General Publications May 20, 2019

“What 9th Circ.’s Take on Dynamex Means for Calif. Employers,” Law360, May 20, 2019.

Extracted from Law360

On May 2, 2019, the U.S. Court of Appeals for the Ninth Circuit issued its decision in Vazquez v. Jan-Pro Franchising International Inc., concluding that the California Supreme Court’s decision in Dynamex Operations West Inc. v. Superior Court of Los Angeles, in which the state’s high court announced a new independent contractor test for California employers, should be applied retroactively. While not a surprise, the Ninth Circuit’s ruling should remind California employers not only of the significant hurdles presented with the new ABC test announced in the Dynamex case, but also of the potential exposure facing employers for misclassification of employees as independent contractors.

The Jan-Pro case was originally filed in federal court in Massachusetts as a putative class action. The plaintiffs, janitors, claimed that Jan-Pro had created and implemented a multitier franchising model that permitted Jan-Pro to improperly label each janitor as an independent contractor to avoid paying those individuals minimum wages and overtime compensation, among other things. Because some of the plaintiffs resided in California, the court in Massachusetts severed the California plaintiffs’ claims and sent those claims to federal court in the U.S. District Court of the Northern District of California to be litigated. Jan-Pro ultimately brought a motion for summary judgment in the pending California action, and that motion was granted by the federal district court.

After the summary judgment motion was granted and the plaintiffs’ case dismissed, the California Supreme Court issued its ruling in the Dynamex case in May 2018. In that fateful case, California’s highest court set forth a new independent contractor test for classifying California’s workers. Establishing that workers would be presumed to be employees and, further, that the employer now has the affirmative burden of justifying the individual’s classification as an independent contractor, the California Supreme Court provided a three-part test, now referred to as the ABC test, that the employer must satisfy to establish that an individual is properly classified as an independent contractor.

To satisfy this burden, the employer must satisfy each of the following elements: “(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.”

Based on the Dynamex holding, the Jan-Pro plaintiffs appealed the district court’s ruling to the Ninth Circuit and argued, among other things, that the Dynamex ruling should be applied retroactively to their case, not just prospectively to future cases involving misclassification claims. The plaintiffs made two primary arguments in support of the retroactive application.

First, the plaintiffs argued that in the Dynamex decision, the California Supreme Court had the opportunity to explicitly state in its ruling that the new ABC test would be applied only prospectively, and did not take such affirmative conduct. Second, according to the plaintiffs, lower California courts applying the Dynamex decision were already applying the ABC test retroactively.

The Ninth Circuit concurred with the plaintiffs on both arguments, citing to California law in concluding that “judicial decisions are given retroactive effect.” The Ninth Circuit rejected an argument from Jan-Pro and a supporting brief from the International Franchise Association that because the Dynamex decision was “silent” on the issue of the retroactive application, the Ninth Circuit should not infer that the decision would be applied retroactively to the Jan-Pro case. The Ninth Circuit disagreed with that position, however, concluding that, by deciding the Dynamex decision without commenting on its retroactive applicability, the California Supreme Court’s ruling “strongly suggested that the usual retroactive application, rather than the exception, should apply to its newly announced rule.”

The Ninth Circuit next examined lower court decisions that already applied the Dynamex ruling retroactively. Relying on Garcia v. Border Transportation Group and Johnson v. VCG-IS LLC, the Ninth Circuit noted that both cases, pending in California state courts, had already applied the Dynamex ruling retroactively to similar pending misclassification claims.

On that basis, the Ninth Circuit determined that the Dynamex holding should likewise be retroactively applied to the Jan-Pro case. In its holding, the Ninth Circuit stated that “retroactivity protects the janitorial industry as a whole, putting Jan-Pro on equal footing with other industry participants who treated those providing services for them as employees for purposes of California’s wage order laws prior to Dynamex.” The Ninth Circuit also noted that retroactive application was both fair and appropriate as it put Jan-Pro “on equal footing” with those employers who treated similarly situated workers as employees prior to Dynamex. In other words, companies like Jan-Pro would not receive the benefits from misclassification up to the time the Dynamex case was decided.

The Ninth Circuit remanded the case so that the district court could determine the plaintiffs’ misclassification claim on the merits instead of granting Jan-Pro’s motion for summary judgment based on procedural considerations, as it originally had done.

How Does This Decision Impact California Employers?

The Jan-Pro decision does not come as a great surprise to those following the changing landscape of the independent contractor classification in California. However, the Jan-Pro case serves as a reminder to us that the new ABC test articulated in the Dynamex case is the new law of the land and that the burden is on California employers to justify the application of the independent contractor classification.

The Jan-Pro decision is also a reminder not only of the implications of Dynamex, but that a potential defense that had existed — that Dynamex should only be applied prospectively to future conduct, and not to prior conduct that has since been corrected — is no longer available to employers as they seek to grapple with the sea change in worker classification.

As California employers navigate through classifications post-Dynamex and post-Jan-Pro, those employers with workers classified as independent contractors must be diligent and undertake internal audits to determine whether their current classifications are appropriate under California law. The Jan-Pro case serves as a stark reminder to companies doing business in California that the ABC test not only puts the onus on employers to prove the classification they have assigned is correct, but also sets forth a stringent test to determine whether a worker can truly be classified as an independent contractor.

The most critical prong of this new test is the second prong in the analysis — whether the worker performs work that is outside the usual course of the hiring entity’s business. Because so many independent contractors employed in the state of California traditionally engaged in business that was within the course of their employer’s own business, those individuals will likely need to be reclassified as employees, unless other extenuating circumstances exist.

The Dynamex decision is here to stay. California employers must apply the new ABC test to ensure that its workers are properly classified. Employers should consult with human resources professionals and counsel to audit worker classifications to ensure they are in compliance with the law. Without such audits, employers run the risk of being liable for misclassification under the California Labor Code. With such violations, employers can be subject to penalties, back wages and attorney fees. Companies should utilize industry experts to ensure they are in compliance with the law, especially in light of developments like those seen in the Jan-Pro decision.

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