The California Supreme Court held on January 14, 2021, that its landmark Dynamex decision, which established a rigid standard under California law for companies to classify workers as independent contractors, and later was codified in and expanded by AB 5, applies retroactively. As described in our 2018 discussion of how the case dramatically reshaped California worker classification laws, the Dynamex court, in construing the "suffer or permit to work" definition of "employ" in California's wage orders, adopted a new ABC test, which presumes that a worker is an employee unless the hiring entity demonstrates that the worker is (A) free from the company's control; (B) performs work outside the company's usual course of business; and (C) is customarily engaged in an independently established trade, occupation or business.
In Vazquez v. Jan-Pro Franchising International, a unanimous supreme court held that Dynamex applies retroactively because (1) Dynamex answered a question of first impression by interpreting the "suffer or permit to work" language that had long been included in California wage orders to define the scope of employment relationships, rather than overruling or disproving prior law; and (2) there was no reason to depart from the general rule that judicial decisions apply retroactively.
The court rejected the argument that applying the ABC test retroactively was unfair because businesses relied on the more flexible, multi-factor Borello test, and could not reasonably have anticipated that the ABC test could apply. The court observed both that Borello did not address worker classification under the state's wage orders, and that the court had indicated in other decisions that the question remained open. Businesses were therefore on notice that a worker's status as an employee or independent contractor may well depend on the rigid "suffer or permit to work" language of the wage orders, and that the law was not settled.
The court also rejected the argument that businesses must anticipate the exact rule that a court ultimately adopts in order for the rule to be retroactive. It held that the ABC test was foreseeable because the three elements of the ABC test were prominent factors already listed in Borello. The court further determined that fairness and policy considerations justified retroactive application of Dynamex, since prospective application would potentially deprive many workers of the intended protections of the wage orders.
As a result, the rigid ABC test will apply to (1) pending wage order-related misclassification claims (for minimum wage and overtime, for example) that were pending in April 2018 (when Dynamex was published); and (2) not-yet-filed claims involving pre-Dynamex conduct. However, misclassification claims brought solely under the state's Labor Code (e.g. for business expense reimbursement), which claims were not subject to the ABC test until January 2020 (when California's AB 5 was codified and expanded), are not subject to this rule of retroactivity for conduct before January 2020.
Nor does Vasquez broaden the reach of AB 5, which we described in detail in our 2019 alert. AB 5 continues to apply the ABC test only to claims under California's Labor Code and Unemployment Insurance Code, and only to those persons who are not exempt from its reach (such as certain professionals and freelancers, B-to-B contractors, construction subcontractors, workers in the music industry and certain other occupations that remain subject to the Borello test, as well as app-based drivers, who are classified as independent contractors pursuant to California ballot initiative Prop 22, which voters passed in November 2020).
While in practice, Vasquez materially impacts only a limited number of cases that were either (1) pending at the time Dynamex was decided; or (2) involve pre-Dynamex conduct where the statute of limitations has not yet run, it is now more clear than ever that companies should carefully examine their contractor classifications to ensure compliance with the ABC test.
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