Retroactivity of Dynamex and AB 5

In the past year and a half, state and federal courts have been grappling with questions arising in the wake of the California Supreme Court's landmark decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 4th 903 (2018). A key question has been whether Dynamex is retroactive. Last week, the California Court of Appeal answered that question in a published opinion. Gonzales v. San Gabriel Transit, Inc., 2019 DJDAR 9696 (Oct. 8, 2019).

First, some background. Dynamex changed long-standing precedent by adopting the ABC test to determine whether a worker was properly classified as an independent contractor or employee. Dynamex has a significant impact on employers because the ABC test places the burden on putative employers to establish a worker is an independent contractor, not an employee, by meeting the following three elements:

A: the worker is free from control and direction over performance of the work, both under the contract and in fact;

B: the work provided is outside the usual course of the putative employer's business; and

C: the worker is customarily engaged in an independently established trade, occupation or business.

Before the California Supreme Court adopted the ABC test, employers could use the flexible multi-factor test from S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989). The key element of the Borello test was the measurement of control exercised over the worker, which is similar to Part A of the ABC test. Where the ABC test differs from the Borello test is that Part B precludes a finding of independent contractor status if the work performed by the worker is in the employer's line of business. Because most independent contractors do perform work in the same line of business as the putative employer, under the new test, millions of workers must be reclassified as employees. For industries that have relied on the flexibility of independent contractor relationships this change in precedent is significant. Workers who may want to continue to work as an independent contractor cannot freely choose to do so.

The adoption of the ABC test exposes businesses that use independent contractors to substantial liability for violations of California's wage orders because these workers are now entitled to, among other things, minimum wage and rest and meal periods, and can sue for these violations. After Dynamex, many businesses have wondered whether the new standard applies retroactively. If it does, misclassified independent contractors may sue for violations of California's wage orders going back four years.

In Gonzales, the California Court of Appeal (2d Dist., Div. 4) held that Dynamex applies retroactively. The Gonzales court's analysis of retroactivity is brief, occupying just over a page of discussion. The court began by concluding that the defendant "failed substantively to address the issue" and thus "forfeited any claim that Dynamex is not retroactive." The court, however, proceeded to address the question on the merits. The court perceived "no reason" to depart from the general rule that judicial decisions in civil cases are given retroactive effect. Courts recognize an exception to the general rule for situations when considerations of fairness and public policy cut against retroactive application. The classic example of the exception is when a judicial decision articulates a new standard or rule of law. The Gonzales court found the exception inapplicable because, it concluded, "Dynamex did not establish a new standard." The court instead interpreted Dynamex as streamlining the "existing" test for independent contractor status under the wage orders.

The Gonzales court recognized that another published decision had taken a contrary position on the retroactivity of Dynamex. In a 2018 decision -- Garcia v. Border Transportation Group, 2018 DJDAR 10354 -- Division 1 of the 4th District stated that Dynamex "changed" the legal standard for independent contractor status. The Gonzales court considered this statement from Garcia to be dicta and noted that the briefing in Garcia was already complete when Dynamex was decided.

Although the Gonzales court gives a clear answer on the retroactivity of Dynamex, it seems unlikely that Gonzales will have the last word on the issue. Given the stakes -- the status of millions of workers hangs in the balance -- the issue appears destined for the California Supreme Court. Notably, the state high court declined an early opportunity to address retroactivity. Before the decision in Dynamex was final, a consortium of businesses filed an amicus letter seeking clarification on whether the decision would apply only prospectively, but the court did not answer the question.

Litigants will no doubt be knocking at the door of the state high court, and not just in Gonzales. Because decisions of the California Court of Appeal have no horizontal stare decisis effect -- they are binding only on superior courts -- businesses can be expected to continue litigating the issue of retroactivity in the appellate courts, including seeking review by the California Supreme Court.

Of course, a litigant seeking review of a state appellate court decision is not the only way the issue can present itself to the California Supreme Court. As mentioned above, both state and federal courts are wrestling with the impact of Dynamex. In May, the 9th U.S. Circuit Court of Appeals held that Dynamex applies retroactively. Vazquez v. Jan-Pro Franchising Int'l, 2019 DJDAR 3707. Consistent with what the state court would later hold in Gonzales, the 9th Circuit reasoned that Dynamex clarified, rather than departed from, established law. But after receiving briefing on whether to rehear the case, the Vazquez court retracted its opinion and later issued a published order requesting that the California Supreme Court answer the question of Dynamex's retroactivity. 2019 DJDAR 9227. The California Supreme Court has not yet ruled on whether it will answer the certified question.

