California employers face even more liability now for misclassifying workers as “independent contractors.” That’s because the California Supreme Court recently ruled in Vasquez v. Jan-Pro Franchising, Inc. that the test for determining whether a worker qualifies as an employee or independent contractor – known as the “ABC Test” and announced in the Court’s 2018 decision Dynamex Operations West, Inc. v. Superior Court – applies retroactively.
The ABC Test
The ABC Test makes it difficult, if not impossible, for many employers to classify workers as independent contractors. Under the ABC Test, for an employer to classify the worker as an independent contractor, the employer must prove all of the following:
A. The worker is free from control and direction of the hiring entity in connection with the performance of the work;
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.
It is the “B” and “C” prongs of the ABC Test that are creating the most problems for employers. Many of their would-be independent contractors are in the same business as the employer; thus, they fail the “B” prong and cannot be independent contractors. Many other would-be independent contractors do not have a separate, independent business set up for themselves and the work that they provide; thus, they fail the “C” prong and cannot be independent contractors.
Retroactive Application of the ABC Test
As a result of the California Supreme Court’s ruling in Vasquez, this “ABC Test” that first appeared in 2018 now applies retroactively. This means that the evaluation of all workers in California will be governed by the ABC Test, even those workers who were classified BEFORE the Dynamex decision and BEFORE the ABC Test existed. Retroactive application of any watershed California Supreme Court decision, like Dynamex, means that employers are going to be sued and held liable for failing to meet some test that the employer was not even aware of – because the California Supreme Court had not even announced the test, yet, as of the time the employer took its action.
This sounds fundamentally unfair to hold employers (or anyone) responsible under some test that did not even exist at the time of the alleged wrongdoing. But the California Supreme Court ruled otherwise. They concluded that fairness and public policy demanded the retroactive application of the ABC Test because a contrary result would allow employers to improperly benefit from having misclassified their workers. (Note the circular logic here. The Court justifies its decision by assuming that these mythical employers benefitted from misclassifying their workers. But it’s not certain that any of these mythical workers were misclassified pre-Dynamex because the law was different then. In reality, these employers may have clearly and properly followed the existing law at the time and, thus, properly classified their workers. It’s only now, years later, that these employers’ classifications turn out to be illegal because they are being judged by a brand-new test, the ABC Test, that no employer could have known about prior to 2018.)
What Employers Should Do Now
The law is now settled – the ABC Test applies to every worker classification in California, even those classifications that occurred prior to the Dynamex decision, except for a few statutory exceptions that were recently signed into law. We blogged about these new statutory exceptions here. So, if you are an employer, and your worker does not fall into one of these exceptions, that worker will need to meet all three prongs of the ABC Test in order to be classified as an independent contractor.
In the event an exception does apply, then the worker does not automatically become a contractor. The exception simply means that the employer does not have to satisfy the ABC Test. Instead, the employer would have to try to qualify the worker under the law that existed prior to the ABC Test, which is known as the Borello test. We have blogged about the Borello test here.
If your business depends on independent contractors and you need assistance navigating these issues, contact one of our attorneys. We can help.
You can read the California Supreme Court’s recent decision in Vasquez here.