On January 14, 2021, the California Supreme Court held that the ABC Test, as articulated in Dynamex, applies retroactively to claims under California’s Industrial Welfare Commission Wage Orders.
In 2018, in notable Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court held that for purposes of compliance with California’s IWC wage orders, workers are presumed employees, unless the hiring entity proves ALL of the following under the so called “ABC” test:
(A) 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) the worker performs work that is outside the usual course of the hiring entity’s business; and
(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Prior to the Supreme Court’s Dynamex ruling, and depending on the applicable regulation or statute, California used several varying tests for determining whether a worker was an independent contractor, particularly the multifactor tests and considerations set forth in Supreme Court decisions re Martinez v. Combs and S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations. Under Borello, not one factor was controlling by itself – and the determination of whether a worker was an employee or independent contractor depended on the weighing of various factors.
The Supreme Court’s new case is called Vazquez v. Jan-Pro Franchising International, Inc. The Jan-Pro decision started in 2008, with a class action lawsuit filed by janitors who alleged that Jan-Pro had developed a sophisticated “three-tier” franchising model to misclassify its janitors as independent contractors and avoid paying minimum wage and overtime compensation.
As a general rule, court decisions apply retroactively. After the Court created the 2018 ABC test in Dynamex, Jan-Pro argued before the federal Ninth Circuit that Dynamex should not apply to nonfinal cases that predated the Dynamex decision (in other words retroactively). They argued it was unfair for employers to use a standard that did not exist yet.
The Ninth Circuit disagreed and reasoned that while the California Supreme Court did not say whether the ruling applied retroactively, it suggested as much by summarily denying a petition to clarify that the ruling only applies prospectively.
On rehearing, the Ninth Circuit decided to certify the question of retroactive application to the California Supreme Court.
Jan-Pro argued that an exception to the general retroactivity principle should be applied because, prior to Dynamex, businesses could not reasonably have anticipated that the ABC test would govern at the time when they classified workers as independent contractors rather than employees. Instead, employers used the older Borello test to determine a workers’ status.
The Supreme Court disagreed and held retroactive application of Dynamex is warranted, partially because Borello was not a wage order case, and “did not purport to determine who should be interpreted to be an employee for purposes of a wage order.”
The Supreme Court further added that the analysis used by it in Dynamex, regarding the “suffer or permit to work” standard in wage orders, was previously held to be “one of three alternative bases upon which an employment relationship could be established for purposes of … wage order(s).” Therefore, per the Supreme Court, “employers were clearly on notice well before Dynamex” that a worker’s status for purposes of wage order obligations “might well depend on the suffer or permit to work” standard.
Additionally, the Supreme Court was not convinced by Jan-Pro’s argument that it relied on Borello to classify its workers as independent contactors. The Court reasoned that the numerous Borello factors prevented an early determination of a worker classification, and as a practical matter declining to extend Borello has no effect on Jan-Pro’s reasonable expectations.
The Court stated that while foresight of a ruling is not a requirement for retroactive application, the “ABC test articulated in Dynamex was within the scope of what employers reasonably could have foreseen.”
Finally, the Court held that should it have chosen to only apply the ABC Dynamex test on prospective basis, this “would potentially deprive many workers of the intended protections of the wage orders to which they may have improperly been denied, as well as permit businesses to retain the unwarranted advantages of misclassification.” And because the decision applied to the Dynamex parties retroactively, it would be unfair “to withhold the benefit of that decision to other similarly situated litigants.”
In short – even if you, as an employer, did not appreciate or know that the ABC test applied to you; it did. More importantly, all hiring entities should carefully review their worker classifications to determine whether the stringent standards can be satisfied.