California’s Assembly Bill 5 (AB 5) doesn’t violate federal or state Equal Protection clauses, the en banc Ninth U.S. Circuit Court of Appeals has determined.
The dispute dates back to 2019, when the state legislature enacted AB 5 and adopted the “ABC test” used by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles.
Pursuant to AB 5, all workers are assumed to be employees – not independent contractors – unless the employer can affirmatively satisfy the ABC test by proving three things: (A) that the worker is free from the control and direction of the hirer when performing the work, both under the contract for 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.
The new law faced immediate challenges, ranging from a First Amendment action to a lawsuit filed by freelance writers and photographers.
In addition, Lydia Olson, a California-based Uber driver, and Miguel Perez, who uses Postmates to run his own delivery business, filed suit seeking to enjoin the state and attorney general from enforcing AB 5.
They argued that the law, as it was enacted and then later amended by Assembly Bills 170 and 2257, both of which added more exemptions for specific categories of workers, violated the Equal Protection Clause for those engaged in app-based ride-hailing and delivery services. There are currently over 100 different industry and job-specific exemptions to the initially “simple” ABC test.
The district court sided with the state and dismissed the case, but a three-judge panel of the Ninth Circuit reversed, ruling that the statute couldn’t survive rational basis constitutional review, given the lack of apparent rhyme or reason to the various exemptions.
In a unanimous decision, the en banc Ninth Circuit reached a different conclusion, holding that it was rational for the California legislature to create differential treatment of app-based work arrangements in the transportation and delivery service industry and app-based work arrangements in other industries.
“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,” the court wrote.
By codifying and expanding the reach of the California Supreme Court’s decision in Dynamex, the legislature sought to restore important workplace protections and rights to potentially several million workers who were “exploited by being misclassified as independent contractors instead of being recognized as employees.”
While the plaintiffs alleged that the app-based work arrangements in the transportation and delivery service industry have functionally identical business models, “that similarity alone does not compel us to conclude that there is no rational reason to treat those apps differently,” the court said. “One explanation for such a distinction is that the legislature perceived Uber, Postmates, and other transportation and delivery services as more substantial contributors to the problem of misclassification than referral agencies engaged in other services.”
The exemptions carved out by the legislature plausibly reflect its determination that workers in certain occupations and industries bear closer resemblance to traditionally lawful independent contractors, the court added, and that AB 5 might be underinclusive because it does not extend the ABC test to every industry and occupation that has historically contributed to California’s misclassification woes, which does not render it unconstitutionally irrational.
“Whether AB 5, with all of its expansions and exemptions, will have a net effect of improving or worsening misclassification and income inequality remains to be seen, but that is entirely irrelevant for our purposes,” the court wrote. “To consider whether the law is actually effective in achieving its stated goals would require us to second guess a legitimate ‘legislative choice’ and engage in ‘courtroom fact-finding.’ The Equal Protection Clause does not give us license to do so.”
As the Ninth Circuit found “plausible reasons” to exist for the law, the district court’s dismissal of the plaintiff’s claims was affirmed.
To read the opinion in Olson v. California, click here. For recent media comments from Manatt attorney Esra Hudson on this topic, click here.
Why it Matters
The federal appellate panel’s decision leaves the state with a hodgepodge law that will likely continue to be challenged. In the meantime, companies should ensure that their workers are properly classified, understanding that the default presumption is that a worker is an employee unless the ABC test factors are met, or one of the many exceptions to the rule applies.