The debate over Dynamex’s retroactivity heads to the California Supreme Court

For decades, California courts and employers distinguished between independent contractors and employees using a flexible, multi-factor test articulated by the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 769 P.2d 399 (Cal. 1989). Last year, however, in Dynamex Operations West Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), the Supreme Court announced that another standard, commonly referred to as the "ABC" test, could be used for this same purpose under California's wage orders.

The court's adoption of the ABC test sent a shockwave through California law, and sparked intense debate over whether Dynamex applies retroactively. The "question of Dynamex's retroactive application has potentially broad ramifications for those who have been doing business in California," and could result in substantial liability for "economic sectors that rely more heavily on independent contractors." Vazquez v. Jan-Pro Franchising Int'l, Inc., 939 F.3d 1045, 1049 (9th Cir. 2019).

The 9th U.S. Circuit Court of Appeals has now called on the California Supreme Court to resolve this retroactivity question in Vazquez. The Supreme Court could well accept this certification request, as lower courts are increasingly divided over whether Dynamex upended settled law or merely clarified existing law.

The usual rules governing the retroactivity of judicial decisions

The law does not favor retroactivity. Aktar v. Anderson, 68 Cal. Rptr. 2d 595, 604 (1997). Consequently, statutes are "presumed to operate only prospectively absent some clear indication" otherwise. City of San Jose v. Int'l Ass'n of Firefighters, Local 230, 100 Cal. Rptr. 3d 396, 404 (2009). The same rule applies to regulations. People ex rel. Deukmejian v. CHE, Inc., 197 Cal. Rptr. 484, 491-92 (1983).

In contrast, "[o]rdinarily judicial decisions apply retrospectively." Grafton Partners v. Superior Court, 116 P.3d 479, 492 (Cal. 2005). But courts may decide a judicial opinion cannot apply retroactively when the opinion "alters a settled rule upon which parties justifiably relied." Id.

Whether a judicial decision like Dynamex applies retroactively therefore "turns primarily upon the extent of the public reliance upon the former rule and the ability of the litigants to foresee the coming change in the law." Schlauch v. Hartford Accident & Indem. Co., 194 Cal. Rptr. 658, 663 (1983). Courts have "almost invariably" refused to apply a judicial decision retroactively when it represents a "clear break with the past." People v. Hicks, 195 Cal. Rptr. 127, 129 (1983).

The growing division over whether Dynamex announced a new test

Although the retroactivity of a judicial decision often hinges on whether it clearly breaks with past precedent, the application of this standard to Dynamex is shrouded in uncertainty. This is so because courts are increasingly divided over whether Dynamex adopted a new test or merely clarified existing law.

Some have concluded that Dynamex announced a new test. For example, Garcia v. Border Transportation Group, LLC, 239 Cal. Rptr. 3d 360, 371 (2018), explained that "Dynamex changed the appropriate standard for determining whether [a worker] was an employee entitled to wage order protection, or an independent contractor who was not."

Likewise, the 9th Circuit has said Dynamex "enunciated" a new test "for analyzing whether a worker is an employee under California wage orders." Vazquez, 939 F.3d at 1049. As one federal court explained, Dynamex "upset" settled law. Lawson v. Grubhub, Inc., 2018 WL 6190316, at *4 (N.D. Cal. Nov. 28, 2018).

Similarly, in applying for an extension of time based partly on Dynamex's impact, the labor commissioner's office took the position that Dynamex "dramatically changed the law concerning employment status."

Others, however, disagree. For example, Gonzales v. San Gabriel Transit, Inc., 2019 WL 4942213, at *11 (Cal. Ct. App. Oct. 8, 2019), recently held that Dynamex applies retroactively because it "merely clarified and streamlined" existing California law.

The 9th Circuit's Certification Request to the California Supreme Court

The California Supreme Court may soon step in to resolve the uncertainty over Dynamex's retroactive application in Vazquez, an appeal originating in the 9th Circuit.

Vazquez is a putative class action against a company that licenses a system for marketing cleaning services to regional master franchisees. The plaintiffs, former unit franchisees who purchased their franchises from regional master franchisors, allege that the defendant unlawfully misclassified janitors as independent contractors. The federal district court granted the defendant's summary judgment motion, applying pre-Dynamex law to conclude that plaintiffs had not shown a triable issue of material fact as to whether they were employees. The plaintiffs appealed.

While their appeal was pending, the California Supreme Court decided Dynamex. Subsequently, the 9th Circuit initially issued an opinion holding that Dynamex applied retroactively because "Dynamex did not fabricate the ABC test anew" and instead had said the test remained faithful to the fundamental purposes of California's wage orders. Vazquez v. Jan-Pro Franchising Int'l, Inc., 923 F.3d 575, 586-88 (9th Cir. 2019).

But the 9th Circuit later withdrew this opinion, and issued a new order certifying the retroactivity question to the California Supreme Court. In doing so, the 9th Circuit explained that Dynamex had announced a new test, emphasized the broad ramifications employers could face if Dynamex is applied retroactively, and asked the Supreme Court to decide the "unsettled" retroactivity issue given its "potential importance ... to California businesses and workers." Vazquez, 945 F.3d at 1048-49.

The California Supreme Court usually agrees to take up questions of California law certified to it by the 9th Circuit. Until recently, the Supreme Court had granted 13 requests in a row and 21 of the previous 22. The court, however, occasionally turns down a request, as it recently did when it declined to answer a question about employment law certified by the 9th Circuit.

When deciding whether to take up a certified question, the Supreme Court considers "whether resolution of the question is necessary to secure uniformity of decision or to settle an important question of law." Cal. Ct. R. 8.548(f)(1). Given the split of authority over whether Dynamex announced a new test, and the broad ramifications of the retroactivity issue for employers and workers alike, the Supreme Court could well agree to accept the 9th Circuit's certification request in Vazquez.

Moreover, even if the Supreme Court declines to do so, it is unlikely this will be the last time the court is called on to resolve the issue. As employers potentially face substantial liability in the event of Dynamex's retroactive application and a shroud of uncertainty hangs over this issue due to divisions among the lower courts, it is virtually certain parties in cases other than Vazquez will ask the Supreme Court to definitively end the confusion surrounding this retroactivity question regardless whether the Supreme Court takes up the matter in Vazquez. 