May 3, 2019

Ninth Circuit: Dynamex "ABC" Test Unquestionably Applies Retroactively

Holland & Knight Alert
Samuel J. Stone | Tina Tellado

A panel of the U.S. Court of Appeals for the Ninth Circuit issued its decision in Vazquez et al. v. Jan-Pro Franchising Int'l., Inc., No. 17-16096 (Jan-Pro) on May 2, 2019, holding that the recently adopted, three-pronged "ABC" test used to determine independent contractor status under California's Wage Orders operates retroactively. In Dynamex Ops. W. Inc. v. Superior Court, 4 Cal. 5th 903 (Cal. 2018) (Dynamex), the California Supreme Court adopted the "ABC" test but left open the question of whether it would be applied retroactively to determine classification status. Relying on longstanding California law, the Dynamex decision itself and a subsequent decision by the California Supreme Court not to clarify Dynamex, as well as other California cases, the Ninth Circuit definitively answered the unresolved issue in favor of retroactive application.

The "ABC" test adopted in Dynamex is used to determine whether an individual is classified as an employee or an independent contractor for purposes of the California Industrial Welfare Commission's Wage Orders, which regulate working conditions across certain industries. See Jan-Pro, Slip Op. at 7, 28. The "ABC" test applies only under the Wage Orders, and different standards apply to different statutory claims. See Dynamex, at 942, 948; see also Garcia v. Border Transp. Grp., LLC, 28 Cal. App. 5th 558, 571 (2018). In order to show that an individual was an independent contractor, the hiring entity bears the burden to establish each of the three prongs in the "ABC" test. See Dynamex, at 958-964. However, as noted by a California Court of Appeal, Dynamex itself addressed only the "class certification question before it," and left the retroactivity question open. Garcia, 28 Cal. App. 5th at 572 n.12.

The Ninth Circuit's Decision

In Jan-Pro, the district court granted summary judgment on the misclassification issue in the employer's favor before Dynamex issued; the parties were subsequently ordered to brief Dynamex's impact on the merits of the matter. Jan-Pro, Slip Op. at 9. After disposing with Jan-Pro's attempts to avoid reaching the retroactivity question, the Ninth Circuit started from the premise that it is settled law that "judicial decisions are given retroactive effect." Id. at 22. While the panel noted that "there is an exception to the rule of retroactivity" based on the parties' reasonable reliance on the legal principle subject to change, it held that the exception did not apply, soundly rejecting Jan-Pro's argument that the reliance analysis should examine only the factual record at hand. Id. at 23.

The Ninth Circuit further pointed to the California Supreme Court's refusal to modify Dynamex for "[c]larification that [the "ABC" test] is Prospective Only," observing that while refusal to hear a matter does not constitute a ruling on the merits, "actions sometimes speak louder than words" and the "[California Supreme C]ourt strongly suggested that the usual retroactive application, rather than the exception, should apply to its newly announced rule." Id. at 24. Looking to post-Dynamex cases, the Ninth Circuit found it particularly instructive that a California Court of Appeal applied Dynamex in Garcia v. Border Transp. Grp., LLC, supra, and commented that Dynamex likely applied retroactively. Id. at 25. Per the Ninth Circuit, Garcia "is persuasive" and represented "datum for ascertaining state law which is not to be disregarded by a federal court[.]" Id.

After rejecting due process concerns and finding that retroactive application of Dynamex was neither arbitrary nor irrational, the Jan-Pro panel turned to the merits of the matter, vacating and remanding to the district court to develop a further factual record regarding the Dynamex criteria. Id. at 36. In so doing, the Ninth Circuit offered extensive guidance to the district court for the novel legal issues presented and cautioned that no special result was demanded because of the franchise relationship between the parties. Id. at 37.

Takeaways and Considerations

The Jan-Pro decision offers much-needed guidance to employers and hiring entities on the crucially important and (formerly) unresolved issue of retroactive application of Dynamex. Along with Garcia v. Border Transp. Grp., LLC, which gave clarity on particular elements of the "ABC" test, Jan-Pro offers a bright line that puts hiring entities on notice that, if their industry is covered by a wage order, the "ABC" test will govern classification questions. Accordingly, employers and hiring entities should carefully evaluate with counsel whether their workforce is properly classified as either "employees" or "independent contractors" under the "ABC" test.

For more information regarding classification distinctions, retroactivity, and potential class or representative actions alleging misclassification, please contact the authors or another member of Holland & Knight's Labor, Employment and Benefits Group.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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