On April 30, 2018, the California Supreme Court decided Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018), a landmark ruling that replaced California’s longstanding independent contractor classification test with a new “ABC” test. The new test is described in the May 2018 issue of the ALERT. In reconstituting the test, the Supreme Court left two critical questions unaddressed. First, it did not determine whether the ABC test applied retroactively. Second, it did not expressly indicate whether the principles of the decision will apply broadly to the entire Labor Code or just issues raised under the IWC Wage Orders.

On May 2, 2019, the Ninth Circuit held in Vasquez v. Jan-Pro Franchising International, Inc. 2019 U.S. Dist. LEXIS 54608 (9th Cir. 2019), that Dynamex applies retroactively under California law. Although the Ninth Circuit may not authoritatively interpret California law, this development indicates that Dynamex’s scope—which may govern hundreds of thousands of independent contractor relationships throughout the state—continues to expand.

1. Application Of Dynamex By The Ninth Circuit In Vasquez

a. Background

Vasquez’s lengthy procedural history began in 2008 with a potential class action filed in the U.S. District Court, District of Massachusetts by janitors against JAN-PRO, an international commercial cleaning franchisor. The janitors’ minimum wage and overtime claims stemmed from allegations that they were misclassified as independent contractors as part of JAN-PRO’s franchising model. Because several of the janitors resided in California, the Massachusetts District Court severed the California janitors from the case and transferred their claims to the Northern District of California. In the Northern District, JAN-PRO prevailed on a summary judgment motion as to the janitors’ minimum wage and overtime claims. The janitors appealed. While on appeal, the California Supreme Court decided Dynamex. The Ninth Circuit then ordered the parties to brief the effect of Dynamex on their case.

b. The Ninth Circuit’s Decision

In its opinion, the Ninth Circuit examined California precedent and found that applying Dynamex retroactively was consistent with the state’s “legal tradition” to apply judicial decisions retroactively. While the court acknowledged that there was an exception to that general rule, it declined to apply it here. Rather, the court reasoned that there was a strong presumption in favor of retroactivity, Dynamex only clarified existing law, and that California state courts provided no indication of an intention to limit Dynamex to new cases. As part of its opinion, the Ninth Circuit acknowledged that the California Supreme Court’s denial of a petition asking it to state that Dynamex should be applied prospectively was only “a data point for us to consider.”

Although the Ninth Circuit remanded the case to the Northern District to decide the case’s merits, it nonetheless offered “guidance” on the analysis. It urged the district court to focus on Prong B of the ABC test, raising the serious question of whether the janitors performed work outside the “usual course” of JAN-PRO’s business. Although JAN-PRO markets itself as a “commercial cleaning company,” it argued that it was a franchising business and not a cleaning business—a fact that may prove dispositive on remand.

2. Practical Pointers

As a result of Vasquez, companies defending misclassification claims in the Ninth Circuit may now confront potential exposure for claims that accrued several years before the April 2018 Dynamex decision, increasing the already-heightened pressure on companies who use independent contractors.

Some action items that companies may take to mitigate the risk of future misclassification claims include:

• Conduct a risk analysis with legal counsel to confirm all independent contractors are properly classified.

• Confirm in the risk analysis that the independent contractors do not provide services that are part of the company’s core business offerings.

• If necessary, reclassify independent contractors.

• Establish a checklist and process for onboarding independent contractors that contemplates the ABC test and prevents misclassifications.

• In light of the U.S. Supreme Court’s recent decisions affirming the validity of arbitration agreements, including those that contain class action waivers, consider including private arbitration agreements to resolve any disputes that arise from the working relationship.

• Note that different criteria are applied under the Wage Orders and federal laws, including the Fair Labor Standards Act.

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