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Appeals Court Reviews California Contractor Case

Bill advances to codify state Supreme Court ruling that endangers existence of independent contractors.

A federal appeals court has agreed to review last year’s California Supreme Court decision that wiped out independent contractor status for the state’s truck driver owner-operators, among other independent contractors.

At the same time, however, legislation that would codify the court decision into law is advancing in the state legislature.

The April 2018 decision by the state Supreme Court overturned nearly 30 years of legal precedents used in deciding who could or could not be considered an independent contractor. The court did so by establishing a rigid three-part test that makes it almost impossible for businesses that traditionally rely on contractors to continue doing so.

The state court threw out a more flexible multi-part standard for defining independent contractors which had been in place since 1989, called the Borello test, replacing it with a simple three-pronged “ABC Test” in a case involving the Dynamex Inc. nationwide parcel delivery company.

Under the new test, contractor status cannot be granted to anyone who operates in the same line of business as the company they contract to, such as truck owner-operators who choose to lease themselves and their equipment to other trucking companies.

The Ninth Circuit U.S. Court of Appeals has agreed to hear a case that will determine whether the California Supreme Court decision violates the Federal Aviation Administration Authorization Act (FAAAA), which preempts all state laws that relate to “a price, route, or service of any motor carrier” in regard to the transportation of property, even if those laws only do so indirectly.

It is quite possible that truckers may eventually find some relief in this proceeding, according to attorneys Mara D. Curtis and Michael R. Kleinmann of law firm Reed Smith “There is reason to believe that the 9th Circuit may find the ABC test preempted by the FAAAA, thus placing companies in the transportation industry contracting with truck drivers back under the traditional Borello test for independent contractor classification,” they observe.

The U.S. Supreme Court observed in an earlier decision upholding the FAAAA law that preemption may occur “even if a state law’s effect on rates, routes, or services is only indirect” and applies “at least where state laws have a significant impact related to Congress’ deregulatory and preemption-related objectives.”

The Ninth Circuit Appeals Court agreed to hear the Dynamex case after U.S. District Judge Morrison C. England, Jr. dismissed the lawsuit filed by the Western States Trucking Association (WSTA), and rejected the association’s challenge, which also was based on the argument that the ABC test is preempted by the FAAAA and violates the Commerce Clause of the Constitution.

Any optimism about how the Ninth Circuit may rule on the FAAAA issue should be tempered by that fact that less than two weeks later the same court denied another appeal by employers and held that the California Supreme Court’s decision can be applied retroactively to other cases alleging independent contractor misclassification.

Now a Political Football

A measure of how important this issue is to the state’s politicians and union leadership can be seen by the fact that California Attorney General Xavier Becerra (D) chose to issue a press release in support of Judge England’s dismissal of the WSTA challenge.

“This court ruling is a victory for truck drivers and for all California workers who put in the time and labor at the behest of their employer,” Becerra said. “The courts have once again demonstrated that it is well within a state’s right to establish standards for the welfare of those working within its borders.”

California Labor Secretary Julie Su added, “This is another victory in our fight to protect truck drivers from misclassification. When drivers’ rights to basic workplace standards are violated, this case makes clear that the state has the right and responsibility to protect them according to California law.”

Last year, business groups backed legislation introduced in the State Assembly that would reverse the Dynamex decision, only to find it countered by legislation authored by pro-union Democrats to write the Dynamex criteria permanently into state law. Both bills were reintroduced in the State Assembly this year. The business coalition’s legislation is dead in the water while the other bill, designated AB 5, is advancing through the committee process and looks like it has a good chance to pass.

At the beginning of April, business groups and industry associations wrote a letter to the bill’s author, Assemblywoman Lorena Gonzalez (D-San Diego) offering to support AB 5 if exceptions could be granted for consultants, travel agents, therapists, real estate agents, hair stylists, and truck, taxi and gig economy drivers, among others. Calling the list of professions too broad, Gonzalez has indicated she may be amenable to excepting hair stylists and real estate agents.

The bill as currently written already carves out exceptions for licensed insurance brokers, physicians and surgeons, licensed securities brokers and investment advisers, and direct salespersons who work for companies like Herbalife, Avon and Mary Kay Cosmetics. It also has been reported that Gov. Gavin Newsom (D) is seeking a compromise to protect the contractor status of gig workers in the high-tech sector, a very important industry for the state.

Concerns also have been voiced about the potential negative impact of the Dynamex standard on one of the state’s most iconic business sectors, the entertainment industry, which makes wide use of freelancers to staff and create its productions.

Gonzalez and other bill supporters in the legislature are staunch supporters of labor unions, which seeks to eliminate independent contractor status. The Teamsters in particular have been waging a decades-long campaign to end the contractor status of port truck drivers in the state and have been pursuing another effort to organize the drivers who work for the car services Uber and Lyft.

From her public statements, it seems evident that Gonzalez believes most independent contractors are in reality exploited employees, which puts her on the same page as other Democrats such as former presidential candidate Hillary Clinton and Obama Administration officials. It is a viewpoint so rigid that it does not accept the blandishments of the many individuals who argue that they prefer to work as independent contractors.

Commenting on the gig economy in general, Gonzalez declared, “Something is wrong with the way we’ve allowed these companies to operate,” adding, “Individuals are not able to make it on three side hustles. That shouldn’t be the norm. That shouldn’t be accepted.”

When her bill was passed out of committee in April, she commented, “As lawmakers, we will not in good conscience allow free-riding businesses to continue to pass their own business costs onto taxpayers and workers. It’s our job to look out for working men and women, not Wall Street and their get-rich-quick IPOs.”

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