Dynamex Bites Back … and Sinks Its Teeth In: California Supreme Court Confirms Retroactive Application of the ABC Test
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Dynamex Bites Back … and Sinks Its Teeth In: California Supreme Court Confirms Retroactive Application of the ABC Test

Key Takeaways

  • The California Supreme Court has issued a decision holding that the ABC test adopted in Dynamex applies retroactively

  • The ABC test, expanded under AB 5, makes it more difficult for California businesses to lawfully classify service providers as independent contractors under California’s Wage Orders

  • Businesses using independent contractors or franchisee employers should immediately review their independent contractor and franchise arrangements

 

In the final installment of the Vazquez v. Jan-Pro Franchising Int’l, Inc. saga, the California Supreme Court issued a decision on January 14, 2021 upholding the U.S. Court of Appeals for the Ninth Circuit’s holding (which we discussed here) that the ABC test adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles should be applied retroactively. The California Supreme Court’s latest decision may increase potential liability for companies who had in good faith relied on the prior Borello standard in classifying its workers.

Dynamex and the ABC Test

The series of decisions culminating in the California Supreme Court’s holding last week in Vazquez began in April 2018, with the California Supreme Court’s landmark Dynamex Operations West, Inc. v. Superior Court of Los Angeles decision. Dynamex adopted the expansive ABC test, making it far more difficult for California businesses to lawfully classify service providers as independent contractors under California’s Wage Orders. Assembly Bill No. 5 (AB 5) further expanded Dynamex so that it also applies under the California Labor Code and Unemployment Insurance Code. Under the ABC test, workers in California are assumed to be employees unless a company can prove that the worker meets all three elements of the test:

  1. 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 such work and in fact; and
  2. That the worker performs work that is outside the usual course of the hiring entity’s business; and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Retroactivity: California Supreme Court Confirms Ninth Circuit’s Earlier Decision

One major issue remained open after all these developments: whether the ABC test standard articulated in Dynamex applies retroactively to claims arising under California’ Wage Orders.

On May 2, 2019, the U.S. Court of Appeals for the Ninth Circuit held in Vazquez v. Jan-Pro Franchising Int’l, Inc., that the ABC test the California Supreme Court adopted does apply retroactively. The Ninth Circuit, however, later withdrew that ruling and asked the California Supreme Court to certify and decide the issue.

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 and confirmed the Ninth Circuit’s withdrawn decision in finding that the Dynamex standard does in fact apply retroactively. In so holding, the court reasoned that the Dynamex decision did not alter any “settled rule” of law as to what test applied to the Wage Orders and as such was not unfair to employers who had relied on the prior, more permissive, Borello test. Specifically, the court reasoned that employers had no reasonable basis for relying on Borello as the Borello decision did not address application of California’s Wages Orders.

New Risks of Unpaid Wage Claims for California Employers

The Supreme Court’s decision creates enormous risk of potential liability under the Wage Orders for misclassification as the California Supreme Court confirms that Dynamex applies retroactively to all cases “not yet final” as of the date of the Dynamex decision. As most claims for unpaid wages under the California Labor Code carry a three-year statute of limitations (extended to four years with a claim under California’s Unfair Competition Law), businesses that had previously relied on the prior Borello standard remain exposed to a myriad of claims stemming from potential misclassification under Dynamex.

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, Vazquez reminds us that businesses using independent contractors or franchisee employers should immediately review their independent contractor and franchise arrangements to determine compliance with the new ABC standard.

Since long before the Dynamex decision, our attorneys have cautioned California businesses to avoid classifying workers as independent contractors without clear support for the classification. Nothing has changed in that regard. Our employment attorneys stand ready to continue providing assistance.

For more information or immediate guidance, contact: