On July 25, 2024, the California Supreme Court affirmed the Court of Appeal’s decision and unanimously upheld Proposition 22.

After nearly four years of court battles, Proposition 22, aka the Protect App-Based Drivers and Services Act, has been upheld by the California Supreme Court. The voter-enacted law allows drivers for app-based transportation or delivery companies, also known as “network companies,” to be classified as independent contractors―as long as several conditions are met.

Summary of Proposition 22

In January 2020, Assembly Bill No. 5―the landmark bill in employment law that created a streamlined test for determining which workers are independent contractors―took effect. AB-5 codified the “ABC test” set forth in Dynamex Operations West, Inc. v. Super. Ct. Under that test, a worker may be treated as an independent contractor if the hiring entity can meet all three of the following conditions:

1. 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;
2. The worker performs work that is outside the usual course of the hiring entity’s business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. See our previous Alert.

After the enactment of AB-5, many app-based transportation or delivery companies reclassified their drivers as employees and provided benefits that California employees are legally entitled to receive (i.e., overtime, rest and meal breaks, sick leave, etc.). The companies then lobbied for an exception to AB-5, declaring that app-based drivers were in fact independent contractors.

On November 2020, Proposition 22 found its way onto the ballot and passed with the support of 58 percent of the voters. Proposition 22 was then codified as California Business and Professions Code §§ 7448 to 7467.

Under Section 7451 of the code, an app-based driver is an independent contractor, and not an employee or agent, if the following conditions are met. The hiring entity:

1. Does not unilaterally set specific dates, times of day or minimum number of hours that the driver must be logged into the network company’s online application or platform;
2. Does not require the app-based driver to accept any specific ride-hailing services or delivery service request as a condition of maintaining access to the network company’s online application or platform;
3. Allows drivers to perform ride-hailing or delivery services through other network companies except during engaged time; and
4. Does not restrict the worker from performing any other kind of lawful work.

The law also required hiring entities to provide app-based drivers with certain benefits and protections, including:

• “a guaranteed minimum level of compensation for app-based drivers that cannot be’ reduced (Section 7453, subd (a));
• “a quarterly health care subsidy to qualifying app-based drivers” (Section 7454, subd (a)); and
• “occupational accident insurance to cover medical expenses and lost income resulting from injuries suffered while the app-based driver is online” (Section 7455, subd. (a)).

Under Section 7451, app-based drivers would not be covered by the California workers’ compensation scheme, which generally applies only to employees and not independent contractors. They also would not be covered by most provisions of the California Labor Code and the Industrial Welfare Commission’s wage orders.

Amendments to Proposition 22 can be made and Section 7456 specifies the procedure for doing so. Specifically, the Legislature must pass a statute in each house with seven-eighths of the membership concurring. Additionally, if any portion of Proposition 22 is deemed invalid by the court, the decision does not affect the validity of the remaining portions of the proposition. The proposition does, however, leave a carveout for Section 7451: If any part of Section 7451 is held to be invalid, then Proposition 22 in its entirety is held invalid.

The Attack on Proposition 22: Castellanos v. State of California, et. al.

Roughly three months after it took effect, drivers and labor unions challenged Proposition 22, claiming that it violated the California Constitution[1] because it interferes with the Legislature’s power to pass and enforce workers’ compensation laws. The workers and their unions argued that removing them from workers’ compensation protections was unfair, that only the Legislature could do so, and that the Legislature’s hands would be tied in the future from restoring workers’ compensation protections to the drivers. They also argued that because Section 7451 was invalid, the entirety of Proposition 22 had to be invalidated.

The trial court agreed with the workers. But in 2023, the Court of Appeal reached a contrary result, holding that Proposition 22 did not conflict with the state Constitution and that both the Legislature and the voters hold power to create a workers’ compensation system. The case was then appealed to the California Supreme Court.

California Supreme Court’s Final Decision

On July 25, 2024, the California Supreme Court affirmed the Court of Appeal’s decision and unanimously upheld Proposition 22. The court held that Section 7451 does not conflict with the state Constitution since (i) the Constitution does not bar voters from passing initiatives on matters affecting workers’ compensation, (ii) the term “unlimited” from Article XIV, Section 4, is ambiguous, and (iii) the Legislature does not have sole authority to “create and enforce a workers’ compensation system.”

The court further found that Proposition 22 does not limit the Legislature’s authority to pass new workers’ compensation laws for app-based drivers in the future, as the workers had argued. Section 7451 does not, by its terms, limit the Legislature’s power to enact workers’ compensation laws. The Legislature has already made a number of exceptions to the general rule that independent contractors are not eligible to receive workers’ compensation protections. Although the workers argued that any act by the Legislature to give workers’ compensation benefits to the app-based drivers might conflict with the state Constitution, the California Supreme Court declined to address the issue without specific legislation in front of it.

What Does This Mean for Employers?

Network companies in California can finally take a breath of relief. Because Proposition 22 remained in effect throughout the litigation, the California Supreme Court’s decision does not change how delivery and ride-hailing services operate in California, except for those companies that classified the drivers as employees out of an abundance of caution and now wish to reclassify them as independent contractors. Of course, any such employers must be able to show that the conditions enumerated in Proposition 22 are met.

However, as noted above, Proposition 22 remains vulnerable. The court refused to answer questions regarding the impact of potential future legislation on the constitutionality of Proposition 22. By staying silent, the court has left a door open for the Legislature and/or the voters to pass new workers’ compensation laws affecting app-based drivers, leaving the fate of the law unknown. For now, however, businesses who utilize app-based drivers may continue to treat them as independent contractors (or may newly classify them as contractors), provided the conditions outlined in Proposition 22 are met.

For More Information

If you have any questions about this Alert, please contact Jennifer A. Kearns, Brooke B. Tabshouri, Poline Pourmorady, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.