California Supreme Court Confirms that Case Adopting “ABC Test” for Independent Contractors Has Retroactive Effect

By SHLC on January 15, 2021 in Legal Update
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On January 14, 2021, the California Supreme Court issued a long-awaited opinion regarding whether its prior ruling adopting the “ABC Test” for determining independent contractor status applies retroactively. The Court answered in the affirmative, providing finality to a question that had been lingering for nearly three years.

(Download a copy of the Supreme Court’s opinion here.)

Relevant Background

In April 2018, the California Supreme Court issued a landmark ruling in Dynamex Operations West, Inc. v. Superior Court (“Dynamex”), adopting a new test for determining whether a worker is an independent contractor or employee, and upending decades of legal precedent in California. The new three-part test—commonly referred to as the “ABC Test”—made it substantially more difficult to properly classify a worker as an independent contractor under California’s Wage Orders.

The ABC Test presumes that all workers are employees, unless the employer can satisfy the burden of proving all of the following:

  1. The worker must be free from the control and direction of the putative employer in how he or she carries out his or her tasks. This is consistent with other independent contractor tests in which detailed control typically establishes an employment relationship.
  2. The worker must perform a task that is outside the normal scope of business of the putative employer. For example, a worker who services a bakery’s air conditioning probably satisfies this prong, while a worker who decorates cupcakes at the bakery likely does not.
  3. The worker must be customarily engaged in an independent business or trade, reflecting an independent decision on the part of the worker to go into business for himself or herself.

(Read our original blog post about the Dynamex case here.)

Shortly after the ABC Test was adopted, the question arose whether the test should be applied retroactively, to disputes that arose before Dynamex was decided. Independent contractors who felt they were misclassified prior to April 2018 wanted the ABC Test to reach back in time and apply to their circumstances pre-Dynamex­, while employers argued it would be unfair to expect them to have been able to comply with the ABC Test prior to the test ever having been announced.

In May 2019, the federal Ninth Circuit Court of Appeals held that the Dynamex decision, and the ABC Test, should be applied retroactively, dealing a huge blow to all California employers who had used independent contractors any time in the previous four years. Months later, however, the Ninth Circuit reheard the matter and decided it would ask the California Supreme Court to provide a definitive answer to the question whether Dynamex applies retroactively.

(Read our prior blog post on the Ninth Circuit’s opinion here.)

The Current State of Affairs

Now, more than a year later, the California Supreme Court has given its answer. The ABC Test applies retroactively. To complicate matters further, however, litigation and legislative efforts are ongoing regarding California Assembly Bill 5 (“AB 5”), which generally codified the ABC Test of Dynamex and expanded its application, with various exceptions, beyond the California Wage Orders. Perhaps most notably, November 2020 saw the approval of Proposition 22, which specifically exempted app-based drivers from AB 5 and the ABC Test, and made it possible for companies like Uber and Lyft to continue to treat their drivers as contractors. In very general terms, the ABC Test is the test to apply to determine independent contractor vs. employee status under the California Wage Orders, Labor Code, and other important employment laws. However, this area of the law is currently still in flux.

Takeaways for California Employers

The ABC Test will be applied to worker claims under the Wage Orders arising before or after the Dynamex decision in April 2018. This means, generally, that if you have used independent contractors within the last four years—even prior to April 2018—you may have exposure for misclassifying such workers as independent contractors, and you should consult with qualified employment law counsel immediately.

Also, for now, the ABC Test remains the law of the land with respect to most independent contractor arrangements, and it does not appear to be going away any time soon. It is strongly recommended to consult with qualified employment law counsel if you are using or are considering using independent contract labor in your business. This is a rapidly developing and complex area of the law, and the potential exposure associated with employee misclassification in California is substantial.

What About Nevada Employers?

In Nevada, for purposes of wage and hour obligations, employers are subject to a much less exacting standard than the ABC Test when determining whether to treat a worker as an independent contractor or employee. In fact, Nevada employers may be entitled to a conclusive presumption of independent contractor status if they can satisfy certain criteria as outlined in NRS 608.0155. However, the ABC Test is used in Nevada for determinations of employment status under laws governing unemployment and workers’ compensation insurance.

(Read our prior blog post on Nevada’s conclusive presumption of independent contractor status here.)

Upcoming Events

To learn more about the ABC Test and the California Supreme Court’s recent decision, you can sign up for our New Year Labor Law Update on January 21, 2021, presented by the Tahoe Chamber. We will be presenting on wide range of new developments in California and Nevada employment law, including independent contractor issues. View the event on our Events page or simply sign up on the Tahoe Chamber website by clicking here.

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SHLCView all posts by SHLC