What Does the Passage of Proposition 22 Mean for California Employers?

Rideshare

On Election Day, California voters considered Proposition 22, which was an initiative that would classify workers for app-based ride-hailing and delivery companies—such as UberLyft, and DoorDash—as independent contractors and adopt labor and wage policies specific to app-based drivers and companies.

By roughly 59% to 41%, the proposition passed, and voters decided that app-based drivers would continue to be considered independent contractors rather than employees.

Proposition 22 will offer some benefits to drivers—like guaranteed pay equal to 120% of minimum wage. However, that only applies for the time that they’re engaged by the app and not for the time they spend waiting for a task. So a ride-share driver may get a raise when they’re driving a customer, but not when they’re waiting for a call.

The proposition overrides 2019 legislation on the issue. If the “no’s” had prevailed, California Assembly Bill 5’s “ABC test” would be used to decide whether app-based drivers are employees or independent contractors.

This means that these tech companies can continue with their operations as before, which are dependent upon a vast number of independent contractors who aren’t entitled to the state-mandated benefits and workplace protections required for workers classified as employees in the state.

What Does Proposition 22 Change?

The new law is a condemnation of the recent California state labor law, Assembly Bill 5, which set out a three-part “ABC” test for whether workers should be considered contractors or employees.

AB 5 was effective January 1, 2020 and provides that to determine if a worker is an employee or independent contractor in California, employers are required to classify workers as employees unless they meet all three conditions of the ABC test:

  • The person 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.
  • The person performs work that’s outside the usual course of the hiring entity’s business; and
  • The person’s customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

State legislators in favor of AB 5 thought the law would require gig economy companies like Uber and Lyft to classify drivers as employees. That, in turn, would require them to pay for fringe benefits and unemployment insurance.

Both Uber and Lyft made changes prior to the law’s effective date to provide their drivers with more flexibility, which they said would make them compliant with the law. However, California’s Attorney General sued the companies, alleging they didn’t do enough to pass the new labor test. A trial court granted a preliminary injunction that would’ve required companies to adhere to the employee classification, but it wasn’t to take effect until after the election. However, that litigation is unlikely to matter now that Prop 22 has passed, allowing these companies to continue operating as they have in the past.

In California’s First District Court of Appeal, writing for a unanimous panel, Associate Justice Jon Streeter opined that ride-hailing companies “should have come away with an expectation” that they would have to redesign their business model after the California Supreme Court issued the employee-friendly “ABC Test” in its 2018 Dynamex Operations v. Superior Court decision.

But Prop 22’s new base hourly compensation is roughly $16.80, which is higher than the minimum pay under fair labor standards, provisions, and regulations. That pay hike made the companies’ view more tolerable.

However, those who opposed Prop 22 say that Uber and Lyft drivers spend a considerable amount of time waiting in their cars for a rider request for a pickup or driving to a nearby stop without pay.

The state’s legislators can change the new law; however, it would require the approval of a nearly 90% supermajority in both houses—a virtually unachievable level of support for controversial issues.

What About Other California Employers?

The passing of Prop 22 muddies the landscape of industries that are subject to the state’s worker-classification law, AB 5. Although AB 5 exempts specific jobs, app-based drivers now will have their own exception. Nonetheless, the law still applies to numerous other professions that are not exempt.

Note that Proposition 22 doesn’t apply retroactively, but California courts will probably be asked to decide if these types of tech companies were liable for employee-classification violations.

One signal as to the answer may come from the California Supreme Court, which will soon consider how far back its ruling in Dynamex should extend.

Takeaway

Proposition 22 exempts app-based transportation and delivery companies from classifying their workers as employees, and instead allows them to continue to consider them independent contractors.

Employers should review their positions in light of AB 5, the modifications of AB 2257 which recently became effective, and Prop 22 to see if any changes are needed to ensure workers are classified correctly as employees or independent contractors.

For help in reviewing vendor agreements, employee classifications and in applying the “ABC”, contact Danielle G. Eanet or (310) 997-4185. We can help your business with a thorough audit to determine whether any contracts are subject to reclassification in light of the new laws in California.

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