By Stephen T. Melnick, a Shareholder with Littler Mendelson, P.C. in the firm’s Boston, MA office.
California’s new independent contractor law, commonly known as AB 5, has proven controversial from the start. Under this law, many individuals who formerly would have been considered legitimate independent contractors will likely be deemed employees instead. Given the widespread disruption that this law is expected to cause, a flurry of challenges have arisen in recent weeks against AB 5, from both companies and individuals—in the courts, at the legislature, and even (potentially) at the ballot box. These challenges range from attempts to narrow its scope, to proposals to repeal, and even lawsuits seeking to declare it unconstitutional.
This Legal Backgrounder will provide a brief history of AB 5, followed by a summary of the statute’s main provisions. It will then offer an overview of the various actions that individuals and businesses have taken so far to limit or strike down the law.
AB 5’s History
For years, California courts and agencies used an eight-factor test, set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations,1 to determine whether a person was an employee or an independent contractor. What was known as the “Borello test” was marked by its flexibility: it looked at all eight factors, and no single factor controlled. This likewise gave individuals and businesses some flexibility in arranging their relationship to comply with the law.
However, in 2018, the California Supreme Court overturned Borello in Dynamex v. Superior Court (Dynamex).2 Dynamex adopted a new “ABC” test, based on the previously unique Massachusetts independent contractor statute. The Dynamex decision applied only to certain California wage-and-hour regulations; most other aspects of the employment relationship were still determined by the Borello test. Unlike Borello, the new ABC test adopted in Dynamex had three narrow prongs, all of which had to be satisfied for a person to be considered an independent contractor.
In late 2018, proponents of the Dynamex approach introduced a new bill, AB 5. Initially intended to “codify” and “clarify” the Dynamex decision, AB 5 was amended repeatedly—and grew in size and complexity. The Legislature finally passed AB 5 on September 11, 2019, and Governor Gavin Newsom signed it into law a week later. AB 5 went into effect on January 1, 2020.
The AB 5 Morass
In its final form, AB 5 runs over 6,700 words in length. The first portion—the independent contractor test—is relatively short. AB 5 codifies the ABC test first announced by Dynamex. Under AB 5, for a person to be deemed an independent contractor, the hiring entity must prove all three of the following:
(A) 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.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.3
While courts are likely to interpret each of these elements narrowly, the “B” prong of this ABC test—the requirement that the person perform work “outside the usual course of the hiring entity’s business”—should prove the most problematic for companies and independent contractors. The California Supreme Court offered a few examples showing that “usual course of business” is to be read broadly, making it difficult to prove that a person is working “outside” the scope of the business.4 Because a hiring entity’s failure to prove even one prong of the ABC test means the person is an employee, the “B” prong is often the last word on independent contractor status.
The remaining 6,000+ words of AB 5 set forth a wide variety of exemptions for 19 industries,5 13 professional service occupations,6 and 16 types of referral services.7 For businesses or individuals that fall within these exemptions, the Borello test still applies. A few of these have sunset provisions, applying only until 2021 or 2023. AB 5 also sets separate rules for construction subcontractors,8 and a very narrow exemption for “bona fide business-to-business contracting relationships.”9
Legal Challenges to AB 5
Many companies and independent contractors strongly opposed AB 5. Not surprisingly, there have been numerous efforts to limit or even strike down the law in the courts.
Thus far, the most successful challenges to AB 5 have been by the motor transportation industry, through a statute called the Federal Aviation Administration Authorization Act of 1994 (FAAAA). Despite its aeronautical name, the FAAAA deals with the transportation of goods using motor vehicles, preempting any state law that “relates to” the “prices, routes or services” of someone providing such transportation.
