After nearly four years of court battles, Proposition 22—also known as the Protect App-Based Drivers and Services Act—has been upheld by the California Supreme Court. The voter-enacted law allows drivers for app-based transportation and delivery companies—also known as “network companies”—to be classified as independent contractors, as long as several conditions are met.
Summary of Proposition 22
In January 2020, Assembly Bill No. 5 (AB-5)—the landmark bill that created a streamlined test for determining which workers are independent contractors—took effect. AB-5 codified the “ABC test” set forth by the California Supreme Court in Dynamex Operations West, Inc. v. Super. Ct. Under the ABC test, a worker may be treated as an independent contractor only if the hiring entity can meet three conditions.
After the enactment of AB-5 made it virtually impossible to classify workers as independent contractors, many app-based transportation or delivery companies reclassified their drivers as employees and were therefore forced to provide all the benefits to which California employees are legally entitled (i.e., overtime, rest and meal breaks, and sick leave, among others). At the same time, the app-based transportation and delivery companies also lobbied for an exception to AB-5, declaring that app-based drivers were in fact independent contractors.
In November 2020, Proposition 22 found its way onto the ballot and passed with the support of 58% of the voters. Proposition 22 was then codified as California Business and Professions Code sections 7448 to 7467, the Protect App-Based Drivers and Services Act. The Act sets forth straightforward criteria under which such workers can be classified as independent contractors.
Under the Act, specifically Section 7451, drivers using rideshare and delivery platforms are exempt from the ABC test and are independent contractors, rather than employees or agents, so long as their relationship with the company meets the following four conditions:
- It doesn’t unilaterally set specific dates, times of day, or minimum number of hours the driver must be logged into the network company’s online application or platform.
- It doesn’t require the app-based driver to accept any specific rideshare services or delivery service request as a condition of maintaining access to the network company’s online application or platform.
- It allows drivers to perform rideshare or delivery services through other network companies except during engaged time.
- It doesn’t restrict the worker from performing any other kind of lawful work.
The Act also requires contracting entities to provide app-based drivers with certain benefits and protections, including:
- “a guaranteed minimum level of compensation for app-based drivers that cannot be reduced” (§ 7453, subd (a));
- “a quarterly health care subsidy to qualifying app-based drivers” (§ 7454, subd (a)); and
- “occupational accident insurance to cover medical expenses and lost income resulting from injuries suffered while the app-based driver is online” (§ 7455, subd. (a)).
Under Section 7451, app-based drivers would not be covered by California’s workers’ compensation scheme, which generally applies only to employees and not independent contractors. They also would not be covered by most provisions of the California Labor Code and the Industrial Welfare Commission’s wage orders.
Attack on Proposition 22
Roughly three months after Proposition 22 took effect, drivers and labor unions challenged it, claiming it violated the California Constitution because it interferes with the legislature’s power to pass and enforce workers’ comp laws. The workers and their unions argued that removing them from workers’ comp protections was unfair, that only the legislature could do so, and that the legislature’s hands would be tied in the future from restoring workers’ comp protections to the drivers. They also argued that, because Section 7451 was invalid, the entirety of Proposition 22 had to be invalidated.
The trial court agreed with the workers. But, in 2023, the court of appeal reached a contrary result, holding that Proposition 22 did not conflict with the state constitution and that both the legislature and the voters hold power to create a workers’ comp system. The case was then appealed to the California Supreme Court.
California Supreme Court’s Final Decision: A Win for Companies
On July 25, 2024, the California Supreme Court affirmed the court of appeal’s decision and unanimously upheld Proposition 22. The court ruled that Section 7451 doesn’t conflict with the state constitution since (1) the constitution doesn’t bar voters from passing initiatives on matters affecting workers’ comp, (2) the term “unlimited,” from Article XIV, Section 4, is ambiguous, and (3) the legislature doesn’t have sole authority to “create and enforce a workers’ comp system.”
The court further found that Proposition 22 doesn’t limit the legislature’s authority to pass new workers’ comp laws for app-based drivers in the future, as the workers had argued. The legislature has already made a number of exceptions to the general rule that independent contractors are not eligible to receive workers’ comp protections. Although the workers argued that any act by the legislature to give workers’ comp benefits to the app-based drivers might conflict with the state constitution, the California Supreme Court declined to address the issue without specific legislation in front of it. Hector Castellanos v. State of California (California Supreme Court, 7/25/2024).
Bottom Line
Network companies in California can finally take a breath of relief. Because Proposition 22 remained in effect throughout the litigation, the California Supreme Court’s decision doesn’t change how delivery and rideshare services operate here in California, except for those companies that classified the drivers as employees out of an abundance of caution and now wish to reclassify them as independent contractors. Of course, any such employer must be able to show the conditions enumerated in Proposition 22 are met.
However, as noted above, Proposition 22 remains vulnerable. The court refused to answer questions regarding the impact of potential future legislation on the constitutionality of Proposition 22. By staying silent, the court has left a door open for the legislature and/or the voters to pass new workers’ comp laws affecting app-based drivers, leaving the fate of the law unknown. For now, however, businesses that use app-based drivers may continue to treat them as independent contractors (or may newly classify them as contractors), provided the conditions outlined in Proposition 22 are met.
Poline Pourmorady is an attorney with at Duane Morris LLP in San Diego and can be reached at ppourmorady@duanemorris.com.