California Supreme Court Rings In The New Year With A Blast To Employers’ Past
In a landmark decision issued on January 14, 2021, entitled Vazquez v. Jan-Pro Franchising Int’l Inc. (2021) (“Vazquez”), the California Supreme Court held that the State’s ABC test applies retroactively to cases that were pending at the time of its decision in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903 (“Dynamex”). Vazquez v. Jan-Pro Franchising Int’l Inc. (2021) 2021 Westlaw 127201. The Vazquez Court was asked by the Ninth Circuit Court of Appeals to answer the question of whether Dynamex applies retroactively. In concluding that it does, the Court noted that Dynamex does not impact any settled law, the general rule that judicial decisions are given retroactive effect, and that public policy and fairness concerns favor applying Dynamex retroactively. Vazquez, however, comes as a significant blow to businesses by making them potentially liable for lawsuits pending long before the ABC test existed.
Background
In its 2018 Dynamex decision, the California Supreme Court adopted the ABC test as the standard to determine whether a worker should be classified as an employee or independent contractor for claims arising under the Industrial Welfare Commission (“IWC”) Wage Orders. In doing so, the Court replaced the longstanding multi-factored Borello test, which was the test that California employers used for determining whether a worker was an employee or independent contractor for nearly 30 years. Our alert on the Dynamex decision can be found here. Following the Dynamex decision, Assembly Bill No. 5 (“AB 5”) expanded and codified the ABC test into law. Our post on AB 5 can be found here. Since its enactment in 2019, AB 5 has been the target of lobbying efforts, ballot initiatives, and has been modified through emergency legislation.
The California Supreme Court’s Decision to Apply the ABC Test Retroactively
In concluding that the ABC test applies retroactively, the Vasquez Court stated that it primarily relied on its position that Dynamex did not change a settled rule. That is, prior to Dynamex, the Court had not determined the test for whether a worker should be classified as an employee or independent contractor in the Wage Order context. As such, the Court did not find a reason to depart from the general rule that judicial decisions are given retroactive effect. Moreover, the Court highlighted that protecting workers and benefitting business that comply with their obligations under the Wage Orders favors retroactive application of the ABC test.
No Exception to the Retroactivity of Dynamex (For Now)
In Vazquez, Jan Pro Franchising International, Inc. (“Jan Pro”) (the employer defendant), argued for an exception to the general retroactivity rule because businesses could not reasonably have anticipated that the ABC test would govern when they classified its workers as independent contractors. Jan Pro — like other California businesses —believed the question of whether a worker is an employee or independent contractor would be decided under the longstanding Borello test. Thus, Jan Pro argued it would be unfair to apply the ABC test, rather than the Borello test, to non-final cases that predate the Dynamex decision. The Court was not persuaded.
First, the Court emphasized and reiterated that the ABC test does not disrupt any settled law. The Court clarified that Borello was not a Wage Order case, and it did not decide the issue of who is considered an employee for the purposes of a Wage Order. Instead, the issue was addressed for the first time, and resolved, in Dynamex where the ABC test was adopted. Furthermore, according to the Court, its decisions prior to Dynamex clearly signaled that the standard for determining whether a worker is an independent contractor or employee in the Wage Order context was an open question yet to be answered.
Specifically, in Martinez v. Combs (2010) 49 Cal.4th 35 (“Martinez”), the Court emphasized that it was not deciding whether Borello had any relevancy to Wage Order claims. Likewise, in Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522 (“Ayala”), the Court explicitly stated that it left for another day the question of what standard applies to determine whether a worker is an independent contractor or employee for the purposes of the obligations imposed by a Wage Order. Based on these passages from Martinez and Ayala, the Court went as far as to declare that employers were on notice that the applicable standard was not yet settled. In other words, Jan-Pro’s reasoning that it relied on the Borello test because there was not yet a set standard does not, by itself, justify an exception to the retroactive application of the ABC test.
Second, the Court highlighted that since the ABC test was derived from the Borello test, it should not have come as a surprise to employers. Still, whether employers could have anticipated the ABC test is of little consequence. The Court rejected the idea that litigants must be able to anticipate the rule that the court adopts in order for the rule to be given retroactive effect.
Notably, the Court was silent as to whether other circumstances may justify an exception to the retroactive application of the ABC test. Borrowing from the Court’s rationale, leaving this question unanswered means that there may be some, if only slight, hope that the ABC test does not apply retroactively in every context.
What This Means for Employers
Dynamex and AB 5 caused substantial upheaval to California businesses, and Vazquez comes as the aftershock. The California Supreme Court is known for its decisions in favor of employees’ rights; and here, the Court made its intentions clear — to ensure that workers are not deprived of the protections of the Wage Orders and to prevent businesses from retaining unwarranted advantages of misclassification. The retroactivity of the ABC test, however, comes at a potentially steep price to California businesses. If you have any questions regarding worker classifications or the retroactive application of California’s ABC test, contact the authors or your trusted AALRR counsel.