So far, two decisions have held that the FAAAA preempts AB 5. In an action filed by the City Attorney for Los Angeles against a number of trucking companies, a California Superior Court judge agreed with the trucking company defendants that AB 5 (and the Dynamex decision) “clearly run afoul of Congress’s 1994 determination in the Federal Aviation Administration Authorization Act,” and therefore the Borello test would apply.10 The Superior Court held that the under the B Prong, “a motor carrier’s core transportation-related services cannot be performed by independent contractors,” and therefore drivers would necessarily be employees under AB 5.11 This leads to “the common-sense conclusion that AB 5 would have a substantial impact on trucking prices, routes, and services, as motor carriers in California revamp their business models” to satisfy the statute, and thus AB 5 “is preempted by the FAAAA.”12
Likewise, the California Trucking Association filed a lawsuit in federal District Court, seeking to bar application of AB 5 against motor carriers.13 On December 31, 2019, the District Court granted a temporary order blocking California from enforcing AB 5 against motor carriers, finding it was “likely preempted” by the FAAAA.14 On January 16, 2020, the District Court extended that order, entering a preliminary injunction barring the state from enforcing AB 5 against any motor carrier. In particular, the District Court held that because “independent-contractor drivers necessarily perform work within the usual course of the motor carrier hiring entity’s business, drivers who may own and operate their own rigs will never be considered independent contractors under California law,” and thus AB 5 “requires motor carriers to artificially reclassify all independent-contractor drivers as employee-drivers.”15 Following the Superior Court decision from the week before, the District Court held that AB 5 related to the prices, routes and services of motor carriers, and therefore was preempted by the FAAAA. The state has appealed this decision to the Ninth Circuit.
So far, gig economy companies have had less luck challenging AB 5. In one lawsuit, a pair of drivers for app-based transportation companies, and the companies themselves, sued the state, arguing that AB 5 is “an irrational and unconstitutional statute designed to target and stifle workers and companies in the on-demand economy,” and therefore violates the Equal Protection Clause, the Due Process Clause, the Ninth Amendment, and the Contracts Clause of the United States and California Constitutions.16 The plaintiffs moved for a preliminary injunction, but the District Court denied that motion on February 10, 2020. The Court ruled that AB 5 is “rationally related to a legitimate state interest” and “did not target gig economy companies” unlawfully; that it “does not deprive gig economy workers of the right to pursue their chosen profession”; and that it does not “impair [their] contracts.”
In another lawsuit by the City Attorney of San Diego against Instacart, the court indicated on February 13, 2020 that it would grant a preliminary injunction preventing that company from using independent contractors in California.17 The court found that while there is “some evidence” that Instacart’s workers were independent contractors, it still found it was “more likely than not” that the City Attorney could prevail on at least one of the three prongs of the ABC test. The court also acknowledged the significant harms that would befall the company if an injunction was granted, but nonetheless held that independent contractors “and the public” would be harmed if an injunction did not enter. The decision did note that it was “not an adjudication of the ultimate rights” of the parties, and explicitly referenced the “immediate availability of an appeal” to the parties.
There have been two other judicial challenges to AB 5: The American Society of Journalists and Authors and the National Press Photographers Association filed a lawsuit against the state, alleging that AB 5’s exemption for freelance writers and visual journalist was too narrow, and therefore limits freedom of speech under the First Amendment and violates the Equal Protection Clause.18 The District Court denied a motion for a temporary order barring enforcement of AB 5, and a motion for preliminary injunction is pending. Also, a court-reporter agency sued the state, arguing that AB 5 would interfere with its preexisting contracts to provide court-reporting services to various courts, and that excluding court reporting agencies from AB 5’s lengthy list of exemptions “lacks a rational basis to a legitimate state interest” and is “arbitrary, irrational and capricious,” thus violating the Equal Protect Clause of the California Constitution. No motions have been filed in that case.
