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California Employers Beware: Ninth Circuit Holds That Dynamex “ABC Test” Applies Retroactively

Franchise & Distribution Alert Chris Nickels, James Wu, Nicholas D'Amico

Last year, the California Supreme Court handed down a landmark ruling in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, establishing the so-called “ABC Test,” an expansive test used to determine whether a worker is an employee or an independent contractor. The ABC Test had sweeping implications for California businesses, who could face a slew of wage and working condition regulations under the California Industrial Welfare Commission's Wage Orders if their putative independent contractors are reclassified as employees. Now, following the Ninth Circuit ruling on May 2, 2019 in Vazquez v. Jan-Pro Franchising International, Dynamex could apply retroactively, subjecting California businesses to still more exposure for misclassifying employees.

All three factors required

To establish that a worker is an independent contractor for the purposes of the Wage Orders, which regulate employee protections including overtime, meal and rest breaks, and minimum wages, the hiring entity must satisfy the ABC Test by showing: (A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under contract for the performance of such work and in fact; (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 for the hiring entity. All three factors are necessary; otherwise, the worker will be classified as an employee. What’s more, the burden is on the business to establish all three factors. In other words, California courts will presume that a worker is an employee unless the business can prove otherwise. If a California business misclassifies employees as independent contractors, it could be on the hook for wages and other benefits that are owed to the employee under the Wage Orders.

In Vazquez, the putative employer Jan-Pro claimed it was in the business of franchising rather than in the cleaning business. Jan-Pro contracted with “master franchisees” that, in turn, sold business plans and provided sales, support, training and services to “unit franchisees,” who were the entities or individuals who performed the cleaning services. Although neither Jan-Pro nor the master franchisees themselves performed cleaning services, Gerardo Vazquez, a unit franchisee, sued Jan-Pro alleging that he and other similarly situated unit franchisees were misclassified as independent contractors. The district court entered summary judgment against the workers in 2017, finding they were independent contractors under California law using a different test (not the recently adopted ABC Test from Dynamex) based on prior California case law.

Following Dynamex, the Jan-Pro plaintiffs appealed to the Ninth Circuit asking that their case be reviewed under the ABC Test, which should apply retroactively. The Ninth Circuit agreed, citing established California “legal tradition” that judicial decisions are given retroactive effect, even when overruling precedent. The Ninth Circuit reasoned that due process, fairness and reliance exceptions do not apply to the general retroactivity tradition in this case, stating that the ABC Test did not overturn prior law; rather, the test was “‘faithful’ to the history of California’s employment classification law ‘and to the fundamental purposes of the wage orders’”––which is to protect California workers. The court ultimately remanded the case back to the district court to determine whether the Jan-Pro unit franchisees were employees using the ABC Test.

Lawsuits expected to increase

Cutting through the legalese of “retroactivity,” “reliance,” and “due process,” Vazquez presents a practical concern for California businesses: lawsuits. Commentators suggest, and businesses can expect, increased employment and wage claims from classes of workers citing Dynamex misclassification. Vazquez’s retroactivity means putative employee claims can date back as many as four years. Risk assessment teams should ultimately be prepared for a potential uptick in employment disputes for California operations.

Beyond retroactivity, Vazquez also reaffirmed the ABC Test and emphasized the importance of the “B” prong, which asks whether the worker performs work that is outside the usual course of business of the hiring entity. Following Dynamex and Vazquez, California courts will focus on questions such as how the business holds itself out, and whether the worker is necessary to the business, rather than incidental. An accounting firm that incidentally hires a janitor to clean its office certainly does not hold itself out as a cleaning business, nor are janitorial services necessary to the business of accounting­­­­––this relationship would be correctly classified as merely contractual. In contrast, a janitorial services business will have a more difficult time classifying janitors as independent contractor franchisees in California. The reaffirmed ABC Test therefore has broad implications for any business, including franchisors, “gig economy” businesses and others, that currently classifies its relationship with workers as independent contractors.

For more information or assistance with your company’s employment compliance requirements, please contact your Quarles & Brady attorney or: