In April 2018, the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court changed the way in which courts differentiated between an independent contractor and employee in California with regard to wage orders. On January 14, 2021, in Vasquez v. Jan-Pro Franchising, Inc., the California Supreme Court held the A-B-C independent contractor test (the A-B-C test) is retroactive.

In Dynamex, the Court overruled and replaced twenty years of precedent stemming from its 1989 decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, where the Court had adopted a common law test to determine independent contractor status. The new three-part test requires the worker to meet all of the following conditions to be considered an independent contractor:
(A) be 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) perform work that is outside the usual course of the hiring entity’s business; and
©) customarily be engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Under Dynamex there is a presumption that workers are employees, and the burden falls on the hiring entity to meet each of the three prongs to show that a worker is an independent contractor.

Following the Dynamex decision employers, courts and attorneys have struggled to determine whether the California Supreme Court meant for the A-B-C test to be applied retroactively to independent contractor status prior to the Dynamex decision. In Vasquez, the California Supreme Court characterized the Dynamex decision as resolving/interpreting an open legal issue, whether the Wage Order’s “suffer or permit to work” definition should be used to determine whether a worker qualified as an employee or an independent contractor and, therefore, ruled the A-B-C Test applies retroactively to wage orders.

Vasquez is a difficult blow for employers, gig workers and small business owners who previously enjoyed greater flexibility to design the terms of their commercial relationship. The statute of limitations for misclassification cases is four years. Thus, if a business hired workers it classified as independent contractors prior to the Dynamex decision that under the A-B-C Test would have been considered employees, such independent contractors now can bring misclassification actions.

If you are a business owner who hired independent contractors prior to the Dynamex decision that should have been classified as employees upon application of the A-B-C Test, contact your legal counsel to discuss strategies to minimize your company’s exposure to these claims.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Now pending in the California Senate is state Assembly Bill 5. The Bill was passed by the Assembly at the end of May 2019. AB 5, if passed by the Senate and signed into law by the Governor, will make it difficult for companies to hire workers as
independent contractors instead of employees. These workers will be afforded the same labor protections and benefits as employees including unemployment insurance, health care subsidies, paid parental leave, overtime pay, workers’ compensation, and a guaranteed minimum hourly wage.

AB5 expands on the California Supreme Court’s decision last year known as Dynamex. The ruling and the bill require businesses to use the so-called “ABC test” to figure out whether a worker is an employee. To hire an independent contractor, businesses must prove that the worker (a) is free from the company’s control, (b) is doing work that isn’t central to the company’s business, and (c) has an independent business in that industry. If the worker does not meet all three of these
conditions, then the worker must be classified as an employee.

California businesses are panicking over the possible passage of AB5. Many businesses and organizations are lobbying for exemptions. Among the professions to be excluded from the ABC Test, as AB5 is presently drafted, include doctors, dentists, lawyers, architects, insurance agents, accountants, engineers, financial advisers, real estate agents, and hairstylists who rent booths at salons.

If AB 5 becomes law gig workers would, for the first time, have a safety net. The state of California would also benefit. The State estimates that it loses $7 billion in tax revenue each year from companies that misclassify employees.
In light of the Dynamex and this proposed legislation, Employers should consult with their business attorneys to avoid misclassification of their workers and engage in legal planning as to the structure of the business to explore whether they can avoid turning their present “independent contractors” into employees.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.