Since its introduction on September 18, 2019, Assembly Bill 5 (AB 5) has caused confusion and controversy, and has sparked fervent opposition across California, as it codifies the common law “ABC Test” used for determining the existence of an employer/employee relationship. As we have described here and here, the ABC test has made it considerably more difficult for businesses in the Golden State to utilize workers as independent contractors.
Many business groups and employers across various industries have been vocal in their opposition to AB 5, but few have been as vocal as a number of companies in the “gig economy.” Employers in the gig economy have historically relied on independent contractors to operate their app-based businesses and some of the largest employers in California have since refused to reclassify their workers as employees, instead opting to take the fight to the courts and the ballot box.
While continuing to fight AB 5 in the courts without any material victories, Uber and Lyft joined forces with other gig economy employers and mounted a $200 million campaign to put the question of whether gig workers are independent contractors to a statewide vote through a ballot initiative known as Proposition 22. On November 3, 2020, California voters voted in favor of Proposition 22, which created an exception to AB 5 for “app-based drivers” in exchange for certain other concessions designed to provide some of the protections sought by lawmakers who were in favor of requiring employers to classify these workers as employees. Proposition 22 will become law on December 16, 2020. However, this result will not relieve gig employers from liability for any past violations prior to December 16, 2020.
Additionally, the backlash against AB 5 has led the California legislature to pass Assembly Bill 2257 (AB 2257), which was signed into law on September 4, 2020. AB 2257 expands the list of exemptions in AB 5 by exempting certain occupations in connection with the music and performance art industries, certain sales and marketing professions, a variety of consulting services, and several other specialty occupations/professionals. AB 2257 also expands the business-to-business exemption, revises the exemption criteria for referral agencies and service providers, and creates an exemption for the relationship between two or more sole proprietors.
While employers in certain industries have enjoyed victories in their fight against AB 5, other industries have had different results. For example, the trucking industry was recently dealt a significant blow in the courts. On November 19, 2020, a California Court of Appeals held that AB 5 applies to motor carriers in the trucking industry, because it is not preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA).
The court acknowledged the FAAAA preempts state laws which “relate[] to a price, route, or service of any motor carrier … with respect to the transportation of property,” but was not convinced that the ABC test interferes with the ability of motor carriers to engage with owner-operators as independent contractors. In coming to this conclusion, the court reasoned the ABC Test is a “generally applicable employment law that does not prohibit the use of independent contractors, and therefore does not have an impermissible effect on prices, routes, or services.” Notably, the same preemption issue is also being argued in the federal courts, with a similar case currently pending before the Ninth Circuit. It is possible the U.S. Supreme Court will ultimately decide the issue during its next term.
The law on independent contractor classification remains an ever-shifting and complex area of the law, particularly in California, which is presently serving as a “laboratory” for other states waiting to enact laws similar to AB 5. It is important for companies with business operations in California to conduct audits and ensure compliance with California law so as to avoid the anticipated increase in misclassification litigation regarding past and future violations.