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California Justices Take Up Retroactivity of Independent Contractor Standards

The legal battle over the reach and applicability of California’s new test for classifying workers as independent contractors came to a head Tuesday at the state Supreme Court, where the justices took up the as-yet unanswered question of whether it applies retroactively.

SAN FRANCISCO (CN) — The legal battle over the reach and applicability of California’s new test for classifying workers as independent contractors came to a head Tuesday at the state Supreme Court, where the justices took up the as-yet unanswered question of whether it applies retroactively.

In 2018, the high court shook the foundation of labor law with its decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, a ruling establishing a three-part “ABC test” for determining when companies can classify their workers as independent contractors rather than employees. They must show A) the hiring entity does not directly control the worker, B) the work falls outside the hiring entity’s usual course of business, and C) the worker is “customarily engaged in an independently established trade occupation, or business of the same nature as the work performed.” 

The Legislature codified the Dynamex standard into California law with the passage of Assembly Bill 5 last year.

Shannon Liss-Riordan, an employment attorney representing low-wage cleaners suing janitorial franchisor Jan-Pro Franchising, said of course Dynamex has retroactive effect.

“There are no special circumstances raised here for the court to go against its usual rule that cases it decides will apply to the time period prior to the decision,” she argued Tuesday.

Liss-Riordan said the Dynamex decision was not a "break” with but an evolution of the law, bringing much-needed clarity to the standard for properly classifying workers. Independent contractors are not required to receive overtime, minimum wages or other entitlements afforded to employees for whom businesses withhold income taxes and pay Social Security and Medicare taxes.

“It was a reconfiguring of the factors that had previously been used in Borello. It wasn’t an adoption of a completely new and distinct standard it was an evolution in how procedurally cases were to be addressed that raised the independent contractor question,” she said. “What this court did was make the analysis more clear. This court recognized the importance of having predictability in the decision and clarity for all parties involved.”

Justice Mariano-Florentino Cuéllar asked Liss-Riordan how she would account for Jan-Pro’s reasonable reliance on legal decisions prior to Dynamex.

Liss-Riordan said Jan-Pro could not have reasonably relied on an ever-evolving body of case law centered around an issue as hotly disputed as independent contractor classification. 

For three decades, the California labor commissioner and state Employment Development Department had used the 11-factor test under S.G. Borello & Sons v. Dept. of Industrial Relations.

In finding for Jan-Pro in 2017, U.S. District Judge William Alsup applied the employment relationship defined by the California Supreme Court in Martinez v. Combs. Alsup also looked to the high court’s ruling in Patterson v. Domino’s Pizza, which determined that franchisors are not vicariously liable for franchisees’ workplace conduct.

The Ninth Circuit disregarded Patterson when it overturned Alsup in 2019, since it was not a wage and hour case but focused instead on a franchisor's vicarious liability for a worker’s sexual assault. 

After Dynamex, the appellate court set aside its ruling to ask the California Supreme Court to settle the question of whether it could apply to the cleaning workers’ claims.

Representing Jan-Pro, attorney Jason Wilson of the firm Willenken opted to largely disregard the retroactivity question. Instead, he argued Dynamex’s ABC test should never have been applied in the first place because Jan-Pro did not do the hiring. 

“Jan-Pro didn’t do the classification here, an intermediary did, Jan-Pro does not have a contractual relationship with the petitioners in this case. Jan-Pro wasn’t the one who hired so the test should not apply to Jan-Pro in this particular instance,” Wilson said. 

He also said Jan-Pro’s tiered franchise system absolves it of potential joint-employer liability.

Justice Joshua Groban observed that Wilson had already raised these arguments with the Ninth Circuit, and the panel rejected them.

“You're now here in front of us saying we should now decertify the retroactivity question because we think the court got the joint employer question wrong and we want to go back again?” he asked.

Wilson said the appellate court never dealt with the joint-employer question but he intends to raise it in a future petition for an en banc rehearing in the Ninth Circuit. If granted, he will also argue that the ABC test was misapplied. 

“I think ultimately, a decision in this case will be purely advisory,” he said.

The court took the arguments under submission.

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