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Uber and Postmates denied preliminary injunction barring enforcement of California independent contractor law

By Tulay Turan, J.D.

AB 5 rationally furthers the state’s asserted interest in protecting exploited workers to address the erosion of the middle class and income inequality.

Uber and Postmates, along with a pair of rideshare and delivery drivers, were denied a preliminary injunction barring the enforcement of California’s AB 5 against them. A federal district court in California found the drivers failed to show a likelihood of success on the merits on their Equal Protection, Due Process and Contract Clause claims because AB 5 is rationally related to a legitimate state interest, does not target gig economy companies, and does not unconstitutionally impair their contracts. In addition, the balance of equities and the public interest weighed in favor of permitting the state to enforce the legislation (Olson v. State of California, February 10, 2020, Gee, D.).

ABC test codified. In September 2019, the State of California enacted AB 5, which codifies the state’s Supreme Court holding in Dynamex Operations West, Inc. v. Superior Court, and adopts the ABC test for all provisions of the California Labor Code, the Unemployment Insurance Code, and IWC wage orders, with numerous exemptions. On December 30, 2019, the plaintiffs filed a lawsuit alleging that AB 5 violates the U.S. and California Constitutions and sought declaratory, injunctive, and other relief from the state and its attorney general.

AB 5 went into effect on January 1, 2020. On January 8, 2020, the plaintiffs filed this motion for a preliminary injunction requesting the court enjoin the defendants from enforcing the law against Uber and Postmates. Although the complaint contained 10 claims against the defendants, the motion focuses on AB 5’s alleged discrimination against the drivers in violation of the Equal Protection, Due Process and Contract Clauses.

Failed to show likelihood of success. Addressing the four factors that must be shown for a preliminary injunction to be granted, the court first found that no serious questions existed as to the drivers’ likelihood of success on the merits on their Equal Protection claims, and this factor thus weighed against granting their motion. AB 5 rationally furthers the state’s asserted interest in protecting exploited workers to address the erosion of the middle class and income inequality.

The court rejected the drivers’ argument that the law does not rationally further that asserted interest because the numerous exemptions roll back Dynamex for workers who would otherwise be covered by it. The drivers claimed these workers included them because they are similarly situated to employers and workers in the exempted industries. However, the court found the drivers did not show their work arrangements were so similar to exempted work arrangements that exempting Uber and Postmates from AB 5’s application would further the state’s interest in preventing misclassification of independent contractors.

Exemptions. In addition, AB 5 maintains exemptions of workers who were previously exempted under Dynamex—workers in the “administrative, executive, or professional category” and “outside salespersons.” There were rational explanations for AB 5’s exemptions because the work relationships described therein require business organization, skill, self-direction, self-pricing, shorter or less frequent work terms, a distinct location, specific type of work, and other hallmarks of independent status.

In addition, although the record contained some evidence that AB 5 targeted Uber and Postmates and other gig economy companies, “such targeting, even if it rises to the level of animus toward gig economy companies, does not establish an Equal Protection violation where the statute addresses legitimate concerns of deleterious misclassification of workers in many industries, not just the gig economy.”

Right to pursue chosen occupation. Turning to the Due Process claim, the court found AB 5 did not deprive gig economy workers of the right to pursue their chosen occupation. Uber and Postmates insisted their drivers qualify as independent contractors even under the ABC test. The drivers can still work as independently contracted drivers if they satisfy the ABC test or fall under an exemption, such as the one that exempts business entities providing services through referral agencies. Even if the drivers’ employment status would change under AB 5, they potentially could still pursue their line of work, provided that their employers compensate them properly and allow them to have flexible work schedules. Thus, the drivers’ due process claim was unlikely to succeed.

Does not impair contracts. Next, the court found that enforcement of AB 5 does not unconstitutionally impair the drivers’ contracts. While the existence of contractual relationships between the drivers and Uber and Postmates was clear, AB 5 does not require them to reclassify drivers as employees. Uber and Postmates also asserted that, even under the ABC test, their drivers are independent contractors. As such, their contractual relationships with drivers are not impaired at all, according to the court.

The court also noted a court is less likely to find substantial impairment when a state law “was foreseeable as the type of law that would alter contract obligations.” Here, each of the contracts was entered into in the wake of foreseeable potential enforcement of the ABC test to the drivers. The drivers thus should have foreseen that the independent contractor status of drivers set forth in their contracts could be challenged.

Further, even if the drivers could establish a substantial impairment of contracts, they have not shown that AB 5 does not serve a significant and legitimate public purpose. The law is an exercise of the state’s police power to protect workers aimed at what it perceives to be a broad economic and social problem. AB 5 satisfies the public purpose test imposed in a Contract Clause challenge, and no serious questions exist as to the merits of these claims.

Irreparable harm? Addressing whether the plaintiffs would suffer irreparable harm in the absence of preliminary relief, the court separately analyzed harm to Uber and Postmates and harm to the drivers. The court found Uber and Postmates demonstrated a likelihood of irreparable harm based on the threats of enforcement against them by city attorneys and the availability of criminal penalties. It noted this showing was offset somewhat by the fact that Uber and Postmates may still face private enforcement actions under Dynamex, even in the absence of AB 5. As no enforcement or nonspeculative reclassification measures applied to individual drivers, the drivers did not demonstrate the likelihood of irreparable harm. Accordingly, the court found this factor weighed slightly in the plaintiffs’ favor.

Balance of equities and public interest. Lastly, noting that when the government is a party, the final two preliminary injunction factors—balance of the equities and public interest—merge, the court found these weighed against granting relief. “Considering the potential impact to the State’s ability to ensure proper calculation of low income workers’ wages and benefits, protect compliant businesses from unfair competition, and collect tax revenue from employers to administer public benefits programs, the State’s interest in applying AB 5 to [Uber and Postmates] and potentially hundreds of thousands of California workers outweighs [the drivers’] fear of being made to abide by the law.” Thus, the factors weighed against enjoining enforcement of AB 5 against Uber and Postmates, and the court, therefore, denied the motion.