On May 2, the Ninth Circuit expanded the application of the “ABC” test, adopted by the Supreme Court of California in Dynamex Ops. W. Inc. v. Superior Court. In Dynamex, the Supreme Court held that the ABC test should be used to determine whether workers are considered employees or independent contractors under California wage orders, effectively limiting a hiring entity’s ability to engage the services of independent contractors. The new Ninth Circuit decision holds that the ABC test must be applied retroactively, even to cases that pre-date the California Supreme Court’s Dynamex opinion.

The ABC test requires that the hiring entity prove three elements to establish that a worker is an independent contractor: (A) that the worker is free from the control of the hiring entity in connection with work performance; (B) that the worker performs work outside the hiring entity’s usual business; and (C) that the worker is customarily engaged in an independent business of the same nature as the work performed. If all three prongs of the test are not met, the worker is an employee under California’s wage orders, which means that the state’s minimum wage, overtime, meal and rest periods, and other wage payment requirements apply.

Specifically, the Ninth Circuit ruled that (1) retroactive application of Dynamex is called for by California law; (2) applying Dynamex retroactively is consistent with due process; and (3) Dynamex expanded the definition of “suffer or permit” for California wage order cases.

In reaching this decision, the Ninth Circuit noted that under California law, “it is basic in our legal tradition that judicial decisions are given retroactive effect.” Thus, the Court reasoned that there is a strong presumption of retroactivity in the application of Dynamex and its ABC test, given that (1) the Supreme Court of California denied a petition by an amicus to modify its Dynamex opinion for clarification and (2) lower courts have already begun applying Dynamex retroactively. Additionally, the Ninth Circuit was not persuaded by arguments that retroactive application of Dynamex would violate due process rights by retroactively exposing entities to civil liability.

The Ninth Circuit also held that the Dynamex analysis should not be altered in its application to the franchise industry. In short, the Court held that the ABC test should apply to both franchisee and franchisor.

What this means for California hiring entities:

The ABC test for determining whether a worker is an employee or independent contractor under California’s wage orders will be used to analyze claims that predate the April 2018 Dynamex decision. This means that businesses may be held liable for failing to meet the ABC test before April 2018, even though the ABC test did not yet exist.