9th Circuit: California’s Strict Independent-Contractor Test Applies Retroactively

 

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The 9th U.S. Circuit Court of Appeals dealt a blow to employers by ruling that California's stringent new "ABC" test for determining whether a worker is an employee or an independent contractor applies retroactively.

Making the ABC test retroactive may subject businesses to liability for misclassifying workers as independent contractors even before the test was made law, said Jeffrey Horton Thomas, an attorney with Akerman in Los Angeles. This "will be devastating to many businesses and requires their attention now," he said.

There are now significant questions about whether it is advisable to hire independent contractors, said Ron Holland, an attorney with McDermott Will & Emery in San Francisco. Examining current and prospective contractor relationships is critical, he noted, and even more so now that the 9th Circuit has weighed in.

[SHRM members-only resource: California Labor and Employment Law Overview]

"This is a significant case," said Katherine Catlos, an attorney with Kaufman Dolowich & Voluck in San Francisco. She noted that the decision will likely be appealed.

The ruling comes several days after the U.S. Department of Labor issued an employer-friendly opinion letter stating that some gig-economy workers can be properly classified as independent contractors under federal law. But many employment laws are state-based, and businesses must follow state standards under those laws.

Misclassification claims are a frequent source of litigation because employees are entitled to minimum wage, overtime pay and other benefits that are not afforded to independent contractors.

The New Standard

In April 2018, the California Supreme Court applied the ABC test to state wage-order claims in Dynamex Operations West v. Superior Court. Under the new analysis, all three of the following factors must be met for a worker to be properly classified as an independent contractor:

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  • The worker performs tasks that are outside of the usual course of the hiring entity's business.
  • 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.

The prior test was a more flexible multifactor analysis that primarily focused on who exerted control over the work. Employers should note that the ABC test applies only to wage-order claims in California, and different tests may apply under other state laws.

Since the Dynamex decision, the California Supreme Court has denied a petition to clarify that the decision applies only prospectively, and some trial courts in the state have explicitly ruled that the test applies retroactively. The 9th Circuit agreed with the trial courts May 2 in Vazquez v. Jan-Pro Franchising International.

Franchise Operation

The defendant in the 9th Circuit case, Jan-Pro Franchising International, operated a multitiered franchise model for janitorial services, through which it entered into contracts with "master franchisees." The master franchisees served as intermediaries and sold business plans to "unit franchisees," which performed commercial cleaning services under the Jan-Pro name.

In a proposed class action, unit franchisees claimed they were misclassified as independent contractors and were actually Jan-Pro employees. But Jan-Pro argued that its business was a separate entity from the master franchisees that contracted with the unit franchisees.

Several plaintiffs in the case worked in California and claimed that the ABC test should apply—even though their claims preceded the Dynamex ruling—and they should be deemed employees under that analysis.

Siding with the plaintiffs, the 9th Circuit said that courts will generally presume that a judicial decision applies retroactivity. Furthermore, in Dynamex, the state high court said its ruling was a clarification rather than a departure from established law, and several lower courts in the state have applied the ruling retroactively.

Thus, the 9th Circuit directed the lower court to evaluate the case in light of the Dynamex decision.

Applying the ABC Test

The 9th Circuit provided guidelines to use when evaluating the ABC test. For example, for "Prong B," the court discussed what the hiring entity needs to prove in order to establish that a worker was not performing tasks that are a part of the company's usual course of business.

"The court suggested a follow-the-money approach for Prong B," Catlos said. Is the hiring entity's financial gain dependent on the tasks the worker performs? The lower the financial impact, the more likely a court will find in favor of independent-contractor status, she noted.

In Dynamex, the California Supreme Court used the example of a retail store hiring a plumber to repair a bathroom leak. The plumber provides "incidental services for otherwise unrelated businesses" and may be properly classified as an independent contractor. However, the state high court said, when a bakery hires cake decorators to regularly work on its custom-designed cakes, the workers are performing tasks that are part of the company's usual business operation.

The 9th Circuit decision provides guidance to franchisors—but it is also informative for any businesses that hire independent contractors, including those in the gig economy, Catlos said. Current franchisors and all entities who use independent contractors should review their contracts and audit their practices "on the ground" to ensure workers are truly independent contractors in light of the court's guideposts and observations, she added.

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