California Assembly Bill 5 (2019)

California Assembly Bill 5 (AB 5), passed in 2019, was designed to determine a worker's status as an independent contractor or an employee. AB5 codified into law the California Supreme Court's decision in the case Dynamex Operations West, Inc. v. Superior Court of Los Angeles.

On September 18, 2019, California Gov. Gavin Newsom signed AB 5. Asm. Lorena Gonzalez (D-80) was the bill's lead sponsor. In the California State Senate, the vote on AB 5 broke down along partisan lines. In the California State Assembly, 60 Democrats and 1 Republican voted to pass the legislation, and 15 Republicans and 1 Democrat voted to reject the legislation.

In 2020, the campaign Yes on 22 - Save App-based Jobs & Services is sponsoring a ballot initiative, certified as Proposition 22, to exempt app-based drivers from AB 5. Examples of companies that hire app-based drivers include Uber Technologies, Lyft, and DoorDash. The ballot measure would not affect how AB 5 is applied to other types of workers.

Assembly Bill 5 (AB 5)

ABC Test

Assembly Bill 5 (AB 5), like Dynamex, created the presumption that a worker is an employee, rather than an independent contractor, unless the hiring business can prove each part (A, B, and C) of the ABC test. AB 5 used the same language as Dynamex to define the ABC test. In AB 5, the exact language of the ABC test is as follows:

“

(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.

”

In Dynamex, the ABC test was used to decide whether a worker was entitled to benefits and regulations found in the California Wage Orders. AB 5 also established that the ABC test applied to additional laws, along with the California Wage Orders, found in the California Labor Code and California Unemployment Insurance Code.

Enforcement

AB 5 provided the following officials with the power to enforce AB 5 to prevent the misclassification of employees as independent contractors and prosecute putative employers: the California Attorney General; the city attorney of a city and county (San Francisco), with the consent of the district attorney; the city attorney of a city with a population of more than 750,000 persons (Los Angeles, San Diego, San Jose, and San Francisco); and the city prosecutor of a city with a full-time city prosecutor.

Exemptions

According to AB 5, the ABC test cannot be applied to bona fide business-to-business contracting relationships. In 2020, the California State Legislature passed AB 2257, which expanded the list of exemptions. Between AB 5 and AB 2257, the following workers and professions were exempted from the ABC test:

• professional service contractors who (a) maintain their own business location, which could be their residence, (b) have a business license, (c) can set or negotiate their own rates for the services performed, (d) can set their own hours outside of project completion dates and reasonable business hours, (e) are customarily engaged in the same type of work performed under contract with another hiring entity or hold themselves out to other potential customers as available to perform the same type of work; and (f) can customarily and regularly exercise discretion and independent judgment in the performance of the services.

• securities broker-dealers or investment advisers (or their agents and representatives)

• certain medical professions, including physicians, surgeons, dentists, podiatrists, and psychologists

• veterinarians

• lawyers

• architects and landscape architects

• freelance writers, photographers, photojournalists, videographers, and editors

• performance artists who set their own terms of work

• engineers

• private investigators

• accountants

• individuals who perform underwriting inspections, premium audits, risk management, or loss control work for insurance and financial service industries

• individuals who provide appraisal services

• home inspectors or manufactured housing salespersons

• individuals who are conducting an international exchange visitor program

• competition judges

• direct sales salespersons

• commercial fishermen

• licensed real estate agent

• repossession agent (when free from the control and direction of the hiring person or business)

• subcontractors for construction contractors (when certain conditions are met)

• subcontractors for construction trucking services (when certain conditions are met)

• individuals performing services for a certified motor club (pursuant to a contract between the motor club and a third party)

Background

Dynamex Operations West v. Superior Court of Los Angeles

On April 30, 2018, the California Supreme Court ruled in the case Dynamex Operations West v. Superior Court of Los Angeles. The ruling established the ABC test that AB 5 codified into law. Dynamex used the ABC test to determine whether a worker was an employee or independent contractor for the purposes of benefits and regulations found in the California Wage Orders.

Lawsuits

Olson v. California

Lydia Olson et al. v. State of California is a case before the U.S. District Court for the Central District of California that addresses whether Assembly Bill 5 (AB 5) violates the rights of Postmates, Inc., and Uber Technologies, Inc., along with two individuals (Lydia Olson and Miguel Perez) who were named as app-based workers, under the U.S. Constitution and California Constitution. Plaintiffs described AB 5 as "an irrational and unconstitutional statute designed to target and stifle workers and companies in the on-demand economy."

