California Supreme Court Reaffirms 'ABC' Test Is Retroactive

On Jan. 14, the California Supreme Court held in Vazquez v. Jan-Pro Franchising Int'l, Inc. that the "ABC" test for determining worker classification fashioned in its groundbreaking decision, Dynamex v. Superior Court, applies retroactively. The court relied on its position that independent contractor classification under the California wage orders was unsettled law until 2018. The decision surprised few in the legal industry, given the court's prior reasoning in the unanimous Dynamex decision.

Employers should note that the California Legislature passed AB 5, applying the same ABC test used in Dynamex for purposes of the California Labor Code, workers' compensation and unemployment benefits. Drafted to be clearly prospective, AB 5 settled the question of retroactivity of the test for those purposes, but the question of retroactivity of the test as applied to the wage orders remained.

The 'ABC' Test

In Dynamex, the California Supreme Court overturned three decades of precedent and ruled that the ABC test was the appropriate standard for determining whether a given worker was an employee or an independent contractor for purposes of the California wage orders. Under the ABC test, a worker is generally considered to be an employee unless the putative employer can prove:  (a) the worker was not under its direction and control in performance of the work in question; (b) the worker's business was not in the hiring company's usual course of business; and (c) the worker was customarily engaged in an independent trade or business. 

As a practical matter, the ABC test broadens the definition of employment, applying it to many who were previously classified as independent contractors. The ABC test had never been applied in California prior to the Dynamex opinion. 

Constitutionally, the legislature creates laws and the courts apply and interpret them. As a result, most court decisions are retroactive, because the law already existed—the court is merely clarifying its application in a particular context. When the law is unclear or unsettled, courts may go further, developing legal standards to further the practical application of an otherwise ambiguous law. On rare occasion, such a standard may not be predictable or the change in direction may contravene fairness and public policy for those who sought to comply with the law as it was previously understood. Courts can choose to lessen the impact of these unpredictable changes by making the new standard prospective only.

Due to the landmark nature of the Dynamex decision, many cases already making their way through the courts lacked guidance on its retroactivity. The California Supreme Court at first declined to provide any finding on retroactive application, denying a petition for rehearing on that question.

The Court Decision

Then, in October 2019, the 9th U.S. Circuit Court of Appeals, by way of Vazquez v. Jan-Pro Franchising Int'l, Inc., also requested the state high court's input on the issue of retroactivity. This time, the court agreed. 

Despite the consistent application of the 20-factor Borello test to all types of questions of independent contractor status since the case was decided in 1989, the California Supreme Court relied on three sentences spread across two prior decisions to justify its classification of Borello as unsettled law. The court also relied heavily on the distinction between the applicable test for workers' compensation and wage orders. 

By determining that the appropriate test for whether someone is an employee or independent contractor for the purposes overtime and minimum wage (as opposed to workers' compensation) had yet to be decided until Dynamex, the court was able to maintain that "employers were clearly on notice… that the law was not settled."  As a result, the state high court reasoned, "Dynamex was within the scope of what employers reasonably could have foreseen."

The California Supreme Court additionally found that concerns regarding fairness and public policy supported—not undermined—Dynamex's retroactive implementation. Just as it discussed in Dynamex, the purpose of the creation and application of the ABC test in California was to extend the protections of the state labor code to individuals who would otherwise be contractors. With this reasoning as its foundation, the court decided fairness and public policy furthered the cause of retroactivity.

What Does This Mean for Businesses?

Based on the relevant statute of limitations, the court's finding only affects those cases involving allegations of a violation of the wage orders, which are already making their way through the legal system, and similar cases filed within the next year or so. Exceptions do exist, however, for those industries and occupations carved out by AB 5 and its successors and the app-based drivers and delivery workers covered by the newly enacted Proposition 22.

The Vazquez decision will certainly impact misclassification cases currently in litigation, but perhaps the most important lesson of Vazquez is that the California Supreme Court continues its full-throated support for its decision that turned California independent-contractor law on its head.

Mel Cole and Michael Lotito are attorneys with Littler Mendelson in San Francisco. Bruce Sarchet is an attorney with Littler Mendelson in Sacramento. © 2021 Littler Mendelson. All rights reserved. Reposted with permission.