California’s Proposition 22: Impacts in the Golden State and Beyond

Of the over 100 different ballot initiatives under consideration across the United States in the recent election, California’s Proposition 22 stands alone.  The measure was perhaps the most significant initiative voters considered, and likely will have a far-ranging impact on businesses and society as a whole. 

Background:  California adopts the ABC test (with exceptions)

As most in the employment and labor law community know, in 2018 the California Supreme Court issued its ruling in Dynamex Operations West v. Superior Court.  In Dynamex, the court abandoned the previous test for determining independent contractor status, known as the “Borello” test.  That test had focused on the right of the putative employer to control the activities of the worker.  Instead, the court borrowed from the law of the state of Massachusetts and imposed the ABC test on California businesses.  The court’s decision was limited to California’s wage orders—unaddressed was the question of application of the new test to other considerations, such as unemployment insurance, workers’ compensation, and other provisions of the Labor Code.  The decision also was potentially retroactive, a question that is being litigated to this day.  In fact, on Election Day itself, November 3, the California Supreme Court heard oral arguments on the question of the retroactivity of Dynamex. Accordingly, Dynamex left many questions unanswered and many in the California business community deeply concerned about the impact of the decision on their operations.

The decision was met with concern across a broad spectrum of California businesses, which for years had relied on the Borello test to structure their operations.  Dynamex was of particular concern to technology platform businesses that link contractors with consumers, such as ride-sharing applications or grocery delivery platforms.  In the summer of 2018, coalitions of these businesses attempted to negotiate with the California legislature and the governor a potential solution to the challenges that the court’s decision presented.  These efforts were unsuccessful.

AB 5 was touted as a legislative “fix” to Dynamex.  The law adopts the ABC test for determining whether a worker was an independent contractor or an employee for purposes not only of the wage orders, but also for unemployment insurance, workers’ compensation, and other provisions of the California Labor Code. 

Under this ABC test, workers are presumed to be employees unless all three of the following conditions are met:

  1. The individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact; and
  1. The service is performed outside the usual course of the business of the employer; and
  1. The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

AB 5 then went on to list a number of “exceptions” where the former test, known as the Borello test, would be used to determine employee/independent contractor status. However, completely left out of the discussion were the so-called “gig economy” businesses.  They did not receive any special exception from the ABC test. 

Both government and private parties have since filed numerous lawsuits alleging that gig economy workers were misclassified as independent contractors.  Several other lawsuits have been filed challenging the constitutionality of AB 5 itself.  Those legal battles are ongoing.

Proposition 22

This history set the stage for Proposition 22.  Petitions were circulated, and the measure qualified for the general election in November. 

The initiative allows workers at Transportation Network Companies (TNCs) and Delivery Network Companies (DNCs) to retain their status as independent contractors, but provides them certain “benefits” that are similar in many respect to the fringe benefits provided to traditional employees. 

The proposition declares that app-based drivers are independent contractors and not employees of their network company if the network company does not unilaterally prescribe their schedule or a minimum number of hours; does not require drivers to accept any specific ride or delivery request to maintain access to the network; and allows drivers to work for other network-based companies or hold other jobs.  In addition, Proposition 22 guarantees that drivers be paid no less than 120% of minimum wage for the time that they are engaged, as well as payment per mile.  Network companies are also required to provide health care subsidies and insurance coverage to drivers, develop anti-harassment policies, provide drivers with mandatory safety training, and conduct criminal background checks on network drivers. 

By a relatively comfortable margin, voters approved Proposition 22 on November 3.

What does this mean for DNCs and TNCs in California?

This is, of course, good news for these businesses.  Voters sent the message that they appreciate and depend on the flexibility and value that these business models provide to them as consumers.  The DNCs and TNCs now seem to have a clearer path forward with their business models, though Proposition 22 does not necessarily eliminate or make irrelevant all of the pending legal challenges working their way through the courts.  But, perhaps this will be the impetus for a meaningful policy discussion in the halls of the state capital with regard to the gig economy and the transformation of work.

What does this mean for the rest of California?  

Proposition 22 does nothing to address the serious issues and challenges that more “traditional” businesses face in the wake of AB 5.  Those businesses are still stuck with attempting to make sense of the complex law, which is, to put it mildly, dense.  AB 5 uses about 130 words to describe the ABC test itself, but over 4,000 words to describe the “exceptions” to the test.  For the majority of California businesses, Proposition 22 does not change the reality of grappling with compliance with AB 5.

Current California law falls short of addressing the fundamental problems of the ABC test itself.  For example, what is the “usual course of business” of a business?  The “B” prong is subject to endless debate.  And what about the failure of the legislature to provide for any integration between AB 5 and the California Corporations Code?  The Corporations Code recognizes many different business structures, but under AB 5, a “business owner” can completely disregard those structures and claim that they should have been classified as an employee.  These legal questions apparently will be with us for years to come.

Perhaps the adoption of Proposition 22 will spur the legislature to take a more serious look at AB 5 and the ABC test itself.  We have not yet seen a meaningful policy discussion about the many benefits workers find in the independent contractor model:  “I get to be my own boss and work only when I want to.” 

What does this mean for the rest of the country?

Perhaps the passage of Proposition 22 will tamp down efforts in other states (notably New York and New Jersey) to adopt an ABC test of their own.  Certainly the struggles in the Golden State over these issues have received national attention—others may be able to learn from these mistakes.  At the federal level, the proposed PRO Act adopts the ABC test for purposes of some federal labor laws.  Again, perhaps Proposition 22 will cause a more serious policy debate in other states, and in Washington DC, about the important interests and values that are supported and enhanced by the independent contractor model.  This also could be a part of a broader discussion about the transformation of the American and global workplaces—workers today value choice, flexibility, and economic opportunity.  This might be the catalyst for finding a more positive balance among competing interests.

Proposition 22 becomes effective on the fifth day after the California secretary of state certifies the election results.

One other point: the use of the initiative process to adopt employment law policy is relatively new.  California has seen something like this before. In 2018, voters adopted Proposition 11, which gave private ambulance companies more flexibility regarding the scheduling of rest breaks for ambulance drivers.  Florida joined the club this year, with an initiative to increase the minimum wage.  It seems likely that we will see more such efforts in the years to come.

As we mentioned in our summer 2020 update on California independent contractor law, we at the Workplace Policy Institute submit that we must look for a better way to address these issues.  We should continue to search for ways to allow our modern and dynamic economy to thrive.  We should be creative and innovative in our approach to the challenges of the employment-independent contractor debate.  And we should remember that, above all, this is about people—workers and business owners who contribute much to the fabric of our society.  We must continue to strive for better ways to establish policy that meets the challenges of our modern workplace.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.