California’s Proposition 22: It Passed, Now What?

Paul Mello and William D. Taylor^*

California, for better or worse, has long been on the leading edge of labor and employment law developments that have broadly impacted business in general and the transportation industry in particular.  Often California’s courts are quick to issue challenging decisions impacting the industry.  In many cases California’s legislature does not want to be left behind and often enacts statutes that reaffirm (or even expand) and protect significant judicial decisions.  The California Supreme Court’s 2018 decision in Dynamex Operations West v. Superior Court is one such decision.  That decision led to the legislature’s passage of AB 5 and, ultimately, Proposition 22: The Protect App-Based Drivers and Services Act.  In this note, we discuss the history that led to the passage of California’s Proposition 22, the contours of the Act, and what its passage may mean for California and beyond.

Dynamex, the ABC Test, and AB 5

In Dynamex, 4 Cal. 5th 903 (2018), the  California Supreme Court adopted a new test, the so-called “ABC test”, for evaluating independent contractor status in California. In so doing, the Supreme Court departed from nearly 30 years of California precedent and the multi-factor test set forth by the Court in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341 (the “Borello test”).

Prior to Dynamex, California courts relied on the Borello test to determine whether an individual was or is an employee for the purposes of California’s Wage Orders, which cover overtime, meal periods, rest breaks, and other items. In Dynamex, the Court concluded that Borello was not the proper test and found that the ABC criteria should be used instead in order to determine whether a worker is properly classified as an employee or an independent contractor under applicable California’s Wage Orders.  California’s Legislature enacted and Governor Newsom signed into law AB 5 in the fall of 2019.  AB 5 (California Labor Code section 2750.3), which became effective January 1, 2020, codified the Dynamex decision and extended coverage beyond its narrow confines.

Pursuant to California’s ABC test, a worker is presumed to be an employee, unless the company proves that he or she: (1) is free from the control and direction of the company in performing work, both practically and in the contractual agreement between the parties; (2) performs work that is outside the usual course of the company’s business; and, (3) is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company.

As set forth above, AB 5 expanded the application of the ABC test beyond California’s Wage Orders.  The new law provides that the ABC test must be used to evaluate whether a worker providing services in California is an employee for purposes of the California Wage Orders and California’s Labor Code provisions, Workers Compensation Law, and the Unemployment Insurance Code.

Before and after its passage, AB 5, has been the focal point of numerous subsequent decisions construing and articles dissecting the statute.  AB 5  contains numerous “exemptions”[1] which were the product of intense industry-based lobbying efforts by various constituencies.  Many industries, particularly motor carriers, were unable to carve out a specific exemption that would help sustain the long-standing relationships between independent drivers and motor carriers.  Instead, AB 5 led to significant litigation, one of which resulted in a successful effort by the California Trucking Association to enjoin enforcement of AB 5 as to its motor carrier members in California Trucking Ass’ v. Becerra, No. 20-55106, No. 20-55107, which is now pending appeal before the 9th Circuit (which left the injunction in place).  After several unsuccessful attempts to avoid the adverse consequences of AB 5, “gig”  companies like Uber, Lyft, DoorDash and Instacart decided to take matters into their own hands by fashioning a legislative fix which would exempt them from AB 5 through California’s procedures to legislate by a public vote of the people.

Proposition 22: The App-Based Drivers as Contractors and Labor Policies Initiative

The short but tortured history of AB 5 set the stage for Proposition 22.  By way of background, laws in California are created in the old-fashion way through the legislative process when the members of its state Assembly and Senate meet to propose and pass new legal requirements, many of which impact businesses (generally, from an adverse perspective) whether operating within, to or from the state.

In addition to  “traditional” legislative law making, new laws can also be created at the ballot box through California’s Proposition process. This methodology provides the opportunity for various business, political, social or other constituencies to propose and make law by the vote of California’s citizens, rather than through typical legislation. Each election cycle produces interesting, highly charged and well-financed initiatives, successful passage of which creates new laws impacting those persons and businesses targeted by the purposes for and the language of any successful Proposition.

The 2020 California election ballot included 15 separate voter Propositions, several of which passed and others failed.  From a business perspective, Proposition 22  emerged as the most controversial and, ultimately, the biggest winner in 2020.  Generically, and with certain self-imposed conditions, Proposition 22 is aimed at permitting app-based gig economy companies to classify workers as independent contractors, rather than employees.  The proponents of Prop 22 consisted primarily of Uber, Lyft, Door Dash, Instacart and other “gig” companies who came together to spend over $200 million dollars in a successful effort to be exempted from application of the ABC test and AB 5.

Proposition 22 passed in California, garnering nearly sixty percent of the vote.  The initiative allows person at Transportation Network Companies (TNCs)[2] and Delivery Network Companies (DNCs)[3] to maintain their status as independent contractors, but provides those workers with certain benefits that are akin to benefits provided to traditional employees.

