Ninth Circuit Holds that New Employee vs. Independent Contractor Test Applies Retroactively

A May 2, 2019 decision by the Ninth Circuit Court of Appeals has made it clear that the “ABC” test, used to distinguish between employees and independent contractors, will be applied retroactively to all California cases (Vazquez v. Jan-Pro Franchising Int’l, Inc.).

The now-retroactive test is a relatively new creation, having been established by the California Supreme Court in the 2018 case Dynamex Operations W. v. Superior Court.   It replaced the longstanding Borello test with a new three-part analysis, stating that in order to classify a worker as an independent contractor, the hiring entity must establish:

• 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;
• That the worker performs work that is outside the usual course of the hiring entity’s business; and
• That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

This test was enacted by the Dynamex court in order to provide a clear standard that can be relied upon by workers and employers when agreeing to employment terms. The Dynamex court explained that the presumption of “employee” status and the clarity of the ABC test are designed to protect workers when it stated: “[this standard,] by expansively defining who is an employer, is intended to preclude a business from evading the prohibitions or responsibilities embodied in the relevant wage orders directly or indirectly—through indifference, negligence, intentional subterfuge, or misclassification.”

Because the ABC tested created by the Dynamex ruling was a clarification of the existing law, and the California Supreme Court gave no indication that it should only be applied prospectively, the Ninth Circuit Court in Vasquez held that it was to be applied retroactively.

The distinction between “employees” and “independent contractors” has long been critical for all entities that pay individuals for their work/services.  The responsibilities carried by the employing organization are much more strict when the individual is classified as an employee, including the duties to pay federal social security and payroll taxes, pay unemployment insurance taxes and state employment taxes, provide workers compensation insurance, and comply with all statutes and regulations regarding the wages, hours, and working conditions of employees, as laid out in the Industrial Welfare Commission Wage Orders.

The Vazquez ruling will require all organizations to re-examine their classifications not only for future workers, but also for workers hired prior to the Dynamex ruling.  The dates of initial employment or classification will not be relevant to future disputes regarding the classification of workers.