Misclassification Liability in the Rear-View Mirror May Be Greater Than It Appears: Cal Supremes Say Dynamex "ABC Test" Applies Retroactively

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It was quite a week for the gig economy in California. This is the second of a two-part update; last week we reported on a union- and driver-led California Supreme Court challenge to Proposition 22, the November 2020 voter initiative that allows app-based hiring entities to classify certain workers as independent contractors if they meet specific conditions. Proposition 22 was a response to AB 5, which codified a 2018 decision that is the subject of this article.

On January 14, 2021, the California Supreme Court held in Gerardo Vazquez v. Jan-Pro Franchising International, Inc. that the stringent ABC test for determining whether a worker is an independent contractor or employee applies retroactively to the time period before the Court adopted the ABC test in its April 30, 2018 decision in Dynamex Operations West, LLC v. Superior Court of California (“Dynamex”).The ABC test, which was also codified by the legislature as Assembly Bill (“AB”) 5, determines that a worker can only be classified as an independent contractor if all three of the following requirements are met:

A. That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, and

B. That the worker performs work that is outside the usual course of the hiring entity’s business, and

C. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Prior to Dynamex, this question would be determined by the less stringent Borello test, which looked to multiple factors to answer a principal question of whether the person receiving a service has the right to “control the manner and means” of completing that service.

Although 2020 welcomed a series of changes to the law by providing numerous exceptions to the ABC test for various categories of workers in the form of AB 2257 (discussed here) and Proposition 22 (discussed here), this decision now highlights that regardless of subsequent changes to the law, employers may nonetheless be held liable for violations of the ABC test prior to the changes, and even prior to April 30, 2018, when the Dynamex decision was first issued.

Significantly, the Court specifically rejected the argument that employers relied on the Court’s 1989 Borello decision before the Dynamex decision first discussed the ABC test in 2018, seeing no reason to depart from the general rule that California courts apply decisions retroactively. While the Dynamex decision is now almost three years old, with a quickly expiring statute of limitations period, challenges to the recently passed Proposition 22 are already underway before the California Supreme Court, as discussed in part one of this update, and the implications of this and other decisions being retroactive may result in significant liability for employers who, understandably, do not know which form of the law to apply.

Therefore, employers should beware that any relief based on changes in the law may not necessarily absolve them of prior liability (as a court pointed out to Uber and Lyft last year, as discussed here), or liability that they could be exposed to resulting from a change in the law due to a future court decision. Companies who engage independent contractors should continue to evaluate the viability of that classification under the ABC test, particularly because any changes to the law may or may not be retroactive, and may or not may not apply outside of the particular company or the gig economy. Therefore, liability could result from government enforcement and class and representative actions filed by purported employees.

FordHarrison attorneys are following the developments of the law in this area and will continue to keep you updated regarding legislative developments and court decisions impacting companies that use independent contractors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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