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self-study / Employment

Dynamex’s classification test applies retroactively

Felix Shafir

Partner, Horvitz & Levy LLP

Appellate Law

Email: fshafir@horvitzlevy.com

Felix's practice focuses on the defense of class and representative actions.

For decades, California courts, regulators and businesses distinguished employees from independent contractors based upon a standard that came to be known as the "Borello test" -- named after S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 769 P.2d 399 (Cal. 1989). But in Dynamex Operations West, Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), the California Supreme Court shifted course and adopted an "ABC test" for distinguishing between employees and independent contractors.

This unexpected development immediately raised questions as to whether Dynamex's ABC test applied retroactively to pending cases. Subsequently, the 9th U.S. Circuit Court of Appeals asked the California Supreme Court to answer a broad and "open question of California state law": "Does the Court's decision in Dynamex ... apply retroactively?" Vazquez v. Jan-Pro Franchising International, Inc., 939 F.3d 1045, 1046 (9th Cir. 2019).

The Supreme Court has now answered that question, holding that "Dynamex applies retroactively." Vazquez v. Jan-Pro Franchising International, Inc., 2021 DJDAR 535 (Cal. Jan. 14, 2021).

From Borello to Dynamex

For more than a half-century before Dynamex, California courts had looked to Borello and its predecessors to classify workers as employees or independent contractors. Borello articulated a "flexible," "multi-factor," "case-by-case, totality-of-the-circumstances" assessment of the employment arrangement. It focused on whether the employer had the "'right to control the manner and means of accomplishing'" the work, while also considering "'secondary' indicia of the nature" of the work relationship. Courts had relied on the control test and secondary factors well before Borello.

Although Borello was a workers' compensation case, California courts applied Borello to wage-and-hour cases too. The Division of Labor Standards Enforcement -- the agency charged with interpreting and enforcing state wage-and-hour laws -- did the same.

Nonetheless, in Dynamex, the California Supreme Court broke from Borello and adopted an ABC test for resolving independent contractor status for purposes of California wage order obligations. This test, which Dynamex adopted from Massachusetts law, "presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity's business; and (c) that 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 debate over Dynamex's retroactivity

Dynamex did not say whether its ABC test applied retroactively. Workers and hirers alike began debating the question.

Judicial decisions are generally applied retroactively in California. "This rule of retroactivity, however, has not been an absolute one." Newman v. Emerson Radio Corp., 772 P.2d 1059, 1062 (Cal. 1989).

Whether to apply a decision retroactively has often "'turn[ed] primarily upon the extent of the public reliance upon the former rule, and upon the ability of litigants to foresee the coming change in the law.'" Id. at 1067 (citation omitted). The retroactivity question "has been answered consistently and categorically when a new rule is 'a clear break with the past.'" People v. Hicks, 195 Cal. Rptr. 127, 129 (Cal. Ct. App. 1983). "In such cases the court 'almost invariably has gone on to find such a newly minted principle nonretroactive.'" Id. Before Vazquez, Dynamex's retroactive status under this standard was unclear.

Until Dynamex, ABC tests were unknown to California law. ABC tests trace their roots to unemployment compensation laws. The federal government's enactment of the Social Security Act in 1935 spurred state legislation defining who qualified as an employee for purposes of such laws. These laws varied greatly from state to state. Some states codified different variations of the ABC test as their statutory definition of "employment."

California took a different approach. Both before Borello and after, California followed the more flexible multi-factor, totality-of-the-circumstances test for "distinguishing employees from independent contractors in many contexts, including in cases arising under California's wage orders." Dynamex, 16 P.3d at 27. The DLSE did likewise.

Thus, no California case "adopted the ABC test for the classification of California workers prior" to Dynamex. Lawson v. Grubhub, Inc., 2018 WL 6190316, at *5 (N.D. Cal. Nov. 28, 2018). "[T]here was nothing unsettled about whether the ABC test applied to the misclassification inquiry prior to Dynamex. It did not." Id.

One California Court of Appeal concluded that Dynamex applied retroactively because it did not announce a new standard. Others, however, disagreed with this underlying premise.

The 9th Circuit said Dynamex "adopted a new test," Salazar v. McDonald's Corp., 944 F.3d 1024, 1032 (9th Cir. 2019), while another California Court of Appeal explained that "Dynamex changed the appropriate standard." Garcia v. Border Transportation Group, LLC, 239 Cal. Rptr. 3d 360, 371 (Cal. Ct. App. 2018). Some California state and federal courts therefore "acknowledged that Dynamex represented a 'sea change' in this area of [California] law." Goro v. Flowers Foods, Inc., 2020 WL 804841, at *3 (S.D. Cal. Feb. 18, 2020.) And the labor commissioner's office informed a Court of Appeal that Dynamex dramatically changed the law concerning employment status.

As the debate heated up, the 9th Circuit asked the California Supreme Court to address Dynamex's retroactivity.

Vazquez's retroactivity decision and its impact

In Vazquez, the Supreme Court held that Dynamex applies retroactively to pending cases. The court began by reconceiving Borello's scope: "Borello was not a wage order case and that decision did not purport to determine who should be interpreted to be an employee for purposes of a wage order." While California's intermediate appellate and trial courts, as well as the DLSE, had long applied Borello to wage-and-hour cases, the court stressed that it had only "resolved this question for the first time in Dynamex." Since Dynamex was a case of first impression and "did not change a previously settled rule," the court held that "any reliance by the parties on the previous state of the law" did not warrant a departure from the general rule applying judicial decisions retroactively.

The court indicated this conclusion was bolstered by the context in which Dynamex adopted the ABC test. Dynamex was interpreting the wage orders' suffer-or-permit-to-work standard that had "defin[ed] who should be treated as an employee for purposes of the wage order for more than a century." While prior decisions had not adopted the ABC test or equated it to this standard, the court explained that its prior decisions over the past decade placed employers on notice that a worker's independent contractor status could depend on the especially broad suffer-or-permit-to-work standard. The court therefore concluded that Dynamex's interpretation of this standard as constituting an ABC test "was within the scope of what employers reasonably could have foreseen."

Whether Vazquez (and Dynamex's retroactive application) will have a significant impact is unclear.

When the 9th Circuit certified the retroactivity issue to the Supreme Court, it observed that some had said Dynamex's retroactive application "could lead to substantially greater liability for California businesses, for conduct that occurred before Dynamex, than the pre-Dynamex legal regime." Vazquez, 939 F.3d at 1049.

But Dynamex was decided nearly three years ago and the 9th Circuit certified the retroactivity question nearly a year and a half ago. At this stage, Dynamex's retroactive application should affect only the slice of misclassification cases that were either: (1) already pending when Dynamex was decided; or (2) filed after Dynamex but seek liability for allegedly wrongful conduct predating that 2018 decision.

It is far from clear whether this limited category of actions represents a significant percentage of current wage-and-hour litigation. Moreover, moving forward, fewer and fewer newly filed lawsuits will be impacted by Dynamex's retroactive application since the statute of limitations for seeking liability based on conduct predating the 2018 Dynamex decision has already expired or will do so in the near future. 

#876

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