Compliance Matters TM
California Supreme Court’s Controversial A-B-C Test for Classifying Workers as Independent Contractors Applies Retroactively  
In May 2018, we wrote about the California Supreme Court’s landmark Dynamex decision, which made it far more difficult for California businesses to lawfully classify service providers as independent contractors rather than as employees under our state’s Wage Orders. Eighteen months later, we reported on Assembly Bill No. 5 (“AB 5”), which further expanded Dynamex so that it also applies under the California Labor Code and Unemployment Insurance Code. In November 2020, California voters approved Proposition 22, which carves out a narrow exception to Dynamex and AB 5 for certain “gig economy” workers.

One major issue remained open after all these developments: whether the Dynamex standard applies retroactively to cases that were pending and not final at the time the Dynamex decision became final. On January 14, 2021, the California Supreme Court unanimously ruled that Dynamex is, indeed, retroactive.

This retroactivity decision came in a lawsuit filed in federal court, titled Vazquez v. Jan-Pro Franchising International, Inc. The Ninth Circuit U.S. Court of Appeals had ruled in Vazquez that Dynamex was retroactive, but later withdrew that opinion and instead asked the California Supreme Court to certify and decide the question of Dynamex’s retroactivity. The California Supreme Court granted that request and eventually reached the same result as the Ninth Circuit.

California follows the general rule that judicial decisions are retroactive. A party who opposes retroactivity must demonstrate that a decision should apply only to future cases. The court found no exception to retroactivity applied to its Dynamex decision.

The employer in Vazquez argued that Dynamex changed the law, because employers had reasonably relied for nearly 30 years on the more flexible “Borello” standard which many courts had used in wage and hour cases as well as other settings. But as the Supreme Court emphasized, Borello itself was a workers’ compensation case, and did not involve any issues under the wage orders.

Dynamex was a case of first impression as far as the wage orders were concerned. No prior Supreme Court decision had decided the question of how the wage order language should be applied when distinguishing between employees and independent contractors. Primarily for this reason, the Supreme Court saw no reason to depart from the general rule that judicial decisions apply retroactively.

The employer in Vazquez also argued it could not have anticipated the Supreme Court would adopt its onerous “ABC” test for determining whether a worker is an employee or independent contractor. Under that test, a worker is presumed to qualify as an employee, unless the hiring entity proves three things: (A) the worker is free from the entity’s “control and direction” in connection with performance of the work, both as a matter of contract language and “in fact”; and (B) the worker performs work “outside the usual course” of the entity’s business; and (C) the worker “is customarily engaged” in an independent business, occupation, or trade of the same nature as the work he or she performs for the hiring entity.

However, the California Supreme Court found this argument carried “little weight” because Dynamex did not change any settled rule of law, or even disapprove of any prior California Court of Appeal decision. The Supreme Court also relied on “public policy and fairness concerns, such as protecting workers and benefitting businesses that comply with the wage order obligations,” as favoring retroactivity.

The Supreme Court noted that “the retroactive application of Dynamex will in practice affect a limited number of cases,” due to “constraints imposed by the statute of limitations.” A variety of statutes of limitations apply to California wage and hour lawsuits—some as short as one year (for penalties), and some as long as four years (for unfair competition).

Because Dynamex was decided nearly three years ago, only a limited number of employers would have benefitted if the Supreme Court had decided against applying its rule to cases that were not final before the Dynamex decision became final. “Nonetheless,” the Supreme Court found “no compelling justification for denying workers included in such lawsuits the benefit of the standard set forth in Dynamex.”

As expected, the Dynamex decision has made it more difficult for California businesses to successfully classify service providers as independent contractors rather than employees. It also has given plaintiffs’ lawyers a “road map” for filing big-money class action lawsuits in cases where a business has misclassified its workers.

Going back long before Dynamex, we have cautioned California businesses to assume that every service provider is an employee, and to avoid classifying workers as independent contractors unless it is clear that a court would uphold the classification. The Vazquez decision confirms the importance of correctly classifying service providers.
 
We can help with that analysis. If you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at (818) 508-3700, or visit us online at www.brgslaw.com

Sincerely,
Richard S. Rosenberg
John J. Manier
Ballard Rosenberg Golper & Savitt, LLP 
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