By: Philip A. Toomey, Esq.
In a decision posted today (Vazquez v. Jan-Pro Franchising International, Inc. (2021) ___Cal.5th ___), the California Supreme Court declared its decision to applying the very restrictive A-B-C test to determine if someone is an independent contractor for wage and hour purposes (Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903) will be given retroactive effect. As to any matter not final as of the date of the Dynamex decision, the relevant statute of limitations is four (4) years prior to the filing of the lawsuit. Businesses who still utilize independent contractors in California should, once again, review their agreements, how work is actually performed, and potential exposure and then make appropriate changes.
For wage and hour purposes, California has long determined an individual is either an “employee” or an “independent contractor” by applying the applicable Wage Orders. For some time prior to the Dynamex decision, establishing independent contractor status was difficult, but not impossible, by application of different multi-factor tests announced in court decisions. While certainty was never clearly established, starting in 2010 the California Supreme Court indicated classification for wage and hour purposes was an “open issue” subject to further review (Ayala v. Antelope Valley Newspapers, Inc. (2014) 59 Cal.4th 522 (Ayala); Martinez v. Combs (2010) 49 Cal.4th 35, 57–58 (Martinez).)
In its Dynamex decision, the California Supreme Court established the rule that, for wage and hour purposes, classification as employee or independent contractor would be determined by application of a test not previously articulated in any California court decision. The “new” (or “different”) test applied three separate criteria. To be classified as an independent contractor, a business was required to establish specific requirements for each independent contractor. The three requirements are:
(A) The individual is free from the control and direction of the business in connection with the performance of the work, both under the contract for the performance of such work and in fact;
(B) The individual performs work that is outside the usual course of the hiring business; and
(C) The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the business.
Known as the “A-B-C Test,” this “new” standard was subsequently adopted by the California Legislature as part of AB-5. Most commentators agree Dynamex (and AB-5) both applied a different standard than the multi-factor tests previously announced, but by application of the “B” part made it became very, very, very difficult to establish independent contractor status. Since the Dynamex decision, the DLSE has issued scores of citations asserting misclassification.
Risks of Improper Classification
If an individual is misclassified as an independent contractor, the resulting economic consequences are severe. The business, now being the individual’s “employer,” is subject to employer withholding and trust fund deposit, record maintenance, immigration control, minimum wage, overtime, meal break, fair pay, mandated paid sick leave, paycheck disclosure and waiting time obligations. In addition, if the individual is an employee, workplace illnesses or injuries are handled under the workers’ compensation system, with the additional requirement the business cover the “employee” under policies or workers’ compensation insurance.
By declaring that Dynamex only interpreted language included in the Wage Orders, the Court today established that, at least for wage and hour matters, the A-B-C Test is the only relevant test to be applied, irrespective of “when” the individual was hired, or “even if” after the Dynamex decision the business immediately treated the individual as an employee. The end result is that when there is a claim of misclassification, the business must calculate its exposure by looking back four (4) years, and include the required penalties and interest.
Should you have any questions regarding this decision, please contact our Leech Tishman attorneys in the Employment & Labor Practice Group.
Philip A. Toomey is a Partner at Leech Tishman and Chair of the firm’s national Employment & Labor and Immigration Practice Groups. He is based in Leech Tishman’s LAX office and can be reached at (424) 738-4400 or email@example.com.
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