California’s Struggle With Its “ABCs” Continues

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Obermayer Rebmann Maxwell & Hippel LLP

In January of 2020, California enacted a new law that codifies a strict test for determining if workers are independent contractors or employees and thereby entitled to minimum wage, overtime, and various other benefits.  That standard, originally set forth in a 2018 California Supreme Court case called Dynamex, imposes a presumption that a worker is an employee unless all three prongs of the following test are met:

  1. The person 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 person performs work that is outside the usual course of the hiring entity’s business; and
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Given the law’s obviously far-reaching impact, it received substantial pushback from the employer community. Its opponents scored some early victories, with Uber and Lyft mounting a $220 million campaign that resulted in a successful ballot initiative, Proposition 22, which carved out an exemption for app-based transportation and delivery drivers. In addition, several trucking companies, which rely on contracting with independent owner-operator drivers, successfully enjoined the trucking component of the law as preempted (superseded) by the Federal Aviation Administration Authorization Act (FAAAA).

However, the pendulum has recently swung the other way in this multi-front battle. First, a trial court judge in Alameda County recently ruled that Proposition 22 violates the California State Constitution, and is therefore unenforceable, for various technical reasons associated with how the law was passed. It is unclear whether this lower court decision will withstand scrutiny during on appeal, or if gig economy businesses will pursue a different initiative. But either way, the battle is far from over.

Meanwhile, the truckers and freelance writers and photographers were also on the losing end of two recent rulings by the notoriously employee-friendly Ninth Circuit. First, the appellate court held that the FAAAA does not preempt AB5. Importantly, the Supreme Court of the United States declined to hear the case on October 4, 2021, leaving in place a split in authority regarding whether states can change the rules regarding how truckers are treated. Second, the Ninth Circuit rejected an argument advanced by freelancer groups that the law violates the free-speech rights of freelance writers and photographers on grounds that AB5 regulates economic activity as opposed to speech. 

The impact of these three cases is presently unclear. The challenge to Proposition 22 remains on appeal, and there is a pending petition for certiorari with the Supreme Court that presents it with an opportunity to take up the FAAAA preemption issue. And all this litigation may be for naught, as the Biden Administration has made it clear that one of its priorities is imposing the “ABC Test” at the federal level via the PRO Act, which passed the House in March of 2021.   

Classification of employees as independent contractors will assuredly continue to be a hot button issue that requires employer vigilance and should involve consultation with counsel—particularly in states, such as California and New Jersey, with laws more hostile to businesses who rely on independent contractors.  As always, HR Legalist will continue to monitor misclassification developments in California and other states and provide regular updates. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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