Article: January 2021: California Voters Approve Proposition 22, Approving “Independent Contractor” Status for “App-Based” Drivers

On November 3, 2020, California voters approved Proposition 22, a ballot initiative defining app-based transportation and delivery drivers as independent contractors and adopting specific labor and wage policies for these industries. The adoption of Proposition 22 presents a remarkable example of a voter initiative overruling both the California legislature and the California Supreme Court. Proposition 22 is not just a big deal in California. It is already seen as a potential blueprint for changing labor and employment laws across the country. So what is Proposition 22 and how did it come about?

What Triggered Proposition 22?

The genesis of Proposition 22 is a case called Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), reh'g denied (June 20, 2018). Dynamex is an on-demand, same-day courier and delivery service. In 2004, Dynamex converted all of its drivers from “employees” to “independent contractors,” in an effort to avoid withholding and paying employment tax, as well as complying with certain state and federal labor and employment laws including minimum wage, overtime, expenses reimbursed, paid sick days, paid family leave, unemployment insurance, and an employer healthcare option. In response to this reclassification, one of Dynamex’s drivers filed a class action lawsuit claiming that Dynamex’s alleged misclassification of its drivers as “independent contractors” violated California law and state wage orders. The trial court ultimately certified the class action, relying on the California Supreme Court’s threepart definition of “employ” under Martinez v. Combs, 49 Cal. 4th 35, 64 (2010) (“Martinez”).

Dynamex filed a writ petition in the California Court of Appeal challenging the trial court’s decision, arguing that the definitions of “employ” under Martinez were inapplicable outside of the joint employer context and that the proper standard for determining whether a worker is an employee or independent contractor under California law is the standard set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989) (“Borello”). Under the Borello standard, Dynamex argued that its drivers were properly classified as independent contractors. The Court of Appeal rejected this argument, and Dynamex petitioned for review to the California Supreme Court.

The California Supreme Court also found against Dynamex, but clarified that the appropriate test for determining whether drivers were employees or independent contractors was the “ABC test.” Dynamex, 4 Cal. 5th 903 at 956–57. Under the ABC test, a driver would be an independent contractor only if the hiring company could show:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Id. at 957. The California Supreme Court has recently reaffirmed the important California public policy animating the ABC test, ruling that the test applies retroactively to all cases not yet final as of the effective date of Dynamex. Vazquez v. Jan-Pro Franchising Intern., Inc., --- P.3d ---, 2021 WL 127201, at *2-3 (Cal. Jan. 14, 2021). The Supreme Court noted that retroactive application was justified to protect important worker benefits, while depriving businesses of the unwarranted advantages of worker misclassification. Id. at *6.

The practical implication of Dynamex was that appbased drivers could not be classified as “independent contractors,” requiring the companies employing them to comply with state and federal labor and employment laws. Supporters of the Dynamex decision moved quickly to codify the decision through legislation. On September 18, 2019, California Assembly Bill 5 (“AB 5”) was signed into law. AB 5 added Section 2750.3 to the Labor Code, adopting and expanding the ABC Test not only for purposes of wage orders, but also for purposes of the Labor Code and Unemployment Insurance Codes, subject to certain defined exemptions that did not include transportation and delivery companies. Not surprisingly, many rideshare and delivery companies were not pleased with this new law and started a campaign to overrule both Dynamex and AB 5 through a ballot initiative.

The Proposition 22 Campaign
Even before the passage of AB 5, app-based transportation and delivery companies prepared to appeal directly to voters in California if they could not convince the California state legislature to exempt them from the proposed law. As Bloomberg reports, on August 30, 2019—almost three weeks before the passage of AB 5— Uber, Lyft, and DoorDash each pledged $30 million to fund a ballot initiative that would maintain the status of their drivers as independent contractors. After AB 5 became law without any exemptions for app-based transportation and delivery companies, the companies unveiled the “Protect App-Based Drivers and Services Act.” The act was later designated Proposition 22, which is a ballot initiative that sought to override AB 5 with respect to the companies’ drivers by defining them as independent contractors.

Proposition 22 defines an “app-based driver” as an independent contractor and not an employee or agent of a delivery or transportation company that maintains an online-enabled application or platform to deliver its services. In order to be considered an “app-based driver” the driver must work for a company that does not (1) “unilaterally prescribe specific dates, times of day, or a minimum number of hours” during which the driver must be logged into the company’s app or platform, (2) require the driver to accept any specific rideshare or delivery service request as a condition of maintaining access to the company’s app or platform, (3) prohibit drivers from performing rideshare or delivery services for other companies on their own time, and (4) prohibit drivers from working in any other lawful occupation or business.

In addition to classifying app-based drivers as independent contractors, Proposition 22 also provides labor and wage policies specific to the app-based transportation and delivery companies and their drivers. Such policies include prohibiting companies from taking, receiving, or retaining any tips given to drivers. They require that the companies make payments to the drivers for the difference between a driver’s net earnings, excluding tips, and a “net earnings floor” that takes into account a minimum wage and mileage consumption. They limit drivers from working more than 12 hours during a typical 24-hour period. They require companies to provide certain healthcare subsidies for drivers who average between 15 and 25 hours and additional subsidies for drivers who average at least 25 hours per week. Companies must also carry occupational accident insurance with certain required criteria and accidental death insurance for certain situations.

