Business Law

Franchise Law Committee Case Report: Retroactive Application of Dynamex

The Franchise Law Committee presents the following case update.  In 2018, the California Supreme Court issued a landmark decision in the matter of Dynamex Operations West, Inc. v. Superior Court of Los Angeles.  The court rejected a previous test for determining whether workers should be classified as either employees or independent contractors.

On January 14, 2021, the Supreme Court of California issued its opinion holding that its previous decision in Dynamex Operations W., Inc. v. Superior Court, 4 Cal. 5th 903 (2018), should be applied retroactively. See Vazquez v. Jan-Pro Franchising Int’l, Inc., No. S258191, 2021 WL 127201 (Cal. Jan. 14, 2021). This opinion was issued in response to the Ninth Circuit’s certified question. Shortly afterward, the Ninth Circuit reissued its previously withdrawn opinion from May 2019, with only the retroactivity section modified. Vazquez v. Jan-Pro Franchising Int’l, Inc., No. 17-16096, 2021 WL 403788 (9th Cir. Feb. 4, 2021).

The Supreme Court began its analysis with reference to the general rule that judicial decisions are applied retroactively, even where the interpretation differs from previous interpretations. It explained that retroactivity was especially appropriate in a case of first impression, which it deemed Dynamex to be, because “[i]t did not change a settled rule on which the parties below had relied.” Jan-Pro’s stated reliance on previous jurisprudence—notably S.G. Borello & Sons v. Dep’t of Indus. Relations, 48 Cal. 3d 341 (1989)—was misplaced, according to the Court, due to the breadth of the term “suffer or permit to work” in the wage orders and because the Court had “signaled” in previous decisions that the test for distinguishing between employees and independent contractors in the wage order context remained an open question. Declining to recognize an exception to the general rule in this case, the Court held that fairness and policy considerations favored retroactive application of the ABC standard. The opinion left unclear what standard should have been used by employers seeking to comply with the wage orders before Dynamex. Claiming that Dynamex “did not depart sharply from the basic approach of Borello,” the Court insisted that the ABC test “was not beyond the bounds of what employers could reasonably have expected.” However, because the Borello standard involved weighing multiple factors, the Court implied that Jan-Pro’s reliance on any particular outcome under that standard was unreasonable. Finally, the Court observed that a literal application of the “suffer or permit to work” standard was inappropriately broad, as it would likely have encompassed even “true” independent contractors as employees, “when they could not reasonably have been intended to be so treated.” Throughout its opinion, the California Supreme Court relied heavily on Newman v. Emerson Radio Corp., 48 Cal. 3d 973 (1989), which explored at some length the history of and rationale behind the principle of retroactivity. In explaining why “virtually all of this court’s previous groundbreaking tort decisions have been applied retroactively, even when such decisions represented a clear change in the law,” the Newman court quoted, with approval, a law review article authored by former California Supreme Court Chief Justice Roger Traynor. Chief Justice Traynor opined that, in most tort cases, retroactive application of judicial opinions is necessary to prevent the injustice to the parties who would otherwise “be saddled with an unjust precedent,” and that this consideration “ordinarily outweighs any hardship on those who acted under the old rule” because “[n]either the tortfeasor nor the victim normally takes account of expanding or contracting rules of tort liability …” But it is precisely this reliance aspect of retroactivity that distinguishes tort cases from wage order cases, in that—in contrast to the tortfeasors and victims described by Chief Justice Traynor—businesses do arguably “take account of” and place significant reliance on existing legal interpretations and are disproportionately harmed when the rules change, even if the new interpretation is deemed to be more “correct.” The Supreme Court’s rejection of this argument in Vazquez does not obviously do justice to Newman’s underpinnings.

The Supreme Court dropped a footnote making clear that “the question of California law posed by the Ninth Circuit … does not involve any inquiry into the general relationship or applicability of the Dynamex decision to franchise agreements or arrangements, and we do not address that subject.” The Ninth Circuit had no such qualms, and proceeded to issue an opinion that was virtually identical to its original version. Included in the Ninth Circuit’s opinion—“[a]s an aid to the [district] court” on remand— was an extensive section offering “observations and guidance” on how the district court should apply the ABC test to the franchising relationship before it.

This case report was prepared by Sandra Gibbs (sgibbs@mulcahyllp.com) of the law firm Mulcahy LLP for the Franchise Law Committee.  Members of the Franchise Law Committee represent franchisees, franchisors and distributors in both disputes and deals and advise practitioners regarding the laws and regulations that govern franchises throughout California and other states.  If you are interested in joining the Franchise Law Committee, please contact Taylor Vernon, tvernon@lewitthackman.com.

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