AB 5/AB 2257: California’s Worker Classification Law

The Basics and the Latest

Updated April 5, 2024

Latest News:

• The full U.S. Court of Appeals for the Ninth Circuit reheard the appeal of Uber’s successful claim against AB 5’s differential treatment of certain app workers.

• A federal trial court in San Diego entered judgment affirming AB 5’s enforceability in the trucking industry.

• CullenLaw files amicus brief in Ninth Circuit AB 5 rehearing.

Summary:

• California adopted a rigid worker classification test (the ABC test) that presumes all workers in the state are employees subject to labor, wage, and unemployment rules unless the hiring company can satisfy three specific requirements.

• Dozens of industries and categories obtained exemptions from the ABC test, removing thousands of workers from its application but leaving other, otherwise similar workers subject to its strict mandates.

• The ABC test has the potential to fundamentally alter or eliminate the independent contractor business model for thousands of companies and workers in some industries. This legislation has caused many independent contractors to consider leaving the California market.

• Certain industry groups, including commercial truckers represented by CullenLaw, sued the state in federal court to prevent the ABC test from being applied to them. On March 15, 2024, the trial court entered judgment in favor of the defendants, preserving the government’s authority to enforce AB 5 in the trucking industry.  As of the publication of this article, the decision remains subject to potential appeal to the U.S. Court of Appeals for the Ninth Circuit.

What is AB 5?

On September 18, 2019, California passed far-reaching legislation changing the test that determined whether workers are classified as independent contractors or as employees. The AB 5 law itself states that its purpose was to “ensure workers who are currently exploited by being misclassified as independent contractors instead of recognized as employees have the basic rights and protections they deserve under the law including a minimum wage, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, and paid family leave.” AB 5 § 1(e).

However, the law has caused consternation among 1) employers who are unsure how and whether the new law applies to them, and 2) individuals who consider themselves independent contractors, prefer their existing business model, and do not want to become employees.

AB 5 was amended on September 4, 2020, by AB 2257. The ABC test and its amendments and exceptions are found in California law at Cal. Lab. Code §§ 2775-2787. 

What is the ABC test?

AB 5 presumes a worker is an employee (and therefore subject to the state’s worker regulations) unless the company can demonstrate three conditions: 

A. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

B. The person performs work that is outside the usual course of the hiring entity’s business.

C. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB 5 purports to apply across industries to all workers in California. But apart from the legal issue of whether the California legislature can regulate workers, AB 5 and AB 2257 contain numerous general and industry-specific exceptions.

For parties who fall under one of the AB 5 exceptions, the law classifies workers by applying the long-established multi-factor test recognized in the caselaw, S.G. Borello & Sons v. Department of Industrial Relations, 48 Cal.3d 341 (1989) (Borello). Unlike the ABC test, the Borello test does not presume a worker to be an employee or an independent contractor. Instead, worker classification requires an examination of 11 factors related to the manner and extent of the hiring company’s control over the worker. This test is viewed by many as a more accurate reflection of the traditional distinctions between employees and independent contractors.

Are there any general exemptions exempt from the ABC test?

The business-to-business exception (B2B) provides the broadest general exception to the ABC test. Where a company can show each of 12 conditions related to the independence of the worker (such as whether the worker maintains a separate business location and provides its services to the hiring company rather than directly to the company’s customers), the B2B exception applies, meaning Borello applies to worker classification determinations.

Which industries secured specific exceptions from the ABC test?

AB 5 has the effect of precluding persons in some industries from ever working as independent contractors. Affected parties include workers who have long chosen to be independent contractors; who rarely, if ever, sought the protections of California’s employment laws or challenged their classification status under Borello; and who would likely have been able to maintain their independent contractor status under Borello. For these workers and industries, AB 5 fundamentally changes the structure and operation of their businesses at great expense and disruption.

Because of AB 5’s far-reaching impacts, lobbyists for dozens of specific industries sought and received exemptions to the ABC test. These industries include the creative arts (for example, photographers), various professions (like engineers and lawyers), and certain businesses (such as construction). Following AB 5’s enactment, many additional industries lobbied the California legislature to amend the law, securing even more exceptions from the ABC test via AB 2257. Some exceptions include data aggregators (§ 2782) and music industry workers (§ 2780). The California legislature also exempted workers who provide services “at the location of a single-engagement event” like weddings (§ 2779) and workers who provide referral services (§ 2777). All told, these exceptions provided relief from AB 5 for dozens of types of business and their workers.

Two industries that did not get exceptions from the law include trucking and app-based drivers. These groups have resorted to other ways to challenge AB 5’s application to their businesses.

How have workers and businesses challenged AB 5?

