On February 10, 2020, United States District Judge Dolly M. Gee denied a motion for a preliminary injunction to enjoin California from enforcing Assembly Bill 5 (AB 5) against Postmates Inc. and Uber Technologies, Inc. Judge Gee concluded: “Plaintiffs have not shown serious questions going to the merits — the critical factor in determining whether to issue a preliminary injunction — and, though company plaintiffs have shown some measure of likelihood of irreparable harm, the balance of equities and the public interest weigh in favor of permitting the state to enforce this legislation.”

Background

Effective January 1, 2020, AB 5 requires the application of the “ABC test” to determine if most workers in California are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission wage orders. (Read our prior post HERE.) Under the ABC test, a worker will be an employee and not an independent contractor unless these three conditions are satisfied:

1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Notably, the statute exempts a number of occupations from the ABC test, such as certain licensed insurance agents and brokers, certain licensed physicians or veterinarians, and certain licensed private investigators.

Motion for Preliminary Injunction

On January 8, 2020, Postmates and Uber, along with two individuals who drive on those platforms (collectively referred to as “Plaintiffs”), filed a Motion requesting the Court to enjoin California from enforcing the new ABC test against Postmates and Uber.

In particular, Plaintiffs argued that AB 5: (i) treated gig economy companies different from other groups in violation of the Constitution’s Equal Protection Clause; (ii) deprived the two individuals of their substantive due process rights to pursue their chosen professions; and (ii) impaired the contracts between the individuals and Postmates and Uber.

The Court’s Ruling

On February 10, Judge Gee denied the Motion and rejected these arguments. Judge Gee acknowledged there was evidence that AB 5 targeted gig economy companies, but she held that “such targeting, even if it rises to the level of animus toward gig economy companies, does not establish an Equal Protection violation where the statue addresses legitimate concerns of deleterious misclassification of workers in many industries, not just the gig economy.”

In particular, she found that the “State’s asserted interest in protecting exploited workers to address the erosion of the middle class and income inequality…could provide a rational basis[] for any ostensible targeting of gig economy employers and workers.” Judge Gee also found rational explanations for AB 5’s exemptions because those work relationships “require business organization, skill, self-direction, self-pricing, shorter or less frequent work terms, a distinct location, a specific type of work, and other hallmarks of independent status.” Judge Gee therefore declined to find that AB 5 targeted gig economy companies in violation of the Equal Protection Clause.

The individual drivers’ arguments that AB 5 deprives gig economy workers of the right to pursue their chosen occupation also did not persuade Judge Gee. She reasoned that “[e]ven if Individual Plaintiffs’ employment status would change under AB 5, they potentially could still pursue their line of work, provided that their employers compensate them properly and allow them to have flexible work schedules.”

Finally, Judge Gee further determined that enforcement of AB 5 does not unconstitutionally impair the contracts between platform companies and drivers in violation of the Contract Clause because the parties should have known that the terms setting forth a driver’s contractor status in the contracts did not determine employment classification, even under the former Borello standard. She also held that, even if there was substantial impairment of contracts, AB 5 satisfies the public purpose test in a Contract Clause challenge because “AB 5 is an exercise of the State’s police power to protect workers aimed at remedying what it perceives to be a broad economic and social problem.”

What’s Next?

The Plaintiffs’ lawsuit challenging the constitutionality of AB 5 is still in progress, notwithstanding the denial of the motion for a preliminary injunction.

In addition, certain platform companies have launched a ballot initiative called the Protect App-Based Drivers and Services Act, which is aimed to appear on the November 2020 state ballot. Under the proposed Act, app-based drivers would be considered independent contractors, but be entitled to certain benefits (including minimum wage and a form of healthcare benefits) if certain conditions are met. For instance, the hiring entity must permit the worker to select their own dates, times, and hours of work; allow the worker to reject a request for an assignment at any time they wanted; let workers perform services for any other company including direct competitors; and cannot restrict the worker from performing any other kind of work.

Your Baker McKenzie attorneys will continue to provide updates on the ever-changing landscape of independent contractors in California.