Employment Defense: Workforce Classification

by Lewitt Hackman’s Employment Practice Group

The analysis of whether a worker is an employee or independent contractor for purposes of California’s Wage Orders became more restrictive in 2018 following the California Supreme Court’s adoption of the “ABC” test in the landmark Dynamex decision.

Under the ABC test, a worker is presumed an employee unless the hiring entity can satisfy all three of the following elements: (A) The worker is free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of such work and in fact; (B) The worker performs work that is outside the usual course of the hiring entity’s business; and (C) 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.

The Dynamex decision makes it more difficult to categorize workers as independent contractors, and in a state with an expanding gig economy, the ruling compelled many companies to review how they classify their workforce. The Dynamex decision has now resurfaced in the Ninth Circuit’s decision in Vasquez v. Jan-Pro Franchising Int’l (9th Cir. 2019), and a Division of Labor Standards Enforcement (“DLSE”) opinion letter.

On May 2, 2019, the Ninth Circuit ruled that the ABC test applies retroactively. In Vasquez, janitors appealed a lower court’s award of summary judgment on wage and hour claims stemming from allegations that Jan-Pro, a major international janitorial cleaning business, misclassified workers as independent contractors through Jan-Pro’s franchising model. On review, the Ninth Circuit ordered the parties to brief the impact of Dynamex on the case.

Jan-Pro argued that Dynamex, which was decided ten years after Vasquez was filed, did not apply retroactively. The Panel disagreed, noting the general rule that judicial decisions apply retroactively, except where the decision “changes a settled rule on which the parties below have relied.” While Jan-Pro argued the case should be remanded to the district court to determine whether Jan-Pro relied on pre-Dynamex law, the Court declined, finding this argument “conceptually problematic” because it “could lead to the surprising result that Dynamex applies retroactively to some parties but not to others.” The panel also reasoned that while the California Supreme Court did not say whether the ruling applied retroactively, it suggested as much by summarily denying a petition to clarify that the ruling only applies prospectively.

Just one day after Vasquez, the DLSE issued an opinion letter expanding the reach of Dynamex.The DLSE concluded it will apply the ABC test not only to California’s Wage Orders, but also to certain provisions of the Labor Code. 

The DLSE reasoned that because the wage orders are not independently actionable, any Labor Code provision that derives from or rests on an obligation under the wage orders is now subject to the ABC test. For example, the opinion letter stated that Labor Code section 2802 (business expense reimbursement) is now subject to the ABC test even though that claim was not addressed in Dynamex. The opinion letter declared that the following Labor Code provisions would also be analyzed under the ABC test: itemized wage statements; meal and rest periods; overtime; minimum wage; and liquidated damages.

The DLSE finalized the opinion letter with a caveat regarding waiting time penalties under Labor Code Section 203. Whether the ABC test applies to a Section 203 claim will depend on whether the penalty is derivative of an underlying minimum wage or overtime violation.

Together, these developments will continue to expose employers to costly lawsuits. Misclassification of workers can result in legal exposure with respect to taxes, insurance, wage and hour compliance, and civil penalties under PAGA, among other potential claims. Employers should review the classification of their workforce and the potential risks associated with such classification.

Read: DLSE Opinion Letter: Application of the “ABC Test” to Claims Arising Under Wage Orders

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