Ninth Circuit Vacates Jan-Pro; Certifies Dynamex Retroactivity to the California Supreme Court
On July 22, 2019, the Ninth Circuit vacated its decision in Vazquez v. Jan-Pro Franchising International, Inc., 923 F.3d 575 (9th Cir. May 2, 2019). The May Jan-Pro decision had held that the “ABC” test for independent contractor status mandated in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018), applied retroactively. This ruling was expected to have a sweeping impact on California’s economy, as businesses who had hired independent contractors to serve in their principal business found themselves open to misclassification lawsuits by their newly-designated “employees.”
On July 22, 2019, the Ninth Circuit granted Jan-Pro’s petition for panel rehearing, vacated its May 2, 2019 Order, and certified the question of Dynamex’s retroactivity to the California Supreme Court. The Ninth Circuit did not provide its reasoning, but it stated that a revised disposition and order would be filed soon.
Vazquez v. Jan-Pro, which will likely become the landmark case on Dynamex retroactivity once the California Supreme Court decides the issue, may impact businesses as much as, if not more than, the Dynamex decision itself.
The Supreme Court in Dynamex, 4 Cal. 5th at 955-56,959, 960-63, as most who hire independent contractors now know, rejected the previous “multi-factor” test that governed whether a worker could be an independent contractor, and imposed the stricter “ABC” test. As before, a correctly-classified independent contractor must be in an independent trade or business (factor “C”) and contractor must be free from the hirer’s “control and direction” (factor “A”). Id. at 955-56, 960-63.
Factor “B”, however, mandated that the worker cannot be an independent contractor if he or she works “in the hiring entity’s business.” Id. at 959 (citing Martinez v. Combs, 49 Cal. 4th 35, 69 (2010)). While this was one of many factors courts previously considered in assessing whether an entity was a joint employer (see Martinez, 49 Cal. 4th at 69) or whether a worker was an independent contractor (see Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal. 3d 341, 350-51 (1989)), this factor is now mandatory. The effect, and it appears, the intent, of Dynamex was to force employers who hire workers in their principal business – whether trucking and transportation, or food service, or entertainment – must classify and pay those workers as employees, and must follow the California Labor Code and IWC Wage Orders as to hourly-paid, nonexempt workers.
Obviously, Dynamex affects companies’ business models going forward. But if the California Supreme Court rules similarly to the Ninth Circuit’s May 2019 decision in Jan-Pro, companies could face massive liability for their past independent contractor practices. Successful class actions (and Private Attorneys’ General Act actions) for misclassification could be catastrophic to businesses. If an employee is found to be wrongly classified as an independent contractor – even if the company was following the law as it understood it before Dynamex – the company can owe damages and penalties for every day that every “employee”: (1) was not paid at least minimum wage per hour of work, (2) was not paid overtime at 1.5 times the regular rate for hours over 8 in a day or 40 in a week, (3) was not provided an unpaid meal break of at least 30 minutes for shifts of 5 hours or more, (4) was not provided 10-minute paid meal breaks for every 4 hours worked or major fraction thereof, for shifts of at least 3.5 hours. Additional damages may be due for failures to provide compliant wage statements and to reimburse business expenses. Moreover, there are tax consequences – if Dynamex is retroactive, companies may be held responsible for payroll taxes for prior years for its independent contractors.