Trucking companies and drivers are currently fighting against the application of the ABC test to their industry. In CTA v. Bonta (Southern District of California Case No. 3:18-cv-02458-BEN-DEB), the California Trucking Association and the Owner-Operator Independent Drivers Association (represented by CullenLaw) have challenged AB 5/AB 2257 to preserve the independent owner-operator model in trucking. This lawsuit is based primarily on three claims:

1.     A federal statute (the Federal Aviation Administration Authorization Act) enacted in part to ensure the deregulation of the trucking industry preempts the ABC test as applied to truckers because it effectively prohibits the use of independent owner-operators.

2.     The Commerce Clause of the United States Constitution, which restricts states from discriminating against or imposing undue burdens on interstate commerce, prohibits California from dictating the business model of thousands of truckers based outside California who haul freight through the state.

3.     The United States and California Constitutions’ equal protection provisions require California to treat economically similar parties the same unless the state can demonstrate that it has a rational basis to treat them differently. Because AB 5/AB 2257 excludes thousands of workers and categories based solely on political purposes at odds with the law’s goal of protecting workers, it violates these equal protection guarantees.

In June 2023, the challengers filed renewed motions asking the federal court to prevent the state from enforcing AB 5 against the trucking industry until the case (and the constitutionality of AB 5) is resolved.

While the parties were briefing these preliminary injunction motions, the judge decided to consolidate the hearing on the motions, which was set for the end of August 2023, with the full trial on the merits (a procedure permitted under Federal Rule of Civil Procedure 65(a)). This had the effect of streamlining the case, reducing or eliminating any discovery (like depositions) that the parties might have conducted before trial.

Instead, the parties (and the court) agreed to reschedule the hearing on November 13, 2023 to give the parties the opportunity to file final trial briefs and responses and submit additional written evidence regarding the effects of AB 5’s ABC test on the trucking industry. During October and early November, the parties did just that and argued the case in the federal court in San Diego. On March 15, 2024, the trial court decided this case in favor of the state, leaving AB 5 in place. That decision remains subject to appeal to the U.S. Court of Appeals for the Ninth Circuit.

Another ongoing case, Olson v. State of California (Central District of California Case No. 2:19-cv-10956-DMG-RAO), will test whether AB 5/AB 2257 violates the constitutional rights of app-based workers like Lyft and Postmates drivers, arguing that the law irrationally provides exemptions for businesses like TaskRabbit and Wag!, businesses that operate using identical business models. The challengers there secured an early victory after the U.S. Court of Appeals for the Ninth Circuit decided that they had alleged plausible claims, giving them the opportunity to demonstrate that AB 5/AB 2257 treats them unfairly. Following that decision, the state petitioned the full Ninth Circuit Court of Appeals for rehearing, and a majority of the court voted in favor. The court, sitting en banc, heard argument on March 20, 2024. The resolution of these cases could significantly impact the way businesses operate in California in the trucking and app sectors.

Believed to be one of the primary targets of AB 5, huge rideshare and delivery apps like Uber and Postmates successfully obtained an exemption for their workers through California’s ballot initiative process. Proposition 22, passed by the voters at a 59% to 41% margin, ensures that the ABC test does not apply to those workers and that they remain independent contractors subject to the Borello test.

Have other states adopted similar ABC tests?

Versions of the ABC test have also been adopted in other states throughout the country. California’s AB 5 applies the ABC test to a broad scope of employment rules: unemployment compensation, wages, and other mandates related to working conditions. Numerous other states, however, use the ABC test solely to determine whether a worker falls within their unemployment compensation rules. See, e.g., Indiana Code § 22-4-8-1(b). Those states use the less rigid common law test for their wage and working condition determinations.

Moreover, many states that have adopted an ABC test use a less restrictive version than the standard found in AB 5. See, e.g., 820 Illinois Comp. Stat. 405/212. Prong B of this version allows companies to demonstrate a worker’s independent status by showing either that the worker provides services outside the usual course of the company’s business (this is California’s Prong B) or that the worker provides services outside the company’s place of business. This option allows for many truly independent workers to qualify as independent contractors where California’s narrower ABC test would treat them as employees (for instance, an independent trucker arguably provides services within the motor carrier’s usual course of business but outside the carrier’s place of business).

Notably, CullenLaw has found that none of these states have adopted a business-to-business exception to the ABC test as California has done.

Has the federal government adopted an ABC test for the purposes of any federal labor laws? 

Various federal officials have also publicly contemplated whether and how the federal government might adopt an ABC test. The current nominee to be the Secretary of the U.S. Department of Labor, Julie Su, comes from California and was a strong supporter of AB 5. The Biden Labor Department took the position that federal courts had determined that the Department does have congressional authority to consider an ABC type of rule. Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 87 Fed. Reg. 62,218, 62,230 (Oct. 13, 2022). Thus, any federal adoption of the ABC rule would require an act of Congress. Members of Congress are split on a nationwide ABC test. In light of the current politically divided Congress, the ABC test has almost no chance of becoming federal law in the near future.

Need more information?

For more information about AB 5 and CullenLaw’s work on this important topic, please contact us. For links to our current and prior articles and blog posts concerning AB 5, see the titles below.