Wrong Test Used in 7-Eleven Classification Suit, 9th Circ. Told

A California federal court should have applied the state’s ABC test for worker classification to determine whether four 7-Eleven franchise owners were misclassified as independent contractors, the workers told the Ninth Circuit, arguing that the lower court erred by applying the test’s predecessor.

The four owners told the appellate court Tuesday that the district court erred in 2021 by using the Borello test to determine whether they were independent contractors, who aren’t entitled to several legal protections and benefits mandated for employees, including minimum wage, overtime pay and paid sick time.

The workers said that the ABC test applies to their claims under California's Labor Code seeking reimbursement for the expenses they said they were unlawfully required to pay to run the stores.

"It would make little sense to apply the ABC test to some alleged Labor Code violations, but then apply the former (rejected and confusing) Borello standard to determine employee status when other violations are alleged," the franchise owners said.

The Borello test, established by the state high court's 1989 ruling in S.G. Borello & Sons Inc. v. Department of Industrial Relations, weighs 11 factors and focuses on an employer's control over workers.

On the other hand, the ABC test was introduced by the California Supreme Court's 2018 decision in Dynamex Operations West Inc. v. the Superior Court of Los Angeles County. Under the test, a worker is considered an employee unless a company can demonstrate the worker is free from its control, performs work outside its line of business and operates as an independent firm.

In February 2021, U.S. District Judge Dale S. Fischer ruled that the Borello test would apply to Labor Code violation claims that franchise owners Serge Haitayan, Jaspreet Dhillon, Robert Elkins and Maninder "Paul" Lobana made under Section 2802 of California's Labor Code in their 2017 lawsuit against 7-Eleven. Section 2802 directs employers to indemnify employees for expenses workers incur during their employment.

Judge Fischer also said the ABC test would only apply to the owners' wage claims.

The owners said Tuesday that Judge Fischer erred later in 2021 by applying the Borello test to their Labor Code claims, saying that the ruling went against a California appeal court's 2019 ruling in Gonzales v. San Gabriel Transit Inc. In that decision, the court said that Dynamex would apply retroactively to Labor Code claims rooted in wage orders.

The drivers said that "the Gonzales court recognized that 'failure to reimburse expenses and improper deductions in violation of section 2802 is encompassed by [two wage orders]" and therefore the ABC test applies.

The franchise owners further argued that their Labor Code claims should have been scrutinized under the ABC test after Assembly Billy 5 went into effect in the Golden State in January 2020.

Under A.B. 5, which raised the standard to classify workers as independent contractors and codified the ABC test, California "expressly adopted the ABC test for all Labor Code claims," the workers said.

Haitayan, Dhillon, Elkins and Lobana sued 7-Eleven in October 2017 on behalf of a potential class of 1,000 franchisees in California. They alleged that the convenience store chain wrongly classified them as independent contractors because their franchise agreements left them with limited control over their operations.

In 2018, the district court ruled that the franchisees had not shown that 7-Eleven had enough control over their wages and hours, hiring practices and other working conditions, and so their status as independent contractors was correct under California law and the Fair Labor Standards Act.

The franchisees appealed the ruling to the Ninth Circuit. While the appeal was ongoing, the California Supreme Court issued its Dynamex decision, and the Ninth Circuit vacated the lower court's 7-Eleven decision and sent the case back.

In September 2021, Judge Fischer ruled that the franchise owners were independent contractors because they had independent control over their schedules, hiring and firing other employees and what products to sell.

Shannon Liss-Riordan of Lichten & Liss-Riordan PC, who is representing the owners, said Thursday she looks forward to the Ninth Circuit stepping in and ruling that the ABC test applies to expense reimbursement claims under California Labor Code.

"It is hard to read the Dynamex decision and come away with the impression that the California Supreme Court intended it to be a limited decision, but that is what defendants have been trying to argue," Liss-Riordan said.

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