The Ninth Circuit Court of Appeals, in Vazquez v. Jan-Pro Franchising Int'l, No. 17-16096 (9th Cir. May 2, 2019), has held that the California Supreme Court's landmark decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), applies retroactively. That is, Dynamex applies to how employers have classified employees and independent contractors under prior law before the Supreme Court decided Dynamex.
Dynamex transformed California's test under California wage orders to determine whether workers are employees or independent contractors. To demonstrate that workers are independent contractors under the wage orders, employers must satisfy the 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.
In Vazquez, the Ninth Circuit reasoned that California law demands retroactive application, noting that statutes operate only prospectively, while judicial decisions operate retrospectively. The Supreme Court did not give any indication that Dynamex was an exception to this general rule. Further, a judicial decision retroactively changing liability is constitutionally problematic only if the new rule is arbitrary and irrational. According to the Ninth Circuit, applying Dynamex retroactively is neither arbitrary nor irrational.
As a San Diego Superior Court judge stated in a recent decision in a case where the Employment Development Department sought to retroactively apply the ABC test: "It seems to this court manifestly unfair for the [EDD] to insist on application of a test in this court when that test was unknown to all parties at the time of the [ ] contracts at issue, the audit, and the administrative proceedings. One of the functions of the law is to help people and businesses order their affairs, and it seems to the court that great violence may be done to these expectations if a change in the law five years after the last [ ] year in question -- a change neither side really could have anticipated -- provides the rule of decision. . . . But the law, contrary to the court's initial impression as expressed during opening statements, is otherwise." Vendor Surveillance Corp. v. Henning, No. 37-2016-00037096-CU-MC-CTL (S.D. Sup. Ct. Mar. 13, 2019).
What Employers Should Know
This has to be a frustrating decision for California employers that have ordered their affairs and structured their businesses based on longstanding law about how to classify workers. Nevertheless, employers should reevaluate all of their independent contractor relationships, whenever established, to comply with the ABC test.