Jan 16, 2020

Uber and Postmates’ Important AB-5 Lawsuit Faces an Uphill Battle

But the AB-5 court challenge is still potentially important for the future of independent contractors and the gig economy
Trace Mitchell Staff Writer, Jennifer Huddleston Former Research Fellow

January 1 did not just ring in a new year and a new decade, it also heralded the start of California’s new worker classification law: Assembly Bill 5 (AB-5). Signed last month by Gov. Gavin Newsom (D), the new law will affect how freelance workers do (and don’t do) business in the state and, given California’s trendsetting status, in other states throughout the United States. AB-5 has sparked the assortment of lawsuits and political responses that such heavy-handed interventions generally do, plus it has caused collateral damage to both workers and consumers.

Under this new law, many individuals who were previously considered independent contractors will now be considered employees of the companies they previously worked for on a per job basis. Where such workers had been accustomed to doing specific short-term jobs for compensation, AB-5 now mandates that they also be subject to certain regulatory requirements typical of full-time employees, such as unemployment insurance.

But this law will probably not help gig economy workers as intended. Rather, by artificially raising the cost of employment for this vulnerable labor pool, AB-5 will limit opportunities for freelance workers across the board and, in some cases, lead to large-scale layoffs.

For their part, freelance workers are not united in their enthusiasm for the protections the new law promises. Gig economy platforms Uber and Postmates have thrown their support behind individual workers Lydia Olson and Miguel Perez in a complaint filed with the United States District Court for the Central District of California challenging the validity of AB-5. The suit alleges that California’s new law violates both the US and California constitutions.

While the complainants face an uphill battle in the courts because of the low legal standards that the state must meet for the law to stand, the challenge could turn a spotlight on the harm created by worker reclassification laws and serve as a warning to other states that laws like these will not go unchallenged.

Not all independent or contract workers are treated equally under AB-5. The law creates exemptions for physicians, lawyers, dentists, securities brokers, psychologists, investment advisers, veterinarians, private investigators, architects, direct salespersons, engineers, licensed insurance agents, accountants, commercial fishermen, and various other individuals that the legislature felt compelled to exclude from these new requirements. Supporters of AB-5 made it clear that this legislation specifically targeted the practices of large gig economy firms. This is where Uber and Postmates’s lawsuit comes into the picture.

The lawsuit argues that AB-5’s numerous exemptions for different non-gig-economy industries intentionally discriminate between “network” (or gig economy) and “non-network” companies and subject the former to more burdensome employment regulations. The complaint alleges that this differential treatment is “irrational” and in violation of the US and California Constitutions’ equal protection clauses.

The complaint also argues that AB-5 violates the California Constitution’s inalienable rights and due process clauses and the US Constitution’s due process clause. It claims that AB-5 “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” and that the law “has no substantial relation to the public, health, safety, or morals, or to the general welfare, and it is not congruous with any legitimate purpose the government can proffer.” As such, it argues that “any proffered rational basis for AB-5 is illusory.”

Finally, the complaint alleges that AB-5 violates the US and California constitutions’ contracts clauses because it would impair the obligations of previously established contracts between platform companies and their workers without having a “legitimate public purpose.”

Although this lawsuit highlights important legal problems and the many substantial harms that California’s new worker classification rules could impose on workers and employers, it is unlikely that the courts will strike down AB-5 as unconstitutional.

Under the claims levied by the complaint, AB-5 will most likely be subject to some form of what’s called rational basis review. This type of review applies the lowest level of scrutiny to the state’s actions. Under rational basis review, the government need only proffer a plausible reason for the law that is in some way related to a legitimate government interest. The government’s true intentions are largely, if not completely, irrelevant. While the test prevents completely arbitrary or irrational laws, if the court can conceive of some valid reason for the law, it will typically uphold the law, even if that rationale was not the impetus behind the law. In this way, the court starts with a thumb heavily on the scale in favor of the government. 

In this case, advocates for AB-5 and worker reclassification have already provided many rationales for the state’s actions, such as ensuring that workers are paid higher wages and given more benefits. Moreover, some courts have even held that pure economic protectionism itself is a good enough justification for a law to survive rational basis review. With a bar this low, it is very unlikely that any court will soon strike AB-5 down as unconstitutional.

However, even if this lawsuit does not ultimately succeed in the courts, it still highlights many of the issues stemming from AB-5’s new employee classification rules and could signal to other states that workers and employers alike will not stand idly by while legislatures experiment with their livelihoods. Other states should carefully consider how such lawsuits might play out given their own state constitutions and whether the costs and publicity associated with all of this litigation are really worth it.

This is particularly true for those states that have already created opportunities for new entrepreneurs and innovation through reforms such as enshrining a “right to earn a living” in their law or constitution.

In addition, the Uber and Postmates lawsuit is far from the only challenge to AB-5 and shows the wide-ranging impact this new law will have on workers and industries. For example, a recent truckers’ lawsuit ruled that existing federal policy preempts AB-5 in this industry. In other cases, such as one being argued by the Pacific Legal Foundation on behalf of freelance journalists, there may potential First Amendment violations, which would subject the law to a higher level of scrutiny and thus give the plaintiffs a much better chance of prevailing.

However, even if these lawsuits fail, they raise questions about worker independence and the future of work. States should ask themselves whether they really want to lose so many of the opportunities and benefits that the gig economy has created. Gig economy jobs are important for so many people, from workers who would be unable to participate in the traditional job market to consumers who have been left unsatisfied by industries staffed by more traditional employees, such as taxis.

Some individuals may very well benefit from becoming employees, but forcing this change by legislative fiat will have dramatic fallout on those left behind as well as the consumers who rely on gig economy options. Although the large gig economy firms which were targeted have taken the spotlight, at the end of the day, it’s not really about them but about individual workers and consumers. Regardless of states’ intentions, taking options away from people is almost always the wrong way to go.

While AB-5 may not ultimately be struck down by the courts, Uber and Postmates’ lawsuit highlights just how much harm can be caused by worker reclassification laws. With any luck, other states will take notice and refrain from going down the road California has chosen. If not, we will likely see far more lawsuits similar to this one. And while all this legal uncertainty may be great for lawyers, it does little for all of the workers who may be left behind.

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