Ninth Circuit Rules that "ABC Test" for Independent Contractor Status Applies Retroactively and Should Be Liberally Applied

May 8, 2019

Compliance Matters
™ Newsletter

Ninth Circuit Rules that "ABC Test" for Independent Contractor Status Applies Retroactively and Should Be Liberally Applied

One year ago this month, the California Supreme Court issued its landmark Dynamex ruling, which makes it far more difficult to prove that a worker may be legally treated as an independent contractor under California's Wage Orders [ link ]. One major remaining question has been whether Dynamex will be applied "retroactively" to lawsuits that were brought before Dynamex was decided.

The Retroactive Application of the Dynamex Ruling

On May 2, 2019, the Ninth Circuit U.S. Court of Appeals answered that question in the affirmative in a case called Vazquez v. Jan-Pro Franchising International.

The Vazquez lawsuit is a class action originally filed back in 2008 in a federal district court in Massachusetts. The plaintiffs came from several states, including California. They claimed that the defendant, Jan-Pro, is "a major international janitorial cleaning business" which "developed a sophisticated 'three-tier' franchising model to avoid paying its janitors minimum wages and overtime compensation by misclassifying them as independent contractors."

The claims by the California-based plaintiffs eventually were split off and sent from Massachusetts to a federal court in Northern California. That court ruled in favor of Jan-Pro and dismissed the case, concluding that the plaintiffs were independent contractors and not employees. Importantly, that court issued its decision before our state Supreme Court decided Dynamex.

As previously reported, in Dynamex, the court announced a new test for deciding whether a worker is an independent contractor or an employee covered by our state's Wage Orders. Under this "ABC test," a worker is presumed to qualify as an employee, unless the "hiring entity" proves all three of the following elements:

(A) the worker is free from the entity's "control and direction" in connection with performance of the work, both as a matter of contract language and "in fact";

(B) the worker performs work "outside the usual course" of the hiring entity's business; and

(C) the worker "is customarily engaged" in an independent business, occupation, or trade of the same nature as the work he or she performs for the hiring entity.

The Ninth Circuit ruled that the Dynamex decision was meant to be applied retroactively and the Court reinstated the case for the plaintiffs. That's because under well settled California law, most decisions published by the Supreme Court and appellate courts apply retroactively - even if the decision overrules prior decisions. One exception to this rule is where a decision "changes a settled rule on which the parties...have relied." According to the Court, this exception did not apply here.

Technically. the Ninth Circuit's decision is binding only on federal courts in California. However, the Ninth Circuit concluded that a recent state Court of Appeal case from 2018 essentially came to the same conclusion - that Dynamex is retroactive. So far, no court appears to have disagreed.

Since the Ninth Circuit did not decide whether Jan-Pro's workers were employees or independent contractors, it sent the case back to the lower court to make that determination under Dynamex.

What This Means for Your Business

The Ninth Circuit emphasized that Dynamex makes it much easier for workers to prove they are employees rather than independent contractors. The Court did a detailed analysis of how the new three-part test has been applied elsewhere, and emphasized how the so-called "B" factor is likely to be the one that will trip up most employers.

The "B" factor essentially requires that a worker cannot be an independent contractor unless the work that the contractor is being hired to do is outside the usual course of the hiring entity's business. The Court cited to common sense examples of a retail store needing a plumber or electrician to fix broken equipment (plumbing and electrical work are not part of the retailer's ordinary business).

Vazquez highlights the necessity for businesses that routinely engage independent contractors to review the bona fides of the relationship, before a suit is filed for misclassification. With a presumption that most workers are employees, and with the "B" factor being so hard to satisfy, it will be very difficult under Dynamex for most businesses to establish true independent contractor status.

If you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at (818) 508-3700, or visit us online at www.brgslaw.com.

Sincerely,
John J. Manier
Richard S. Rosenberg
Ballard Rosenberg Golper & Savitt, LLP

15760 Ventura Blvd.

Eighteenth Floor

Encino, CA 91436

(818) 508-3700

18067 W. Catawba Ave

Suite 201

Cornelius, NC 28031

Matthew Wakefield:

(704) 765-1469

David Harvey:

(704) 765-1409

www.brgsl aw.com

THE LAW FIRM
FOR EMPLOYERS