Despite the passing of Assembly Bill 5 (AB 5) and the codification of the so-called “ABC” test into California’s wage and hour laws, the California Supreme Court is still working through the issues brought up by its 2018 decision in Dynamex Operations West Inc. v. Superior Court. One such issue is whether the approach taken in Dynamex should be applied retroactively to decisions taken to classify independent contractors prior to the date of the court’s decision.

It was the Supreme Court that first applied the ABC test to determine whether an individual is an employee or independent contractor under the state’s Industrial Welfare Commission Wage Orders. Prior to the decision in Dynamex, the question of whether a worker should be classified as an employee or an independent contractor had been resolved under the “Borello” test established almost 30 years before by the Supreme Court in 1989 (S.G. Borello & Sons v. Department of Industrial Relations).

Following the court’s decision in Dynamex, the California legislature adopted and expanded the ABC test, which starts with a presumption that anyone who performs work for a business is an employee, unless the hiring entity business can establish that:

(A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both in the terms of the contract for the performance of such work and in fact;

(B) the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) 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 was a new test and the question of whether it would apply to cases pending at the time Dynamex became final had not been dealt with — the Supreme Court in Dynamex declined to address whether their judgement would apply retroactively. In all US jurisdictions, new rules of law announced by a court are presumed to have retrospective effect for up to four years — that is, they are presumed to apply to events occurring before the date of judgment. There are, however, exceptions in certain cases where a court believes that such application of the new rule will upset serious and reasonable reliance on the prior state of the law.

A class-action lawsuit filed by janitors in 2008 — Vazquez v. Jan-Pro Franchising International Inc. — was ultimately considered on the basis of the ABC test established by Dynamex. In Vazquez, the defendant, Jan-Pro Franchising International Inc., asserted that an exception to the general rule of retroactivity should be recognized. The defendant maintained that, prior to the decision in Dynamex, it had reasonably believed that the question of whether a worker should be classified as an employee or independent contractor would be resolved under the “Borello” test, which examined the total circumstances of the relationship between the business and the person performing the work. The Borello Test comprises multiple factors, with the focus being on the potential employer’s control of the manner and means of accomplishing the work. This factor is not dispositive and must be considered along with other factors, such as the skill required, the manner of payment, investment by the worker, and the length of time the services are to be performed.

Both the Borello standard and the ABC test presume the worker is an employee. The hiring entity has the burden to prove the worker is an independent contractor. However, the ABC test imposes a significantly higher burden on companies than the previous Borello standard, making it more difficult to establish independent contractor status.

In Vazquez, California’s Supreme Court held that the ABC test does apply retroactively to all nonfinal cases that predate the effective date of the Dynamex decision, and that the exception did not apply in this case.

The main reason for the court’s decision was that the Borello test addressed whether farm workers hired by a grower under a written “sharefarmer agreement” were independent contractors or employees for purposes of the workers’ compensation statutes. Instead, the Dynamex ABC test was limited to claims arising solely under a California Wage Order; it did not extend to other employer obligations established under the Labor Code.

In resolving the meaning of the terminology used in the wage orders, the court did not overrule any prior California Supreme Court decision or disapprove any prior California Court of Appeal decision. Dynamex was the first time the California Supreme Court had been asked to determine how the definition of “employ” as to “suffer or permit to work” in California’s wage orders should be applied in distinguishing employees from independent contractors.

Another reason the court cited for their decision was that “Applying the interpretation of the suffer or permit to work definition adopted in Dynamex only prospectively would potentially deprive many workers of the intended protections of the wage orders to which they may have improperly been denied, as well as permit businesses to retain the unwarranted advantages of misclassification.”

The AB 5 connection. AB 5, meanwhile, makes the ABC test applicable to any claim arising under the Labor Code, not just those under the wage orders. AB 5 also specifically states that only certain sections of the law apply retroactively. However, hiring entities should carefully review their worker classification methods to determine whether they are at risk of noncompliance with this more stringent standard for all potential legal claims.

The risk of being sued for past decisions diminishes over time as the deadlines (statute of limitations) by which legal claims must be filed (or otherwise initiated) pass. In California, such deadlines are generally between six months and three years from the most recent date the violation occurred; but the sooner employers put their house in order, the better.