamex Operations West v. Superior Court, (2018) 4 Cal.5th 903, had "clarified the definition of 'suffer or permit,'" so that a putative employer suffers or permits a putative employee to work if it cannot overcome the ABC test. Vazquez appears to be saying the Dynamex ABC test applies in all circumstances, which might include joint employer claims, in which the "suffer or permit" standard is considered.

Franchisors ordinarily license franchisees to operate the same kind of business—a franchisor selling bagels would appear to be in the same business as its franchisees, who are also selling bagels, rather than repairing transmissions. That means that franchisors, under Vazquez, would struggle to overcome the B prong of the ABC test and might have been stripped of the vital protection afforded to them by the Patterson gloss and the protection of prior joint employer cases that had held that franchisors were not employers if they did not control the hiring and supervision of their franchisee's employees.

If franchisors are challenged as employers, under Vazquez, the sole test for employer status would apparently be to ask if the bagel franchisor and its franchisee were both selling bagels, leading to a highly disruptive false-positive result that threatens to overlay the obligations of employers over the already daunting obligations of California's franchise laws. The Vazquez approach inexplicably misclassifies a commercial arrangement as an employment relationship.

On Oct. 1, another panel of the Ninth Circuit issued a decision in Salazar v. McDonald's, 2019 BL 373466 (9th Cir. Oct. 1, 2019), that respected the special circumstances created by the franchise business model, as recognized in Patterson. Instead of disregarding the Patterson gloss, the Salazar court cites to it often, expressly stating that "McDonald's involvement in its franchises and with workers at the franchises is central to modern franchising and to the company's ability to maintain brand standards, but does not represent control over wages, hours, or working conditions."

The new Salazar opinion, strikingly, holds that Dynamex has "no bearing here, because no party argues that plaintiffs are independent contractors. Plaintiffs are [the franchisee's] employees; the relevant question is whether they are also McDonald's employees." The court found "no evidence that McDonald's had the requisite level of control over plaintiffs' employment to render it a joint employer under the principles set forth … applicable California precedents."

After the original Vazquez decision had been handed down, the lawyers for the plaintiffs in Salazar had written two letters to the Ninth Circuit panel on their case to bring to its attention the new Vazquez decision and its disregard of the Patterson gloss and its broad application of the ABC test. Based on these letters in the docket in Salazar, it is readily apparent that the Salazar court was mindful of the holding of the Vazquez panel before it rendered its own decision on the same issue. The Salazar court nonetheless thankfully chose to follow a completely contrary approach.

The Salazar analysis restores reason to the franchise-employer issue, though it is uncertain how it will co-exist with Vazquez. The passage of AB-5, which adopts the ABC test established in Dynamex, may add some complications to the analysis, although Lorena Gonzalez, author of AB-5, has written a letter to the chief clerk of the Assembly to "clarify the intent of AB-5," expressly stating that "AB-5 is not intended to replace, alter, or change joint employer liability between two businesses."

Salazar is in line with a growing body of case law that has protected the franchise business model subsequent to the 2018 Dynamex decision. Curry v. Equilon Enterprises LLC, (2018) 23 Cal.App.5th 289, analyzed a licensing arrangement similar to a franchise and held that the licensor "was not in a position to terminate [a licensee's employee] or hire a different person to perform the tasks [she]performed." The licensor did not retain sufficient control over its licensee to meet the "suffer or permit" standard.

Curry determined that the public policies that led to the adoption of the ABC test differed in the context of joint employment, concluding that "it does not appear that the Supreme Court intended for the 'ABC' test to be applied in joint employment cases."

Even though the Curry court concluded that the ABC test was not meant to apply to joint employment, the court did a quick ABC analysis and concluded that Shell met none of the prongs of the ABC test. The court ultimately concluded that there was not a triable issue as to whether Shell met the ABC test "to the extent it applies in the joint employment context." It is not surprising that the Vazquez court discounted the analysis in Curry as "slim on its own terms." Vazquez at 599. The Salazar court noted that Curry had "well explained" the history and meaning of "suffer or permit." Cruz v. MM 879, 2019 BL 18250 (E.D. Cal. Jan. 16, 2019), also reached the same conclusions as Salazar.

Franchisors will still have to find their way through the morass created by Dynamex (which was not a franchise case), Vazquez (Sept. 24), Salazar (Oct. 1) and AB-5, which was signed into law Sept. 18. In a fortnight, franchising has been battered and redeemed and left to face an uncertain future as courts struggle to reconcile the franchise business model with the expanding definition of employment relationships.

Jonathan Solish is a partner in Bryan Cave Leighton Paisner's Los Angeles office and a California certified franchise specialist. He is one of 12 lawyers listed in Thought Leaders Global Elite in franchising in the U.S. and is rated Band 1 in Chambers Franchising Nationwide and Tier 1 in Best Lawyers in America in franchising.