Written By: Rebecca Gomez
Last April 2018, the California Supreme Court issued the landmark decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles which imposes a narrower standard for classifying Independent Contractors. The Court held that all workers in California are presumed to be employees subject to the Industrial Welfare Commission Wage Orders unless employers can prove that the independent contractor meets all three elements of the ABC Test:
- The worker is free from the control and direction of the hiring entity in connection with the performance of work;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- 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 California Supreme Court did not address whether the ABC Test (Dynamex Standard) would apply retroactively or prospectively. That answer was clarified by the Ninth Circuit on May 2, 2019, in Vazquez v. Jan-Pro Franchising Int’l, Inc. The Ninth Circuit held that the ABC Test adopted by the California Supreme Court should be applied retroactively. Businesses now have the burden of showing that workers classified as independent contractors in California before the Dynamex decision meet all requirements of the ABC Test.
The Ninth Circuit considered two factors in reaching their decision that the ABC Test applies retroactively. First, the Court analyzed how California law treated the application of judicial decisions. The Court noted that in California, statutes operate only prospectively while Judicial decisions operate retroactively. The Court held that if the California Supreme Court intended for the new standard to be applied prospectively, they would not have denied the petition to clarify that the ruling only is applied prospectively. Second, the Ninth Circuit considered whether the application of the Dynamex standard retroactively would be unconstitutional. The Court concluded that the retroactive application of the Dynamex standard does not violate the Constitutional due process since it would not be arbitrary nor irrational.
The Ninth Circuit decision creates liability exposures for businesses in California, especially those who heavily rely on independent contractors. Retroactive application of the ABC Test means that even if your organization is compliant with the stringent requirements for classifying independent contractors moving forward, you may still be exposed to potential liability for misclassification of workers in the past. There is a four-year statute of limitations on wage claims in California, the Ninth Circuit decision may lead to a significant increase in wage and hour claims across many industries.
If your organization utilizes independent contractors, you should review your independent contractor arrangements with your employment attorney to ensure compliance with the ABC standard and to determine any exposure for liability for years prior to the Dynamex decision in 2018. Employment Practice Liability Insurance (EPLI) Coverage usually does not provide coverage for wage and hour claims, however some insurance carriers provide a defense sub-limit. Let us know if you have any questions regarding independent contractors or would like us to provide you with an EPLI quote with wage and hour sub-limit for defense. We are here to help!
*** This is intended for informational purposes only. Consult with your attorney and HR professional.