In April 2018, the California Supreme Court turned worker classification on its head when it decided Dynamex Operations West Inc v. Superior Court (Dynamex). In Dynamex, the court adopted a three-factor “ABC” test for analyzing misclassification claims under the California Wage Orders. Under the ABC test, for an employer to show that workers were properly classified as independent contractors, they must demonstrate that: the worker (A) was not under the company’s direct control and direction; (B) performed work that was outside the usual course of the hiring entity’s business; and (C) was customarily engaged in an independent business. Because of, in particular, the second element of the test, this standard makes it very difficult for businesses to prove that workers are independent contractors.
Since last year’s ruling in Dymanex, there has been much speculation about the application of the decision, specifically whether it applies retroactively and the scope of any application of the “ABC” test.
To the shock of employers, on May 2, 2019, a unanimous three-judge panel of the Ninth Circuit of the United States Court of Appeals (the Panel), in Vasquez v. Jan-Pro Franchising International, Inc. (Jan-Pro), held that the Dynamex rule should be applied retroactively.
In Jan-Pro, the plaintiffs accused a janitorial services company of misclassifying its franchisees as independent contractors. While the initial outcome of the district court was to dismiss the claim, the plaintiffs appealed the ruling – after Dynamex was decided. In the appeal, the plaintiffs asked the court to rule that Dynamex applied retroactively. The defendant took the position that applying the ABC test retroactively would be unfair. More specifically, it would be unfair for the defendant to face liability for alleged misclassification under a new and different test when it had previously been operating legally under the then-existing test.
The Panel vacated the district court’s pre-Dynamex dismissal. The Panel held that California law requires that it apply Dynamex retroactively and remanded the case to the district court for consideration on the merits under the Dynamex ABC test. In reaching this ruling, the Panel explained that the Supreme Court’s decision in Dynamex was based on the history and purpose of California wage laws (which have long been construed in favor of workers to ensure they do not earn substandard wages) and that California’s “general tradition” provided that judicial pronouncements have a retroactive effect.
The Panel also provided further detail on how the ABC test should be applied. In that regard, the Panel offered specific guidance regarding the analysis of the three prongs of the ABC test and encouraged the district court to consider authorities from other jurisdictions that apply the ABC test.
Based on the Panel’s decision, employers may have liability for unpaid wages as a result of misclassification for up to four years (or up to four years prior to the filing of any pending lawsuit) – even if the individuals were properly classified under the prior test.
In addition to the recent Jan-Pro decision, there are three relevant bills in the California legislature dealing with the Dynamex decision, demonstrating the chaos and continually evolving scene for independent contractor classification in California:
- Assembly Bill 5 seeks to codify the ruling (and ABC test) in Dynamex with a few proposed exemptions for certain types of licensed workers.
- Assembly Bill 71 seeks to codify the longstanding Borello (right to control) standard.
- Assembly Bill 233 seeks to exempt insurance salespeople from the ABC test of Dynamex.
California businesses utilizing independent contractors should continue to be on high alert. Employers are encouraged to seek outside counsel to review their existing worker classifications to determine whether the business satisfies the new ABC test, and to determine how (and whether) they can comply with the new law. Further, businesses should consider coordinating with outside counsel to prepare for a possible spike in wage-and-hour lawsuits due to the retroactive reach of the Dynamex test.