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Federal Court Makes Dynamex Retroactive

SAN FRANCISCO, CA, May 10, 2019 -- The Ninth U.S. Circuit Court of Appeals ruled last week that the Dynamex decision of the California Supreme Court, which severely restricted the ability of employers to hire workers as independent contractors, can be applied to wage-and-hour disputes retroactively.

In Vazquez v Jan-Pro Franchising, the federal appellate court justified its ruling on retroactivity by noting that court decisions interpreting the law are customarily given retroactive effect, and that the California Supreme Court had declined a request to modify its Dynamex to clarify that it applied only prospectively.

The Dynamex decision, issued last April 30 by the California Supreme Court, dramatically changed state law on independent contractors.

Historically, administrative agencies and courts have developed a variety of rules for distinguishing employees from independent contractors.  While the exact scope of those rules varied, all were focused at their core on the extent to which an employer did or could “control” the actions of the worker; the greater the level of control, the more likely the worker was to be regarded as an employee.

In Dynamex, the Supreme Court effectively threw out the old rules and adopted a new “ABC test.”  To qualify as an independent contractor, an employer must now prove all of the following:

A)    That the worker is free from the control and direction of the hirer in the performance of the work; and

B)    That the worker performs work outside the usual course of the hiring entity’s business; and

C)    That the worker is customarily engaged in an independently-established trade, occupation or business of the same nature as the work being performed for the hiring entity.

For most businesses, including insurance agencies and brokerages, the second prong of the new test is the biggest change, and the most difficult to meet:  An independent contractor must be doing work that is OUTSIDE the usual course of the hiring entity’s work—which in practical effect means that agencies can no longer hire producers or CSRs or similar agency personnel as independent contractors.

Jan-Pro is an international janitorial cleaning business, and plaintiffs alleged in a class action filed over a decade ago that Jan-Pro had created a sophisticated “three-tier” franchising model to avoid paying its janitors minimum wages and overtime by misclassifying them as independent contractors.  A federal district court had granted summary judgment in favor of Jan-Pro, but while that decision was on appeal, the California Supreme Court handed down its Dynamex decision.

As a result of last week’s federal appellate decision, the Jan-Pro case will be sent back to District Court for further litigation under the rules articulated in Dynamex.

In addition to deciding the issue of retroactivity, the 9th Circuit Court of Appeals also provided additional guidance for employers on determining whether the controversial second prong of the ABC Test was satisfied:  That the work is outside the usual course of the hirer’s business.

“Prong B requires the hiring entity to establish that it was not engaged in the same usual course of business as the putative employee. This factor reflects the distinction between workers who are truly independent contractors and those whose work involves the hiring entities usual course of business,” District Judge Frederic Block wrote for the unanimous three-judge panel.

“Analytically, courts have framed the Prong B inquiry in several ways,” the Court said.  “They have considered whether the work of the employee is necessary to or merely incidental to that of the hiring entity, whether the work of the employee is continuously performed for the hiring entity, and what business the hiring entity proclaims to be in.”

The decision is likely to place even more pressure on the California Legislature to mitigate the dramatic impact of the new rules on California employers.

AB 5, sponsored by the influential California Labor Federation, bill would codify last year’s Supreme Court decision in the Labor Code, but also add four express exemptions from the new rules—including one offered by IIABCal Lobbyist John Norwood for insurance agencies and brokerages.  The bill would exempt from Dynamex, any “person or organization who is licensed by the Department of Insurance pursuant to Chapter 5 (commencing with Section 1621), Chapter 6 (commencing with Section 1760), and Chapter 8 (commencing with Section 1831) of Part 2 of Division 1 of the Insurance Code.”

The only other exemptions currently contained in AB 5 are for doctors, financial advisors, and “direct sellers” of products, such as “Mary Kay Cosmetics” salespersons.  The author of the legislation, Assemblywoman Lorena Gonzales (D-San Diego) has been quoted as saying that additional exemptions and further amendments to the bill are likely as it works its way through the legislative process.

If enacted, AB 5 would effectively restore prior law to the business of insurance—meaning that insurance companies, and insurance agencies and brokerages, could elect to hire licensees as either employees or independent contractors, provided the terms of employment were legally consistent with those classifications.

Gonzales has said that big “gig economy” employers, such as Uber and Lyft, have not been exempted—and won’t be.

Another bill sponsored by IIABCal, AB 233, co-authored by Assemblyman Tom Daly (D-Anaheim) and Ken Cooley (D-Sacramento), would permit insurance agents and brokers to elect whether they wish to work as employees or independent contractors, provided certain requirements were satisfied.  Daly is the chairman of the Assembly Insurance Committee; Cooley is one of its most respected members.   That bill remains alive.

Here is the current amended text of AB 5:

Here is the opinion of the 9th Circuit Court of Appeals in Vazquez v Jan-Pro Franchising: