Instacart, The Gig Economy, and Employee Classification

After a three-year legal battle, Instacart withdrew its appeal to the California Supreme Court, a decision that would potentially resolve the issue of employment classification for gig economy workers in California. (Cutler, Bloomberg Law). The gig economy is defined as economic activity that involves the use of temporary or freelance workers to perform jobs typically in the service sector, which has seen enormous growth over the last decade. (Merriam-Webster). The City of San Diego sued the grocery delivery service (via parent company Maplebear Inc.), alleging violations of the California labor code and unfair business practices through the misclassification of its workers as independent contractors instead of employees. E.g. People v. Maplebear Inc., 81 Cal. App. 5th 923, 297 Cal. Rptr. 3d 652 (2022), review withdrawn (Oct. 12, 2022). The trial court found that San Diego had a probability of success in proving that the alleged employees were indeed employees under California law as well as that the balance of harm favored the city and issued a preliminary injunction. Maplebear Inc., 81 Cal. App. 5th 923, at 982.

San Diego argued the misclassification of employees eliminates workers’ legal protections, curbs tax revenue, shifts liability from employers to workers, and provides an unfair advantage to businesses that misclassify. (Rosenfeld, Boston College Law Rev). Instacart’s motivation for the appeal appeared to have been to avoid the classification of its workers as employees. Gig economy giants Uber and Lyft have stated in federal filings that treating drivers as employees could force them to alter their business models, stating that their labor costs would rise 20 to 30 percent. (Conger & Browning, NY Times).

In issuing the preliminary injunction, the trial court applied the ABC test, which the California Supreme Court established to determine whether a worker is an employee or an independent contractor. Dynamex Operations W. v. Superior Ct., 4 Cal. 5th 903, 416 P.3d 1 (2018). The ABC test presumes that a worker is an employee unless the employer can prove that the worker is free of the employer’s control regarding work performance; completes work beyond the extent of the employer’s normal operations; and has an independent trade, profession, or enterprise that aligns with the services rendered. Id. The California Legislature codified the ABC test with passage of Assembly Bill 5 (AB-5), which applies to gig economy workers, despite the efforts of gig economy companies to negotiate an exception. (Conger & Scheiber, NY Times).

Instacart and fellow gig economy companies such as Uber, Lyft, and DoorDash were strongly opposed to rule AB-5’s passage without exception for their workers. Id. They expressed this opposition financially through over $200 million in funding to support Proposition 22 (Prop 22). (Conger, NY Times). Prop 22 was a California referendum that created an exception to the AB-5 test for gig economy companies, such as Instacart, to classify their workers as independent contractors instead of employees. (Allsup, Bloomberg Law).

After Prop 22 passed in November 2020, the appellate court found that the preliminary injunction in Instacart’s case was unconstitutionally vague because it required that Instacart follow the law. California v. Maplebear, Inc., No. D077380, 2021 WL 612567, at 7 (Cal. Ct. App. Feb. 17, 2021). Prop 22 created an exception to the AB-5 test for gig economy workers, but the parties disputed whether Prop 22 precluded the application of the ABC test in this case. Id at 7. The appellate court reversed the injunction, reasoning that there was no way for Instacart to know whether it was or was not complying with the law and, in turn, the injunction. Id at 7.

At the original trial, Instacart threw everything but the kitchen sink at their defense in attempt to avoid classifying its workers as employees; for instance, Instacart attempted to compel San Diego to arbitration through a novel argument that the City was bound by the arbitration clause in the workers’ contracts. Maplebear Inc., 81 Cal. App. 5th 923, at 982. While all the arguments were unsuccessful, at least at the original trial, the appellate court’s reversal of the preliminary injunction citing Prop 22 likely instilled confidence in Instacart that its promotion of Prop 22 had paid off, and its shoppers would be classified as independent contractors. With the risk of their shoppers being classified as employees eliminated, Instacart lost all incentive for its remaining appeal on the enforceability of an arbitration clause, which was withdrawn shortly after the decision.

The legal battle between AB-5 and Prop 22 in the State of California could foreshadow a federal employment law showdown as the Biden administration recently proposed rules that would lower the threshold for employee classification.(Scheiber, NY Times). The proposed rule could result in the classification of gig economy workers as employees under federal law, which would provide them with federal employment protections such as the federal minimum wage. Id. The proposed rule faces criticism from labor activists who say that the rule is not a panacea and that impact of the rule will almost entirely depend on how the rule is enforced once passed,  highlighting that even the enactment of the rule is not the end of the employment classification battle. Id. If gig economy companies are willing to invest $200 million in support of a California referendum, Biden’s labor department can count on those same companies fighting tooth and nail to avoid the next proposed rule.

Those who advocate for the ABC test and expansive employee classifications argue that companies that misclassify their employees as independent contractors gain an unfair advantage while those in compliance suffer greater financial burden as a result. (Bauer, Rutgers Journal of law & Public Policy). The argument goes that companies that misclassify employees do not contribute to unemployment compensation funds, payroll taxes, or Social Security and Medicare taxes and leave companies in compliance with the bill. Id. Additionally, independent contractors are unable to collect workers' compensation or sue for employment discrimination. Id. The concerns range from the macro-economic level where gig economy companies are not paying their fair share of taxes to the individual level where independent contractors are not receiving the legal protections they deserve.

On the other hand, gig economy companies argue that their workers prefer the flexibility that independent contractor status affords them, such as the ability to work when, where, and however long they choose. (Scheiber, NY Times). For instance, Denae Bettis, a 23-year-old gig economy worker, quit her job at UPS, and the flexibility of her new job enabled her to pursue her true passion in becoming a makeup artist. (DePillis, NY Times). Again, gig economy companies continue to argue that their operation costs will go up enormously, and they may need to change their business model if they were to classify their workers as employees. (Conger, NY Times). If the Instacart legal battle is any indication of how this issue will be resolved, it appears that our society favors the bottom line of enormous corporations such as Instacart and Uber over the individual rights of their employees.