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By: David Molinari
If you have practiced law in the State of California for an appreciable period of time you become numb to warnings from out-of-state clients and counsel bemoaning enactments by the state’s legislature that will doom business and cause exodus of industries from the state. We are a resilient people, capable of prospering despite the “well-intentioned” actions of the state’s governing bodies. However, did the State Assembly really intend to draft a bill that violates California Constitution Article 1, Section 9 prohibiting ex post facto laws with California Assembly Bill 5, adding Labor Code 2750.3?
Assembly Bill 5 seeks to codify the recent California Supreme Court decision of Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018.). In the Dynamex case, the State Supreme Court virtually eliminated the status of independent contractor. The California Supreme Court adopted an “ABC” test for determining whether workers are employees under California Wage Order laws. The test requires the hiring entity establish three elements to disprove employment status: (A) That the worker is free from control of the hiring entity in connection with work performance-both under the contract and in fact; (B) That 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.
Under Assembly Bill 5, the legislature seized on the ability to expand the categories of individuals eligible to receive benefits by creating a legislative instrument that would result in additional monies being deposited into the state via continuously appropriated funding from an expanded pool of employers. The Bill seeks to codify the Dynamex decision. But the legislature simply adopted the Supreme Court’s opinion which includes retroactive application. The legislative findings clearly show a financial purpose behind codifying Dynamex: The loss to the state of revenues from companies that use “misclassified” workers to avoid payment of payroll taxes, premiums for workers’ compensation, Social Security, unemployment and disability insurances. The Assembly clearly did not overlook or ignore retroactive application of Dynamex may subject this new pool of employers to criminal penalties they currently are not exposed to suffering. The Assembly in its findings concluded: Assembly Bill 5 “Would expand the definition of a crime.”
The Supreme Court held applying Dynamex retroactively was consistent with due process because the Court was “merely extending” principles previously stated in S.G. Borello & Sons, Inc v. Department of Industrial Relations, 48 Cal.3rd 341 (1989) and represented “no greater surprise than tort decisions that routinely apply retroactively.” The holding has been cited for authority for retroactive application by the 9th Circuit in Vasquez v. Jan-Pro Franchising as well as the State Courts of Appeal including the 4th District, Division 1 in Garcia v. Border Transportation Group, LLC, 28 Cal. App. 5th 558.
Codification of Dynamex threatens to create an ex post facto law that expands exposure to criminal penalties. Thus, it would seem to be in violation of California Constitution, Article 1, Section 9 that the legislature shall not pass ex post facto laws. For example, the new pool of employers will be immediately subject to prosecution under California Labor Code Section 3700.5. Labor Code Section 3700.5 makes it a crime, punishable by imprisonment in the county jail for up to one year, or by a fine of not less than $10,000.00 or both, for any entity that fails to secure workers’ compensation insurance. A second or subsequent conviction is punishable by imprisonment for up to a year and a fine of not less than $50,000.00.
Article 1, Section 9 has been applied to past employment-related legislation; but only with respect to the Article’s prohibition against laws impairing the obligation of contract. The language of Article 1, Section 9 appears unambiguous and absolute. However, prior challenges have run into judicial interpretation that the Article may not be read literally and the prohibitions of Article 1, Section 9 may not be absolute; at least with respect to the impairment of contracts. The clause “is not to be read with literal exactness like a mathematical formula.” Torrance v. Workers’ Compensation Appeals Board, 32 Cal.3rd 371 (1982).
The guidelines for determining the constitutionality of a statute imposing an ex post facto criminal penalty applies a presumption against retrospective application unless the legislature expresses such specific intent. The legislature’s findings expressly stated Assembly Bill 5 “would expand the definition of a crime.” Is that enough of a legislative expression of intent even though the State Supreme Court only referenced civil “tort decisions” to justify retroactive application? Maybe we shouldn’t be numb to those warnings any longer.
For more information, please contact David Molinari at [email protected].