Uber and Postmates Can’t Hitch a Ride on the Trucking Industry’s AB-5 Success: The Significance of a Preemption Argument and Other Takeaways from the Latest AB-5 Ruling

As we’ve chronicled in recent articles, the trucking industry, represented by the California Trucking Association (“CTA”), has enjoyed courtroom success battling AB-5, California’s controversial “gig worker” law. U.S. District Judge Roger T. Benitez followed a New Year’s Eve TRO with a January 2020 preliminary injunction, blocking state officials for the life of the suit from applying AB-5 to motor carriers and independent owner-operators who help meet consumer shipping needs.  Injunctive relief was warranted, he found, because the CTA was likely to prove AB-5 is preempted by the Federal Aviation Administration Authorization Act (“FAAAA”), which bars state laws related to the “price, route, or service” of any motor carrier transporting property.

At the same time, Uber and Postmates, giants in a different sector of the gig economy, teamed up in a lawsuit seeking to block AB-5 from enforcement in their industry.  The reason is obvious: employment experts agree that AB-5, as written, would require Uber, Postmates, and companies like Lyft and DoorDash to re-classify California drivers as employees, adding 20-30% to overall labor costs and hundreds of millions of dollars in expenses. Riders, restaurants, and diners, in turn, may balk at the increased fares and fees likely to result, while drivers would earn less income.  Uber and Postmates drivers Lydia Olson and Miguel Perez joined the suit, and paint a compelling picture of how the gig economy has given them opportunities for “on-demand work,” allowing them “to earn money when and where they want, with unprecedented independence and flexibility.” Olson “uses on-demand work to supplement her primary income while still ensuring that she can always care for her husband, who has multiple sclerosis.”  Perez uses it “to earn a more substantial income than he previously did as a trucker, while still making it to all of his son’s little league games.” They offer examples of others who similarly benefit: an aspiring comedian who wants to work while attending auditions, a student who wants to earn money between classes, a retiree who wants to supplement fixed income and enjoy social interaction, a military spouse who wants to make money amidst frequent relocation. In sum, thanks to the gig economy, “independent workers can work as much, or as little, as they want in order to accommodate family, social, professional, academic, and other commitments.”

Among other things, the Uber Plaintiffs allege that AB-5 violates equal protection, due process, and contract clauses in the federal and state constitutions by: (1) drawing irrational distinctions that permit a host of exceptions to AB-5 enforcement for non-app industries like doctors, lawyers, construction contractors, dog walkers, travel agents, grant writers, home cleaners, and fisherman; (2) infringing on the rights of app companies and workers to pursue on-demand work, their chosen profession, with the flexibility and autonomy it entails; and (3) invalidating existing work contracts. Like the CTA, Plaintiffs swiftly sought injunctive relief.

On February 10, 2020, U.S. District Judge Dolly M. Gee denied that relief, finding Plaintiffs failed to show a likelihood of success on the merits. On equal protection, Judge Gee concluded that AB-5 is rationally related to a legitimate state interest of protecting exploited workers and correcting employee misclassification. She rejected Plaintiffs’ claims that AB-5 draws unfair distinctions between app and non-app industries, finding they failed to show that their work arrangements are so similar to the ones exempted that their non-exemption “contradict[ed]” AB-5’s purpose, and failed to negate the State’s claim that it has good reason to exempt certain occupations whose work relationships are defined by self-direction, self-pricing, shorter/less frequent work terms, and other hallmarks of “independent” status.

Judge Gee found claims of unfair legislative animus toward the app companies equally unpersuasive. Lobbying, she explained, is constitutionally protected and legislators may enact reform step-by-step. While there is “some evidence” that AB-5 specifically targeted app and other gig companies, she held that even animus-based targeting would not alone establish an equal protection violation.  Instead, rational basis review requires impermissible animus and lack of legitimate purpose. As AB-5 addresses “legitimate concerns of deleterious misclassification of workers in many industries, not just the gig economy,” she found a rational basis for the law.

On due process, Judge Gee explained that the court-recognized individual liberty interest in pursuing a chosen profession is subject to reasonable government regulation and is violated only where a law amounts to a “complete prohibition of the right to engage in a calling.”  Due process was not violated here, she found, because AB-5 is reasonably aimed at preventing employee misclassification, and because Olson and Perez could still pursue their line of work, even after an AB-5-induced employment status change, so long as their “employers compensate them properly and allow them to have flexible work schedules.”

