Uber Loses in Court: California AB5 and Relevance to Real Estate

As longtime readers know, I have often written about the issue of misclassification of employees as independent contractors, since that is the key linchpin of contemporary real estate practice.

For example, you can start here: On California’s New Gig Economy Law: Don’t Relax Just Yet and just google the rest.

So this is a brief update based on the news that Uber and Lyft have lost a preliminary motion in California Superior Court:

A California judge has ordered Uber and Lyft to reclassify their workers from independent contractors to employees with benefits, a ruling that could be consequential for gig economy workers if it survives the appeals process.

The implication for real estate is, I think, obvious. Since I’ve written about this numerous times before, and have even talked about it recently in a podcast with Tribus, I won’t go into too much depth about the issue. But I thought it would be useful for a brief overview/refresher.

California AB5 and Real Estate

To be clear, CAR and NAR lobbied for and successfully got an exemption from AB5 for real estate agents. So the court’s ruling in the Uber/Lyft case is not directly on point.

However, that doesn’t mean real estate agents are automatically 1099 independent contractors no matter what. Because what AB5 does is apply the Dynamex rule, rather than the older Borello rule, to determining whether someone is an employee or not. I know, I know, but go read the post I linked to above if you want a more in-depth analysis.

Thus, it has long been and remains my contention that just about every agent team in California currently in existence is in violation of California labor laws, since their team members would qualify as employees under the Borello test.

Does the new Uber/Lyft ruling change anything?

Law is Policy

I think it might.

Without getting into complicated discussions about theories of jurisprudence, let’s just say that the law is rarely black-and-white. And depending on the judge, black-and-white doesn’t matter as long as the judge wants a particular policy outcome. Because judges are human beings who live in society. So I was taught in law school to argue facts when the facts are on your side, to argue the law when the facts are not on your side, and to argue policy when neither the law nor the facts are on your side.

The key grafs from the opinion, then, are these:

And it is irreconcilable with the Supreme Court’s directive in Dynamex that California employee classification standard should be interpreted and applied broadly to include all persons who can reasonably be viewed as working in the hiring entity’s business. To state the obvious, drivers are central, not tangential, to Uber and Lyft’s entire ride-hailing business.

The importance here is that Judge Schulman — and presumably many of the other judges in California — believe that the policy directive from Dynamex is to interpret employee classification standards broadly. We’ll come back to this.

Turning to the equities, the People have shown that substantial public harm will result if the Court declines to issue an injunction. The controlling legal standard creates a presumption of harm where, as here, a party is violating a statute that was enacted to protect the public. In the specific context involved here, both the Legislature and our Supreme Court have found that the misclassification of workers as “independent contractors” deprives them of the panoply of basic rights and protections to which employees are entitled under California law, including minimum wage, worker’s compensation, unemployment insurance, paid sick leave, and paid family leave. They have also found that depriving employees of those rights has ripple effects on law-abiding competing businesses, and on the public generally.

See, if I’m Redfin, or REX or Opendoor or an agent team that employs its team members as W-2 employees (there are more and more of them as time goes by), I think I would be thrilled at this language.

Second, Defendants’ position that AB5 does not apply to them lacks merit as a matter of statutory interpretation and logic. Defendants assert hat they are not “hiring entities” within the meaning of AB5 because their drivers do not provide services to them and Defendants do not pay remuneration to drivers for their services. Nonsense.

This is relevant for teams, as they could claim that they are not the hiring entity — the brokerage is, and the brokerage is 100% protected under the exemption of AB5. Seems to me that argument won’t go anywhere, at least in judge Schulman’s court.

And finally, this:

In recent years, the relevant regulatory agencies of both the federal and state governments have declared that the misclassification of workers as independent contractors is a very serious problem, depriving the federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled.

I’ve already discussed this at length in this post examining the aftermath of the COVID pandemic:

If [real estate agent teams are not] a big fat juicy target for state and local governments who are going to be looking for tax money under every rock, then I don’t know what is.

State governments in particular will be looking for tax revenues to offset spending on healthcare and unemployment — the two biggest areas during the pandemic. What are the two biggest taxes that teams didn’t pay by classifying their team members as independent contractors? Healthcare and unemployment.

So the taxman cometh. California is already talking about increasing its state income tax retroactively to cover the unexpected shortfalls from the pandemic. California is projected to have a $54 billion tax shortfall in 2020, which means $12 billion less to K-12 schools and colleges. Now, no matter what you think about taxes, about government spending, whatever, you can’t deny that if the political fight is between REALTORS and teachers, there is no scenario under which REALTORS win. Especially today.

What Would Happen

The only reason why we don’t have a judicial ruling on this is that no lawyer anywhere has brought a case against an agent team claiming misclassification. There’s not enough money in it; only the large brokerages like Realogy’s NRT have big enough pockets to tempt lawyers, and they are clearly exempt under AB5. Plus, those guys can hire expensive lawyers themselves.

Thing is, agent teams are getting bigger by the day. Some of them make a ton more money than even sizable brokerages. Many are doing sales volume figures that would place them in the RealTrends 500 list. I figure it’s just a matter of time before somebody somewhere brings a lawsuit.

Judge Schulman’s opinion suggests to me that judges at least in California are inclined to find ways to hold for the plaintiff. Even if there is an exemption under AB5, I think judges will bend over backwards to find that it doesn’t apply to teams, only to brokerages.

One way they can do that, of course, is to find that teams are still employers under the old Borello standard, because they exercise too much control, and read “control” very broadly. Teams could try the “We don’t hire agents; our broker does” angle, but I think after this ruling, that argument won’t go very far.

Then you have Redfin and other W2 real estate companies filing amicus briefs urging the court to rule that teams are employers so as to even out the playing field. And of course, you have the State of California and the United States filing amicus briefs urging the court to rule that teams are employers so as to collect a whole lot of back taxes, Medicare and Social Security taxes, and the like.

A Change Whose Time Has Come?

What I find interesting about this is whether the industry — like CAR and NAR and big brokerages everywhere — would actually fight this.

It is crystal clear to me that agent teams are the biggest mortal threat to brokerages, but the REALTOR Associations and the MLSs all need dues-paying bodies, whether they’re doing any business or not. I suppose some of the larger desk-fee based brokerages would also fight it, now that I think about it.

Team owners might fight it, until they do some math. But many won’t because they’re already going down that path anyhow.

I don’t know how that plays out, but would be interested to hear your take on it.

Anyhow, that’s it for now. We can obviously talk about this issue at length, but since it’s something we’ve been discussing here for years now, let’s leave it there.

-rsh

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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