AB 5 challenge cites arbitrary exemptions

On Dec. 30, Uber, Postmates and two independent workers who use app-based platforms for referrals filed suit in U.S. district court challenging the constitutionality of California Assembly Bill 5, which codified a change in the test for classifying independent contractors and became effective Jan. 1. The lawsuit seeks to prevent AB 5 from being applied to app-based services and the individuals who work through them by alleging that AB 5 violates the United States and California Constitutions.

In general, AB 5 makes it more difficult to classify workers as independent contractors. AB 5 adopts and expands the reach of the rigid "ABC test" for determining whether a worker is properly classified as an independent contractor, clarifies how and when the test applies, and provides several exceptions for job functions that will continue to be subject to the nine-factor balancing test previously applied. Under the ABC test, an individual is an independent contractor only if each of the following is true:

A. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;

B. The worker performs work that is outside the usual course of the hiring entity's business; and

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

However, the exceptions to the statute threaten to swallow the rule, including, but not limited to, insurance brokers, physicians, direct salespersons, real estate licensees, attorneys, engineers, private investigators, accountants, commercial fisherman, grant writers, fine artists, and freelance writers, editors, or newspaper cartoonists who do not provide content more than 35 times per year.

It is the apparent arbitrary nature of the "laundry list of exemptions" with which plaintiffs take most issue, arguing that the carve-outs were "solely for interest groups and labor." They assert that "[t]here is no rhyme or reason to these nonsensical exemptions, and some are so ill-defined or entirely undefined [e.g., fine artist services] that it is impossible to discern what they include or exclude." To illustrate the absurdity, plaintiffs note that a delivery truck driver delivering milk would be excluded from the ABC test while a delivery truck driver delivering juice would not.

Plaintiffs further cite to many examples of the statute's author targeting app-based workers and platforms and treating them disparately from "traditional workers." Plaintiffs contend these statements (e.g., accusing platform companies of engaging in wage theft and vowing that AB 5 will stop gig economy companies from relying on independent contractors to prevent them from "skirt[ing] labor laws, exploit[ing] working people and leav[ing] taxpayers holding the bag") show that animus toward app-based services is the only justification for the disparate treatment of the gig economy (which lawmakers vowed would not be exempted from the law) and the seemingly random selection of industries that were excluded from the application of the ABC test.

As such, plaintiffs assert there is no rational basis for subjecting exempt occupations and non-exempt occupations to different rules and burdens in violation of the Equal Protection Clauses of the California and United States Constitutions. Plaintiffs further assert that the statute infringes on the constitutional right to pursue the occupation of one's choice and deprives independent service providers of the flexibility they value working in the on-demand economy.

Even under the rigid ABC test, Uber and Postmates maintain that they are not hiring entities under AB 5 and app-based independent service providers are not employees under the ABC test. Rather, they assert that the "only service that network companies provide is access to an app.... They are technology companies that create and operate apps, which facilitate the connection of consumers and independent service providers, so that consumers can hire an independent service provider to perform particular services." These arguments are relevant to factors B and C of the ABC test, namely, whether the workers perform work that is different from the hiring entity's business and whether they hold themselves out as having an independently established trade, occupation, or business.

If AB 5 is applied to app-based services and the drivers are found to be employees of the companies rather than independent service providers, the reclassification would have a drastic effect on their business and the on-demand economy more generally (including on consumers, who plaintiffs assert will suffer from a decrease in available services on which they have come to rely). These companies, they argue, have been "an engine of economic growth, innovation, and work opportunities." But, if forced to reclassify the workers as employees, these companies would be required to pay employees for time waiting between engagements and overtime, set their hours, provide meal and rest breaks, reimburse for business expenses, including mileage, provide workers' compensation and unemployment insurance, pay payroll taxes, and provide benefits. In essence, it would be a fundamental change to the business structure, eliminate the flexibility that draws workers to this work, and increase costs to the companies significantly, threatening their existence in California.

What this lawsuit highlights is the shifting reality of the modern on-demand economy and the law's direct conflict with that modern reality. App-based services, including Uber, Lyft, Postmates, Instacart, Task Rabbit, and the like, and other on-demand services, such as taxicab services, do not fit within the traditional work model of scheduled shifts and breaks. The California legislature has taken a position that these workers should be afforded the rights and benefits of that traditional work model and that the bill is necessary to protect workers from wage theft. However, many workers and the platforms through which they work assert that workers and the public at large benefit from the flexibility of the on-demand economy and contend that AB 5 stifles innovation.

Regardless of the court's decision, this fight is far from over. Many app-based companies have pledged millions of dollars to back an initiative for the November 2020 ballot proposing that drivers and couriers can be classified as independent contractors while allowing them to receive some benefits and wage guarantees. It seems that a reasonable compromise, which would protect workers by ensuring benefits and wage guarantees while protecting the flexibility and freedom of the on-demand economy, would be the best solution. Absent that, if AB 5 is enforced against app-based services, we are sure to see an increase in class action litigation and a drastic shift in worker flexibility and the convenience to consumers of the on-demand economy. 