In Vazquez v. Jan-Pro Franchising Int’l, Inc., the Ninth Circuit revived a decade old wage and hour class action and simultaneously dealt a blow to many employers utilizing independent contractors by holding that California Supreme Court’s “ABC test,” as set forth in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, applies retroactively. We previously covered the prospective impact of Dynamex when the decision was announced just over a year ago.

In Dynamex, the California Supreme Court established a presumption that a worker is an employee unless the employer can show (a) the “worker is free from the control and direction of the hirer in connection with the performance of the work” under the contract and in fact; (b) the “worker performs work that is outside the usual course of the hiring entity’s business;” and (c) the worker is “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

However, following the Dynamex decision, there remained an unsettled question as to whether Dynamex would only apply prospectively, or retroactively as well. The Dynamex Court previously denied an amicus petition by the California Employment Law Council, without comment, to modify the Dynamex opinion so that the ABC test would only apply prospectively. Today’s Ninth Circuit decision resolved any such ambiguity by holding the ABC test applies retroactively, potentially creating significant retroactive liability that even the most proactive post-Dynamex employer will not be able to avoid.

In its ruling, the Ninth Circuit stated that California has a well-established tradition that judicial pronouncements have a retroactive effect, with the exception being where the judicial decision “changes a settled rule on which the parties…have relied.” In holding the Dynamex decision applies retroactively, the Ninth Circuit held that Dynamex’s ABC test was a “logical extension” and “clarification” of existing law regarding the proper classification of contractors and that its holding was “faithful to the fundamental purpose of California’s wage orders.” The Ninth Circuit also pointed to the Dynamex Court’s decision to deny the amicus petition as strongly suggesting that the usual retroactive application should apply, rather than the exception.

It should be noted that even though there is a trend at the federal level in providing more latitude for employers to classify workers as independent contractors (i.e. the recent U.S. Department of Labor opinion letter finding that service providers in the “gig economy” were independent contractors under the Fair Labor Standards Act (“FLSA”) and not employees as we covered in a post earlier this week), Vazquez serves as a reminder that complying with the federal standard will not absolve companies of potential liability under state law.

Employers waiting with bated breath as to whether Dynamex’s ABC test would apply retroactively now at least have an answer, although certainly not one they were hoping for.

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