Challenges to New California Independent Contractor Law and Ban on Mandatory Arbitration Agreements Wind Through the Courts

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As expected, there have been a number of legal challenges to California Assembly Bills 5 and 51, both of which were signed into law by California Governor Gavin Newsom and set to go into effect on January 1 of this year.

Ban on Mandatory Arbitration Agreements Blocked

AB 51 sought to ban new mandatory arbitration agreements to the extent they cover any discrimination claims under the California Fair Employment and Housing Act (FEHA), or any claims under the California Labor Code.  Violations of the new law would constitute unlawful employment practices under the FEHA and would be a misdemeanor.  As anticipated, AB 51 was challenged based on preemption under the Federal Arbitration Act. 

On December 30, 2019, a federal court in California granted a temporary restraining order preventing AB 51 from going into effect on January 1, 2020.  The temporary restraining order remains in effect for now as we wait for the court to decide whether it will issue a preliminary injunction.

The New ABC Test for Independent Contractors Has Been Challenged by Trucking, Freelance Media, and the Gig Economy

AB 5 generally codifies and expands the applicability of the three-part ABC test from the Dynamex decision in determining whether a worker is an employee or independent contractor for purposes of California Labor Code, Unemployment Insurance Code, and the Wage Orders.  For further background on Dynamex and AB 5, see earlier blog articles here.

There have been a number of legal challenges to AB 5, including by those in the trucking industry, gig economy, and freelance journalists.

A Major Win for Trucking

The trucking industry challenged the constitutionality of the law in lawsuits filed in California federal and state courts.  In the federal case, the judge issued a preliminary injunction blocking the State from enforcement of AB 5 as to any motor carrier operating in California.  The court had previously issued a temporary restraining order.  The court determined that the ABC test is preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA) as applied to owner-operators contracting with motor carriers.

The FAAAA is a broad federal law that bars state laws relating to price, route, and service of any motor carrier with respect to the transportation of property.  The federal law is aimed at ensuring uniformity in certain aspects of the trucking industry in all 50 states and AB 5 was viewed by the court as the type of patchwork state regulation that Congress sought to prevent.

Similarly, a California state court ruled that AB 5 does not cover the trucking industry and that the ABC test conflicts with the FAAAA.  Following these court rulings, the Borello multi-factor test (discussed here), rather than the ABC test will apply in determining whether such workers are properly classified as independent contractors.

The Fight Against AB 5 Continues for Gig Economy and Freelance Journalists

A suit brought by Uber Technologies, Inc., Postmates Inc., and individual drivers seeks to bar AB 5 from being enforced against gig economy companies and on-demand workers.  The plaintiffs argue the law is unconstitutional and unfairly targets the gig economy while providing arbitrary carve-outs for various industries and professions.  The parties have been making their arguments and submissions to the court and we await a decision from the judge.

A group of freelance journalists and photographers also brought suit arguing that AB 5 is unconstitutional and unfairly restrictive as it applies to freelance journalists, including writers, editors and photographers.  Under AB 5, there is an exemption from the ABC test for freelance journalists but it only allows 35 submissions for a given entity per year before losing contractor status.  The plaintiffs allege this narrow exception would force many journalists to give up ownership of the copyright of their work, limit their ability to set their own workload, and increase the cost of freelance work.  The federal court denied the temporary restraining order and criticized the plaintiffs for the timing of their suit, which was filed three months after Governor Newsom signed the law into effect and only two weeks before AB 5 was scheduled to take effect.  As this case works its way through the court, AB 5 will continue to apply to freelance journalists and photographers.

A Note on the Retroactive Effect of Dynamex

We are also keeping an eye on the California Supreme Court, which recently accepted the Ninth Circuit’s request to specifically decide whether Dynamex applies retroactively.  The California Supreme Court is faced with the same question in another appeal currently before it.  While California Supreme Court rulings generally apply retroactively, the court has not explicitly said whether its decision in Dynamex does apply retroactively.  The Ninth Circuit is holding off on a decision in a misclassification case until it receives guidance from the California Supreme Court on this question.

We will continue to monitor these cases for further developments.  Employers with questions about the use of arbitration agreements and classification of workers as independent contractors are encouraged to consult with employment counsel.

Conn Maciel Carey LLP
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