Calif. Beats Back Biz Groups' Suit Against AB 5

In a recent decision, a handful of business groups failed to show how a California law that presumes workers are employees would harm the franchising business.

The suit brought on by the International Franchise Association and three associations of hotel, restaurant and hair salon owners was dismissed without prejudice on January 12. U.S. District Judge Cynthia Bashant said the grounds didn’t successfully support claims they would be hurt by the application of Assembly Bill 5.

"The [complaint] alleges nothing more than a general threat of application of [A.B. 5] to franchises, and the alleged source of the threat is the mere existence of the statute," Judge Bashant said.

A.B. 5 is a bill that raised the standard to classify workers as independent contractors and went into effect in January 2020 by codifying the ABC test introduced through the California Supreme Court's 2018 decision in Dynamex Operations West Inc. v. the Superior Court of Los Angeles County.

The test now provides that 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.

Workers classified as employees are entitled to certain legal protections and benefits, including overtime pay, minimum wage and paid sick time. Additionally, in California employees are also entitled to meal and rest breaks.

The business groups sued the state and officials charged with enforcing A.B. 5 in November 2020. They contend that A.B. 5 and the ABC test are incompatible with the franchising business model.

Because the A.B. 5 test relies in part on whether a firm exercises control over people who work for it, franchisees may be considered employees when they follow the rules that a franchisor establishes to control its brand, the business groups argue.

The state didn't agree, and in April urged the court to dismiss the suit because the groups lacked standing, and their claims were not ripe. The state further argued that the groups failed to state a claim.

Judge Bashant agreed in her Wednesday order, finding that the entities didn't provide evidence that A.B. 5 would apply to the general franchise relationship.

The judge also turned down the groups' argument that their members will face ongoing actions just like a tool manufacturer did in Fleming v. Matco Tools Corp. et al.

While in Fleming, the court was addressing whether Matco misclassified franchisee John Fleming, the groups are asking the court to never apply A.B. 5 to a franchisor-franchisee relationship "regardless of facts and context particular to each dispute that may arise in the future," Judge Bashant said.

The judge also found the groups' argument that franchisors will be unable to operate without violating A.B. 5 lacking, saying the "threat is entirely dependent on the occurrence of unforeseeable events."

International Franchise Association Vice President Jeff Hanscom said Thursday that the judge's decision was disappointing, but the association will continue to challenge A.B. 5.

"All options remain on the table, and the IFA remains committed to protecting, enhancing and promoting the franchise business model and the nearly one million Californians local franchise business owners employ," Hanscom said.

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