Retroactive ABC Test Liability at Stake for California Companies (Corrected)

Nov. 3, 2020, 2:31 PM; Updated: Nov. 5, 2020, 2:45 AM

California’s highest court will consider on Election Day whether a worker classification standard that’s rankled the gig economy, franchises, and other businesses should apply to lawsuits filed years before it was created.

The California Supreme Court is poised to hear arguments Nov. 3 over the retroactivity of a three-part “ABC” test—created by the justices’ 2018 ruling in Dynamex Operations West v. Superior Court— that makes it harder for companies to classify workers as independent contractors rather than as employees entitled to wage protections and other employment benefits.

Business groups have fought against retroactive application of the rigid standard, which they say could open companies across industries in California to wider liability. Workers’ rights groups say the standard should apply to older disputes to help tamp down on worker misclassification that disenfranchises low-income workers.

The arguments before the state’s high court come as California voters weigh whether to exempt gig companies from the ABC test, which state lawmakers codified into law through a measure known as Assembly Bill 5, or A.B. 5., that took effect in January. Uber Technologies Inc., Postmates, and other companies funneled more than $200 million into lobbying for the ballot initiative. Polls indicate the outcome will be close.

Worker Status Lawsuits

The ABC test requires a company to clear three hurdles to label workers as independent contractors. The standard has been raised in lawsuits seeking unpaid wages and overtime against gig companies and businesses that also rely on contractors, such as in the trucking, cleaning, freelance, and adult entertainment industries.

Companies must show a worker has freedom from control over how to perform the services they provide; that the services are outside the business’ normal variety of work; and that the worker is engaged in an independently established role.

A California appeals court has already ruled that Uber and Lyft Inc. must treat their workers as employees under the new test, in a lawsuit brought by the state attorney general’s office.

In 2019, the U.S. Court of Appeals for the Ninth Circuit held that the ABC test applied retroactively in Vazquez v. Jan-Pro Franchising International Inc., where a group of janitors sued more than a decade ago over allegations that they were incorrectly classified as contractors under a three-tiered franchising model.

The janitors purchase a franchise from the company and either hire workers or perform the work themselves. Because they aren’t classified as employees, they don’t receive benefits such as minimum wage, overtime, or health insurance.

“Janitorial workers in California are overwhelmingly Latinx and immigrants working for low pay, in hazardous conditions, and in an industry where wage theft and other illegal conduct is endemic,” said Laura Padin, senior staff attorney with the National Employment Law Project. “These types of misclassification schemes further degrade workplace standards in the janitorial industry and impose obstacles to employer accountability for labor violations.”

Jan-Pro Franchising International and other businesses urged the federal appeals court to reconsider the opinion. Instead, the Ninth Circuit certified the question to the California high court.

The workers’ attorney, Shannon Liss-Riordan, of Lichten & Liss-Riordan in Boston, said A.B. 5’s language is clear that it was enacted to clarify existing law, and is thus retroactive. This makes the retroactivity issue a “historical question,” she said in an email, adding that it’s “not entirely clear how relevant the outcome of Jan-Pro will be now.”

Attorneys for Jan-Pro didn’t immediately respond to an emailed request for comment. The company previously argued it shouldn’t be held to a different standard than the one in place when the litigation was filed.

Gig economy companies like Uber and Lyft view the ABC test and A.B. 5 as an existential threat to their business model, and franchises also fear the legal test could hurt major employers.

Theane Evangelis of Gibson, Dunn & Crutcher, who previously represented Jan-Pro, told Bloomberg Law when the case was certified to the state high court that the company looks forward to “consideration of these important issues, which will have a broad impact on businesses throughout California.”

Business Arguments

Although A.B. 5 explicitly says the exemptions to the state law are retroactive, it doesn’t address whether Dynamex itself is retroactive, business groups argue.

Before the Dynamex decision, California previously relied on a standard, known as the Borello test, that weighed many different factors to determine whether a worker is an independent contractor.

The U.S. Chamber of Commerce argued in a friend-of-the-court brief to the California high court that the state law applies only on a prospective basis. The Chamber and other business groups urged the court to refrain from holding companies retroactively accountable under the new, rigid standard.

“No one could have foreseen this court embracing that test, which differs radically from the prior test that had governed independent contractor status in California,” attorneys for the Chamber argued. They said retroactively applying the ABC test would threaten many businesses “with crushing and unexpected liability.”

The Chamber and other business groups fear that interpreting the ABC test to reach back before the 2018 Dynamex decision would make employers liable for a host of costs associated with classification issues, such as years of back wages. That could mean a flood of lawsuits from workers dating back years before the ruling.

O’Hagan Meyer and Willenken LLP represent Jan-Pro Franchising International. Lichten & Liss-Riordan represents the workers.

The case Vazquez v. Jan-Pro Franchising Int’l, Cal., No. S258191, oral argument 11/3/20.

(Corrects the law firms that represent Jan-Pro before the California Supreme Court to Willenken LLP and O'Hagan Meyer. Gibson, Dunn & Crutcher previously represented the company in prior proceedings. The article was originally published Nov. 3.)

To contact the reporter on this story: Erin Mulvaney in Washington at emulvaney@bloomberglaw.com

To contact the editors responsible for this story: Jay-Anne B. Casuga at jcasuga@bloomberglaw.com; John Lauinger at jlauinger@bloomberglaw.com

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