The State of California and Attorney General Xavier Becerra (D), who is responsible for enforcing AB 5, were named as the defendants in the case. Attorney General Xavier Becerra stated, "At heart, Plaintiffs question the wisdom and effectiveness of AB 5, but that is a legislative policy determination, not viable grounds for a constitutional challenge."

The legal complaint was filed on December 30, 2019. Plaintiffs asked for an injunction on AB 5, pending the court's final judgment. On February 10, 2020, Judge Dolly Gee rejected the request for an injunction on AB 5 while the case is ongoing.

Postmates, Uber, Olson, and Perez argued that AB 5, as applied to their companies and work, violated the U.S. Constitution and California Constitution on multiple counts, including:

• AB 5 violated the Equal Protection Clause and the California Constitution's Equal Protection Clause. According to Olson et al., AB 5 "draws classifications between network companies and non-network companies without a rational basis for distinguishing between the two groups." Plaintiffs also argued that "[n]ot only is animus toward the on-demand economy the only possible explanation for the express exemption of a litany of similarly situated companies but not platform companies, but it is also the actual explanation for the scheme."

• AB 5 violated the California Constitution's Inalienable Rights Clause "because it infringes the rights of network companies and independent service providers to pursue their chosen profession, which is an essential component of liberty, property, happiness, and privacy." Plaintiffs stated, "... AB 5 deprives network companies and independent service providers of these rights by forbidding them from entering into their chosen work arrangements—that of independent service providers, with the flexibility and autonomy that entails."

• AB 5 violated the U.S. Constitution's Due Process Clause and the California Constitution’s Due Process Clause. According to Olson et al., "The malicious and arbitrary purpose of the statute—combined with the back-room dealing that led to its laundry list of irrational exemptions—creates a “wholly arbitrary” standard in violation of due process."

• AB 5 violated the Ninth Amendment of the U.S. Constitution and Article I, Section 24 of the California Constitution. Plaintiffs stated, "The language and history of the Ninth Amendment reveal that the Framers of the Constitution believed that there are additional fundamental rights, protected from governmental infringement, which exist alongside those fundamental rights specifically mentioned in the first eight constitutional amendments. The right to work on one’s own terms—as an independent service provider, rather than an employee—is one of those fundamental rights."

• AB 5 violated the U.S. Constitution's Contracts Clause and the California Constitution’s Contracts Clause. According to Olson et al., "Company Plaintiffs are parties to valid contracts with the independent service providers who operate on their platforms, including Individual Plaintiffs. ... [AB 5] would invalidate these existing contracts between Company Plaintiffs and the independent service providers who operate on their platforms..."

California v. Uber and Lyft

People of the State of California v. Uber Technologies, Inc. and Lyft, Inc. is a case before the California First District Court of Appeal that addresses whether Uber Technologies, Inc. and Lyft, Inc. misclassified their workers as independent contractors instead of employees. The case began in the Superior Court of San Francisco.

Superior Court of San Francisco

California Attorney General Xavier Becerra, Los Angeles City Attorney Mike Feuer, San Diego City Attorney Mara Elliott, and San Francisco City Attorney Dennis Herrera initiated the case against Uber and Lyft on May 5, 2020. Plaintiffs wrote, "The time has come for Uber’s and Lyft’s massive, unlawful employee misclassification schemes to end. The People bring this action to ensure that Uber and Lyft ridehailing drivers—the lifeblood of these companies—receive the full compensation, protections, and benefits they are guaranteed under law, to restore a level playing field for competing businesses, and to preserve jobs and hard-won worker protections for all Californians."

According to Becerra et al., Uber and Lyft could not meet the standards of the ABC test because (A) the companies control which drivers receive which ride requests and how much the drivers can charge, (B) the work that drivers perform is not outside the usual course of business, but rather at the core of their business, for Uber and Lyft; and (C) drivers are not engaged in their own business but rather transport passengers for Uber and Lyft.

On July 10, 2020, Uber asked the court to separate the defendants (Uber and Lyft) into their own cases, stating, "Uber and Lyft are fundamentally different companies with different business models. Many of the general allegations asserted against both Uber and Lyft are simply false as to Uber." Theane Evangelis, a lawyer with the firm representing Uber, said, "Uber has made a wide variety of changes over the last six months ... that we think strengthen the independence of drivers." Julie Wood, a spokesperson for Lyft, responded, "Having the cases heard separately doesn’t impact us. We have all said from the beginning that there is no ‘one-size-fits-all’ when it comes to software platforms or business models in the (ride-hailing and delivery) world." Uber and Lyft also asked the court to postpone the case until after voters decide Proposition 22. Superior Court Judge Ethan Schulman rejected the motion to de-join Uber and Lyft, stating that the companies "share a common adverse interest ... which is the subject of this action: their alleged misclassification of drivers." He also rejected the motion to postpone the case until after voters decide Proposition 22, writing, "That Uber and Lyft are attempting to persuade the voters to change that law, an effort that may or may not succeed, is no reason for this Court to refrain from deciding the issues currently before it.”

