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Judge’s Instacart Ruling Draws First Blood in Contractor Battle

Feb. 26, 2020, 9:00 PM

A California judge’s ruling that balked at Instacart’s gig economy business model could signal increased pressure on industries to reclassify their independent contractors as employees, while battles over a worker-friendly state law continue in courts, boardrooms, and the legislature.

Assembly Bill 5, which took effect this year and makes it harder for companies to classify their workers as contractors, has roiled the California business community and inspired other progressive states to take note. The measure also inspired a wave of litigation by workers and attempts to block its enforcement.

A dispute between Instacart and the city of San Diego reveals how governments can police employers and force them to comply with the stricter worker classification standard that the California Supreme Court created in 2018. A state judge in San Diego Superior Court ruled that Instacart likely misclassified shoppers who deliver groceries, issuing a preliminary injunction against the app-based company.

“To my knowledge, this is the first court order requiring a platform employer to reclassify its workers as employees—but other companies must be seeing the writing on the wall,” said Charlotte Garden, a law professor at Seattle University. “My impression is that all of the platform companies are going to play for time as long as possible, and so I don’t expect any other platform companies to reclassify their workers until they, too, are facing a court order.”

The judge’s order, initially placed on hold, will take effect on Saturday and requires Instacart to classify its estimated 2,000 workers in San Diego as employees, said Deputy City Attorney Mark Ankcorn. The city sought to enforce the law against the company’s roughly 100,000 workers in the state, but the judge trimmed the enforcement to just the city.

A hearing Friday will consider the company’s motion to compel arbitration. The company requires agreements to resolve disputes outside of court, but the city says that it shouldn’t be bound by those contracts. Instacart also is seeking clarity from the judge on whether it can continue to stall the injunction while it pursues an appeal. The judge’s decision could influence other state and local agencies looking to enforce labor and employment laws in the gig economy sector, some legal observers say.

“It may be the beginning of much-needed state enforcement of California employment law against these gig companies,” said Veena Dubal, associate law professor at University of California, Hastings. “We have yet to see another city attorney act, but this demonstrates that California’s biggest cities have the political power and will to act against these large corporations flagrantly violating the rights of a low-income, largely immigrant workforce.”

The ruling comes as freelance journalists, Uber Technologies Inc. and Postmates, and the trucking industry are embroiled in disputes to block the law.

Unlike contractors, employees are entitled to overtime, minimum wage, workers’ compensation, and other benefits. The law forces companies to prove that workers labeled as independent contractors are free from control, perform work outside the ordinary course of business, and have their own established entity. Gig companies such as Instacart, Uber, and DoorDash build their business models on the backs of independent contractors. These models have been challenged in court for years across the country.

Other Cities to Follow?

State enforcement of A.B. 5 could pick up.

Gov. Gavin Newsom (D) included $20 million in his state budget proposal to enforce A.B. 5. His plan includes $17.5 million to pay for the costs associated with more workers using workers’ compensation, and “investigations of labor law violations” related to worker status, wage claim filings, and workplace health and safety inspections.

The governor “has put big numbers on the enforcement of A.B. 5, but it’s unclear what he intends to do,” said Michael Lotito, a Littler Mendelson shareholder and co-chair of the firm’s Workplace Policy Institute. Lotito declined to comment specifically on the Instacart case, as the company is a client.

“Will this spur other cities to say, ‘We don’t want San Diego to have all the fun’? I honestly don’t know,” Lotito said. “It’s possible we will pause a second here and see what happens this year with the legislative process.”

He said proposals are already in the works to amend the measure. Meanwhile, some companies have re-classified workers, some have ended contractor relationships altogether, and many others fear the consequences that could gut their business models, leaving the investor community skittish, Lotito said.

In the Instacart case, the court’s final order reiterated much of a tentative Feb. 13 ruling, but the judge decided to temporarily stall enforcement of the injunction. He said the court doesn’t have the resources to take on direct enforcement of the “prohibitory, rather than mandatory” injunction. He also made it clear the misclassification issue was destined for an appeals court to decide.

“This is a lively area of the law right now,” San Diego Superior Court Judge Timothy B. Taylor said, and “the sooner the Court of Appeal can hold forth on these issues, the sooner the parties will have a clear and definite signal of what is expected of them.”

Seattle University’s Garden said the Instacart order “illustrates the power of authorizing public officials to enforce labor and employment law.” This is especially relevant in the case of companies that force workers into arbitration agreements.

Challenges Ongoing

Instacart couldn’t piggyback on the California Trucking Association’s success in blocking enforcement of A.B. 5 for its industry. It’s the only group, so far, that has secured an injunction against the law based on a special federal carveout for motor carriers engaged in interstate commerce. Instacart tried to say its workers fall under similar circumstances, but the court said the trucker battle didn’t have any impact on the case.

There’s a clear distinction between the Instacart workers and the California truckers, the court said. Instacart workers aren’t motor carriers under the Federal Aviation Administration Authorization Act, as their delivery role is subordinate to their shopping duties and “could just as easily be carried out on a bicycle.” The U.S. Court of Appeals for the Ninth Circuit is poised to review the federal court injunction blocking enforcement of A.B. in the trucking case.

Industry groups representing freelance journalists also will argue to block the measure. A judge rejected the groups’ attempt to get a temporary restraining order in that case. Journalists have opposed the measure, and say they’ve lost work as a result. A.B. 5’s author Assemblywoman Lorena Gonzalez has said she will propose updates to the law for these workers. The law currently says that a contractor who writes more than 35 articles a year should be classified as an employee.

Meanwhile, Uber and Postmates didn’t persuade a federal court to grant an injunction to block the law from applying to their workers. The judge found that the public interest weighs “in favor of permitting the state to enforce this legislation,” while acknowledging the companies’ claim that it poses “irreparable harm” for them.

The status of drivers for the companies is critical to the companies’ business models, and is also of keen interest to potential investors. Postmates said last February that it had filed confidentially for an initial public offering. Since then, the company hasn’t moved ahead with an IPO.

Reclassifying workers as employees creates a range of economic issues and has landed on unintended industries, such as the arts community, said Cozen O’Connor attorney Michele Miller. Other progressive states are watching what’s happening in California, and some have proposed similar standards. New Jersey, Connecticut, and Massachusetts previously adopted similar worker classification tests.

“If anything, the machinations of California will provide guidelines for other states as what not to do,” Miller said. “It’s a very political bill. As a result, we have ended up with numerous exemptions that upon closer examination are really hard to justify.”

To contact the reporter on this story: Erin Mulvaney in Washington at emulvaney@bloomberglaw.com

To contact the editors responsible for this story: Jay-Anne B. Casuga at jcasuga@bloomberglaw.com; Martha Mueller Neff at mmuellerneff@bloomberglaw.com

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