California's "Dynamex" Test for Independent Contractors Applies Retroactively

Author: Michael Cardman, XpertHR Legal Editor

January 15, 2021

California businesses that classified workers as independent contractors from 2018 through present may face additional legal risk following a new ruling that the state's worker-friendly independent contractor test applies retroactively.

There are no "compelling and unusual circumstances" that would justify departing from the general rule that court decisions apply retroactively, the California Supreme Court held in Vazquez v. Jan-Pro Franchising International, Inc.

The court said "employers reasonably could have foreseen" its 2018 ruling in the Dynamex case. In Dynamex, the court established an "ABC test" requiring businesses to classify a worker as employee under California's wage orders unless they can show that the worker:

  1. Is free from control and direction of the work, both under the contract and in fact;
  2. Performs work that is outside the usual course of its business; and
  3. Is customarily engaged in an independently established trade, occupation or business.

In 2019, California's legislature enacted a bill known as AB 5, which codified the Dynamex test and extended it beyond the wage orders (which govern minimum wages, overtime, show-up time / reporting time requirements, meal and rest breaks and other working conditions) to also cover labor relations, unemployment insurance, workers' compensation and more.

The Dynamex test applies retroactively to all cases not yet final as of April 30, 2018. Given that California has a three-year statute of limitations for most violations of the labor code, the window is closing for plaintiffs to file retroactive claims under the Dynamex standard rather than the more employer-friendly Borello standard it replaced. Further limiting employers' exposure is the fact that the Dynamex ruling applies only to the state wage orders for any claims for violations before AB 5 took effect on January 1, 2020.