The California Supreme Court’s landmark 2018 decision in Dynamex Operations West, Inc. v. Superior Court—where the state’s highest court adopted a new standard that made it more difficult for businesses to classify their workers as independent contractors—applies retroactively, the court recently determined.
In Dynamex, the court established the “ABC” test, which presumptively considers all workers to be employees and only permits workers to be classified as independent contractors if the hiring entity demonstrates that the individual satisfies all of the following three conditions:
(A) 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) The worker performs work that is outside the usual course of the hiring entity’s business.
(C) The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
In May 2019, a panel of the U.S. Court of Appeals, Ninth Circuit held that Dynamex applies retroactively in a lawsuit brought by Gerardo Vazquez against Jan-Pro Franchising International, where franchisees offering cleaning and janitorial services accused Jan-Pro of improperly classifying them as independent contractors.
The panel emphasized the general rule that judicial decisions are given retroactive effect—even for decisions that overrule precedent—and noted that state courts in California were already applying Dynamex retroactively.
However, the panel granted the employer’s motion for rehearing and withdrew its decision, certifying to the California Supreme Court the question of Dynamex retroactivity.
In a unanimous decision, the state’s highest court ruled that Dynamex should apply retroactively, relying primarily on the fact that the decision addressed an issue of first impression.
“It did not change a settled rule on which the parties below had relied,” the court wrote. “No decision of this 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. Particularly because we had not previously issued a definitive ruling on the issue addressed in Dynamex, we see no reason to depart from the general rule that judicial decisions are given retroactive effect.”
The Court rejected Jan-Pro’s argument that an exception to the general rule should apply because the company “reasonably believed” that the classification question was governed by a 1989 California Supreme Court decision in S.G. Borello & Sons v. Department of Industrial Relations.
But Borello did not address whether a worker should be considered an employee or an independent contractor for purposes of the obligations imposed by a wage order, the court explained. In addition, in two different subsequent cases (decided in 2010 and 2014), the court signaled that such classification remained an open question in the wage order context.
“Moreover, public policy and fairness concerns, such as protecting workers and benefitting businesses that comply with the wage order obligations, favor retroactive application of Dynamex,” the court wrote. “Thus, we do not view the retroactive application of the ABC test to cases pending at the time Dynamex became final as improper or unfair.”
To read the opinion in Vazquez v. Jan-Pro Franchising International, Inc., click here.
Why it matters: The unanimous decision by California’s highest court means that Dynamex’s ABC test will apply to cases pending at the time the decision became final in 2018. The retroactive application “will in practice affect a limited number of cases,” the California Supreme Court stated, although employers also face the prospective application of the standard to their businesses in future lawsuits.