By: Eric M. Lloyd & Pamela L. Vartabedian

Seyfarth Synopsis: In a unanimous decision, the California Supreme Court held that the worker friendly “ABC” test set forth by the Court in its 2018 landmark ruling, Dynamex Operations West, Inc. v. Superior Court, applies retroactively. The ABC test thus applies to all pending cases governed by the California Wage Orders in determining whether a worker is an independent contractor or an employee. Vazquez v. Jan-Pro Franchising Int’l, Inc.

The Facts

Jan-Pro Franchising, International, Inc. is a franchisor whose franchisees offer cleaning and janitorial services. In May 2017, the U.S. District Court for the Northern District of California granted Jan-Pro summary judgment in a case brought by independent contractor franchisees claiming they should have been treated as Jan-Pro employees. The plaintiffs then appealed the ruling to the U.S. Court of Appeals for the Ninth Circuit.

While the appeal was pending, the California Supreme Court issued its decision in Dynamex. In Dynamex, the high court held that, for purposes of claims arising from the California Industrial Welfare Commission’s Wage Orders, the “ABC” test governs whether workers are properly classified as independent contractors rather than employees. To satisfy the ABC test, a hiring entity must prove: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such 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 for the hiring entity. Dynamex represented a major shift in the law in the eyes of many businesses, practitioners, and courts, who presumed (incorrectly, as explained below) that the multi-factor common law test for employment articulated in a 1989 California Supreme Court case, S.G. Borello & Sons, Inc. v. Department of Industrial Relations, governed the classification question where the Wage Orders were at issue.

On May 2, 2019, the Ninth Circuit vacated the summary judgment ruling for Jan-Pro entered prior to Dynamex, holding that Dynamex applied retroactively, and remanded the case for further proceedings. Then, on September 24, 2019, the Ninth Circuit asked the California Supreme Court to determine whether Dynamex applied retroactively.

The California Supreme Court’s Decision

On January 14, 2021, the California Supreme Court held that the Dynamex decision applies retroactively to its April 30, 2018, publication in all cases currently pending. The Supreme Court based its decision on two grounds.

First, the California Supreme Court emphasized that the misclassification test applicable to Wage Order claims was a question of first impression, rather than a settled rule. The Wage Orders define the term “employ,” in part, to mean “suffer or permit to work.” But the Wage Orders do not define the term “independent contractor,” nor do they address the distinction between workers entitled to the protections of the Wage Orders and independent contractors who are not. Dynamex represented the first time the Supreme Court explicitly ruled on the meaning of the “suffer or permit to work” language in the Wage Orders in the context of independent contractors. Because Dynamex did not overrule a prior Supreme Court decision nor disapprove any prior Court of Appeal decision, the Supreme Court held that Dynamex applied retroactively.

Second, the Supreme Court found no reason to depart from the general rule that judicial decisions apply retroactively. Jan-Pro, backed by numerous business groups, argued that in classifying workers as independent contractors it reasonably relied on the multi-factor common law test set forth in Borello, and businesses could not reasonably have anticipated that the ABC test would apply. The Supreme Court was not persuaded. The Supreme Court noted that Borello was not a Wage Order case and that the Supreme Court in two cases had expressly declined to rule on whether Borello applied to Wage Order claims. Moreover, the Supreme Court rejected the contention that litigants must have foresight of the exact rule that a court ultimately adopts in order for the rule to have retroactive effect. The Supreme Court then went on to state that because the ABC test drew on the factors set forth in Borello, its retroactive application was within the scope of what businesses reasonably could have expected. The Supreme Court also claimed that fairness and policy considerations justified retroactive application of Dynamex, as some workers would be denied the protections of the Wage Orders if Dynamex applied only prospectively.

What Vazquez Means For Businesses

Dynamex was characterized as a sea change in the law by its proponents and its detractors alike. Vazquez, however, insists that it was not, as the California Supreme Court suggests that businesses reasonably could have foreseen that the ABC test applied to Wage Order claims all along. While reasonable minds will disagree with that suggestion, what is clear is that businesses must comply with an increasingly complex web of statutory and case law governing independent contractor relationships in California.

As a result of Vazquez, the ABC test applies to all independent contractor misclassification-related claims arising from the Wage Orders arising prior to 2020, while the Borello test applies to non-Wage Order misclassification-related claims arising during the same time period. And, as of January 1, 2020, when California’s infamous Assembly Bill No. 5 (“AB 5”) took effect, the ABC test applies to all independent contractor misclassification-related claims arising from the California Labor Code, as well as Wage Order claims—that is, unless a business can find comfort in one of the myriad occupation-based exemptions from the ABC test set forth in Assembly Bill No. 2257 (which recently repealed and replaced AB 5) applies. App-based transportation and delivery drivers may also be exempted from the ABC test with the passage of Proposition 22 in November 2020.

If you have questions regarding the Vazquez decision or would like further information, please contact Eric Lloyd (elloyd@seyfarth.com) or Pamela Vartabedian (pvartabedian@seyfarth.com).