We reported in our previous issue of Goodwin Insights for the California Employer that legal challenges had been brought that could delay implementation of AB 5, the new California law codifying the so-called “ABC test” for determining whether a worker should be classified as an independent contractor or as an employee. While the challenges have not concluded, AB 5 remains the law of the land in California for the vast majority of companies and occupations.
Legal Challenges to AB 5
To date, the only successful legal challenge to AB 5 was made in a lawsuit filed in the Southern District of California by the California Trucking Association (CTA) and two motor carriers. The plaintiffs in that case argued that AB 5 violates the supremacy and commerce clauses of the United States Constitution and is preempted by federal law as applied to motor carriers. The preemption argument is based on the Federal Aviation Administration Authorization Act of 1994 (FAAAA), which prohibits states from “enacting or enforcing a law, regulation … related to a price, route, or service of any motor carrier … with respect to the transportation of property.” On January 16, 2020, the district court granted a preliminary injunction enjoining enforcement of AB 5 as to “any motor carrier operating in California.” In granting the injunction, the court held that application of AB 5 to motor carriers is likely preempted under the FAAAA. The injunction is currently in effect, but it has been appealed to the Ninth Circuit.
Some of the big players in the gig economy space have been less successful in their legal challenge to AB 5, which they filed in the Central District of California. They argued that the law is unconstitutional in a variety of ways and moved for a preliminary injunction barring AB 5 from applying to them while their lawsuit was pending. The district court denied the motion, holding that the plaintiffs were unlikely to prevail in their argument that AB 5 inappropriately targeted gig economy companies and workers in violation of equal protection principles. The court also held that the plaintiffs were unlikely to prevail in arguments that AB 5 deprives gig economy workers without due process of their right to pursue their chosen occupation, and interferes with the contractual relationships between the plaintiff gig economy companies and their drivers with the service providers making use of their platforms.
The American Society of Journalists and Authors, Inc. and the National Press Photographers Association, the plaintiffs in another case pending in the Central District of California, have also met with little success so far in their legal challenge to AB 5, which is also based on constitutional grounds. On January 3, 2020, the judge considering the lawsuit denied their request for a temporary restraining order due to their not having made the request until the day before the law went into effect. The court will presumably address the merits of the plaintiffs’ argument when it considers their motion for a preliminary injunction currently scheduled to be heard on March 9, 2020.
Pending Legislative Efforts to Reform AB 5
Since the start of the current legislative session in California, dozens of bills have been introduced to amend AB 5. Some of the bills continue to create or fine-tune carve-outs for specific industries such as construction and wineries. But other bills are much more substantive. One seeks to discard the newly adopted “ABC test” for the flexible multi-factor Borello test that applied for many decades. Another seeks to adopt the economic realities test utilized under the federal Fair Labor Standards Act. And yet another seeks to suspend AB 5 while corrective measures are considered by the California Legislature. One of the more interesting developments has been a bipartisan bill that would seek to create a third classification of worker—providing some minimal measures of protections traditionally afforded to employees while providing the flexibility from most wage and hour requirements that make the use of independent contractors economically advantageous. It is still way too early in the legislative session to opine on which approach will gain momentum, but Goodwin will be following the progress of these efforts.
The “California App-Based Drivers Regulations” Ballot Initiative
Some of the large gig economy companies are also undertaking efforts to undo AB 5 through a ballot initiative called the California App-Based Drivers Regulations Initiative. If the initiative qualifies for the November ballot and is passed, app-based drivers could lawfully be classified as independent contractors as long as they have control over their own hours and when, where, and how long they work, and as long as they have the ability to work for multiple platforms. The measure would also require app-based rideshare and delivery network companies to offer new protections and benefits for drivers that are akin to protections currently given to employees, including an earning guarantee (an amount equal to at least 120% of minimum wage plus 30 cents/mile compensation toward expenses) and, for drivers working a minimum number of hours per week, a healthcare contribution based on a sliding scale. Drivers would also be eligible for occupational accident insurance to cover on-the-job injuries and automobile accident and liability insurance. Supporters will need to collect 622,212 voter signatures by May for the measure to qualify for the November ballot. Recent reports suggest that more than 25% of the required signatures have already been collected.
San Diego Lawsuit against Instacart
The San Diego City Attorney filed a lawsuit against Instacart in September 2019, alleging that the company misclassifies individuals who provide delivery services through the Instacart app as independent contractors. On February 24, 2020, the Superior Court issued a preliminary injunction against Instacart that would require the company to suspend service in San Diego until it classifies individuals providing delivery services through its app as employees. The court concluded that it is more likely than not that San Diego will be able to show that individuals providing shopping and delivery services via Instacart’s app do not pass the “ABC test” because they perform a core function of the company’s business, are not free from its control, and are not engaged in an independently established business. Because the court temporarily stayed enforcement of the injunction pending appeal, Instacart has not been required so far to suspend services in San Diego.
Because AB 5 empowers the California Attorney General and certain local agencies to bring actions for injunctive relief to prevent worker misclassification, more actions like that brought in San Diego are to be expected. For that reason, and because legal challenges to AB 5 have to date met with very limited success, companies making use of independent contractors in California should evaluate their independent contractor relationships and consult with employment counsel about adjusting practices to comply with AB 5.