By Pamela Vallero
Gruenberg Law
The independent contractor-heavy gig economy in California faced a great challenge after the passing of Assemblywoman Lorena Gonzalez’ AB 5, a law intended to codify the decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (2018) 4 Cal.5th 903 (Dynamex). Since its enactment, AB 5 has dominated the conversation in terms of what is to come as the workforce landscape continues to change with the gig economy not just in California, but in the rest of the country. This article will discuss the law’s background and its impact since its enactment.
Dynamex: Landmark Decision on Worker Status and the Basis for the Bill
In the landmark decision, the California Supreme Court reinterpreted and ultimately replaced the former method of classifying employees versus independent contractors by the test adopted in S.G. Borello & Sons v. Department of Industrial Relations (1989) 48 Cal.3d 341 (Borello). Instead, it established a three-pronged “ABC” test to determine whether a worker had been properly classified as an independent contractor versus an employee for the purposes of California wage orders. Under the “ABC” test, a worker is presumed to be an employee unless the hiring entity satisfies all three prongs: (A) that 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 the work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
In May 2019, a panel of the U.S. Court of Appeals for the Ninth Circuit held in Vazquez v. Jan-Pro Franchising International, Inc. that Dynamex applies retroactively. In explaining its decision, the court cited California’s “general tradition that judicial pronouncements have retroactive effect,” as well as “the emphasis in Dynamex on its holding as a clarification rather than as a departure from established law.” Moreover, in emphasizing the general rule that judicial decisions are given retroactive effect, the panel added that retroactive application is “neither arbitrary nor irrational” in violation of due process, particularly given that wage orders must be liberally construed in a manner that serves their remedial purpose. The court also cited policy concerns identified in the Dynamex decision and noted that state courts in California are also applying Dynamex retroactively.
AB 5: What’s in the Bill?
In the wake of the Dynamex decision, lawmakers stepped up and proposed legislation on both sides. Assemblywoman Lorena Gonzalez proposed AB 5, which sets a new standard for hiring independent contractors, requiring many to be reclassified as employees for all purposes under California’s wage orders, which govern, among other things, minimum wage payment, daily and weekly overtime pay, and meal and rest breaks. AB 5 also amends and adds to the California Labor Code, which provides, among other things, penalties for willful misclassification as an independent contractor and reimbursements for necessary business expenses. In September 2019, the California Legislature passed, and California Governor Gavin Newson signed into law AB 5. The law was to take effect on January 1, 2020.
While AB 5 codified the Dynamex decision, it narrowed its reach by exempting a score of occupations such as physicians, lawyers, insurance and real estate agents, engineers, stockbrokers and others seen as having bargaining power over their working conditions. It also added caps to the number of individual assignments a worker could perform for a single company to 35. The exemptions handed out to different occupations continue to reverberate the legal landscape with lawsuits that aim to be the vehicle for further exemptions.
Response to AB 5
Upon the enactment of AB 5 into law, its impacts began to be felt throughout the state. Many believe that AB 5 will result in the loss of jobs for over two million workers who would be governed by the law. Signs that this belief might become reality followed quickly after the passage of the law. Companies began trying to circumvent the standard by refusing to hire freelancers but to instead end their contracts. For example, in December 2019, Vox Media, which hosts the sports site SB Nation, laid off 200 California freelancers, reasoning that the working relationship would become financially untenable for the company under the new law. The company stated that it would replace those independent contractors with 20 part-time and full-time positions. Numerous other companies have also severed ties with their California freelancers and have instead opted to work with contractors who live outside the state.
While the California Legislature attempts to figure out the challenges posed by the law, courts have begun to see an increase in lawsuits from groups who believe they too should be exempted. The results have varied. For example, the California Trucking Association (CTA) successfully brought suit against the state to block the enforcement of AB 5 as it relates to motor carriers in the state that may be governed by the federal Department of Transportation. In its decision, the court reasoned that it was likely that the CTA would prevail on the merits of its argument that AB 5 is preempted by federal law regulating the trucking industry.
Another example comes from the more-recognized gig-economy giants, Uber and Lyft who aim to enjoin the state from applying AB 5 to them, arguing that the law violated, among other things, the Equal Protection and Contract Clauses of the U.S. Constitution. In that case, the trial court denied the injunctive relief sought while recognizing an irreparable harm to plaintiffs.
Another response to AB 5 has come in the form of ballot initiatives. In November’s election, app-based providers have introduced a ballot initiative to overturn AB 5 as it relates to app-based transportation providers and delivery drivers. This initiative, if approved by the voters, would essentially establish yet another standard for determining whether app-based transportation and delivery drivers are independent contractors or employees under the law.
One thing is clear, the issue of worker misclassification is sure to remain, both as the California Legislature continues to sort through the different challenges brought by AB 5 and as courts continue to weigh in on the validity and application of the law.