Based on Uber and Postmates’ public assertions that their drivers qualify as independent contractors even under AB-5’s ABC test, Judge Gee held that AB-5 does not violate constitutional contract clauses.  Taking them at their word, she found enforcement of AB-5 would not require drivers to reclassify, so no contract is impaired. Further, because labels parties place on their relationships have never been dispositive of employment status under California law, drivers could not reasonably expect to qualify as independent contractors simply because their contracts with Uber and Postmates say so.  In the same vein, Uber and Postmates could foresee their drivers’ independent contractor status being challenged in light of a series of court decisions finding Uber drivers may be employees, notwithstanding contract language to the contrary.

Judge Gee did acknowledge that Uber and Postmates showed a “measure of irreparable harm stemming from threatened municipal enforcement actions” against them, paired with a real mechanism for those actions to proceed: criminal penalties and authority to city attorneys to pursue injunctive actions against violators. But she explained (ambitiously) that even if AB-5 enforcement actions led to reclassification of drivers, the companies could create new policies to offer employee drivers the same flexibility and freedom. And, unlike the company Plaintiffs, the individual Plaintiffs had no such risk because “AB-5 does not subject individual workers to any threat of enforcement or litigation” (at least not directly).

Finally, Judge Gee held that the balance of the equities and public interest weighed against injunctive relief because Plaintiffs’ arguments—including study-supported claims that Uber’s rideshare service had reduced alcohol-related motor vehicle deaths and reduced public spending on medical transportation costs by decreasing the use per capita of ambulance services—were premised on their claims’ success on the merits, an outcome the Court already found unlikely.  She concluded: “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 Company Plaintiffs and potentially hundreds of thousands of California workers outweighs Plaintiffs’ fear of being made to abide by the law.”

Judge Gee’s ruling will be lauded as a victory for AB-5’s proponents.  It surely signals an uphill climb ahead for the app companies as their lawsuit proceeds.  But what else can we learn?  What does this case tell us about the fates of the CTA’s suit and separate AB-5 litigation?

First, one big reason the CTA was successful in obtaining injunctive relief when the app companies were not is simple: the CTA has a compelling federal statutory preemption argument, enabling Judge Benitez to grant the CTA injunctive relief without having to touch the alternative constitutional arguments. Indeed, Judge Gee expressly headed off suggestion that her ruling was at odds with her colleague’s, noting that the CTA “raised serious questions regarding whether the [FAAAA] preempted any state legislation relating to aspects of the trucking industry.”  The Uber Plaintiffs had no “similar argument,” as their claims rested solely on constitutional grounds. If other AB-5 opponents have a valid preemption argument, they should lead with it.

Second, AB-5 opponents must mind their burdens. They must prepare creative arguments and compelling facts to overcome the considerable deference courts give legislatures to create laws to address policy issues. Special attention should be paid to showing how: (1) their occupation is so similar in nature to exempted occupations that there is no rational basis for different treatment; and (2) irreparable injury, above and beyond a mere threat of enforcement actions and criminal penalties, is likely. Opponents should refrain from public comment (or judicial admission) that AB-5’s ABC test would not apply to them; such statements rendered Uber and Postmates’ claims of irreparable injury due to costly restructuring and expense purely speculative (if not disingenuous). They may also develop arguments about why they cannot offer newly-classified employees the same flexibility and freedom they enjoyed as contractors, perhaps supported by opinion from business strategists, internal personnel, and economists.

Finally, Judge Gee’s opinion reminds AB-5 opponents that no lawsuit is a sure thing.  Faced with that reality, Uber, Lyft, and other app companies want to take the matter out of the hands of judges and even legislators, filing for a November 2020 ballot measure asking voters to exempt ridesharing and delivery companies from the law. Journalists and freelance photographers have had success lobbying AB-5 chief author, Assemblywoman Lorena Gonzalez, to expand an AB-5 exemption covering them. The lesson: If you can’t win in the courtroom, try another arena.

We’ll track it all—lawsuits, ballot measures, and legislation—as it progresses, both in California and states nationwide, where similar legislation is now being discussed.  Stay tuned.

Heather L. Williams is a Partner in our Maryland office.