Recent California Supreme Court Decision in the Independent Contractor Classification Saga Holds that Dynamex Applies Retroactively

On April 30, 2018, the California Supreme Court issued a landmark decision in the matter of Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5^th 903. The California Supreme Court reinterpreted and significantly altered the test for determining whether workers in California were properly classified as independent contractors for the purposes of the wage orders adopted by California’s Industrial Welfare Commission (IWC). The Court established a new test, often referred to as the “ABC” test, which was codified in AB 5 (effective January 1, 2020).

The Court in Dynamex rejected the longstanding and more flexible multifactor standard established in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341. Under the Borello test, the primary consideration for determining whether an individual is an independent contractor or employee is whether the hiring entity had the right to control the manner and means of the work. Under the “ABC” test in Dynamex, however, the presumption is that the individual is an employee unless the hiring entity demonstrates that all three of the following conditions have been satisfied in order for the individual to qualify as an independent contractor:

A)  The individual is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract terms and in fact;

B)   The individual performs work that is outside the usual course of the hiring entity’s business; and

C)   The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

On September 18, 2019, Governor Gavin Newsom signed AB 5 into law. AB 5 created Labor Code section 2750.3, which codified the ABC test adopted in Dynamex as listed above, and expanded its application beyond Industrial Welfare Commission (IWC) wage orders to the Labor Code and Unemployment Insurance Code. Additionally, AB 5 applied this new Labor Code section 2750.3 to Labor Code section 3351, which relates to employment status for workers’ compensation coverage. Labor Code section 2750.3 also carved out a number of exemptions for occupations that remain subject to the old, multifactor Borello test[1].

Finally, AB 5 amended Unemployment Insurance Code section 621 to incorporate Dynamex’s ABC test. This amendment does not reference the exemptions for occupations in Labor Code section 2750.3 that remain subject to the old, multifactor Borello test. Thus, those independent contractors who fall into one of the exemptions in Labor Code section 2750.3 may not be exempt from the provisions of the Unemployment Insurance Code unless the conditions of the ABC test are satisfied.

LCW published detailed Special Bulletins on the California Supreme Court’s adoption of the “ABC” test, the expansion of Dynamex, and the potential impacts on employers. (The link to one of these articles can be found here.)

An important question left unanswered by the Court and not addressed in AB 5 was whether Dynamex would apply retroactively. The California Supreme Court recently answered this question with a resounding yes delivering another blow to employers and increasing the number of employers who may be liable for the misclassification of workers.

On January 14, 2021, in Vasquez v. Jan-Pro Franchising International, Inc., the California Supreme Court determined that Dynamex applies retroactively. In concluding that the standard set forth in Dynamex applies retroactively — that is, the “ABC” test applies (unless otherwise exempted under Labor Code 2750.3) to all pending independent contractor misclassification cases, which were filed prior to the date the decision in Dynamex became final — the Court relied primarily on the fact that Dynamex addressed an issue of first impression. The Court further noted that it did not change a settled rule on which the parties had relied. Indeed, no decision of the Court prior to Dynamex had determined how the “suffer or permit to work” definition in California’s wage orders should be applied in distinguishing employees from independent contractors. Accordingly, because the Court had not previously issued a definitive ruling on the issue addressed in Dynamex, they saw no reason to depart from the general rule that judicial decisions are given retroactive effect.

The Vasquez decision signifies that Dynamex will be applied in all non-final independent contractor misclassification cases that predate the April 2018 Dynamex decision. In addition, Courts will apply Dynamex to pre-Dynamex conduct in new lawsuits that still may be filed under the applicable statute of limitations.

While the Dynamex ruling is limited to an analysis of the California Wage Orders (Cal. Code Regs. § 11010 et seq.), AB 5 and Labor Code section 2750.3 extend the ABC test in Dynamex to the general Labor Code and Unemployment Insurance Code. Accordingly, employers should carefully consider the clear guidance provided in Dynamex in classifying independent contractors to avoid litigation or defend against it. Public agencies and nonprofits are well advised to review all current independent contractor arrangements under the “ABC” test and reclassify such arrangements if necessary. LCW is available to assist in conducting such a review.