California voters passed Proposition 22, which will allow gig-economy companies such as Uber and Lyft to classify app-based drivers as independent contractors, despite a strict new law that a court said made such drivers employees.
Employees are entitled to minimum wage, overtime pay and other benefits that are not generally provided to independent contractors. In California, employees are also entitled to business-expense reimbursement. So the companies would have to significantly change their business models if they were required to reclassify drivers as employees.
"This is a huge win for digital platforms," said Katherine Catlos, an attorney with Kaufman Dolowich & Voluck in San Francisco. "The passage of Proposition 22 reflects the balance between innovation and protections for gig workers who are not full-fledged employees under California law."
Opponents of Proposition 22, however, said that the measure will allow companies to deny drivers California employment benefits, such as paid sick leave, workers' compensation and unemployment compensation.
Jesse Jauregui, an attorney with Alston & Bird in Los Angeles, said legal pushback may continue. "But Proposition 22 sets the tone for other states to follow in recognizing gig workers as a central part of today's economy and the future of work."
Business Model Challenged
Uber and Lyft representatives have stressed that most drivers want the flexibility that their independent-contractor business models provide. "As an employer, however, Uber would be forced to actively manage drivers' schedules, hiring a specific number of employees based on a baseline volume of consistent business," said Uber Chief Executive Officer Dara Khosrowshahi. "Uber would hire fewer drivers to each do more trips and require them to work a certain number of hours."
California officials have said that drivers are denied important benefits. "Drivers incur substantial expenses when they work," said San Francisco Deputy City Attorney Matthew Goldberg during a court challenge to Uber's and Lyft's business models. Drivers pay for gas, vehicle repairs and maintenance, and other expenses.
"Just looking at that, it impacts every single driver on every single shift," Goldberg said. He argued that money is "being stolen from drivers by virtue of the misclassification."
A trial court judge in San Francisco issued a preliminary injunction on Aug. 10 blocking Uber and Lyft from continuing to classify drivers as independent contractors under the state's employment laws, and on Oct. 22, a state appeals court upheld the injunction.
California voters, however, had a chance to weigh in on the issue before the injunction took effect, and they decided that drivers should remain independent.
Proposition 22
Uber, Lyft, and several grocery and food delivery services secured enough signatures to get the gig-worker classification issue on the ballot. Specifically, California voters got to decide whether drivers for app-based delivery and ride-hailing services should continue to be classified as independent contractors. App-based drivers were defined on the ballot as workers who do one of two things:
- Provide delivery services on an on-demand basis through a business's online-enabled application or platform.
- Use a personal vehicle to provide prearranged transportation services for compensation through a business's online-enabled application or platform.
The ballot measure called for app-based drivers to receive certain benefits, including:
- Minimum net earnings of 120 percent of the state's or locality's minimum wage and 30 cents per mile.
- Health care subsidies.
- Occupational accident insurance.
- Accidental death insurance.
Under the measure, companies will have to develop anti-discrimination and sexual harassment policies, and drivers will be limited to working 12 hours during a 24-hour period.
The 'ABC Test'
Effective Jan. 1, AB 5 codified a 2018 California Supreme Court decision that created a three-pronged test, called the "ABC test," to determine whether a worker should be classified as an employee or independent contractor.
The test used prior to the ABC test was a multifactor analysis that primarily focused on who exerted control over the work. But under the ABC test, all three of the following factors must be met for a worker to be properly classified as an independent contractor:
- 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.
- The worker performs tasks that are outside the usual course of the hiring entity's business.
- The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.
AB 5 applies to all provisions of the California Labor Code and Unemployment Insurance Code unless another definition of "employee" is provided. The statute "is intended to ensure that all workers who meet its criteria receive the basic rights and protections guaranteed to employees under California law," said California Superior Court Judge Ethan Schulman.
Under Proposition 22, app-based drivers will now be exempt from AB 5. Employers should note that there are other exceptions to AB 5 for various categories of workers. "HR professionals should consult with their in-house and outside counsel to determine if any of those exceptions apply to any of their employees or service providers," Jauregui said.