Q: Does the “ABC test” for independent contractor status in the state of California apply retroactively?

A: The California Supreme Court recently issued a decision clarifying that the ABC test for determining independent contractor status does indeed apply retroactively.

By way of background, in what seems like ages ago in the pre-COVID days of in-person hearings and no court delays, the California Supreme Court issued a milestone ruling in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018) that changed the legal landscape governing independent contractor classification. Specifically, the Dynamex ruling established a new standard for determining whether an independent contractor was classified properly under California wage orders, or more commonly referred to as the “ABC” test. Under the ABC test, a worker is presumed to be an employee unless the hiring entity 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;
• 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 that involved in the work performed.

The Dynamex ruling and its new ABC test were monumental because, for nearly 30 years prior, California courts had used a multifactor test under S.G. Borello & Sons, Inc. v. Dept. of Indus. Rels., 48 Cal. 3d 341, 351 (1989) to determine independent contractor status under California’s wage orders, which largely focused on the amount of control that the hiring entity exercised over the worker.

Dynamex’s ABC test was codified into California law under Assembly Bill (AB) 5, effective January 1, 2020, which expanded the ABC test to apply when assessing independent contractor classification under the California Labor Code and wage orders, subject to various occupational exemptions, such as licensed health care professionals, lawyers, accountants, engineers, real estate licensees, securities broker-dealers or investment advisers, direct salespersons, and commercial fisherman, amongst others. Please refer to our previous post for more on AB 5. Notably, even if a worker qualifies under one of AB 5’s exemptions, the hiring entity still must meet the multifactor test under Borello. While the Dynamex ruling and AB 5 solidified the application of the ABC test on a going-forward basis under California’s wage and hour laws, the Dynamex ruling left open the pivotal question: Does the ABC test apply retroactively?

On January 14, 2021, the California Supreme Court finally weighed in, clarifying that the ABC test applies retroactively. In Vazquez v. Jan-Pro Franchising Int’l, Inc., 2021 WL 127201 (Cal. Jan 14, 2021), the franchisee plaintiffs appealed a motion for summary judgment ruling in favor of franchisor Jan-Pro to the U.S. Court of Appeals for the Ninth Circuit. In granting Jan-Pro’s motion for summary judgment, the trial court relied on the pre-Dynamex multifactor common law test under Borello in determining whether the franchisees were properly classified as independent contractors. The Dynamex decision was issued while the Vasquez appeal remained pending. The Court of Appeals initially vacated the summary judgment ruling, stating that Dynamex applied retroactively, but later withdrew its opinion and indicated that it would instead ask the California Supreme Court to clarify the retroactivity of its Dynamex ruling.

The California Supreme Court ruled unanimously in Vasquez that the Dynamex test applies retroactively. According to the Court, (1) Dynamex addressed an issue of first impression (as opposed to changing a settled rule that the parties previously relied upon) by determining how the definition of the “suffer or permit to work” language in California’s wage orders should be applied to distinguish employment vs. independent contractor relationships; and (2) there was no reason to depart from the general rule that judicial decisions apply retroactively.

The Vasquez decision is just another example of how the dynamic legal landscape surrounding independent contractor classification continues to change and evolve. Since the Dynamex decision in 2018 and its codification under AB 5 in 2020, California businesses have struggled to apply the heightened standards of the ABC test. Most recently, in 2021, California passed AB 2257, which replaces and expands the statutory exemptions from the ABC test that were initially defined under AB 5. AB 2257 made notable changes to the business-to-business and referral agency exemptions initially set forth in AB 5, and created other exemptions for professions such as musicians, landscape architects, home inspectors, and translators, among others. Please see our earlier blog post on AB 2257.

In November 2020, California voters also approved Proposition 22, which created additional exemptions for gig economy companies (such as app-based ride-hailing and delivery companies) from AB 5. While there have been several challenges to AB 5 since its enactment, the Vasquez decision unfortunately adds another concern for California businesses  due to the risk of potential liability for misclassification claims arising prior to the 2018 Dynamex decision. The statute of limitations can range from one to four years, depending on the underlying wage and hour claims asserted as part of a misclassification theory,