On January 14, 2021, the California Supreme Court held that the “ABC” test laid out in its decision in Dynamex v. Superior Court[1], for determining worker classification, applies retroactively. The Dynamex case was decided on April 30, 2018. In Dynamex, the Court held that whether a worker is properly classified as an employee or independent contractor for purposes of the California Wage Orders is determined by the “ABC” test. The “ABC” test has subsequently been codified as AB 5.

Under the ABC test, a worker is presumed to be an employee and not an independent contractor unless the hiring entity establishes all three of the following conditions:

  1. 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;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The issue of whether the decision in Dynamex applies retroactively was decided in Vazquez v. Jan-Pro Franchising International, Inc.[2] The California Supreme Court relied primarily on the fact that Dynamex addressed an issue of first impression and did not change a settled rule on which the parties had relied. The Court reasoned that the decision in Dynamex was the first time the California Supreme Court ruled on the meaning of the “suffer or permit to work” language in the Wage Orders in the context of independent contractors.  Because it did not overturn any prior precedent, Dynamex applied retroactively.

The Supreme Court also found no compelling reason to stray from the general rule that judicial decisions apply retroactively. The Supreme Court rejected Jan-Pro’s argument that it reasonably relied on the multi-factor common law test set forth in Borello[3] for distinguishing between employees and independent contractors. The Supreme Court was equally unpersuaded by the argument that businesses could not reasonably have anticipated that the “ABC” test would apply instead of the multi-factor common law test which had been in place since 1989. The Supreme Court reasoned that the test set forth in the Borello case was not a Wage Order case. Moreover, in two prior decisions the Supreme Court had declined to rule on whether Borello applied to Wage Order claims.

In rejecting Jan-Pro’s arguments, the Supreme Court held that “…defendant’s argument carries little weight when, as here, the underlying decision changes no settled rule. 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. 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.”

The Supreme Court reasoned that fairness and policy considerations justified retroactive application of Dynamex because some workers would be denied the protections of the Wage Orders if Dynamex applied only prospectively.

As the Vazquez decision makes clear, the “ABC” test applies to all independent contractor misclassification-related cases that were already pending when Dynamex was decided. The retroactive application also reaches to pre-Dynamex misclassification issues raised in new lawsuits that may be filed. NavBat recommends businesses review their relationships with workers classified as independent contractors to avoid misclassification issues that may result in substantial legal liability.

[1] Dynamex Operations W. v. Superior Court (2018) 4 Cal.App.5th 903.

[2] Vazquez v. Jan-Pro Franchising International, Inc. (Jan. 14. 2021) 2021 WL 127201

[3] S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.App.3d 342