Did the Ninth Circuit Find AB 5 Unconstitutional?

Did the Ninth Circuit Find AB 5 Unconstitutional?

The U.S. Court of Appeals for the Ninth Circuit recently held that California AB 5's differing treatment of app-based workers in the transportation and delivery service industry survived constitutional review because there were plausible reasons for treating these types of companies differently from other types of referral companies.

Background

Postmates, Uber, Lydia Olson, and Miguel Perez challenged the constitutionality of Assembly Bill 5, which was enacted to address a systemic problem of businesses improperly characterizing their workers as independent contractors to avoid fiscal responsibilities owed to employees. Olson used the Uber Driver mobile app to provide rides to customers, and Perez used the Postmates app to make food deliveries.

The plaintiffs filed a complaint against the State of California and the Attorney General of California seeking relief based on their allegations that AB 5 violates the Equal Protection Clauses, the Due Process Clauses, and the Contract Clauses of the U.S. and California Constitutions. They sought a preliminary injunction to prevent the state defendants from enforcing the law. The district court denied their motion for preliminary injunctive relief. They appealed the decision, and shortly before the Court of Appeals heard argument in that appeal, voters approved Proposition 22, a ballot initiative that classifies rideshare and delivery drivers—like Olson and Perez—as independent contractors, notwithstanding AB 5 or any other provision of law.

After Prop. 22 passed, but before the Ninth Circuit issued a decision in the appeal of the preliminary injunction, the plaintiffs filed a Second Amended Complaint. The defendants moved to dismiss for failure to state a claim, and the district court granted the motion. The court determined that the plaintiffs' new allegations concerning the amendments to AB 5 and Prop. 22 didn’t rescue their claims. Again, the plaintiffs appealed, and a three-judge panel of the Ninth Circuit reversed in part, concluding that the district court erred by dismissing the plaintiffs' Equal Protection claims. The panel concluded that the plaintiffs plausibly alleged that "the exclusion of thousands of workers from the mandates of AB 5 is starkly inconsistent with the bill's stated purpose of affording workers the 'basic rights and protections they deserve.'"

The Ninth Circuit granted rehearing en banc and vacated the three-judge panel decision.

The Full Court of Appeals Decision

Circuit Judge Jacqueline H. Nguyen wrote that AB 5 doesn’t directly classify any particular workers as employees or independent contractors.

Rather, under AB 5, as amended, arrangements between workers and referral agencies that provide delivery or transportation services are automatically subject to the ABC test adopted by the California Supreme Court in Dynamex Operations W., Inc. v. Superior Ct. (2018), while arrangements between workers and referral agencies that provide other types of services, such as dog walking or handyman services, are subject to the multifactor test set forth in the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989), if certain statutorily defined criteria are met.

“Employee" versus “Independent Contractor"

Drawing the line between "employee" and "independent contractor" is a difficult task, Judge Nguyen wrote, with significant consequences for workers and businesses.

Under the deferential rational basis standard, Judge Nguyen and the Court approach AB 5 with "a strong presumption of validity," and they will invalidate it only if the plaintiffs negate "every conceivable basis" that might justify the lines it draws. Here, the judge found that the plaintiffs failed to carry that burden. There are plausible reasons for treating transportation and delivery referral companies differently from other types of referral companies, particularly where the legislature perceived transportation and delivery companies as the most significant perpetrators of the problem it sought to address—worker misclassification.

Under the ABC test, a worker is properly considered an independent contractor to whom a wage order does not apply only if the hiring entity establishes:

(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 such 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 the work performed for the hiring entity.

The ABC test places the burden on the hiring entity to establish that a worker is an independent contractor, and the hiring entity's failure to establish any one of the ABC factors "will be sufficient in itself to establish that the worker is an . . . employee" included in the wage order.

The legislature quickly enacted AB 5 in 2019 and codified the California Supreme Court's decision and extended the application of the ABC test beyond wage orders to other labor and employment legislation. In deciding which occupations and service relationships may be exempt from automatic application of the ABC test, "California weighed several factors: the workers' historical treatment as employees or independent contractors, the centrality of their task to the hirer's business, their market strength and ability to set their own rates, and the relationship between them and their clients,” the judge explained, citing an earlier case.

The legislature amended AB 5 with additional exemptions to the ABC test. As such, arrangements between workers and referral agencies that provide delivery or transportation services are automatically subject to the ABC test, while arrangements between workers and referral agencies that provide other types of services, such as dog walking or handyman services, are subject to the multifactor Borello test—provided the hiring referral agency can show that the eleven statutory criteria described in California Labor Code § 2777(a) are satisfied.

Differential Treatment Challenged

To establish an Equal Protection claim, the plaintiffs must demonstrate "that a class that is similarly situated has been treated disparately." Once the plaintiffs identify a similarly situated class that is treated disparately under AB 5, they must also negate "every conceivable basis which might support" such disparate treatment.

The plaintiffs contended that other app-based companies like Wag!, which provides on-demand dog-walking, and TaskRabbit, which provides on-demand help with daily tasks like handyman work, are functionally identical "in all relevant aspects" to Uber and Postmates. The complaint alleged that "service providers who use TaskRabbit and Wag! have the same patterns of use as the 'drivers' and 'couriers' who use Uber and Postmates."

Judge Nyguen reasoned that while the plaintiffs alleged that Uber and Wag! have functionally identical business models, that similarity alone doesn’t compel the Court to conclude that there’s no rational reason to treat those apps differently. In evaluating the constitutionality of AB 5 under the Equal Protection Clause, the Court asked whether "plausible reasons" exist for the law. It found that they do. As a result, the district court correctly dismissed the plaintiffs' Equal Protection claims. And because their suit was properly dismissed, the district court properly denied preliminary injunctive relief. Olson v. California (U.S. Ninth Circuit 6/10/24).

Bottom Line

The Ninth Circuit held that there were plausible reasons for treating transportation and delivery referral companies like Uber differently from other types of referral companies, particularly where the legislature perceived transportation and delivery companies as the most significant perpetrators of the problem it sought to address—worker misclassification.

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