Determining whether workers should be classified as employees or independent contractors presents one of the key issues in modern agency law.[1] This classification impacts issues of liability as well as potential employee benefits.[2] The rise of the gig economy has made it more urgent for courts and legislatures to clarify this difference.[3] When gig workers are not classified as employees, gig economy companies like Uber and DoorDash are exempt from labor laws that require them to pay for their driver’s health insurance and other benefits.[4]
The question of the independent contractor made national headlines this year when a California state ballot initiative, Proposition 22 (“Prop. 22”), passed in November 2020.[5] Prop. 22 was introduced and lobbied for in the wake of a 2019 California Supreme Court ruling in Dynamex Operations W. v. Superior Court..[6] The unanimous ruling in Dynamex set forth a three-prong employment test to determine whether a worker should be classified as an employee or an independent contractor.[7] Dynamex’s “ABC test” made it harder for companies to classify workers as independent contractors.[8] Though Prop. 22 served to legislatively undercut most of the Dynamex ruling, an ongoing case brought by California 7-Eleven franchise owners alleging that they were improperly classified as independent contractors may allow the California courts to further clarify the tests and standards applied.[9] These franchise owners are not the kind of independent contractors most commonly implicated by Prop. 22 and the surrounding court decisions, but their claims may have broad implications.[10]
Employers are vicariously liable for the actions of their employees.[11] Additionally, an employer is required to provide their employees certain benefits.[12] Requirements vary by state and industry but commonly include benefits such as overtime pay and health insurance.[13] However, the actions of an independent contractor do not create similar liabilities for the principal contractee, and the contractee is likewise not required to provide the contractor the benefits of an employee.[14] Employees and independent contractors are generally distinguished based on the amount and type of control the principal exerts over the worker.[15]
Franchise owners themselves are usually classified as independent contractors, but if the franchisee exerts enough control over the franchise’s day-to-day operations, the franchise owner may instead be considered a mid-level employee of the franchisor.[16] This distinction is often relevant in determining who is responsible for labor code violations against franchise employees: is it the franchisor or, perhaps, the franchisor’s boss, the franchisee?
In Haitayan v. 7-Eleven, the franchise owners seek classification as employees.[17] The case began in 2017 when four 7-Eleven franchisees brought a class action alleging that that 7-Eleven improperly classified them as independent contractors.[18] As employees, they would qualify for unpaid overtime wages and expense reimbursements.[19] The state court granted 7-Eleven’s motion for judgment on the pleadings, finding that 7-Eleven was not the plaintiff’s employer.[20] Because Dynamex was decided while the parties in Haitayan were in the midst of the appeals process, the parties have litigated the question of the new case’s applicability in a few rounds of appeals and remands.[21]
In early February 2021, the plaintiffs were denied a bid for class status but asked a federal judge to allow the Ninth Circuit to address the denial.[22] The Ninth Circuit is set to consider the test set forth in Dynamex as it applies to another case brought by a GrubHub driver.[23] Choosing to grant this newest motion might signal a willingness to expand the retroactivity of Dynamex. If the plaintiffs succeed in their bid to form a class, they will represent nearly 1,000 California-based 7-Eleven franchisees.[24] Their success may also represent a victory for workers in the larger fight for clarity and fairness in determining employee status.
[1] See, e.g., James F. Morgan, Clarifying the Employee/Independent Contractor Distinction: Does the California Supreme Court’s Dynamex Decision do the Job?, 69 Lab. L. J. 129, 129-30 (2018) (“the borderland [between the two classifications]is even more vexing and dangerous today”); Leticia Chavez, The Dynamex Dichotomy and the Path Forward, 50 Golden Gate U. L. Rev. 147, 149 (2020).
[2] See Morgan, supra note 1, at 130.
[3] See, e.g., Melissa Lewis, Independent Contractor Laws and the Sharing Economy, 36 GPSolo Mag. (Sept. 2019), https://www.americanbar.org/groups/gpsolo/publications/gp_solo/2019/september-october/independent-contractor-laws-sharing-economy/.
[4] Id.
[5] See Kate Conger, Uber and Lyft Drivers in California Will Remain Contractors, N.Y. Times (Nov. 4, 2020), https://www.nytimes.com/2020/11/04/technology/california-uber-lyft-prop-22.html.
[6] 416 P.3d 1 (2018).
[7] Id. at *42.
[8] Id.
[9] Haitayan v. 7-Eleven, Inc., No. CV 17-7454 DSF, 2020 U.S. Dist. LEXIS 51162 (C.D. Cal. Feb. 19, 2020).
[10] See Dave Simpson, 7-Eleven Franchisees Seek 9th Circ. Take on Nixed Class Cert., Law360 (Feb. 10, 2021), https://www.law360.com/articles/1354163.
[11] See, e.g., Burlington Indus. v. Ellerth, 524 U.S. 742 (1998) (holding that “a master is subject to liability for the torts of his servants committed while acting in the scope of their employment).
[12] See Dep’t of Labor, Summary of Major Laws of the Department of Labor, https://www.dol.gov/general/aboutdol/majorlaws (last visited March 4, 2021).
[13] See id.
[14] See Frank Messina et al., Employee Versus Independent Contractor, CPA J. (Feb. 2019), https://www.cpajournal.com/2019/02/11/employee-versus-independent-contractor/.
[15] See I.R.S., Understanding Employee vs. Contractor Designation (July 20, 2017), https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation.
[16] See Kati L. Griffith, An Empirical Study of Fast-Food Franchising Contracts: Towards a New “Intermediary” Theory of Joint Employment, 94 Wash. L. Rev. 171, 180-83 (2019).
[17] No. CV 17-7454 DSF, 2020 U.S. Dist. LEXIS 51162, at *1 (C.D. Cal. Feb. 19, 2020).
[18] Id. at *3.
[19] Id.
[20] Id.
[21] Id. at *3-6.
[22] Order Denying Plaintiff’s Motion for Class Certification at 1, Haitayan v, 7-Eleven, Inc., 416 P.3d 1 (2018).
[23] See Simpson, supra note 10.
[24] Id.