Proposition 22 further requires companies to develop anti-discrimination and sexual harassment policies, provide safety training for drivers, conduct criminal background checks of all drivers, and mandate the suspension of a drivers reasonably suspected of providing rideshare or delivery services while under the influence of drugs or alcohol.

According to the California Secretary of State Voter Guide website, supporters of Proposition 22 argued by a 4:1 margin that drivers preferred to work as independent contractors. The site further explains how app-based transportation and delivery companies argued that prohibiting drivers from being independent contractors would eliminate hundreds of thousands of jobs because the companies could not afford to hire that many drivers as employees, with the end result being longer wait times, higher prices, and a permanent shutdown of services in many areas. The companies also touted that Proposition 22 provided drivers with the aforementioned benefits. Opponents of Proposition 22 countered that Proposition 22 would legally deny drivers’ basic workers’ rights and protections such as paid sick leave, workers’ compensation, or unemployment benefits.

The campaign surrounding Proposition 22 was one of the most expensive in California history. According to California’s Secretary of State website, from January 1, 2020 through October 17, 2020, the main political action committee supporting Proposition 22 received over $190 million, and spent $184 million, in contributions. Almost all of those contributions came from five industry companies—Uber, Lyft, DoorDash, Instacart, and Postmates.

In the run up to Election Day, supporters of Proposition 22 also used their respective apps as a tool to communicate with riders and drivers urging them to vote for the ballot measure. This direct advocacy did not go unchallenged by opponents. Less than two weeks before the election, a group of Uber drivers opposed to Proposition 22 filed suit in San Francisco Superior Court accusing the company of pressuring drivers to support Proposition 22. The suit alleged that drivers were prompted with a message reading “Prop 22 is progress,” and forced drivers to click through the prompt, answering either “Yes On Prop 22” or “OK” to proceed. The lawsuit was quickly dismissed by the court as “moot” and lacking evidence of any improper “political coercion.”

Ultimately, California voters approved Proposition 22 by a margin of 58.6% to 41.4%, as reported on California’s Secretary of State Statewide Election Results website. The battle over Proposition 22, however, may be just beginning. On January 22, 2021, a group of app-based drivers, joined by the Service Employees International Union, filed an Emergency Petition for Writ of Mandate directly with the California Supreme Court. See Castellanos, et al. v. State of California, Case No. S266551. The Petition argues that Proposition 22 improperly usurps the Legislature’s “plenary” power to establish a complete system of workers’ compensation under Article XIV of the State Constitution, and also invades the authority of the judiciary by pre-classifying any legislative effort to authorize organizations to bargain collectively on behalf of app-based drives as an “amendment,” which can only be enacted through a seven-eighths supermajority vote. The Petition further argues that Proposition 22 improperly violated California’s “single subject” rule for ballot initiatives. The California Supreme Court will have to decide whether to exercise original jurisdiction over these issues, or require the case to be refiled in the lower courts, potentially setting up years of further litigation.

Will Proposition 22 Become a Blueprint?
While legal challenges persist, Proposition 22 appears for the time being to have been a big win for gig-economy companies. In the wake of this victory, Bloomberg reports that proponents are now eying similar measures elsewhere. For example, Uber CEO Dara Khosrowshahi said on a November 5, 2020 earnings call that the company will “more loudly advocate for new laws like Prop 22.” Similarly, DoorDash CEO Tony Xu said in a recent statement that the company is “looking ahead and across the country, ready to champion new benefits structures that are portable, proportional, and flexible.”

As gig-economy companies push to use Proposition 22 as a blueprint for other jurisdictions, many labor unions and worker advocacy groups are gearing up for fights in states such as New York, New Jersey, and Massachusetts, while others are suggesting that a compromise brokered deal is the better approach. Whether the parties can reach a compromise solution or will battle the “independent contractor” status on a state-by-state basis will have long-lasting implications for the gig-economy and other industries in which workers have traditionally been classified as “independent contractors.”

It also remains to be seen what impact Proposition 22 might have on employment law generally. While Proposition 22 itself is limited to “app-based” drivers, it may portend a more general trend towards expanding independent contractor status, which could have ramifications on employee rights and protections in a wide range of industries and across jurisdictions throughout the country.

Finally, the Proposition 22 campaign may well be a precursor for how technology can influence future laws both inside and outside the United States. Proposition 22 successfully overturned the will of both the California Supreme Court and the California legislature based in part on direct advocacy to voters through the very same app-based, technology platforms that were used to justify the new employment categorization in the first place. Going forward, it stands to reason that a similar ability to influence ballot initiatives, elections, and rulemaking, will only increase as Artificial intelligence (AI), the Internet of Things (IoT), 5G, and quantum computing, among other technologies, collectively reshape the world economy and the ways information is shared. Potential voters can be reached in ways never before imagined. Time will tell the extent to which these resources will help shape future campaigns and influence future disputes.