Ninth Circuit Affirms that the Dynamex “ABC” Test for Classifying Independent Contractors Applies Retroactively**

 

In April 2018, the Dynamex decision rocked the business world by adopting a test that cast doubt on whether many independent contractors were properly classified as such.  Dynamex Ops. W. Inc. v. Superior Court, 4 Cal. 5th 903 (Cal. 2018) (“Dynamex”).  In Dynamex, the California Supreme Court adopted the “ABC” test to determine whether a person would be classified as an employee or independent contractor for the purposes of California Industrial Welfare Commission’s Wage Orders (“Wage Orders”).  The “ABC” test requires businesses to establish all three of the following elements to prove an individual is an independent contractor rather than an employee:  “(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; (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.”  Vazquez et al. v. Jan-Pro Franchising Int’l., Inc., No. 17-16096, 2019 U.S. App. LEXIS 13237, at *40-41 (9th Cir. May 2, 2019) (“Vazquez”).  Whether Dynamex would apply retroactively had been an open question until the recent Vazquez decision.

 

On May 2, 2019, the Ninth Circuit in Vazquez unequivocally held that Dynamex applies retroactively.  Id. at *23.  Starting from the premise that “it is basic to our legal tradition that judicial decisions are given retroactive effect,” the court found no exception to this rule applied and retroactive application was consistent with due process.  The Ninth Circuit relied, in part, on the fact that the Dynamex “ABC” test was not intended to be a “test anew,” but rather to remain “faithful …to the fundamental purpose of [California’s] wage orders.”  Id. at 27 (citing Dynamex).  In light of Vazquez, any timely claim of independent contractor misclassification brought under Wage Orders, even if predating the 2018 Dynamex decision, will be decided using the “ABC” test. 

 

To mitigate risk, businesses should carefully consider any independent contractor classifications to ensure compliance with the “ABC” test.  Additionally, employers should evaluate all individuals classified as independent contractors, including contractors who performed work for the business before Dynamex and before the business changed their policies or practices because they did not comply with Dynamex.  Employers should proactively make any necessary reclassifications and address any outstanding compensation due to the reclassified individual as promptly as practicable.

 

**See Update regarding this issue. 

 

 

Important update regarding retroactivity of the Dynamex decision –

 

Previously, in Vazquez v. Jan-Pro Franchising Int’l., the Ninth Circuit unequivocally held that the Dynamex “ABC” test applies retroactively to determine whether a person would be classified as an employee or independent contractor for the purposes of California Industrial Welfare Commission Wage Orders.  Vazquez et al. v. Jan-Pro Franchising Int’l., Inc., 2019 U.S. App.

 

LEXIS 13237 (9th Cir. May 2, 2019) (“Vazquez”).  Last week, a panel for the U.S. Court of Appeals for the Ninth Circuit withdrew the Vazquez opinion and certified the question of retroactivity to the California Supreme Court.  Vazquez v. Jan-Pro Franchising Int’l, Inc., 2019 U.S. App. LEXIS 21687 (9th Cir. July 22, 2019).  This is a win for employers in the near term, but employers should be prepared for the California Supreme Court to find retroactive effect.  The California Supreme Court’s opinion in Dynamex indicated that the decision was just a clarification of existing law, not a rewrite, and the California Supreme Court previously denied a petition for rehearing on retroactivity and modification of the decision to specifically indicate it only applied prospectively.  Thus the Supreme Court may lean towards retroactivity, which is also a common approach in judicial interpretations of California law.  If you have any questions regarding how this decision may impact your company we are happy to discuss further with you.