The 2018 California Supreme Court decision in Dynamex Operations West v. Superior Court marked a radical shift in California’s employment landscape when it dramatically altered the test utilized by the courts to determine whether a worker is an employee or an independent contractor.
In Dynamex, California’s highest court held that a new, more restrictive test would be applied for determining whether a worker should be classified as an “independent contractor” or an “employee” (and thus subject to employment taxes and the protection of state and federal employment laws).
Under the Supreme Court’s new “ABC test,” a worker will be deemed to be an employee for purposes of the California wage order unless the employer establishes:
- that 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;
- that the worker performs work that is outside the usual course of the hiring entity’s business; and
- that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Only if the employer establishes all three of these requirements will the worker be deemed an independent contractor.
Following the decision, dozens of current and former independent contractors filed lawsuits alleging they were improperly classified and had been denied pay and benefits to which they should have been entitled to as an employee. If the Dynamex decision applies retroactively, thousands of California business could have exposure for classifying a worker as an independent contractor under the former “Borello” factors as far back as four years.
Several appellate decisions have been issued applying Dynamex but among the most significant was the May 2019 decision by the Ninth Circuit in Vazquez v. Jan-Pro Franchising International, Inc. In Vazquez, the Ninth Circuit ruled that, under California law, the Dynamex decision should be applied retroactively by the courts, meaning that it would apply to conduct that happened before the Dynamex decision was decided on April 30, 2018.
However, on Monday, July 22, 2019, in what can be considered at least a temporary win for California employers, the Ninth Circuit granted employer Jan-Pro’s Petition for Rehearing, withdrew the May 2019 opinion, and instead will be requesting that the California Supreme Court address the issue of whether Dynamex applies retroactively to California businesses.
In the meantime, while employers wait for a decision on whether Dynamex applies retroactively, the California state legislature has also taken up Dynamex with a bill that looks poised to become law, but its final contours remain unknown. California AB-5 has passed the state Assembly and is now in front of the state Senate. In its present form, AB-5 would codify the standard set out in Dynamex and make clear that it is applicable to all wage and hour related claims. However, it also clarifies that a number of occupations would be exempt from the requirements of requirements of Dynamex, including physicians and surgeons, investment advisers, direct salesperson, real estate licensees, certain hairstylists and others providing “barbering services,” attorneys, and certain other professions.
There can be no doubt that decisions made by the State’s highest court and legislature in the coming year will have a significant impact on the way employers hire and retain workers in the future.