California lawmakers didn't violate the constitutional rights of Uber and other app-based ridesharing and delivery services when they tailored controversial labor regulations under the law known as AB5 to make sure their workers are considered employees, and not independent contractors, a federal appeals court has ruled.
While voters have since overridden that law, the ruling could still subject the companies to potentially massive liability for alleged violations of the state's labor law for prior years.
On June 10, a so-called en banc panel of 11 judges from the U.S. Ninth Circuit Court of Appeals upheld the constitutionality of Assembly Bill 5 and the new employment test ensconced into law for determining who is an independent contractor and who must be treated as a regular employee.
AB5 was enacted by California lawmakers and Gov. Gavin Newsom in 2019 to specifically require businesses to follow the so-called ABC legal employment classification test established by the California Supreme Court under the so-called Dynamex decision.
Up to that point, employers had been required to use a test established under the so-called Borello decision. That test centered on the amount of control an employer held over the worker to determine if the worker was properly classified as an independent contractor.
Under the new ABC Dynamex test, however, the California Supreme Court required A) the worker to be "free from the control and direction of" the employer "in connection with the performance of the work;" B) the worker "should perform work that is 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."
Failure to meet even one of the "ABC factors" could mean a worker must be classified as a regular employee, subject to state wage and hour and other labor regulations, and not an independent contractor. Critics have asserted there is no way for employers to meet the requirements of Factor B, as any employer would naturally seek people to provide services within the normal course of their business.
Despite the criticism, the state's Democratic supermajority in Sacramento moved quickly to enact AB5 to make the ABC Test state law.
However, lawmakers then amended the law to include a host of exemptions for a number of different kinds of "independent contractor" employers, including a range of app-based services, such as a dog-walking service described as the "Uber for dogs." Those exemptions allowed those other services to use the Borello test to classify their workers.
Lawmakers, however, specifically refused to exempt ridesharing services like Uber or food delivery services like Postmates from the ABC Test. And in the process, lawmakers said so, indicating the law was meant to punish Uber and others like them for allegedly intentionally misclassifying workers as independent contractors.
Critics of the law said it was enacted at the behest of labor unions, specifically to allow unions to either organize rideshare and delivery drivers, or use the law to crush the companies. They noted, for instance, that AB5's author, former Assemblywoman Lorena Gonzalez, D-San Diego, departed the legislature in 2022 for a leadership spot in the AFL-CIO labor union.
Uber and Postmates sued, claiming lawmakers' decision to target them with the law, while exempting many others with little difference in their business models, violated their rights to equal protection under the law.
Upon its first stop to the Ninth Circuit, a three-judge panel agreed that the "animus" displayed by lawmakers toward Uber and similar companies in tailoring the law to hurt them makes the law unconstitutional.
However, that decision was vacated by the rest of the Ninth Circuit court, and assigned to be reconsidered en banc by what is considered a full panel of 11 judges, led by Chief Judge mary H. Murguia.
In the meantime, California voters enacted a measure known as Proposition 22, which gutted AB5 as applied to Uber, Postmates and similar companies, officially declaring their drivers should be considered independent contractors, regardless of AB5.
The lawsuit, however, continued, as Prop 22 did not apply to claims against Uber and the other rideshare and app-based delivery companies for the period between the passage of AB5 and the effective date of Prop 22, a period which could still expose the companies to potentially significant financial liability for alleged violations of AB5.
Prop 22 also could still be thrown out by the California Supreme Court, where it has been challenged by unions seeking to ensure their AB5 law can be used against Uber and the other companies targeted by their allies in Sacramento.
In their decision, the 11-judge court said they believed AB5 should be considered constitutional.
The decision was authored by Ninth Circuit Judge Jacqueline Nguyen. There were no dissents from the panel which included a blend of Democratic and Republican appointees, including appointees of President Donald Trump.
They said they believed lawmakers had "plausible justification for their disparate treatment" of Uber, Postmates and their competitors and cohorts.
Particularly, they said lawmakers were within their authority to target the companies they considered the most egregious among those considered to have misclassified employees as independent contractors.
"The legislature may have perceived Uber as the pioneer of the on-demand app-based business model that many other services replicated," Judge Nguyen wrote in the decision. "It is certainly reasonable for the legislature to try to target the problem of misclassification at its origin."
The judges further said the court cannot consider whether the law actually would accomplish its stated purposes of improving working conditions, rather than just serving as a cudgel for the state and unions to use against disfavored businesses.
"Whether AB5 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," Nguyen wrote. "To consider whether the law is actually effective in achieving its stated goals would require use 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."
The decision, however, specifically does not address the earlier appellate ruling that California lawmakers demonstrated "impermissible animus and political favoritism" in tailoring AB5 against Uber and similar companies.
Nguyen said such a ruling was unnecessary because the court "identified plausible legitimate purposes motivating AB5 and the lines it draws between workers..."
California Attorney General Rob Bonta hailed the ruling, calling it a "big win for California workers." In a statement released by the California Department of Justice, Bonta said: "Today's decision upholding AB5’s protections for app-based drivers is a big win for California workers. AB5 was enacted by the California legislature to address a systemic problem of businesses improperly classifying their workers as independent contractors to avoid providing financial benefits and legal protections owed to employees. Today the Ninth Circuit correctly and unanimously rejected Uber and Postmates’ attempt to invalidate the application of AB5 to the app-based driving sector."