From this legal landscape, some observers consider a decision from the state high court to be inevitable. "The California Supreme Court is well aware of the positions of all stakeholders," said appellate attorney James Azadian. "With the issue of retroactivity coming up in cases left and right, and with the 9th Circuit's certification of the question," Mr. Azadian predicts, "the court will likely answer the question sooner rather than later."

Interestingly, the Court of Appeal had not yet rendered its decision in Gonzales when the 9th Circuit issued its order requesting an answer from the state high court. The defendant in Gonzales submitted a letter notifying the court of the 9th Circuit's certification order. At that point, the Court of Appeal could have waited to see if the California Supreme Court agreed to answer the question, but it elected not to do so.

Another issue addressed in Gonzales is whether the Dynamex ABC test applies to claims other than those involved in Dynamex. The plaintiff in Dynamex alleged that Dynamex misclassified drivers as independent contractors, resulting in unpaid overtime and violations of the Labor Code. The court in Dynamex applied the ABC test only to the plaintiff's claims based on violations of California's wage order (i.e., failure to pay for overtime worked). The Gonzales court distinguished Labor Code claims that are based on an alleged violation of a wage order from those that aren't. It held that "the ABC test applies to Labor Code claims which are either rooted in one or more wage orders, or predicated on conduct alleged to have violated a wage order." For Labor Code claims that are not based on a wage order, the court held, "the Borello test remains appropriate." This aspect of the court's holding will soon take on lesser importance because of a bill Gov. Gavin Newsom signed last month -- Assembly Bill 5.

AB 5 both codifies Dynamex and expands its scope. Dynamex was limited to violations of California's wage orders, which impose obligations relating to wage and hour violations and basic working conditions (for example, required meal and rest breaks). AB 5 will make the ABC test applicable to all Labor Code violations, such as statutory penalties for not supplying accurate itemized wage statements. This will broaden the impact of the ABC test dramatically. Like many laws, AB 5 has exceptions; it identifies certain occupations and professions that will remain subject to the historic Borello test.

Although businesses may believe they have until Jan. 1, 2020 -- AB 5's effective date -- to reclassify workers according to the ABC test, a critical question remains: Will AB 5 be applied retroactively? The language of the statute itself does not definitively answer this question, but it does provide some clues. The Legislature proclaims the statute to be a declaration of "existing law." And the law states that the specific exemptions will apply "retroactively to existing claims and actions to the maximum extent permitted by law." Based on this language and the general presumption of retroactivity discussed above, it might seem like retroactivity of AB 5 is a foregone conclusion.

Courts, however, use a different test for determining retroactivity of a statute than they do for judicial decisions. In fact, the presumption is reversed. Quoting a decision of the United States Supreme Court, the California Supreme Court explained in Evangelatos v. Superior Court, 44 Cal. 3d 1188, 1207 (1988), that "[t]he principle that statutes operate only prospectively, while judicial decisions operate retrospectively, is familiar to every law student." This presumption of legislation operating only prospectively "is rooted in constitutional principles." Myers v. Philip Morris Companies, Inc., 28 Cal. 4th 828, 841 (2002). California courts follow this presumption unless either the statute contains an express retroactivity provision or it is "very clear" from extrinsic sources that the legislature "must have intended a retroactive application." Evangelatos, 44 Cal. 3d at 1209. When AB 5 takes effect, businesses will likely argue that the legislative history does not overcome the presumption against retroactivity.

If AB 5 is determined to apply retroactively, it will render moot the debate about whether Dynamex as a judicial decision is retroactive. But until then, the issue likely will not go away, and Gonzales probably won't be the last court to weigh in. The California Supreme Court will continue to be presented with opportunities to answer the question. It remains to be seen whether it will do so. Businesses should be aware that even if the California Supreme Court determines Dynamex is not retroactive, the decision has been in effect since April 2018. A business that misclassifies workers as independent contractors under the new standard may still be liable for numerous wage and hour violations going back to April 2018. 