By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.
Duane Morris Takeaways: On June 10, 2024, the Ninth Circuit issued its en banc opinion in Olson, et al. v. State of California, et al., Case No. 21-55757, 2024 WL 2887392 (9th Cir. June 10, 2024). The en banc panel affirmed the dismissal of the Plaintiffs’ lawsuit challenging the constitutionality of A.B. 5, which mandates application of the “ABC test” for independent contractor classification to workers in certain industries. The Ninth Circuit found no equal protection violation in applying the “ABC test” to certain gig workers, yet applying the easier-to-satisfy “Borello” test to other gig workers.
California employers in industries subject to A.B. 5 and its more rigorous “ABC test” for independent contractor classification should take heed of the Olson ruling.
Case Background
Postmates, an application-based goods delivery platform, Uber, and two individual workers for those companies sued the State of California and Attorney General of California seeking declaratory and injunctive relief based on the allegation that A.B. 5 violates the Equal Protection Clauses, the Due Process Clauses, and the Contract Clauses of the United States and California Constitutions. They sought a preliminary injunction to prevent enforcement of A.B. 5.
Enacted in 2018, A.B. 5 codified and expanded upon the California Supreme Court’s holding in Dynamex Operations W., Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018), which held that the “ABC test” applies in determining the proper classification of workers as independent contractors or employees under California wage orders. Under A.B. 5, subject to specified exemptions, the “ABC test” applies beyond the wage orders to other labor and employment legislation, including workers’ compensation, unemployment insurance, sick and family leave, and disability insurance.
The “ABC test” is, as its name suggests, is comprised of three parts, with the burden being on the hiring entity to show, A: the worker is free from the control and direction of the hirer, B: the worker performs work outside the usual course of the hiring entity’s business, and C: 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. This test is more challenging to meet that the traditional “Borello” test that was applied prior to A.B. 5’s enactment, which considers a larger number of factors, with the focus being the hiring entity’s right to control the manner and means of the work.
One statutory exemption from A.B. 5’s coverage applies to “referral agencies,” i.e., businesses that provide clients with referrals to service providers. However, A.B. 2257, enacted in 2019, modified this exemption to carve-out referral agencies, like Uber and Postmates, that provide delivery, courier, or transportation services. Consequently, categories of referral agencies are treated differently under the law, with referral agencies like Postmates and Uber subject to the “ABC test,” and referral agencies that provide other services, for example, Wag!, a dogwalking service, and TaskRabbit, which provides on-demand help with daily tasks, subject to the easier-to-meet “Borello” test. It was that differential treatment that Plaintiffs alleged was unconstitutional.
The district court denied Plaintiffs’ motion for preliminary injunctive relief, concluding that A.B. 5 was rationally related to a legitimate state interest. While Plaintiff’s’ appeal of that ruling was pending, California voters approved Proposition 22, a ballot initiative that classifies rideshare and deliver drivers as independent contractors, notwithstanding A.B. 5. Thereafter, the district court dismissed the lawsuit, and Plaintiffs’ appealed that ruling too.
A three-judge panel of the Ninth Circuit reversed, in part, concluding that the district court erred by dismissing the Equal Protection claims. However, the Ninth Circuit then granted rehearing en banc.
The Ninth Circuit’s En Banc Opinion
The Ninth Circuit first noted, as some readers may be wondering, that Proposition 22 did not moot the appeal because Postmates and Uber were still facing a number of claims for alleged violations of A.B. 5 that predated Proposition 22’s passage.
The Ninth Circuit then addressed the Equal Protection claim. It explained that, even if it were true that the application-based business models of Postmates, Uber, Wag!, and TaskRabbit were similar, there were rational reasons for applying a different worker classification test to workers that provide delivery, courier, or transportation services. Such disparate treatment was rational because Postmates and Uber were seemingly perceived by the legislature as “substantial contributors” to the ills that A.B. 5 sought to remedy, including worker misclassification and “erosion of the middle class,” and were pioneers in the on-demand-app-based industry whose business models others might try to replicate. Id. at p. 21-22. The Ninth Circuit further emphasized that, for a “referral agency” like Wag! or TaskRabbit to be exempt from A.B. 5, it needs to satisfy multiple requirements, so the availability of the referral agency exemption remains “limited.” Id. at 23.
The Ninth Circuit further opined that, even though A.B. 5 contains many exemptions, it is entirely rational for the ABC test to apply in some contexts, and for the Borello test to apply in others, because the legislature supposedly wanted the ABC test to apply in industries where worker misclassification was historically problematic (and not because certain industries successfully pushed through legislative exemption).
Implications Of The Decision
We anticipate U.S. Supreme Court review will be sought.
The Olson opinion deals a blow to efforts to challenge A.B. 5’s enforcement. California employers in industries subject to A.B. 5 must satisfy the more rigorous ABC test to establish they have properly classified workers as independent contractors, whereas employers in industries not subject to A.B. 5 bear a lesser burden under the Borello test. That differential treatment is, in the Ninth Circuit’s view, constitutionally sound.