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January 2020

On the Offensive in 2020: California Employers Fight Back Against Laws Restricting Use of Independent Contractors and Arbitration Agreements

With the New Year comes a slew of newly enacted laws, many of which have serious implications for employers in California.  Two of the most contentious new laws are California Assembly Bills 5 and 51 (AB 5 and AB 51 respectively).  However, businesses most affected by these new laws are fighting back, and are finding support and success in doing so, signaling that hope is not lost.

An Introduction and Background of AB 5 Restricting Use of Independent Contractors

California Assembly Bill No. 5 (“AB 5”) governs the classification of employees and independent contractors in California, thereby expanding employee classification status for workers in California.  The present law, effective January 1, 2020, was established in Dynamex Operations West, Inc. v. Superior Court of Los Angeles.  The Supreme Court’s decision in Dynamex, which is codified in AB 5, creates a presumption that a worker who performs services for a hirer is classified as an employee for purposes of claims for wages and benefits.  A three-part test, known as the “ABC test,” is required in order to rebut the presumption that a worker is an employee, and therefore establish that a worker is an independent contractor for the purposes of claims for wages and benefits.

Implications of AB 5

AB 5 is significant, in that it expands employee status to apply to more workers, and limits those workers who may have been considered independent contractors prior to January 1, 2020.  This new bill has far reaching effects, beyond simply increasing the requirements to establish an individual as an independent contractor.  Companies and employers who must now classify workers as employees must pay minimum wage and provide sick time, meal and rest periods, and health insurance.  Employers must also pay worker’s compensation benefits and unemployment insurance.  In addition, the newly expanded definition of those considered employees carries with it an increase in potential violations related to the Labor Code.  The Labor Code makes it a crime for an employer to violate specified provisions of law with regard to an employee.  Moreover, the Unemployment Insurance Code makes it a crime to violate specified provisions of law with regard to benefits and payments.  Accordingly, as the definition of employee expands for purposes of these provisions, AB 5 similarly expands the definition of a crime.

The Trucking Industry Challenges AB 5 and Succeeds, Temporarily

On December 31, 2019, United States District Judge Roger Benitez issued a temporary restraining order (“TRO”), which prevented state officials from enforcing AB 5 against motor carriers.  The TRO is the result of a lawsuit filed by the California Trucking Association (“CTA”) in November 2019, challenging AB 5 and its stringent ABC test, arguing that many of the drivers it represents want to maintain their independent contractor status.

CTA contended that the supremacy and commerce clauses within the U.S. Constitution preempt AB 5, and that AB 5 is in direct conflict with the Federal Motor Carrier Safety Act and the Federal Aviation Administration Authorization Act of 1994. CTA argued that owner-operators make up a significant portion of the trucking workforce, and the ABC test potentially prevents truck drivers who have historically considered themselves to be independent contractors from continuing to do so.  Accordingly, CTA argues that AB 5 wrongfully restricts its drivers’ ability to work.

On December 24, 2019, the CTA filed a motion for TRO, seeking a delay in AB 5’s implementation as it applies to the trucking industry.  Judge Benitez ordered the TRO, holding that CTA established that imminent, irreparable harm is likely because, without significantly transforming their operations to treat independent contracting drivers as employees for all specified purposes under California laws and regulations, the CTA and its members face the risk of governmental enforcement actions, as well as criminal and civil penalties.  The TRO will remain in effect until January 13, 2020, at which time Judge Benitez will hold a hearing on CTA’s motion for a preliminary injunction against AB 5.

Ride-Share and Meal Delivery Services Strike Back

AB 5 was initially aimed at “gig-workers” for ride-share companies. The companies have now gone on the offensive.  On December 30, 2019, a ride-share service, a meal delivery service, and two contracted drivers filed suit in the U.S. District Court for Central California, alleging that AB 5 is unconstitutional.  Specifically, the complaint alleges that AB 5 violates the constitutional rights of individuals, and unfairly discriminates against technology platforms and those who earn a living through those platforms.  The complaint also attacks the exemptions that AB 5 creates, which notably leave out drivers for ride-share companies. The ride-share companies have also proposed a ballot initiative that would circumvent AB 5. 

AB 5 is effective as of January 1, 2020, except as it applies to the trucking industry, which successfully obtained a temporary restraining order staying its enforcement. The “gig-work” lawsuit, when resolved, will clarify the enforceability and viability of AB 5. However, in the meantime, it is of utmost importance that employers judiciously and properly assess and define their workers as employees, unless he or she clearly satisfies each prong of the ABC test.

An Introduction and Background of AB 51 Restricting Mandatory Arbitration Agreements

California’s Assembly Bill No. 51 (“AB 51”), which was to become effective January 1, 2020, criminalizes mandatory arbitration provisions in employee contracts, thereby making it a misdemeanor to obligate employees or applicants for employment to waive their rights to sue for violations of the California Fair Employment and Housing Act (“FEHA”) or the entire California Labor Code, as a condition of employment.

AB 51 is widely viewed as California’s response to the federal policy favoring enforcement arbitration agreements under the Federal Arbitration Act. Unsurprisingly, the enactment of AB 51 has set the stage for significant conflict between California and Federal laws.

AB 51 Successfully on Hold…For Now

The U.S. Chamber of Commerce, National Retail Federation, and others filed suit challenging AB 51 on December 9, 2019, in the U.S. District Court for the Eastern District of California. The organizations argue that AB 51 undermines the Federal Arbitration Act, and therefore creates an impermissible conflict between state and federal law.

On December 30, 2019, District Court Judge Kimberly Mueller granted the Chamber’s TRO to prevent AB 51 from going into effect.  Judge Mueller reiterated the Chamber’s concerns when granting the TRO, stating that the Chamber had raised serious questions regarding whether the challenged statute is preempted by the Federal Arbitration Act as contemplated by the U.S. Constitution.

The hearing for a permanent injunction to AB 51 is set for January 10, 2020.  In the meantime, AB 51 cannot go into effect in California.  Accordingly, businesses in California are not yet governed by the restrictions imposed by AB 51, which will remain until Judge Mueller rules on the request for permanent injunction this January.  Should the lawsuit be successful, AB 51 could be rendered unenforceable.  Should the Court fail to strike the law, AB 51 could go into effect as early as January 10, 2020.  The Court’s decision is likely just the start of a contentious battle as its decision, either for or against the injunction, will almost certainly be appealed.

Conclusion

Employers have made clear that they will not submit to California’s restrictive new laws without a fight. When the dust eventually settles, it is unclear what will become of AB 5 and AB 51. What is clear, however, is that employers must follow new unchallenged laws (e.g. the new minimum wage) and execute the best practices to avoid running afoul of California’s established laws (e.g. meal periods and rest breaks). 

Employment Law

Heidi E. Hegewald
Travis K. Jang-Busby



Employment Law