Labor & Employment Law Daily California’s Dynamex decision applied retroactively in determination of employee status
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Wednesday, January 20, 2021

California’s Dynamex decision applied retroactively in determination of employee status

By Ronald Miller, J.D.

Dynamex held that under the “suffer or permit to work” definition set forth in all California wage orders, any worker who performs work for a business is presumed to be an employee who falls within the protections afforded by a wage order.

Having agreed to decide the question of California law certified from the Ninth Circuit regarding whether the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court applied retroactively, the state high court has ruled that the decision indeed does apply retroactively. The standard set forth in Dynamex will apply to all cases not yet final as of the date that decision became final, concluded the court, seeing “no reason to depart from the general rule that judicial decisions are given retroactive effect.” Here, the high court concluded that no “compelling and unusual circumstances justify[] departure from the general rule” of retroactivity (Vazquez v. Jan-Pro Franchising International, Inc., January 14, 2021, Cantil-Sakauye, T.).

Employee versus independent contractor. In Dynamex, the California Supreme Court was faced with the question what standard applies in determining whether, for purposes of the obligations imposed by California’s wage orders, a worker should be considered an employee who is covered and protected by the applicable wage order or, instead, an independent contractor to whom the wage order’s obligations and protections do not apply. All currently applicable California wage orders define the term “employ” in part to mean “suffer or permit to work” and define the term “employee” to mean “any person employed by an employer.” However, the wage orders do not contain a definition of the term “independent contractor.”

ABC test. In Dynamex, the California high court adopted the “ABC test” to distinguish employees from independent contractors. Under Dynamex, a worker can properly be found to be “an independent contractor only if the hiring entity establishes: (A) 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; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) 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.”Dynamex presented a question of first impression concerning how a wage order’s suffer or permit to work standard should apply in the employee or independent contractor context. In resolving that issue, Dynamex did not overrule any prior California Supreme Court decision or disapprove any prior California Court of Appeal decision. Accordingly, the court determined that the well-established general principle affirming the retroactive application of judicial decisions interpreting legislative measures supported the retroactive application of Dynamex.

On September 24, 2019, the Ninth Circuit certified to the California Supreme Court the question whether the decision in Dynamex applied retroactively. In answer to the question posed by the Ninth Circuit, the state high court concluded that its decision in Dynamex applies retroactively to all nonfinal cases that predate the effective date of that decision.

Retroactivity. Here, the employer asserted that an exception to the general rule of retroactivity should be recognized. It maintained that, prior to the issuance of Dynamex, it reasonably believed that the question of whether a worker should be classified as an employee or independent contractor would be resolved under the standard set forth in the court’s 1989 decision in S.G. Borello & Sons v. Department of Industrial Relations. Thus, the employer argued that it would be unfair to apply the ABC standard adopted in the Dynamex decision, rather than the Borello standard, to nonfinal cases that predate the Dynamex decision.

However, the state high court disagreed that an exception to the general rule of retroactivity was warranted on this theory. Rather, it pointed out that California’s wage orders have included the suffer or permit to work standard as one basis for defining who should be treated as an employee for Borellopurposes of the wage order for more than a century. Moreover, it noted that Borello did not address whether a worker should be considered an employee or an independent contractor for purposes of the obligations imposed by a wage order. It additionally noted that in two prior decisions, Ayala v Antelope Valley Newspapers, Inc, and Martinez v Combs, it signaled that the test for determining whether a worker should be classified as an employee or independent contractor in the wage order context remained an open question.

Fairness. Additionally, the employer contended that it could not have anticipated that the distinction between employees and independent contractors for purposes of the obligations imposed by a wage order would be governed by the ABC test that was adopted in Dynamex. But the court afforded little weight to the employer’s argument when, as here, the underlying decision changed no settled rule. Rather, it rejected the employer’s contention that litigants must have foresight of the exact rule that a court ultimately adopts in order for it to have retroactive effect. The court concluded that the ABC test articulated in Dynamex was within the scope of what employers reasonably could have foreseen.

Finally, the state high court determined that public policy and fairness concerns, such as protecting workers and benefitting businesses that comply with the wage order obligations, favored retroactive application of Dynamex. It observed 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. Thus, the court declined to find that the retroactive application of the ABC test to cases pending at the time Dynamex became final was improper or unfair.

Seeing “no reason to depart from the general rule that judicial decisions are given retroactive effect,” the California Supreme Court concluded that the standard set forth in Dynamex will apply to all cases not yet final as of the date that decision became final.

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