Roman v. Jan-Pro Franchising Int’l, Inc., 2022 U.S. Distr. LEXIS 137190, Case No. C 16-05961 WHA (N.D. Cal.) Decided August 2, 2022
In a wage-and-hour misclassification action, the District Court, Judge Alsup, granted in part plaintiffs’ motion for class certification and motion for summary judgment on certain certified claims, finding Jan-Pro franchisees to be employees who had been misclassified as independent contractors.
Factual and Procedural Overview
Defendant Jan-Pro Franchising International, Inc. (“Jan-Pro”) is an international janitorial cleaning business, and it used a franchise model with three tiers—Jan-Pro on the top tier, “master franchisees” in the middle tier, and unit franchisees on the bottom tier. As of 2009, there were at least 91 master franchisees in the USA. Unit franchisees contract with maser franchisees, not Jan-Pro. A unit franchisee can be an individual or a few partners. And unit franchisees can hire additional workers to help them clean.
Named plaintiffs are unit franchisees who purchased their franchises from two different master franchisees who are not parties to this action. Plaintiff Vazquez purchased his unit franchise for $2,800, Roman purchased his for $2,800, and Aguilar, with a business partner, purchased his unit franchise for $9,000.
On this motion, Plaintiffs sought to certify the following class: all unit franchisees who have signed franchise agreements with master franchisees in the state of California and have performed cleaning services for Jan-Pro since December 12, 2004. The Court granted plaintiffs’ motion for class certification and summary judgment as to (1) failure to pay minimum wage for mandatory training, (2) failure to reimburse for expenses incurred for (a) required uniforms and (b) necessary cleaning supplies, and (3) unlawful deductions of (a) management fees and (b) sales and marketing fees.
The Industrial Welfare Commission of California publishes wage orders that regulate the hours, wages, and working conditions of California employees. The wage orders encompass some, but not all, of the provisions in the California labor code. When a wage order encompasses a labor code claim, courts determine misclassification claims under Dynamex (i.e., the ABC Test). When the wage orders do not cover a labor code claim, such as expense reimbursement for gas and tolls, courts determine misclassification claims under Borello.
Motion for Class Certification – Misclassification Claims
The Court found the proposed class satisfied each of the four prongs of FRCP 23(a) – numerosity, commonality, typicality, and superiority. The Court found there were many franchisees in California, that the misclassification contention was central to the labor code claims, that the named class members’ claims are typical of the putative class, and that the named plaintiffs and counsel satisfied the adequacy of representation prong. As to adequacy, the Court specifically found that Jan-Pro had waived its right to compel arbitration against absent class members “by seeking in court to litigate the merits of its ‘franchise scheme’ on a system-wide, i.e., on a class-wide basis.”
The Court next determined whether questions of law and fact common to class members predominate over any questions affecting only individual members under FRCP 23(b)(3). The Court analyzed this issue first under Dynamex and then under Borello. Under Dynamex Operations W., Inc. v. Sup. Ct. (2018) 4 Cal.5th 903, 955-56, the California Supreme Court explained application of the ABC Test to the issue of whether an independent contractor is an employee:
“The ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions:
(a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
(b) that the worker performs work that is outside the usual course of the hiring entity’s business; and
(c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
(Id. at 955-56.) If the alleged employer cannot satisfy just one prong, then the inquiry ends with a finding of an employer-employee relationship. The Court found common questions predominated under Prong B.
Courts have framed the inquiry into Prong B as to whether the work of the employee/independent contractor is necessary to, or merely incidental to, the employer, and alternatively, whether the work of the employee/independent contractor is continuously performed for the employer. Jan-Pro classified all unit franchisees as independent contractors. Master franchisees had a common practice of using the standard franchise agreement that Jan-Pro provided to master franchisees as a template for master franchisees’ agreements with unit franchisees. The policies contained in the template agreement were therefore applicable to all unit franchisees.
In determining whether unit franchisees’ work was necessary or merely incidental, the Court stated that the unit franchisees all did the same work on behalf of Jan-Pro – cleaning small businesses. Jan-Pro argued individual issues predominated under Prong B, such as plaintiffs’ employment of others to perform work for them, plaintiffs’ filing of business tax returns, plaintiffs’ business dealings with parties other than Jan-Pro, whether plaintiffs held themselves out as independent businessmen, and whether unit franchisees formed LLCs. The Court found these arguments unpersuasive, noting that the focus on Prong B is on the hiring entity’s business, and whether the definition of the hirer’s business encompasses the hiree’s work for the hirer. The Court noted that whether Prong A or C are also susceptible to common proof does not affect class certification, since Prong B is susceptible to common proof. The Court therefore certified a class for misclassification claims under Dynamex.
Under Borello (which applies to labor claims arising from misclassification claims that fall outside of the California wage orders), strong evidence of an employment relationship is the right to discharge the purported employee at will without cause. Additional factors that courts look at under Borello include:
(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of [*33] the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee. “Generally, . . . the individual factors cannot be applied mechanically as separate tests; they are intertwined, and their weight depends often on particular combinations.”
