In April 2018, the California Supreme Court issued its landmark decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, making it much more difficult for businesses to classify workers as independent contractors in California through its adoption of the so-called ABC test. Under this expansive new standard, all workers in California are presumed to be employees subject to Industrial Welfare Commission Wage Orders unless the company can prove that the worker meets all three elements of the ABC test:

• 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;
• That the worker performs work that is outside the usual course of the hiring entity’s business; and
• 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

A crucial question that remained after the Dynamex decision was whether the new ABC test would apply retroactively. The United States Court of Appeals for the Ninth Circuit has now answered this question in a new decision. On May 2, 2019, the Ninth Circuit held in Vazquez v. Jan-Pro Franchising Int’l, Inc. that the ABC test adopted by the California Supreme should be applied retroactively. Under the Vazquez holding, businesses will now bear the heavy burden of showing that workers classified as independent contractors in California, prior to the Dynamex decision, meet all of the requirements of the ABC test.

The Vazquez decision has a long procedural history spanning many years and multiple jurisdictions. At its core, the case involves a class action brought by franchisees in a three-tier franchising model instituted by Jan-Pro, an international janitorial services business. As discussed in the Vazquez decision, Jan-Pro sold the rights to use its name to master franchisors who would then sell its business plans to a unit franchisee who performed the actual janitorial services. The unit franchisees in California argued, as part of their class action, that they were misclassified as independent contractors rather than employees under California law and were thus entitled to damages for Wage Order violations.

In May 2017, the Northern District of California granted defendant Jan-Pro’s motion for summary judgment under the pre-Dynamex standard in California, finding that the plaintiffs could not establish a material issue of fact as to assertion that should have been classified as employees rather than independent contractors. Nearly a year later, while the Vazquez matter was on appeal before the Ninth Circuit, the Supreme Court of California issued its decision in Dynamex. The plaintiff immediately urged the Ninth Circuit to apply the new ABC standard retroactively and revive their claims.

The Ninth Circuit considered two major factors in finding that Dynamex applied retroactively. First, it analyzed how California law treated application of judicial decisions. Here, the Ninth Circuit panel noted that in California, statutes operate only prospectively, while judicial decisions operate retrospectively. The panel found that the Supreme Court of California gave no indication that Dynamex would be an exception to this general rule and, while the court did not explicitly state whether the ruling would be applied retroactively, its denial of a petition to clarify that the ruling only applied prospectively implied that the Supreme Court intended for the new ruling to look back. Second, the Ninth Circuit considered whether applying Dynamex retroactively would be unconstitutional. The panel rejected Jan-Pro’s argument that applying Dynamex retroactively would violate constitutional due process as it would be “neither arbitrary nor irrational.” The Ninth Circuit further noted that its decision ensures that the concerns of the California Supreme Court are respected and puts employer “Jan-Pro on equal footing with other industry participants who treated those providing services for them as employees for purposes of California’s wage order laws prior to Dynamex.”

The Ninth Circuit decision has massive potential implications for businesses in California, especially those who rely heavily on franchisees or independent contractors. The retroactive application of Dynamex means that even if businesses are able to meet the stringent requirements for independent contractor classification under the ABC test moving forward, they may still be exposed to significant potential liability under the Wage Orders for misclassification of workers in the past. Given the up to four-year statute of limitation on wage claims in California, the Vazquez decision may lead to a significant increase in wage and hour claims across many industries.

Businesses that utilize independent contractors or franchisees in California are now highly vulnerable to potential class action lawsuits stemming from misclassification claims under Dynamex. Companies should immediately review their independent contractor and franchise arrangements to determine compliance with the new ABC standard. Businesses may also consider distributing an enforceable arbitration agreement under California law to its workers that includes a class action waiver to minimize the impact of such class action lawsuits. Goldberg Segalla’s employment attorneys can further assist and develop a cogent strategy based on the particular company’s business needs and objectives.