A brief announcement Monday by the 9th U.S. Circuit Court of Appeals could make a big difference for California employers, two local attorneys told HR Dive.
The backstory: In 2018, the California Supreme Court adopted a new standard for worker classification in the state with its ruling in Dynamex Operations West, Inc. v. The Superior Court of Los Angeles. The new standard made use of a test, called the ABC test, to determine whether a worker should be classified as an employee or an independent contractor. The test generally assumes all workers are employees, unless an employer can meet all three standards the test invokes to prove otherwise.
Dynamex represented a shift in and of itself, but another California worker classification case, Vazquez, et al. v. Jan-Pro Franchising International, Inc., took matters a step further. In Jan-Pro, the 9th U.S. Circuit Court of Appeals ruled that the standard applied by the California Supreme Court in Dynamex applied retroactively.
That caught the attention of employers. Jan-Pro was the first case to deal with retroactivity under the Dynamex standard, Jesse Jauregui, partner at the Los Angeles office of Alston & Bird, said in an interview. Retroactivity under Dynamex means an employer could be liable for incorrect classification as far back as four years; an employer facing a worker classification lawsuit filed in 2018 could be held liable for damages as far back as 2014, before the Dynamex standard existed, Jauregui explained.
"Four years is a significant amount of damages," said Jauregui, who said employers found liable in a worker classification case might also be on the hook for civil penalties.
Retroactivity is now up in the air, though, thanks to what happened earlier this week. On July 22, the 9th Circuit said it would withdraw its Jan-Pro decision. It then said it would certify the question of retroactivity to the California Supreme Court. That means the ball is in the latter court's court, Joel Van Parys, partner at the Sacramento office of Carothers DiSante & Freudenberger, told HR Dive.
Once the California Supreme Court answers one way or another, that decision becomes California law, Van Parys said. "Then the 9th Circuit will look at that decision and the court will take that ruling."
Assembly Bill No. 5 looms overhead
There are two additional complications to consider. First, it's not clear how long it will take for the California Supreme Court to issue its decision. Van Parys said that appealing a decision under normal circumstances might take from nine months to a year. However long it takes, the process "doesn't happen automatically," he said.
Second, a piece of legislation currently making its way through the California State Senate — Assembly Bill No. 5 — would codify certain aspects of the Dynamex ruling into state law. Introduced last month, AB-5 is due for a third reading in the Senate ahead of the appropriation process, Jauregui said. But the bill will also need a full vote from the Senate, as well as likely reconciliation, he noted.
AB-5 has a deadline of Sept. 13 — that's the last day legislation may be passed under the current state legislative calendar before the legislature enters recess.
Should AB-5 become law, employers would need to note, among other things, certain exceptions included in the bill's provisions for different industries. A test separate from the ABC test would be applied to several job types, including direct salespersons, real estate licensees, hairstylists and estheticians, among others. And the list might not end there, as many other groups have lobbied for exemptions as the bill makes it way through the process, Jauregui said.
Things could still change with AB-5, so employers will need to keep tabs on the legislation as it moves forward, Van Parys said. He advised employers to "Google it every week."
Next steps for local, multi-state employers
The most basic thing employers can do in the current situation is to evaluate whether their current workers would classify as independent contractors or employees under the ABC test, Jauregui said. The ABC test uses three elements to determine whether a worker is an independent contractor. The hiring entity must show that:
The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
The worker performs work that is outside the usual course of the hiring entity's business; and
The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.
Assuming that Dynamex is law in California is the best course of action, Van Parys said: "If you assume Dynamex is going to be the law, you can work backwards from there."
Determining whether to classify workers as independent contractors should be viewed as a business risk on par with any other, Van Parys noted, and different employers will have to take their own approach. California employers, he said, may need to start with the assumption that it will be difficult to employ independent contractors.
"There are certain types of businesses where the business model is going to be to not have contractors," Van Parys said.
National employers have a difficult choice to make, he added, and they may need to look at California as an exception to operations in other locations.
Correction: A previous version of this story incorrectly described which standard the Dynamex and Jan-Pro decisions, as well as Assembly Bill No. 5, cover in California. The cases and the legislation deal with worker classification in the state. HR Dive has updated the story and headline and regrets the error.