The range of employers who may be liable for the misclassification of workers just got bigger. On January 14, 2021, the California Supreme Court decided that the decision in  Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5^th 903 (Dynamex) applies retroactively to all non-final cases that predate the April 2018 Dynamex decision.

Dynamex established the three-factor “ABC test” to determine whether a worker is an employee or independent contractor for claims arising under California’s Wage Orders. The “ABC test” is onerous for employers because a worker is presumed to be an employee unless the employer can prove all of the following:

1. The worker is free from 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;

2. The worker performs work that is outside the usual course of the hiring entity’s business;

3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Whether Dynamex applies retroactively was a key question left undecided in that Court’s decision, but the question is now settled with a resounding “Yes” by the California Supreme Court in Vasquez v. Jan-Pro Franchising, Inc., 2021 WL 127201 (Cal.),(Jan 14, 2021)(“Vasquez”). The California Court held that there was no reason to depart from the “well-established general principle” that judicial decisions “interpreting legislative measures” are retroactive. Id. at *4.

In Vasquez, the plaintiffs were janitor-franchisees of defendant, Jan-Pro Franchising International, Inc. (“Jan-Pro”), an international janitorial cleaning business. Plaintiffs argued that Jan-Pro misclassified them as independent contractors. In mid-2017, the district court granted summary judgment in favor of Jan-Pro, concluding that the individuals performing cleaning services were independent contractors. The district court’s analysis relied on the three definitions of “to employ” set forth in Martinez v. Combs (2010) 49 Cal. 4^th 35, and concluded that none of them had been met. Plaintiffs appealed, and soon thereafter Dynamex was decided. Consequently, the Ninth Circuit asked the parties to brief the effect of Dynamex on the merits of the case. Of critical importance was whether Dynamex applied retroactively.

The Court rejected all of Jan-Pro’s argument against retroactivity.

• Jan-Pro first argued that prior to Dynamex it was reasonable for employers to believe that the question of whether a worker should be classified as an employee or an independent contractor was determined by the age-old multi-factor common law test called the “Borello” test per the name of the 1989 California Supreme Court case from which it originates (G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 34). The Court disagreed, explaining that Borello did not address whether a worker should be considered an employee or an independent contractor for purpose of the obligations of a Wage Order.

• Jan-Pro then argued that it could not have anticipated that the distinction between employees and independent contractors for purposes of obligations imposed by a Wage Order would be governed by the ABC test adopted by The Court again rejected the argument, explaining that no settled rule was changed. The Court expounded further by stating that retroactive application is supported by public policy and fairness concerns, such as protecting workers and benefitting business that comply with Wage Order obligations.

The Court attempted to diminish the severity of its decision by contending that “given the constraints imposed by the statute of limitations, the retroactive application of Dynamex will in practice affect a limited number of cases.” Regardless of the Court’s attempt to soften the blow, the Vasquez decision is yet another difficult one for employers, gig workers, and small business owners who previously enjoyed the greater flexibility afforded by the previously applied independent contractor test.