How should companies deal with Dynamex retroactivity?

Approximately a year ago, the California Supreme Court issued its opinion in the Dynamex case, upsetting the status quo employment status test that had been in place in California for nearly 30 years. Now, the 9th U.S. Circuit Court of Appeals has weighed in, holding in Vazquez v. Jan-Pro Franchising, International, Inc., 2019 DJDAR 3707 (May 2, 2019), that the Dynamex decision applies retroactively, and that the ABC test on employee status must be considered in the franchisor-franchisee context.

For those employers tracking the fallout of the Dynamex decision -- including the Supreme Court's refusal to affirmatively state the decision was being applied prospectively only -- it likely does not come as a surprise that the 9th Circuit took the typical California approach in the Vazquez decision to apply a "broad reading" of the IWC Wage Orders and declare that the employee-presumptive ABC test set forth in Dynamex should be applied retroactively. Companies involved in ongoing litigation involving independent contractor misclassification claims have by and large been dealing with this development since last year.

So, what exactly are the new implications of Vazquez decision in litigation alleging independent contractor misclassification?

First, as a ray of light, the 9th Circuit went to great pains to detail why the ABC test set forth in Dynamex does not apply to employment claims arising outside of the context of the IWC Wage Orders. The 9th Circuit looked at claims arising under the wage orders uniquely from those arising under tort law (such as the Fair Employment and Housing Act), distinguishing both the purposes and intent of the laws, as well as the potential remedies and liabilities associated with the expansive definition of employment status the ABC test imputes to wage order claims. The 9th Circuit concluded there is "no reason that the tests for employee status must necessarily be the same" in wage order and tort cases.

Thus, at least for now, companies facing non-wage order litigation arising from the allegations (or actions) of independent contractors are still ostensibly dealing with the original, more flexible, employment status test they have been using for nearly 30 years from S.G. Borello & Sons, Inc. v. Department of Industrial Relations.

Second, the 9th Circuit unambiguously expanded the reach of the ABC test to the franchisor-franchisee context for wage order claims in federal court, limiting the reach of the California Supreme Court's recent decision in Patterson v. Domino's Pizza, LLC (a non-wage order case) that affirmed the historical and unique protections for companies of the franchise structure.

Third, the 9th Circuit held that the ABC test could conceptually be applicable in wage order claims even where the alleged hiring entity or franchisor and the putative employee are not parties to the same contract, and the putative employee is only indirectly providing a service to the hiring entity. So, where Company A contracts with Company B for services, and Company B contracts with other third parties (as independent contractors) to perform the work under its contract with Company A, the Vazquez decision says that Company A can be considered the employer of the third parties as an "agent of the misclassification" committed by Company B. This ruling is a first of its kind for California and the 9th Circuit.

What should companies do to deal with the new developments from Vazquez?

Many companies that utilize independent contractors, including many companies operating in the gig economy space, and those involved in franchisor-franchisee relationships, have lessons to learn from the Vazquez decision. Companies reading between the lines of the Vasquez decision, and seeking to head off or limit potential liability for misclassification allegations, should consider:

How does the company describe its business, both to the public and its contractors? For instance, companies must weigh whether their business model centers on an app connecting service providers and end users, or licensing their trademarks and providing business plans to workers, or whether they are actually "in the business of" providing the underlying services which the workers provide. Companies should take a look at their websites, marketing materials, contracts with independent contractors or franchisees, and business prospectus -- does it align with an argument the company is different business than the workers ultimately providing the service? If not, it may be time for a refresh.

Does the company have an arbitration agreement with individuals or entities it contracts with for services? If not, it may be time to consider implementing an arbitration agreement with a class and collective action waiver. It may also be wise to require that any entity the company contracts with that is allowed to further contract out the services provided makes the company an explicit third-party beneficiary of the arbitration agreement with the end service provider. Both the 9th Circuit and the courts in Massachusetts and the 1st Circuit looking at the predecessor cases to Vazquez noted that the reason certain parties were not named as defendants was likely due to the arbitration agreements in place. Companies should consult experienced counsel in crafting enforceable arbitration agreements both in California and on a national scale.

How does the company set up the financial arrangements with its independent contractors? The 9th Circuit looked particularly harshly on the independent contractor analysis under Prong B of the ABC test where companies structured their independent contractor agreements such that the putative employee/service provider paid a portion of his or her earnings to the company, as opposed to a flat or one time rate. In the court's view, service providers being required to continuously share a portion of their earnings meant the company's success was dependent on the performance of the service provider and thus not an independent business entity. Companies setting out new independent contractor agreements or considering revamping existing ones may want to take a look at their compensation structure in light of this guidance from the 9th Circuit.

As Vazquez heads back to the district court for further proceedings, California state courts are considering how to grapple with the implications of the 9th Circuit decision, and the California state legislature considers multiple bills affecting employment classification and gig economy companies, businesses should keep a watchful eye of legal developments in this area and be prepared to implement changes as necessary.