This week, a California Court of Appeal concluded in a class action case that the California Supreme Court’s Dynamex decision applies retroactively. In another case, Vazquez v. Jan-Pro Franchising International, the Ninth Circuit Court of Appeals previously found the Dynamex decision applies retroactively, but subsequently withdrew that opinion and certified the question to the California Supreme Court, where the request is now under consideration. The implication of this decision is that employers who rely upon independent contractors may now be subject to potential exposure for wage and hour claims based on a legal standard that did not exist prior to April 2018.

In Dynamex, the California Supreme Court adopted a new test for determining whether a worker is an employee or an independent contractor. The new test essentially added two new requirements to the test that an employer must meet to establish that the worker is an independent contractor rather than an employee.  Based on this significant change in the applicable test, employers have argued that the new standard should only be applied prospectively.

In Gonzales v. San Gabriel Transit, Inc., the California Court of Appeal concluded otherwise. In that case, a transportation driver brought a putative class action on behalf of himself and other drivers, alleging that they were misclassified as independent contractors rather than employees. The issue on appeal was whether the claim was suitable for class certification. Although the transit company didn’t raise the issue on appeal, the court of appeal first considered whether the Dynamex rule applies retroactively. The court concluded that the Dynamex decision applied retroactively because it did not establish a new standard, but rather “merely clarified and streamlined” the prior standard.

The significance of the retroactive application of the Dynamex standard is that employers now have potential exposure going back four years for potential misclassification of employees as independent contractors (four years is the maximum statute of limitations period for wage and hour claims). Had the rule been applied prospectively only, then exposure would start at the date of the Dynamex opinion, which came out in April 2018.

What is the significance of this ruling in light of AB-5, the law recently passed by the California Legislature codifying the Dynamex decision? AB-5 takes effect Jan. 1, 2020, and expands on the Dynamex decision, applying the test to all claims arising out of the California Labor Code, whereas the Dynamex decision has been interpreted by courts to only apply to claims arising out of the California Wage Orders. Therefore, from Dec. 31, 2019, and before, the Dynamex decision applies, but for Jan. 1, 2020, and on, AB-5 applies. But this period of Dec. 31, 2019, and before provides significant risk for employers, as they did not have any notice prior to the Dynamex decision that they were not applying the proper legal standard to classification of independent contractors. 

In Vazquez, the Ninth Circuit Court of Appeals has asked the California Supreme Court to decide whether the Dynamex decision applies retroactively.  The California Supreme Court will now likely be asked to review the Gonzales decision as well.  The California Supreme Court will decide whether to hear the issue in the next few months.  If the California Supreme Court decides to review Vazquez, then it will likely take the Gonzales decision under review as well. But even if the California Supreme Court grants review of Gonzales, Gonzales will constitute binding authority in California unless the California Supreme Court orders otherwise.

BOTTOM LINE: Until and unless the California Supreme Court concludes otherwise, employers will be subject to retroactive exposure for misclassifying employees as independent contractors.