The Past Decade of Independent Contractor Misclassification and Compliance Law

From JDSupra, Richard Reibstein provides an outstanding review of the past decade for independent contractor compliance. Richard reviews legislative developments, settlements in misclassification lawsuits, three recent court cases that had a significant effect, and administrative and regulatory developments. In the following excerpts, Richard discusses AB5 and the three recent court cases. Richard writes:

The most meaningful law enacted in the past ten years involving independent contractors is undoubtedly the recent passage in California of Assembly Bill 5 (AB5), effective January 1, 2020. That law sought to codify into a statute the California Supreme Court’s decision in the Dynamex case, which adopted a so-called “ABC” test that severely limits the use of ICs. AB5 has created IC convulsions throughout the state.
Legal challenges to AB5 are being filed by transportation companies and their industry associations, a ballot initiative is being proposed to overturn the legislation, some companies are converting ICs to employees, other companies are terminating relationships with workers previously regarded as ICs, and other companies are just going out of business instead of risking enormous legal liability if workers treated as ICs are found to have been misclassified.
Despite the view by many companies that AB5 spells the end of ICs in California, we have noted that companies using an IC business model may still be able to operate lawfully in California after AB5 becomes effective. We have also commented that other states should refrain from enacting laws with ABC tests like California’s AB5, even though it carves out over 50 industries from the Dynamex ABC test in a series of exemptions, some of which have been characterized as “opaque” and “ambiguous.”
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Three Court Cases in the Past Two Years Have Already Had a Dramatic Impact on IC Misclassification Cases: Dynamex, Epic, and New Prime
The decision that has caused an earthquake in California independent contractor circles was Dynamex, issued by the California Supreme Court on April 30, 2018. Overnight, it changed close to three decades of settled law in California that had been based on the 1989 California Supreme Court decision in the Borello case, which had set forth a non-exhaustive list of factors that the courts should consider in determining if a worker was an IC or employee. In Dynamex, the California Supreme Court created a so-called ABC test where all three prongs must be met to establish IC status.
Many companies – from mom-and-pop shops to the largest gig economy companies – had invested in and built their businesses in reliance on Borello, only to have the highest court in the state change the test for IC status in a manner that severely restricts the use of ICs. As noted above, the Dynamex decision prompted the California legislature to pass AB5, which was signed by the Governor and is effective January 1, 2020. While AB5 was designed to “codify” Dynamex into the California Labor Code, it exempted more than 50 industries from the ABC test and allows them to continue to qualify for IC status under Borello.
Rather than simplify the law, which the California Supreme Court sought to do by enacting a three-part test, litigation resulting from Dynamex and AB5 will likely complicate the legal landscape in California and consume a great deal of attention in the next year or two – and maybe a number of years thereafter.
The second noteworthy decision in the past decade was issued in May 2018 by the U.S. Supreme Court in the Epic Systems Corp. case. That opinion upheld mandatory arbitration agreements, including those with class action waivers, imposed on workers by companies. Epic Systems has dramatically changed the landscape of IC misclassification class actions, prompting motions to compel arbitration and reducing considerably the cost of settlements in these types of cases.
In a commentary entitled “Ten Tips for Drafting Arbitration Agreements with Class Action Waivers in Independent Contractor Agreements,” which was published by Bloomberg BNA Daily Labor Report on November 8, 2018, we noted that while Epic Systems may have permitted mandatory arbitration agreements with class action waivers, many courts have struck down such agreements because they were not well-drafted or were found to be unconscionable under applicable state laws. The above commentary provided guidance to companies seeking to effectively draft such arbitration agreements with class action waivers.
The third judicial decision of note in the past two years was the U.S. Supreme Court’s opinion in New Prime Inc., holding that Section 1 of the Federal Arbitration Act (FAA) exempts interstate transportation workers from mandatory arbitration agreements. That January 2019 decision had prompted Swift Transportation, as mentioned above, to settle its class action IC misclassification lawsuit by owner-operators for $100 million, once it became clear that the FAA could not be used to compel individual arbitrations of the IC misclassification claims.
Plaintiffs’ class action lawyers are now trying to expand the New Prime decision to cover couriers making local deliveries of food, groceries, and retail goods. That argument will likely be litigated for years before being resolved, possibly by the U.S. Supreme Court.