(S. G. Borello & Sons, Inc. v. Dep’t of Indus. Rels. (1989) 28 Cal.3d 341, 350-51.) The Court concluded that at least two Borello factors would require individualized inquiries. The Court determined that whether unit franchisees engaged in a distinct occupation or business cannot be determined without asking unit franchisees individually. Similarly, whether unit franchisees believed they were creating an employer-employee relationship is subject to individualized inquires. Therefore, the Court denied plaintiff’s class certification motion for any labor claims for which the issue of misclassification would be determined under Borello.
Motion for Class Certification – Labor Claims under Dynamex
The Court then looked at whether the Dynamex labor code claims should be certified. The Court, noting there was no uniform pay policy, found that individual inquiries predominated over plaintiffs’ claim that Jan-Pro did not pay unit franchisees minimum wage in violation of Labor Code section 1194 and therefore did not certify a class for this claim. The Court likewise denied certification for failure to pay overtime. The Court also found that individual issues predominated over the issue of liability for travel time pay and therefore did not certify a class for this claim. However, the Court did find plaintiffs’ claim that Jan-Pro did not pay unit franchisees minimum wage for mandatory training to be susceptible to common proof, because the standard unit franchise agreement provided that the unit franchisees must attend an initial training program, and plaintiffs submitted evidence from the named class members that they were not paid for these training sessions. The Court therefore certified a class for this claim.
The Court certified a class on the issue of expense reimbursements under Labor code section 2802 for uniforms and cleaning supplies. For reimbursement of insurance and gas expenses, the Court denied certification, finding that the claims arose under Borello rather than Dynamex.
The Court certified a class for unlawful deductions for operational expenses under Labor code section 221 as to management fees and sales and marketing fees, finding that Jan-Pro’s template agreement provided for payment of these fees to the master franchisee.
As to chargeback fees arising out of a customer’s failure to pay for cleaning services, the Court found that individual issues predominated, and that such a fee relies on the Borello misclassification standard, so it denied class certification on this part of the unlawful deduction claim. The Court also denied plaintiffs’ unlawful deduction claims as to franchise fees, royalty fees, and insurance fees, on the basis that such claims rely on the Borello misclassification standard because they do not arise under the California wage orders.
Plaintiffs’ Motion for Summary Judgment on Class-Certified Claims
The Court granted plaintiffs’ motion for summary judgment on the misclassification claim, primarily relying on Prong B of the ABC Test. The Court found that “as a matter of common sense” unit franchisees remained at all times necessary to Jan-Pro’s business, as Jan-Pro’s business depended on unit franchisees performing cleaning services. Jan-Pro earned four percent of all cleaning revenues that master franchisees collected from unit franchisees. The Court also found that unit franchisees performed cleaning services on a regular and continuous basis. Finally, the Court considered whether Jan-Pro was in the cleaning business. The Court noted that Jan-Pro’s website described Jan-Pro as an “environmentally responsible commercial cleaning company” that provided “cleaning services.” In addition, in the master franchise agreements, Jan-Pro described itself as “in the business of operating and franchising comprehensive cleaning and maintenance businesses.” The Court found Jan-Pro’s argument that it was in the business of franchising “unconvincing,” as Jan-Pro “was plainly in the business of selling cleaning services.”
The Court found that treating unit franchisees as employees was not inconsistent with the FTC Franchise Rule, because the FTC Franchise Rule states that a law is not inconsistent with the FTC Franchise Rule if it affords prospective franchisees equal or greater protection, and the “ABC Test affords franchisees greater protection by broadening the definition of ‘suffer or permit to work.’”
Jan-Pro also argued that the ABC Test required the Court to find that Jan-Pro was the “hiring entity.” The Court rejected this argument, finding the phrase “hiring entity” was intended to be expansive, to meet the social safety net objectives of California wage and hour laws.
In addition, Jan-Pro argued that pursuant to Labor Code section 2776, the determination of whether the unit franchisee is an independent contractor or an employees should be governed by Borello, because unit franchisees are business service providers of Jan-Pro. However, the Court noted that the statute’s business service provider exception requires certain criteria to be met, and that one such criterion is that the business service provider is able to negotiate its own rates. The Court found that the evidence established that unit franchisees could not negotiate their own rates. It therefore denied this argument.
The Court then addressed summary judgment as to the class certified labor code claims. The Court granted plaintiffs’ motion for summary judgment as to mandatory training, finding that Jan-Pro is liable for minimum wage pay to unit franchisees who underwent mandatory training. The Court also granted plaintiffs’ motion for summary judgment for expense reimbursement for uniforms and cleaning supplies. And the Court granted plaintiffs’ motion for summary judgment as to unlawful deductions of management fees and sales and marketing fees, finding that Jan-Pro had a policy of unlawfully deducting both management fees and sales and marketing fees, and that these fees impermissibly shifted the costs of Jan-Pro’s routine operational expenses to unit franchisees.
David M. Greeley, Esq. of Greeley Thompson, LLP prepared this Case Report. Mr. Greeley’s practice focuses on representing franchisors and franchisees in disputes. He may be reached at firstname.lastname@example.org.