Independent Contractor Rulings Sharpen Issue of Who Is and Isn’t

Calfornia’s gig worker classification landscape is slightly more in focus with two rulings issued only days apart, one on a state law, the other on a voter-approved initiative covering who is exempt from employee protections including overtime and reimbursement.

Bookending the week, those state and federal appellate decisions issued March 13 and 17 addressed the ability of app-based businesses to treat certain workers as independent contractors. At issue, AB 5, the state law that made it harder to characterize workers that way, and Proposition 22, the voter-passed initiative creating exceptions to that rule.

Gig platforms could see a boost in business as a result, said Pavel Shynkarenko, co-founder and CEO of Solar Staff, an international fintech company that enables businesses to interact with freelancers from over 190 countries.

The Ninth Circuit’s Prop. 22 decision “may cause an increase in the platform’s services by 15-20% when market competition would have led the platforms to introduce additional benefits in time,” he said in an emailed statement. But “in the end, it will be the customers who shoulder this cost.”

The US Court of Appeals for the Ninth Circuit held a trial judge incorrectly dismissed claims by Uber Technologies Inc., Postmates Inc., and driver Lydia Olson that the worker classification legislation violated their equal protection rights. The appeals court returned the case to a Los Angeles federal court to reconsider the preliminary injunction denial.

Attention now turns to potential petitions for review the San Francisco-based court’s ruling before either an en banc panel or the US Supreme Court.

Four days earlier, the California Court of Appeal, in the first appellate ruling on the Proposition 22 carve-out some gig workers from AB 5, held Uber, DoorDash Inc., and Lyft Inc. can treat workers as contractors. The ruling gave something for the drivers and unions to claim as a victory by deeming unconstitutional the initiative’s provision requiring a seven-eighths majority vote for lawmakers to enact amendments, such as allowing gig workers to unionize.

That ruling may just extend the costly fight: gig employers plowed more than $200 million into getting Prop. 22 passed in 2020.

The Ninth Circuit decision has no immediate effect because it just allows the litigation to continue and because Prop. 22 “already exempts the plaintiffs from AB 5,” said Catherine Fisk, a University of California, Berkeley law professor.

The ruling in the longer term could mean that even if the California Supreme Court reverses the state appellate ruling, and strikes down Prop. 22, “the gig companies have an avenue to exempt themselves from California employment law,” because of the potential federal court finding of an equal protection violation, Fisk said in an email.

“But the most shocking thing about the opinion is that it opens the door to courts declaring almost every state or federal regulation of the economy unconstitutional simply because it carves out some industries from regulation while including others,” Fisk said. “That is squarely inconsistent with a number of U.S. Supreme Court rulings (most of which the opinion doesn’t cite), but presumably all of those could be overruled by the U.S. Supreme Court at some point.”

Another Fight

The Olson v. California ruling is just the latest the Ninth Circuit handed down over the state’s worker classification schemes. The court last October refused to block enforcement of the so-called ABC test on doorknockers and signature gatherers for political campaigns.

And it rejected a similar First Amendment challenge brought by freelance journalists and photographers against AB 5. In another AB 5 case, truck drivers are asking a federal judge in San Diego to issue a new injunction preventing enforcement while a court challenge proceeds.

Samantha Prince, assistant professor of law at Penn State Dickinson Law, said even if the preliminary injunction is granted in the Olson case, it “is an injunction from being treated under AB 5, which would mean that the old Borello factor test would apply” when determining employment status.

The California Supreme Court 1989 ruling in S.G. Borello & Sons Inc. v. Dept. of Industrial Relations set a multi-factor test for determining employment under which no single factor controls the determination, according to a California Department of Industrial Relations fact sheet.

Borello was effectively superseded for most occupations when the California Supreme Court’s 2018 Dynamex Operations West v. Superior Court decision created the state’s ABC test.

A worker under the three-factor test is considered an employee and not an independent contractor unless the hiring entity shows the worker is free from control and direction with the performance of the work; performs work outside the usual course of the hiring entity’s business; and is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Dynamex was codified in AB 5, which bill author Lorena Gonzalez Fletcher, who now heads the California Labor Federation, said was “intended to root out misclassification in all high-risk industries with significant labor law violations,” including “construction workers, janitors, truck drivers, domestic workers, healthcare workers and rideshare drivers.”

‘Unclear and Fact Specific’

California worker classification laws are “unclear and fact specific,” said Regan Parker, general counsel for ShiftKey LLC, a platform that connects licensed health professionals with health-care facilities.

The Borello test applies for some occupations, such as creating, promoting or marketing sound recordings or musical compositions, certain licensed physicians including surgeons, dentists, psychologists, or veterinarians, and some direct salespersons, the state Department of Industrial Relations FAQ said.

But, some occupations require additional requirements be met in order to use Borello instead of the ABC test, including still photographers and photojournalists, enrolled agent licensed to practice before the Internal Revenue Service, and certain business-to-business contracting relationships.

“We’ve really never seen clarity about what ‘control’ means. You can have two different people look at the same set of factors and come to completely different conclusions,” Parker said in an interview. “Right now, plaintiffs’ lawyers get the benefit of working off these gray laws and are coming after companies.”

“Until dust settles, I think you have to be a little more cautious,” she said.