Listen to this post

In last Thursday’s Vazquez v. Jan-Pro Franchising, the Ninth Circuit made several impactful findings related to the infamous Dynamex decision:

  1. Aligning with several state court decisions supporting retroactivity, the Ninth Circuit ruled that Dynamex’s ABC test applies retroactively.
  2. It also applied Dynamex to a multi-level franchise structure, expanding the test beyond the independent contractor context.
  3. Last, the Court issued guidance to the district court on remand reaffirming the difficulty of “passing” the ABC test.

Background: The California Supreme Court’s Dynamex Decision

Last year, the California Supreme Court’s Dynamex decision essentially upended the gig economy by radically altering the legal standard for determining whether workers should be classified as employees for the purposes of California’s wage orders. (Read more here.) This decision did away with the flexible, multifactor Borello test, which the California courts had used as the standard for misclassification for several decades, and replaced it with the inflexible ABC test.

By way of reminder, under the ABC test, all workers are presumed to be employees, unless the company establishes the following factors to disprove employment status:

  1. The worker is free from its control; and
  2. The worker performs work outside of the usual course of its business; and
  3. The worker is customarily engaged in an independently established trade or business the same nature as the work performed for the company.

Dynamex created more questions than answers. For example:

  • The Court explicitly refused to decide whether the ABC test applies to past conduct (retroactively), or only to future conduct (prospectively), which made it difficult for companies to assess their potential exposure for misclassification claims and develop a tailored risk mitigation strategy. However, Vazquez answers this.
  • The Court did not explain how companies could “pass” the ABC test, or provide practical guidance on how the test might apply to gig economy companies.

The Ninth Circuit’s Vazquez Decision

  1. The Court ruled Dynamex applies retroactively. The difficulty with this ruling is that now companies can be liable for misclassification under the ABC test going back 4 years (meaning companies can be held responsible for conduct that occurred before the ABC test even existed!).

The Ninth Circuit’s holding follows the position of the lower state courts on retroactivity, which means this question is largely settled. Companies should assume that Dynamex applies retroactively.

  1. The Ninth Circuit also held that the ABC test applies to multilevel franchising structures, and that it is not limited to independent contractors, or to disputes between parties to the same contract. As long as an individual was providing a service to a company, even indirectly, that company can fail the ABC test and be treated as the direct employer.
  2. Lastly, the Court provided (non-binding) guidance to the district court on remand, which affirmed that it is most difficult to satisfy “Prong B” of the ABC test, which requires the hiring entity to establish that the worker was not engaged in its usual course of business. The Court essentially set out a summary judgment road map for plaintiff’s attorneys, and indicated that Prong B is not satisfied if the worker performs services in the area of business the company says it engages in or actually engages in, if the business depends on the type of services performed by the worker, or if the company’s profits are directly related to the worker’s output.

Action Items for Engaging Entities in California

Given the current legal landscape, companies engaging independent contractors and other non-employee workers in California should consider the following risk mitigation measures:

  • Get an arbitration agreement with a class action waiver.

Take advantage of the employer-friendly arbitration landscape and make sure they have in place best practices arbitration agreements with class action waivers. Class action waivers can significantly limit the company’s potential exposure and make the company an undesirable target for plaintiff’s attorneys.

Companies without an arbitration agreement should implement one as soon as possible. Companies with older arbitration agreements should update their agreements, given the recent US Supreme Court decisions. Separately, companies should consider the best way to roll out new arbitration agreements without raising questions from their workforce.

Last year, the US Supreme Court’s Epic Systems decision held that class action waivers in arbitration agreements are enforceable, and that these provisions can be a mandatory condition of employment or doing business. (Read more here.) Just last week, the Supreme Court held that a party cannot be compelled to submit to class arbitration if this is not explicitly contemplated by the arbitration agreement. (Read more here.) These decisions overruled prior case law in the Ninth Circuit and California, which took the position that class action waivers were unenforceable.

However, the US Supreme Court did not address whether collective representative claims, such as claims under the California Private Attorneys General Act (PAGA) can be waived. California courts take the position that these claims cannot be waived because they are brought on behalf of the public, and this is still good law for the time being. This means that an arbitration agreement in California can contain a class action waiver, but must carve out representative actions.

An enforceable arbitration agreement with a class action waiver would prevent plaintiffs from pursuing class-wide misclassification litigation under the ABC test, going back up to 4 years. Plaintiffs could still bring representative claims on behalf of the public under PAGA, but PAGA liability only goes back 1 year, which significantly reduces potential exposure and makes these claims less appealing for plaintiff’s counsel.

  • Audit your company’s non-employee workforce.

Companies without best practices’ arbitration agreements should conduct a privileged audit of their non-employee workforce in California to determine whether any workers are appropriately classified under the ABC test, assess their potential class action exposure (going back up to 4 years), and decide whether it makes financial sense to reclassify some or all of the workers as direct employees.

This analysis should not be limited to independent contractors, as the Dynamex decision can apply to other types of workers if they are subject to the company’s control in practice. If the company is considering reclassification, work with counsel to develop a comprehensive reclassification strategy that limits exposure for past non-compliance.

For more, please contact your Baker McKenzie employment lawyer.