The Gig Economy In The Crosshairs: The Ninth Circuit Extends Dynamex Retroactively
The battle over the gig economy continues on the West Coast. The Ninth Circuit in Vazquez v. Jan-Pro Franchising International, Inc., held that the California Supreme Court’s test to determine whether a worker is an independent contractor or an employee, has retroactive effect. In the context of many high-profile IPOs by companies dependent on independent contractors, and legislative efforts by the California legislature, the Vazquez decision adds additional hurdles for California companies looking to take an expansive approach in classifying their workers as independent contractors.
The test adopted by the California Supreme Court in Dynamex, commonly known as the “ABC” test, puts the burden on the hiring entity to prove each of three elements to establish that a worker is not an employee: (A) the worker is free from the control of the hiring entity in connection with work performance; (B) the worker performs work outside the hiring entity’s usual business; and (C) that the worker is customarily engaged in an independent business of the same nature as the work performed. Importantly, there is a presumption that the worker is an employee under California’s wage orders unless proven otherwise by the hiring entity.
California’s wage and hour enforcement agency, the Division of Labor Standards Enforcement, issued an opinion letter indicating that the ABC test applies to both wage orders and any California labor code provisions that enforce the wage orders, including meal and rest periods, overtime, minimum wage, and reimbursement of expenses. Moreover, the California legislature is considering Assembly Bill 5, which would not only codify the ABC test, but it would also make it applicable to California’s wage orders, labor code, and unemployment insurance.
In contrast, only two days earlier, the United States Department of Labor issued an opinion letter concluding that workers who provide services to virtual marketplace companies are independent contractors, after applying the six-factor “economic realities” test under the Fair Labor Standards Act. And for states that do not follow the ABC test, such as New York and Texas, hiring entities are potentially able to exercise more flexibility in designating their workers as contractors. Under New York’s approach, a company can have “incidental control” over independent contractors without turning those contractors into employees, so long as the employer does not control the “results” of the independent contractor’s engagement, or the means used to achieve those results. In Texas, under rules that went into effect at the end of April, a company that qualifies as a “marketplace platform” has to meet each element of a nine-factor test for the purposes of Texas unemployment laws.
The rapidly changing landscape of applicable law, combined with the different standards at the federal and state levels, renders the issue of proper classification of workers highly important. Companies should perform a specialized and careful review, particularly if they operate in California or another state applying the ABC test.
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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.