California Supreme Court: ABC Test for Contractors Applies Retroactively

The California Supreme Court in Vazquez v. Jan-Pro Franchising International, Inc. ruled on Jan. 14, 2021, that its decision in Dynamex Operations West, Inc. v. Superior Court 4 Cal. 5th 903 (2018) (Dynamex), applies retroactively to all cases not yet final as of the date Dynamex issued on April 30, 2018. This critical holding finally and definitively answers the open question regarding the retroactive application of the "ABC" test for determining employee vs. independent contractor status.

How We Arrived Here

As previously covered by Holland & Knight, the ABC test generally requires a hiring party to establish three stringent conditions to demonstrate that a hired individual is an independent contractor and not an employee. (See previous Holland & Knight alert, "New California Law Codifies – and Expands – Strict ABC Test for Independent Contractor Status," Sept. 25, 2019.) When Dynamex was issued, the California Supreme Court declined to explicitly state whether the ABC test supplanted, on a retroactive basis, the prior common-law test set forth in S.G. Borello & Sons, Inc. v. Dep't of Indus. Relations, 48 Cal. 3d 341 (1989) (Borello).

While the California Supreme Court remained silent on the issue, Ninth Circuit courts did not. On May 2, 2019, a panel of the U.S. Court of Appeals for the Ninth Circuit ruled in Vazquez et al. v. Jan-Pro Franchising Int'l., Inc., No. 17-16096 that the ABC test operated retroactively. Relying on longstanding California law, the Dynamex decision, as well as other California cases, the Ninth Circuit seemingly definitively answered the unresolved issue in favor of retroactive application. (See previous Holland & Knight alert, "Ninth Circuit: Dynamex "ABC" Test Unquestionably Applies Retroactively," May 3, 2019.)

A mere three months later, on July 22, 2019, the Ninth Circuit reversed course and removed the clarity it previously created. On petition for rehearing, the Ninth Circuit withdrew the Vazquez decision and instead certified the question of retroactivity to the California Supreme Court. See Vazquez v. Jan-Pro Franchising International, Inc., __ F.3d __, 2019 WL 3271969, at *1 (9th Cir. No. 17-16096 (July 22, 2019)).

California Supreme Court's Retroactivity Ruling

Clearly and conclusively answering the certified question in favor of retroactivity, the California Supreme Court reasoned that the Dynamex decision did not change a settled rule upon which the parties had relied. As the Court explained, no prior decision had definitively addressed the proper standard for evaluating employee-versus-contractor status in the context of California's Industrial Welfare Commission (IWC) wage orders, which generally apply to those who "suffer or permit to work" for a hiring entity. In so holding, the Court established that there was no rationale for departing from the standard rule that judicial decisions are given retroactive effect.

This ruling means that all cases that were not final as of the date Dynamex issued, on April 30, 2018, will be governed under the "ABC" standard instead of Borello.

Notably, because Dynamex addressed specifically the "suffer or permit to work" standard embodied in the IWC wage orders, it remains an open issue of whether the ABC test applies retroactively to cases pending where putative employers claim that the alleged employees are governed under some other standard besides the "suffer or permit to work" standard, such as the "control" standard (exercising control over wages, hours and working conditions) or the "engage" standard, see, e.g., Martinez v. Combs, 49 Cal. 4th 35 (2010). Future court decisions will be needed to answer this issue.

Finally, employers should keep in mind that there are numerous legislative exemptions to the ABC test – in which cases the Borello test, by express reference in the statute, is to be applied to the classification question. (See previous Holland & Knight alert, "New California Law Excludes Some Industries from "ABC" Test for Independent Contractors," Sept. 9, 2020.)

Moving Forward

Employers should expect a raft of decisions from both federal and state courts at every level further explicating the retroactive nature of the ABC test. In the meantime, businesses currently engaging independent contractors, and those working with "gig economy" workers, should continue to carefully scrutinize the nature of their independent contractor classifications.

While the legal landscape for contractor classification continues to shift in major ways – such as Proposition 22 – the California Supreme Court and Legislature have made clear that the ABC test is here to stay.

For more information regarding the Court's decision and how it could affect your business or employees, please contact the authors or another member of Holland & Knight's Labor, Employment and Benefits Group.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.