Today, in responding to a certified question from the United States Court of Appeals for the Ninth Circuit, the California Supreme Court held in Vazquez v. Jan-Pro Franchise International, Inc., S258191 (2020) that the three-part test announced in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018) applies retroactively.
In Dynamex, the court considered what standard applies under California law to determine whether workers should be classified as employees or independent contractors when considering claims under the California Wage Orders. In that case, the court held that a hiring entity may classify a worker as an independent contractor only if it establishes: (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 and in fact; (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 that is distinct from the nature of the work performed by the hiring entity. This standard is commonly referred to as the ABC test.
In Vazquez, the court noted that Dynamex presented an issue of first impression: how to determine whether a worker is an employee or independent contractor under the Wage Orders. The court wrote that the term “employ,” as used in the Wage Orders, had consistently been used to mean “suffer or permit to work” and that an “employee” is “any person employed by an employer.” According to the court, it adopted the ABC test in Dynamex because it is the “most consistent with the history and purpose of the suffer or permit to work standard in [the Wage Orders].” Additionally, the court had held that it was appropriate to put the burden on the hiring entity to establish that a worker is an independent contractor. Moreover California’s jurisprudential principles establish a presumption that judicial decisions apply retroactively. Therefore, the court reasoned that it is appropriate to apply Dynamex retroactively to cases interpreting the Wage Orders.
Jan-Pro argued that the court should apply the exception that judicial decisions will not apply retroactively when doing so would undermine fairness and public policy. It argued that businesses could not have anticipated that the ABC test would govern when they classified their workers as independent contractors. Furthermore, Jan-Pro argued that it reasonably believed that whether a worker would be considered an employee or independent contractor would be governed by the court’s decision in S.G. Borello & Sons v. Department of Industrial Relations, 48 Cal. 3d 341(1989) (Borello) and had acted in reliance on that authority, such that retroactive application would be unfair.
The court rejected Jan-Pro’s overtures. It noted that Borello addressed whether farmworkers subject to an employment agreement were employees or independent contractors for the purpose of workers’ compensation statutes—not for obligations imposed by the Wage Orders. The court also noted that it had previously signaled in Ayala v. Antelope Valley Newspapers, Inc., 59 Cal. 4th 522 (2014) and Martinez v. Combs, 49 Cal. 4th 35 (2010) that it was an open question as to which test applied to determine whether one is an employee or independent contractor under the Wage Orders. Moreover, the court wrote that retroactivity has been applied even when a litigant does not have complete foresight into the court’s decisions that undermine the party’s prior understanding. Nevertheless, the court wrote that its adoption of the ABC test was predictable given the court’s decision in Morillion v. Royal Packing Co., 22 Cal. 4th 575 (2000), a work-related travel case. In that case, the court noted that federal cases had interpreted “suffer or permit” to mean that a putative employer knows or should have known that work is being performed on its behalf. Finally, the court reiterated that because Dynamex did not change any settled rule of law, the parties could not have had a reliance interest on any prior case.
What Employers Should Know
This case is an unfortunate turn for companies. Vazquez could expand liability for companies that are facing misclassification class action suits with class periods reaching back prior to April 2018, when the court decided Dynamex. However, questions regarding whether applying Dynamex retroactively will violate any federal due process protections are still unresolved. Although a panel of the Ninth Circuit rejected Jan Pro’s federal due process arguments regarding retroactivity earlier in this litigation, an en banc panel of the Ninth Circuit or the Supreme Court of the United States could revive this issue. Contact Payne & Fears LLP if you have questions about this ruling or implementing wage-and-hour policies generally in your workplace.