When a court issues a new rule regarding how to determine whether a worker is an "employee" or an "independent contractor," does the new rule apply only to employer practices that occur after the decision is issued? Or does the new rule apply to everything that occurred in the past?

In other words, is the new rule retroactive?

Last year, in Dynamex Operations West v. Superior Court, the California Supreme Court adopted a new test for determining independent contractor status under the California Wage Orders. The “ABC Test” presumes that all workers are employees. To prove that a worker is an independent contractor, a hiring entity must establish all three of the following elements: 

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact,
• The worker performs work that is outside the usual course of the hiring entity’s business, and 
• 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.

Given the rigid nature of the test, many California businesses assumed that fewer people could be classified as independent contractors -- going forward.  

Now however, the Ninth Circuit in Vazquez v. Jan-Pro Franchising International, Inc., has held that the new rule announced in Dynamex applies retroactively. As a general rule, most California Supreme Court decisions do apply retroactively. However, there is a narrow exception when the decision changes a settled rule on which the parties have relied. 

The defendant in Vazquez argued that the exception should apply, but the Ninth Circuit disagreed.

The Ninth Circuit noted that the California Supreme Court in Dynamex denied a request to clarify its decision, which strongly suggested to the Ninth Circuit that the usual retroactive application should apply. The Ninth Circuit also noted that various state courts in California had already applied the new rule retroactively, and it noted that the California Supreme Court did not fabricate the ABC Test anew – rather, it had “carefully explained how the test remains faithful” to the “fundamental purpose” of the California Wage Orders.

The Ninth Circuit also brushed off the defendant’s concerns that retroactive application of the ABC Test “would sound the death knell for Franchising in California.” Overall, the Ninth Circuit believed that it was more important that the California Wage Orders be “liberally construed” in favor of retroactivity to ensure that workers can provide for themselves and their families. 

The Vazquez decision serves as a reminder to California employers to closely evaluate the classification of workers as independent contractors.