The ABC Test

What is AB5?

The California Supreme Court provided some much needed guidance in the continuing Dynamex saga.  On January 14, 2021, the Court held in Vazquez v. Jan-Pro Franchising Int’l, Inc. that the ABC test fashioned in its landmark decision, Dynamex v. Superior Court, applies retroactively.  The Court noted in its decision that the independent contractor test as applied to California wage orders was unsettled law until its 2018 decision.

The ABC Test

As a reminder, in Dynamex, the Court created a new three-part “ABC” test for determining whether a worker is properly classified as an employee or independent contractor.  The Dynamex decision overturned nearly three decades of precedent and the multi-factor test previously outlined in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations.  Under the new ABC test, the employer must prove a worker satisfies three conditions if it desires to treat the worker as an independent contractor.

A.    The worker was not under the direction and control of the employer in the performance of the work at issue.

B.    The worker was engaged in business that is outside the employer’s usual course of business.

C.    The worker was customarily engaged in an independent trad or business.

If an employer cannot prove each of those three elements, then the worker is an employee and must be classified as such.  Practically speaking, the new ABC test significantly broadened what it means to be an employee and made it significantly more difficult for workers and businesses to enter into valid independent contractor relationships.  The ABC test causes significant upheaval in a variety of businesses and workers that had relied on the independent contractor relationship.

Because the Dynamex test was such an abrupt change from the prior test, a common argument making its way through the courts was that the ABC test could not be retroactively applied.  Usually case law precedent is applied retroactively, because the courts are simply interpreting the legislature’s creations.  In the Dynamex instance defendants up and down the State argued the change was sudden and it is unfair to change the rules and penalize them for it after the fact.  The Court had previously declined to address the issue, until the Ninth Circuit Court of Appeals asked the California Supreme Court to weigh-in on the retroactive application of its Dynamex decision.  The Court agreed and held the ABC test applies retroactively.

Despite the seemingly important clarification from the Court, because the Court waited nearly three years to provide this additional guidance, there are very few cases the decision will impact.  The statute of limitations for cases that could come from classifications prior to the Dynamex situation is up in a little over year.  Most cases being filed today had the benefit of the Dynamex guidance  The key policy take away from the California Supreme Court’s decision to apply the test retroactively is that the Court continues to support the significant shift in worker classification disputes.  This will be important to understand as litigation over AB5 inevitably reach the High Court’s doorstep.

Debates over the classification extend outside the courtroom as the California legislature passed AB5 in 2019, effectively codifying the Dynamex test.  Powerful business and interest groups have since invested substantial resources carving out exceptions to the rule, trying to save their industries.  It has been heavily covered that various gig economy companies, such as Uber, Lyft, and DoorDash mounted the most expensive measure in California history to convince voters to except their drives from the ABC test.  Other industries will likely attempt similar lobbying efforts as they try to get out from under the broader employee definition created by the ABC test.