Under this new law, which becomes effective on or about December 16, 2020, an app-based driver[4] is an independent contractor and not an employee if the following conditions are met:

• the networking company does not unilaterally prescribe specific dates, times of day, or a minimum number of hours during which the app-based driver must be logged into the platform

 

• the networking company does not require the app-based driver to accept any specific rideshare service or delivery service request as a condition of maintaining access to the platform

 

• the network company does not restrict the app-based driver from working in any other lawful occupation or business

 

The new law also requires that there must be a written agreement between the TNC or DNC and the app-based driver with an “appeals process” for drivers whose contracts are terminated.  It also requires certain pay and benefits to workers.  As for earnings, app-based drivers have a guaranteed “net earnings floor” comprised of 120 percent of the applicable minimum wage of “engaged time”[5] and TNCs and DNCs cannot take any tips/gratuities given to the driver.  Moreover, calculation of the “net earnings floor” does not include/account tips/gratuities.  The law also requires mileage reimbursement at thirty cents ($0.30) per engaged mile for 2021 and this rate must be adjusted for inflation on an annual basis.  Amongst other things, the new law also provides for a quarterly healthcare subsidy, certain insurance, provision of safety training, development of anti-harassment policies and training, and requires background checks of drivers.

The passage of Proposition 22 means that TNC and DNC app-based drivers will continue to be deemed to be “independent contractors” and its impact had been immediate.  In a court hearing held the day after the election, a Superior Court Judge in San Francisco referred to Proposition 22 as a “game changer” in the state’s lawsuit accusing DoorDash of misclassifying its workers.  In that case, the assigned judge has requested additional briefing from the parties relative to the impact of Proposition 22, indicating that the government is going to have to create new arguments to avoid the application of the new law.

Even if the courts find that Proposition 22 moots the state’s claims, it is still unclear whether the courts will find that it should be applied retroactively.  However, both Uber and Lyft wasted little time in testing whether Prop 22 should be given retroactive effect. On November 6, 2020, and relying on Prop 22, both of these the ride-hailing companies filed petitions with California’s First District Court of Appeals asking that it reconsider its prior decision upholding state trial court injunctions requiring that each of them reclassify their drivers as employees. Uber and Lyft both argue that Prop 22 undermines and renders moot the legal rationale for reclassifying respective driver as employees. The Appeals court has yet to rule on these petitions.

At this point, other than application to TNCs and DNCs, it is unclear what impacts Proposition 22 will have on other industries.  It still does nothing to address freight motor carriers who are still in the crosshairs of AB 5, leading to such questions as:.  Will California’s legislature take a closer look at the law and its significant impacts on other industries in light of Proposition 22?  Will Proposition 22 type efforts occur in other jurisdictions?  Was Proposition 22 only successful because Californians rely so heavily on ridesharing and app-based food delivery services?  Will the motor carrier or others in the transportation industry join together to support and promote an equivalent of Proposition 22, committing to a budget that will necessarily equal, if not exceed, what the gig companies spent to achieve the desired outcome to be exempted from AB 5?  Will the 9th Circuit uphold the favorable decision in the CTA case?

One thing is clear: Uber and Lyft took California for an expensive , and, thus far,  successful ride.

William D. Taylor

Partner

Hanson Bridgett

500 Capitol Mall

Suite 1500

Sacramento, California 95814

wtaylor@hansonbridgett.com

916-5496876

 

 

Paul B. Mello

Partner

Hanson Bridgett

1676 No. California Blvd,

Suite 620

Walnut Creek, CA 94596

pmello@hansonbridgett.com

925-7468460

 

* Hanson Bridgett LLP, San Francisco, Walnut Creek and Sacramento offices.  This article does not constitute legal advice. Readers should consult with legal counsel before acting on the information presented.

[1] The exceptions that are contained in AB 5 are not absolute exemptions in the traditional sense.  If an “employer” establishes that a person falls within an enumerated exemption, the targeted person is not necessarily or automatically deemed to an independent contractor for all purposes.  Rather, if an individual meets a particular exemption’s requirements, the individual’s status is evaluated under the alternative Borello multi-factor test to determine whether the worker should be classified as an employee.  There are seven categories of exemptions under AB 5: (1) certain listed occupations, (2) certain contracts for specific professional services, (3) certain real estate professionals, (4) bona fide business-to-business contracting relationships (Labor Code section 2750.3(e)(1) [emphasis added], (5) certain relationships in the construction industry, (6) certain relationships involving referral or staffing agencies, and (7) certain relationships with respect to motor club services.  The business-to-business exemption appears to be most relevant to the transportation industry, in general, and, specifically, third-party providers.

[2] A TNC has the same meaning as defined in California Public Utilities Code section 5431, i.e., a company operating in California that provides prearranged transportation services for compensation using an online-enabled application or platform to connect passengers with drivers using a personal vehicle.

[3] A DNC means a company that (1) maintains an online-enabled application or platform used to facilitate delivery services on an on-demand basis and (2) maintains a record of the amount of engaged time and engaged miles accumulated by its couriers.

[4] “App-based driver” means an individual (1) who is a DNC courier and TNC driver; and (2) that meets the requirements above.

[5] “Engaged time” starts when an app-based driver accepts a rideshare or delivery request to when the app-based driver completes that rideshare or delivery request; it does not include time spent on rideshare/delivery services after the request has been cancelled or any time spent on a rideshare or service where the driver abandons performance prior to completion.