On August 10, 2020, Judge Schulman granted an injunction in favor of California, stating that Uber and Lyft were in violation of AB 5 for classifying their workers as independent contractors. Judge Schulman wrote, "Defendants’ [Uber and Lyft] position cannot survive even cursory examination. Far from ‘merely incidental’ to Defendants’ transportation network businesses, drivers’ work—the work of transporting customers for compensation—is ‘an integral part’ of those businesses. Defendants’ entire business is that of transporting passengers for compensation. … Defendant’s drivers are part of their usual, everyday business operations, and their work falls squarely within the ordinary course of that business. In short, under any reasonable understanding of the English language, and Uber or Lyft driver can only be viewed ‘as working in the hiring entity’s business.’" He added, "It also flies in the face of economic reality and common sense. ... To state the obvious, drivers are central, not tangential, to Uber and Lyft’s entire ride-hailing business." Schulman stayed his injunction for 10 days, giving the defendants a window to appeal the decision.

Responding to the injunction, Attorney General Becerra said, "The court has weighed in and agreed: Uber and Lyft need to put a stop to unlawful misclassification of their drivers while our litigation continues. While this fight still has a long way to go, we’re pushing ahead to make sure the people of California get the workplace protections they deserve."

Lyft released a statement responding to the order, which said, "Drivers do not want to be employees, full stop. We'll immediately appeal this ruling and continue to fight for their independence. Ultimately, we believe this issue will be decided by California voters and that they will side with drivers." Uber CEO Dara Khosrowshahi stated, "If the court doesn’t reconsider, then in California, it’s hard to believe we’ll be able to switch our model to full-time employment quickly."

Statements on Uber and Lyft suspending rideshare services

Both Uber CEO Dara Khosrowshahi and Lyft President John Zimmer said that their companies could suspend rideshare operations in California. Lawyers for Uber wrote that a shutdown could last for several months to more than a year. Judge Schulman gave Uber and Lyft until August 20, 2020, to be in compliance with the injunction. On August 20, the California First District Court of Appeal stayed Judge Schulman's decision.

• Uber CEO Dara Khosrowshahi said, "We think we comply by the laws, but if the judge and the court find that we’re not and don’t give us a stay to get to November, then we’ll have to essentially shut down Uber until November when the voters decide. It would be really unfortunate, at a historical time of unemployment in California." Khosrowshahi told Vox, "Hopefully, in November, Proposition 22, we will get voters to vote along." Uber, in the filing of an appeal, stated that "the consequences to drivers and the public from the impending shutdown will be catastrophic."

• Lyft President John Zimmer said that Lyft "cannot comply with the injunction at a flip of the switch" and would be "forced to suspend rideshare operations in California." Zimmer also said, "Fortunately, California voters can make their voices heard by voting yes on Prop. 22 in November."

• Asm. Lorena Gonzalez Fletcher (D-80), the lead legislative sponsor of AB 5, responded on Twitter, "What if [Amazon] threatened to stop doing business in California if we didn’t allow them to pay their warehouse workers less than minimum wage [and] exempt them from paying unemployment, etc. What if it was your employer? That’s the precedent [Uber] is trying to create."

California First District Court of Appeal

On August 20, the California First District Court of Appeal stayed Superior Court Judge Schulman's decision from taking effect. Instead, the Court of Appeal gave Uber and Lyft until August 25 to file written consents to expedited procedures. Uber and Lyft had until September 4, 2020, to file opening briefs, as well as sworn statements from their CEOs confirming that the companies have developed implementation plans should the Court of Appeal uphold the injunction and should voters reject Proposition 22. The Court of Appeal scheduled oral arguments for October 13, 2020.

On October 22, 2020, First District Court of Appeal upheld the lower court's order, stating that Uber and Lyft had 30 days to reclassify drivers as employees. A spokesperson for Uber responded, "Today’s ruling means that if the voters don’t say Yes on Proposition 22, rideshare drivers will be prevented from continuing to work as independent contractors, putting hundreds of thousands of Californians out of work and likely shutting down ridesharing throughout much of the state."

See also

• California 2020 ballot propositions
• California Proposition 22, App-Based Drivers as Contractors and Labor Policies Initiative (2020)