On January 14, 2021, the California Supreme Court ruled in Vazquez et al. v. Jan-Pro Franchising International, Case no. S258191, that the Dynamex ABC Test, which makes it harder for companies to classify workers as independent contractors, applies retroactively, thus making businesses potentially liable for lawsuits filed years before the ABC Test existed.

The ABC Test was first developed in April 2018 in the landmark case Dynamex Operations West v. Superior Court establishing that a company must satisfy all three elements of the test to classify workers as independent contractors. According to the Test, a worker is presumed to be an employee unless the company shows the worker is free from its control, engaged in a separate line of work and in business for himself/herself.

The general rule in California is that a Supreme Court ruling applies retroactively unless it lays down an entirely new rule. Many business groups, including the U.S. Chamber of Commerce, argued that the ABC Test should not apply retroactively because it altered a well-established multi-factor test, set forth in 1989 in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, to determine whether a worker is an independent contractor. The Supreme Court, however, disagreed.

First, the California Supreme Court held that the misclassification test applicable to Wage Order claims (decided in Dynamex) was an issue of first impression, as such it did not alter a settled rule in the S. G. Borello & Sons, Inc. case. The Wage Orders define the term “employ,” in part, to mean “suffer or permit to work.” Dynamex represented the first time the Supreme Court explicitly ruled on the meaning of the “suffer or permit to work” language in the Wage Orders context as applicable to independent contractors. Thus, because the Court held that Dynamex did not overrule a prior Supreme Court decision nor disapprove any prior Court of Appeal decision, the ABC Test set forth in Dynamex should apply retroactively.

Second, the California Supreme Court noted that the multi-factor test set forth in Borello did not involve a Wage Order case and, indeed, in at least two prior decisions the Court had expressly declined to rule on whether Borello applied to Wage Order claims. Moreover, because the Dynamex’s ABC Test drew on the factors articulated in Borello, the Court reasoned that “it was not beyond the bounds of what employers could reasonably have expected.” As such, the Supreme Court did not find any reason to depart from the general rule that judicial decisions apply retroactively.

In sum, because of the retroactive application of the employee-friendly ABC Test, businesses are facing wider liability in Wage Order claims and future cases alike.