California's newest law, AB-5, has been characterized by the media as a bill that would classify gig workers like Uber and Lyft drivers as employees by codifying the 2018 Dynamex case. AB-5 confirms that its express intent is "to codify the decision in the Dynamex case." Even counsel for Uber has characterized AB-5 as a codification of the 2018 Dynamex decision. But AB-5 goes well beyond the Dynamex case in exposing a wide range of California businesses, now dubiously ordained as "employers," to new and potentially lethal damages claims that appear to have been entirely overlooked by the media.

In Dynamex Operations West v. Superior Court, (2018) 4 Cal.5th 903, a driver who alleged he had been misclassified as an independent contractor sued for wage-and-hour violations and for reimbursement of his costs, including fuel and tolls. The court of appeal in Dynamex held that the provision of the Labor Code that applied to employee cost reimbursements was covered by the Borello test—the standard multi-factor common law test for independent contractor status that had been the law in California for many years—and remanded the cost reimbursement issue back to the trial court. The petition for review in Dynamex did not raise the cost reimbursement issue, which was, therefore, not before the Supreme Court. The Supreme Court's ruling in Dynamex was, accordingly, limited to "violations of the obligations imposed by the wage order …" and addressed "only that issue."

The Supreme Court in Dynamex pronounced that the simplistic ABC test would be used to distinguish employees from independent contractors on wage order claims, which generally relate to minimum wage, overtime and meal and rest breaks. Any worker in the same business as a putative employer was now to be considered its "employee" on wage order claims. The ABC test generates innumerable false positives. It's like saying that anything with two ears is a donkey. All donkeys will be accurately identified by the test, but they will be joined by a veritable Noah's Ark of creatures that are most certainly not donkeys.

Dynamex does not hold that the ABC test applies to employee reimbursements under the Labor Code, because only a wage order claim was before the court. That's why the U.S. Court of Appeals for the Ninth Circuit, in a post-Dynamex decision, left it to the district court to determine whether Dynamex applies "to claims not arising under a wage order." See Lasater v. DirectTV, 772 F.3d. Appx. 582, 584 (9th Cir. 2019). Other courts have held that the ABC test applied only to wage orders which "regulate very basic working conditions," and not to nonwage order claims, as in Garcia v. Border Transportation (2018) 28 Cal.App.5th 558, as modified, 28 Cal.App.5th 1090. See also Henry v. Central Freight Lines, 2019 BL 218845, 8 (E.D. Cal. June 13, 2019) ("The Dynamex ABC test merely requires employers to classify employees appropriately and comply with generally applicable wage orders.") See Valadez v. CSX Intermodal Terminals, 2019 BL 165195, fn. 6 (N.D.Cal. March 15, 2019) ("new test" in Dynamex was expressly limited to wage orders).

Post-Dynamex courts seemed to be well on their way to limiting the applicability of the suspect ABC test to basic wage order issues only. This nuance apparently escaped the legislature when it indiscriminately embraced the Dynamex ABC standard "for purposes of the provisions of the Labor Code," exposing businesses operating in California to a devastating range of Labor Code remedies that include the obligation to reimburse "employees" for their expenses and losses.

Labor Code Section 2802 requires an "employer" to indemnify an "employee" for "all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer …" Labor Code Section 2804 invalidates any waiver of this statutory right. An "employer" may adopt a formula to approximate an employee's costs, but the employee is still entitled to actual costs if they exceed the formula, as in Gattuso v. Harte-Hanks Shoppers, (2007) 42 Cal. 4th 554.

Employee costs may include the cost of purchasing a vehicle (Henry), the maintenance costs of operating a vehicle (Gattuso), reimbursement for cellphone charges (Cochran v. Schwan's Home, (2014) 228 Cal.App.4th 1137) or any other expense an employee claims to have spent in discharge of employment duties or in obedience to the directions of an employer. Now that countless commercial relationships have been converted by judicial and legislative fiat into employment relationships, we are left without guidance to ponder what it means to be liable for the "losses" of a former commercial partner who is now an employee. All dealerships, distributorships, franchises and other business or licensing arrangements that include services that are within the usual course of an alleged employer's business will now be subject to Section 2802 claims for the reimbursement of expenses or losses.

The legislature did what it could to ensure that the bounty of AB-5 will apply retroactively "to the maximum extent permitted by law." The Garcia court held that Dynamex was retroactive, tantamount to issuing speeding tickets to motorists who had been driving within the speed limit at the time, but who failed to comply with a subsequently-adopted reduction in permissible speed. The Ninth Circuit said that it would certify the retroactivity issue to the California Supreme Court "in due course," after withdrawing its disruptive published opinion in Vazquez v. Jan-Pro Franchising, 925 F.3d 575 (May 2, 2019) on July 22, 2019, 2019 WL 3271969, at *1, which was inexplicably re-issued on Sept. 24.

If reimbursement rights are retroactive, employee claims could go back for four years. See Espejo v. The Copley Press (2017) 13 Cal.App.5th 329, 367-68 (treating reimbursement claims as Unfair Competition Law claims, which would be subject to a four-year statute of limitations).

California businesses can expect to be defendants in class actions brought on behalf of individuals they never hired, supervised, compensated or scheduled who will seek from them the reimbursement of many years of claimed expenses and losses. The misclassification of countless California businesses as employers by the California legislature will expose many entirely blameless companies to devastating damages claims under the California Labor Code that go far beyond the damages that would have been warranted by the mere codification of the Dynamex decision.

Jonathan Solish, based in Los Angeles, California, is partner at Bryan Cave Leighton Paiser. He focuses his practice on handling complex franchise disputes.