A legal issue being considered by the California Supreme Court could adversely impact state businesses that have used independent contractors in the past.
The 9th U.S. Circuit Court of Appeals recently found that a four-year retroactive Dynamex standard could be applied to pertinent lawsuits, but then removed its opinion and certified it to the highest court in the state. A California Court of Appeal has already contended that the California Supreme Court’s Dynamex decision applies retroactively.
“We think it is fundamentally unfair . . . to apply rules that no one knew existed retroactively. It came out of left field. It’s a major liability,” Luke Wake, an attorney with the National Federation of Independent Business-California, said in a phone interview.
Employers could now be on the hook for back wages due to the misclassification of independent contractors. Wake said that businesses are currently operating under fear of paying out huge settlements for back pay or wages. Some have already been sued under the Dynamex ruling, which reaches back four years.
If the Supreme Court does hand down a decision favorable to retroactive application, it will affect the California business community and impact established relationships between employers and independent contractors, according to Lauraine Bifulco, human resources consultant and board secretary at the California Small Business Association. She added that even though a contractor and employer met the rules mandated during the time of the relationship, the Supreme Court decision could constitute that relational time period as one of employee-employer.
“So it really could be quite significant and costly for employers,” Bifulco said.
Wake says that when the Dynamex decision came down it was a bombshell. There was no fair warning given to the business community and the time frame involved was grossly unreasonable, saying that no one expected the court to suddenly change a rule that had been applied for the last 30 years.
”A lot of businesses that had operated in good faith under the old rules have now found that the carpet has been pulled from underneath them,” Wake said.
The legal standard applies the burden of an “ABC” test on the employer. The three-pronged test determines the status of a worker. If the standard cannot be met, then the independent contractor is considered an employee or wage earner. Dynamex presumes a worker is an employee.
The Dynamex decision was handed down by the California Supreme Court in April 2018, and the original case was Dynamex Operations West, Inc. v. Superior Court of Los Angeles.
Conversely, Stanford Professor of Law, emeritus, William Gould, believes the Dynamex standard and its subsequent codified legislation are necessary.
“We know that many businesses are saving money by classifying their workers as independent contractors,” Gould said. “The whole thrust of Dynamex was to stop that . . . and recognizing that this was a factor in the growing inequality between those on top and those at the bottom.”
Gould says that employers should have been preparing for this situation since the wake of Dynamex because it now exposes them to greater liability.
“This is surely something that they’ve had to do due diligence on for the past year and a half,” he said.
The expansive AB 5, signed into California law in September, replaces the Dynamex standard and takes effect Jan. 1, 2020. It pertains to all claims stemming from the California Labor Code. Claims originating from the California Wage Order, and questions relevant to independent-contractor classification, on or before December 31, 2019, are subject to the Dynamex interpretation.
The state’s Industrial Welfare Commission regulates the hour, wage and working condition requirements for 17 industries through the California Wage Order.