In addition to legal challenges, numerous bills have been filed that would modify, or even abolish, AB 5. A proposed amendment to the California Constitution, enshrining “the right to pursue a chosen business or profession free from arbitrary or excessive government interference” and enshrining the Borello test as the method for determining independent contractor status, was filed in the California legislature.19 Similarly, a bill has been submitted to the Assembly that would repeal AB 5 and replace it with the Borello test.20
Nine other bills have been submitted seeking to expand the exemptions to AB 5 or otherwise modify that law. One bill would make the temporary carve-out for newspaper distributors or newspaper carriers permanent,21 and another would expand the breadth of the freelance journalist carve-out.22 Another bill would clarify that AB 5 and Dynamex “do not apply to the relationship between a franchisee and a franchisor.”23 Other bills would exempt from AB 5 and Dynamex musicians or music industry professionals; 24 umpires of youth sports;25 individuals working for health facilities that contract with companies that employ health care providers;26 pharmacists;27 licensed timber operators, professional foresters, or certain individuals “performing work on forested landscapes”;28 and “transportation network companies.”29
Another bill calls for the Legislature to explore “creating a third classification of workers,” which would combine the “flexible working conditions” of an independent contractor with “basic rights and protections” such as “a minimum wage, occupational accident coverage if they are injured on the job, protection from discrimination, and paid medical leave.”30
A proposed ballot initiative has also been submitted, which would provide that most drivers working for app-based rideshare and delivery services would be independent contractors, in exchange for certain benefits such as minimum compensation and healthcare subsidies.31
Likely in response to this wave of activity, the legislator who has been AB 5’s primary architect, Lorena Gonzalez, published a number of tweets on February 6, 2020.32 She said that the legislature would (1) ask for $20 million to help “small non-profit community arts programs” transition to employees, (2) broaden and clarify the freelance journalist and photographer exemption, (3) specify that the business-to-business exemption was “allowable for freelance writers,” (4) add an exemption for “photographers and videographers regarding platforms used by independent businesses to sell their work,” (5) work to “reach agreement on language regarding musicians,” and (6) work with the California Employment Development Department to “clarify their interpretation of the law.” No bills have been introduced regarding any of these proposals.
Given the complexity of this issue, and the wide-ranging changes that AB 5 will have on businesses throughout California, we can likely expect more challenges to this statute in the future.
- 48 Cal.3d 341 (1989).
- 4 Cal.5th 903 (2018).
- Cal. Lab. Code 2750.3(a)(1).
- The California Supreme Court stated that “work-at-home seamstresses” hired by “a clothing manufacturing company,” or “cake decorators” hired by “a bakery” would be working in the usual course of the business; whereas “an outside plumber” or “electrician” hired by “a retail store” is acting outside the usual course of the store’s business. Dynamex, 4 Cal. 5th at 959.
- Cal. Lab. Code § 2730.3(b).
- Cal. Lab. Code § 2730.3(c).
- Cal. Lab. Code § 2730.3(g).
- Cal. Lab. Code §§ 2730.3(f), 2730.5.
- Cal. Lab. Code § 2730.3(e).
- People v. Cal Cartage Transportation Express, LLC, No. BC689320 (Cal. Super. Ct. Jan. 8, 2020), slip op. at 2.
- Id. at 12.
- Id. at 17.
- Cal. Trucking Assoc. v. Becerra, 3:18-cv-02458-BEN-BLM (S.D. Cal.).
- Id. (Dec. 31, 2019), slip op. at 5.
- Id. at 14 (internal punctuation and alterations omitted).
- Olson v. Becerra, No. 19-cv-10956-DMG-RAO (C.D. Cal.).
- People v. Maplebear, Inc., No. 37-2019-00048731 (Feb. 13, 2020).
- American Society of Journalists and Authors, Inc. v. Becerra, 2:19-cv-10645 (C.D. Cal.).
- Assembly Constitutional Amendment No. 19 (Jan. 15, 2019).
- Assembly Bill No. 1928 (Jan. 15, 2019).
- Senate Bill no. 867 (Jan. 17, 2020).
- Senate Bill no. 868 (Jan. 17, 2020).
- Senate Bill no. 967 (Feb. 11, 2020).
- Senate Bill no. 881 (Jan. 23, 2020).
- Senate Bill no. 963 (Feb. 11, 2020).
- Senate Bill no. 965 (Feb. 11, 2020).
- Senate Bill no. 966 (Feb. 11, 2020).
- Senate Bill no. 975 (Feb. 11, 2020).
- Senate Bill no. 990 (Feb. 12, 2020).
- Senate Bill no. 1039 (Feb. 14, 2020).
- Initiative 19-0026A1 (Dec. 9, 2019).