As we blogged about last year here, in May 2018 the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court and dramatically changed the standard for determining whether California workers could be classified as employees or independent contractors. One key question that the Dynamex court explicitly refused to decide was whether the new “ABC test” applied retroactively — that is, to cases that were pending but not resolved as of the date of the Dynamex ruling. This made it difficult for California employers to assess their potential exposure for past misclassification claims or to develop proper risk mitigation strategies.
But on May 2, 2019, in Vasquez v. Jan-Pro Franchising International, Inc., the Ninth Circuit concluded that Dynamex did, in fact, apply retroactively. This meant that federal courts would apply the new ABC test to all pending wage/hour claims, even if the claim arose before the Dynamex ruling. Even if employers had in the past relied upon and properly applied California’s prior law — often referred to as the “economic realities” test — after Vasquez they could be held liable for not satisfying the new ABC test.
While the Ninth Circuit’s decision in Vasquez was not strictly binding on California state courts, the ruling shook employers throughout California.
This past week, on July 22, 2019, the Ninth Circuit granted a petition for a full panel rehearing and, in the process, withdrew its previous Vasquez decision and ordered their previous opinion depublished. The Ninth Circuit also stated that it would certify the question of Dynamex’s retroactivity to the California Supreme Court.
Whether the California Supreme Court chooses to answer the retroactivity question for the Ninth Circuit is yet to be seen. If it does so, California employers will finally have certainty on the question of whether the new ABC test applies retroactively.
But the California Supreme Court has already signaled that it likely will conclude that Dynamex applies retroactively. Last year, after Dynamex, the Court denied a petition for a hearing that requested that the Court clarify that Dynamex only applied prospectively. Also, a California Court of Appeal has signaled the likelihood of Dynamex retroactivity. In Garcia v. Border Transportation Group, LLC, the Court of Appeal stated in a footnote without deciding the issue that: (1) the general rule is that judicial decisions have retroactive effect; (2) there is an exception when parties reasonably relied on the previously-existing law; (3) the Dynamex court refused to state that its ruling only applied prospectively; and (4) given that Dynamex merely extended rules set forth in the prior cases of Borello and Martinez relating to how to determine proper classification of an independent contractor, Dynamex should come as no greater surprise than any other tort decision that applies retroactively. These signals seem to indicate that if the California Supreme Court weighs in on the issue, it will likely rule that the new ABC test applies retroactively.
Employers cannot change either the past or their past actions. But, employers can and must be extremely cautious now, and moving forward. It would be wise for all employers to consult with employment law counsel (a) to develop new on-boarding checklists reflecting the ABC test; (b) to check before designating any new worker as an independent contractor; (c) to analyze and assess the employer’s risks for past potential misclassification; and (d) to develop strategies for minimizing potential exposure and liability (such as reclassifying independent contractors as employees, revising arbitration agreements to include a class action waiver, and incorporating into any independent contractor agreements an arbitration clause that also includes a class action waiver).