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Dynamex Update: Not a Passing Fancy

In previous blogs we have discussed the California Supreme Court’s seminal decision in Dynamex Operations West, Inc. v. Superior Court, which established a new and extremely limiting test for determining whether a worker is an employee or independent contractor.  Initially, there was some debate over how expansive it might prove to be, and how much impact on operations in California it might have.  During the past year, those questions are being answered.  In a word, as to both, a lot.

Briefly, the Dynamex ruling changed dramatically the method for categorizing a worker as employee or independent contractor.  The new test is the “ABC” test, consisting of three criteria, all of which have to be established by the hiring entity.  The most difficult is “B” – whether the worker is regularly and customarily engaged in an independent trade or business that is different than that performed by the hiring company.  So, if a sandwich shop hires a plumber to fix a broken pipe, presumptively the worker is an independent contractor hired for that job only, but if someone is brought on board to make sandwiches, she is an employee.

The potential impact on many types of businesses is obvious, including much of the gig economy, franchises and even professional service businesses.  Questions immediately arose about the scope of the ruling.  Those questions have been answered in large part during the year since Dynamex was decided.

First, the California Division of Labor Standards Enforcement has issued an opinion that changed the definition of “employment” itself in California.  Dynamex is therefore not limited to “wage and hour” issues only, but extends to minimum wage, overtime and many other employment issues.

Second, the decision by the federal Ninth Circuit Court of Appeals in its Vazquez v. Jan-Pro Franchising International, Inc. found the holding in Dynamex to be retroactive, making companies that had hired workers as independent contractors in good faith prior to the change in the law liable under the new standard for claims of misclassification of its workers, back as far as four years under the applicable statute of limitations.  On July 22nd, however, the Ninth Circuit withdrew its original opinion concerning retroactivity and referred it to the California Supreme Court to decide that issue, which could of course change the original finding.

Finally, the Vazquez court also found that companies cannot make a narrow, technical interpretation of their business so that a worker would be definitionally outside it.

These subsequent interpretations of the new Dynamex standard leave companies little leeway to classify their workers as independent contractors, and the period of potential liability stretches back to before the new standard was established, depending on what the California Supreme Court ultimately decides.  Companies need to be aware of the potential risks posed to their businesses if they have relied on an independent contractor labor force in the past.