The reverberations of the California Supreme Court’s April 2018 decision in continue for employers in the state. Below is a look at the top five takeaways from the opinion a year later.
1. A new legal standard. In the landmark decision, the state’s highest court adopted a new legal standard for determining whether workers should be classified as employees or as independent contractors for purposes of California wage orders. The court adopted the “ABC” test—utilized by other jurisdictions—which makes it more difficult for businesses to classify workers as independent contractors as it presumptively considers all workers to be employees. Employers may only classify a worker as an independent contractor if the hiring entity satisfies all three conditions of the test: (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 the 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 that involved in the work performed.
2. Beware of factors B and C. As an employer must satisfy all three factors to achieve classification of a worker as an independent contractor and the question of “control” found in factor A is fact-intensive, the Dynamexopinion recommended that courts begin with factor B or C of the standard. The California Supreme Court itself took this path in Dynamex, beginning with factor B and finding it “quite clear” that the work provided by the delivery drivers was outside the usual course of the company’s business. While the court went on to consider factor C (and reached a similar conclusion), employers should be prepared to make their case on factors B and C before the question of control—formerly the principal factor in such an analysis—even arises.
3. Employers shoulder the burden. The Supreme Court made clear in the April 2018 opinion that the burden of establishing that a worker is an independent contractor rests entirely on an employer’s shoulders. The court found it “appropriate, and most consistent with the history and purpose of the suffer or permit to work standard in California’s wage orders,” to require the hiring entity to establish not just one or a majority of the factors in the standard, but instead to satisfy each of the three factors embodied in the ABC test. This reflects the remedial purpose of the wage orders, the court said.
4. What’s old may be new again—at least for liability. Adding to the dangers of the new standard, in May 2019 a panel of the U.S. Court of Appeals for the Ninth Circuit held in Vazquez v. Jan-Pro Franchising International, Inc. that Dynamex applies retroactively. Emphasizing the general rule that judicial decisions are given retroactive effect—even for decisions that overrule precedent, the federal appellate panel noted—the Ninth Circuit wrote that the California Supreme Court “did not fabricate the ABC test anew, but instead carefully explained how the test remains ‘faithful … to the fundamental purpose of [California’s] wage orders.’” Retroactive application is “neither arbitrary nor irrational” in violation of due process, the panel added, particularly given that wage orders must be liberally construed in a manner that serves their remedial purpose. The panel noted that state courts in California are also applying Dynamexretroactively.
5. Could the legislature get involved? In the wake of Dynamex, lawmakers stepped in on both sides of the issue. Assembly Member Lorena Gonzalez introduced AB 5, a measure that would codify the ABC test into law. After making its way through two committees, the bill is now being considered by the full Assembly. Alternatively, Assembly Member Melissa Melendez introduced AB 71, which would override the Dynamex decision by adding section 2750.7 to the California Labor Code. Reinstating the prior standard used in California, the bill would establish a multifactor test to determine whether an individual is an employee or an independent contractor.
To read the opinion in Dynamex Operations West, Inc. v. Superior Court, click here.
Why it matters: For employers, the Dynamex decision continues to have a major impact. With the retroactive application of the new ABC standard—under which employers shoulder the burden of proving all three factors in the test—the Ninth Circuit has opened the door to liability going back several years for alleged violations of California wage orders.