The hopes of California gig economy companies to retain the flexibility to classify workers as independent contractors were dashed this week when a federal district court judge refused to enjoin Assembly Bill 5 (“AB5”), which codifies the “ABC” test for most independent contractor classifications.
Governor Gavin Newsom signed AB5 into law last fall, effecting a seismic change on California’s legal landscape. Effective January 1, 2020, the law makes it nearly impossible for companies to lawfully classify most workers as independent contractors (rather than employees). The bill expands on California Supreme Court’s three-prong “ABC” test from its 2018 Dynamex decision for determining how workers can be classified, which you can read about here. With certain limited statutory exceptions, AB5 provides that, to properly classify a worker as an independent contractor in California, an employer must demonstrate that the worker: (A) is free from the company’s control and direction; (B) performs work outside of the company’s usual course of business; and (C) is customarily engaged in independent work of the same nature as the work performed. There is no balancing, as all three factors must be met.
In December 2019, Uber and Postmates (and two of their contracted drivers) sued in federal court to block AB5 from taking effect, seeking an injunction to temporarily stop the state’s enforcement of AB5 while its constitutionality was determined by the court.
This week, U.S. District Judge Dolly Gee denied that request, stating that the law did not specifically target the gig economy and citing the state’s need to regulate the misclassification of workers, which the court believes outweighs the economic risk of harm to the companies. Ironically, the very workers AB5 seeks to protect argue in this case that the law in fact interferes with their constitutional right to “follow a chosen profession free from unreasonable governmental interference.” While not determinative of the entire case (since it relates only to the refusal to grant an injunction), the court’s 24-page denial of the companies’ bid is a strong indicator that the lawsuit is unlikely to succeed, particularly given California’s demonstrated interest in protecting workers from what it perceives to be a systemic injustice.
While the court’s refusal to enjoin application of AB5 is disappointing, not all of the news out of the California courts was bad—California employers did receive a reprieve with the successful injunction of AB51 (the California bill that attempted to criminalize mandatory arbitration agreements in employment; more here).
Misclassifying employees as contractors can result in hefty penalties and a wide range of liabilities in California, and AB5 is certain to have a harsh and disparate impact on industries not exempted from the law. Since AB5 may be here to stay, companies who regularly engage independent contractors in California are advised to contact their employment counsel for advice on quantifying and evaluating these risks and determining the best strategy going forward. Your Blank Rome team in California stands ready to help guide our clients through this minefield.