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California Supreme Court rules Dynamex is retroactive

A recent California Supreme Court decision may increase the number of companies liable for misclassifying workers as independent contractors. In Vazquez v. Jan-Pro Franchising International (Vazquez), California’s Supreme Court upheld that the case Dynamex Operations West, Inc v. Superior Court of Los Angeles (Dynamex) applies retroactively.

The background of the case

Jan-Pro Franchising offers cleaning services and janitorial franchise opportunities. Its business model uses a two-tier structure: master franchisees and unit franchises, where master franchisees have exclusive rights to use the Jan-Pro service mark within a geographic territory. It can offer unit franchises to service providers who want to become franchisees of the brand. Master franchisees provide support to the unit franchisees who are responsible for the cleaning and janitorial services. Unit franchisees choose which accounts they want to work with, set their own schedule, using their own supplies. They pay a fee to Jan-Pro to become a franchisee and must continue to pay the franchise monthly based on the agreed contract. 

Several unit franchisees filed a class-action lawsuit in Massachusetts alleging Jan-Pro had misclassified them as independent contractors. Additional unit franchisees joined the class, including several from California. This suit began over a decade ago and, for the California plaintiffs, it has finally reached a verdict. Because of the complexity resulting from different state law applications, Massachusetts severed several plaintiffs, including the California plaintiffs. Their case was referred back to the Northern District Court in California. 

In 2017, the court granted a summary judgment in Jan-Pro’s favor, concluding the plaintiffs were independent contractors. The Plaintiffs filed an appeal, and while the appeal was pending, the landmark case Dynamex Operations West, Inc. v. Superior Court of Los Angeles was decided. The court ruled Dynamex does apply retroactively. However, this ruling was withdrawn, and the court posed this question to the supreme court. The Supreme Court of California unanimously confirmed this in the opinion published this month.

Dynamex ABC test

The Dynamex decision created a new legal standard for classifying employees as independent contractors. With this ruling, California workers are presumptively employees for purposes related to California Wage Orders. The employer hiring the worker must prove the worker qualifies as an independent contractor, in accordance with the ABC test.

Under the ABC test, the employer must answer the following:

  1. Is the worker free from the employer’s direction?
  2. Is the work performed outside the scope of the employer’s normal business?
  3. Is the worker normally engaged in work of the same nature as the work performed?

This ruling later became law under California Assembly Bill 5 (AB-5.) This law includes numerous exemptions, including doctors, dentists, insurance agents, and many other occupations. Recently, California voters expanded the exemptions to include app-based drivers under Proposition 22. Franchises, however, do not automatically qualify for an exemption. 

Dynamex does not address whether the ABC test should apply retroactively, but the Vasquez decision handed down on January 14, 2021, establishes that it does. The Supreme Court ruled that Dynamex was more of a clarification and resolution of an open issue rather than an overturning of existing law.

What is the effect of this decision?

As a result of this decision, the Dynamex precedent will apply to unresolved cases prior to the Dynamex decision. Any new lawsuits alleging misconduct prior to this decision are subject to the applicable statute of limitations. This case also serves as a reminder of how important it is for companies to ensure their employees are appropriately classified. With this decision, companies could be held responsible for violations of California’s Wage Order going back several years.