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California Supreme Court Decision in Vazquez v. Jan-Pro Franchising International, Inc. Heightens Legal Risk for Companies That Classify Workers as Independent Contractors

The legal landscape for companies that classify workers as independent contractors became more perilous after the California Supreme Court recently ruled that its decision in Dynamex Operations West, Inc. v. Superior Court applies retroactively to all cases not final as of 2018.

In Dynamex, the California Supreme Court held that whether a worker is an employee for purposes of the California Wage Orders is determined by the “ABC test.”  Under that test, a worker is presumed to be an employee unless the hiring entity establishes all three of the following:

(A) The person is free from the 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.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Before Dynamex, California courts and state agencies applied the “Borello test” for determining whether a worker was an independent contractor or employee.  That test, formulated by the California Supreme Court in 1989, looked primarily at whether the hiring entity had a “right to control” the manner in which the worker performed the contracted service.  Businesses (and their attorneys) relied on the Borello test to determine whether they had properly classified workers as independent contractors for purposes of claims under the Wage Orders, which control minimum wage, overtime, breaks, and working conditions.  Dynamex completely changed this understanding but the question remained about whether Dynamex applied retroactively.

The federal Ninth Circuit Court of Appeals asked the California Supreme Court to answer this question in Vazquez v. Jan-Pro Franchising International, Inc.  On January 14, 2021, the California Supreme Court confirmed Dynamex is indeed retroactive (i.e., applies to all cases currently pending as of April 30, 2018, the day the California Supreme Court handed down Dynamex).

The California Supreme Court, which has become notably employee-friendly, justified its decision because Dynamex did not change any settled rule about what test applied to the Wage Orders and, accordingly, retroactive application would not be improper or unfair to employers.  The court rejected the argument that Dynamex should not apply retroactively because business had reasonably relied on Borello for decades in determining how to classify its workers.  The Vazquez court reasoned that employers had no reasonable basis to rely on Borello for Wage Order claims because the definition of “suffer or permit to work” under the Wage Orders was unsettled.

Unfortunately, Dynamex and Vazquez expose businesses that acted in good faith under Borello to increased legal liability.  These decisions, and California’s Assembly Bill (“A.B.”) 5 – which codified the ABC test and expanded it to apply to most California wage and hour laws, subject to exceptions – serve as sharp warnings that business should classify workers as independent contractors only after a thoughtful and deep analysis, preferably in consultation with an employment law attorney.  As we noted during our 2021 Employment Law Briefing, continued lobbying efforts resulted in the passage of A.B. 2257, which immediately took effect on September 4, 2020, and which created new exceptions to A.B. 5 and modified some of the former exceptions.

The legal landscape as it relates to independent contractor classification continues to change.  Please contact your Sacks Ricketts & Case employment attorney if you have questions or would like further information about how to comply with California’s complex laws controlling independent contractor classification.