You Can Contract If You Want To: California Appellate Court Leaves Prop 22 Largely Intact

Alerts / March 20, 2023
Key Takeaways
  • On March 13, 2023, a divided panel of the California Court of Appeal largely rejected several constitutionality challenges to Prop 22, a ballot initiative passed in November 2020 that permits app-based transportation and delivery drivers to classify workers as independent contractors. 
  • The majority declined to declare Prop 22 unconstitutional on grounds that it removes app-based drivers from California’s workers’ compensation system and substitutes a private accident insurance mandate. Instead, the majority recognized that voters have the power to exclude app-based drivers from receiving workers’ compensation benefits.
  • The court did find that certain sections of Prop 22 violate the separation of powers doctrine because they infringe on the judiciary’s authority to determine what constitutes an amendment to the law and limit the legislature’s authority to pass future legislation that would enable independent contractors to collectively bargain. But rather than strike down the law in its entirety, the majority voted to sever the offending provisions and leave the rest intact.  
  • This decision preserves the independent contractor model for app-based transportation and delivery companies – at least for the time being. It is expected that a request for review of the decision will be made to the California Supreme Court.

On March 13, a California Court of Appeal reversed most of a lower court ruling invalidating Proposition 22, the state’s 2020 voter-approved gig economy law allowing giant app-based ride-hailing and delivery companies, like Uber and Lyft, to classify their workers as independent contractors rather than employees. As a result, app-based delivery and ride-share companies can continue to treat their drivers as independent contractors in California.

Prop 22

In 2019, the California Legislature passed Assembly Bill No. 5 (AB 5), which codified a landmark California Supreme Court decision from 2018, Dynamex Operations West, Inc. v. Superior Court (Dynamex).

In Dynamex, the California Supreme Court instituted a legal presumption that workers are employees unless the presumed employer can affirmatively satisfy three prongs of a strict “ABC Test” for determining whether a worker is an independent contractor or an employee for purposes of the California Industrial Welfare Commission’s Wage Orders, which set standards for minimum wage, overtime, meal and rest breaks, and other wage-related subjects. With the passage of AB 5, the ABC Test was expanded to all portions of the California Labor Code and Unemployment Insurance Code, but certain qualifying occupations and industries were exempted from the test. More and more exemptions were written into law with the subsequent passage of AB 170 and AB 2257, but none of these exemptions carved out app-based transportation and delivery companies like Uber, Lyft and DoorDash.

The three companies, along with others, funded a ballot initiative known as Proposition 22 (or Prop 22) to exempt certain drivers and delivery workers for app-based companies from the three-part worker classification test promulgated by AB 5. Prop 22 allows app-based transportation or delivery network companies to classify drivers or couriers as independent contractors as long as they are provided with certain minimum wages and benefits, including healthcare subsidies.

In November 2020, Prop 22 passed with almost 60 percent of the vote. It added sections 7448 to 7467 to the California Business and Professions Code.

A lower court finds Prop 22 “constitutionally problematic”

In early 2021, a group of drivers for services including Uber, Lyft and DoorDash, along with the Service Employees International Union (SEIU) and its California chapter, filed a lawsuit in Alameda County Superior Court challenging the constitutionality of Prop 22. The plaintiffs argued that Prop 22 is invalid because, among other things, it limits the Legislature’s authority to create a workers’ compensation system, and it violates the separation of powers doctrine because it restricts the courts’ authority to interpret the California Constitution and attempts to prevent the Legislature from enacting certain laws.

In August 2021, Judge Frank Roesch of the Alameda County Superior Court agreed with the plaintiffs and declared Prop 22 invalid in its entirety. Judge Roesch found that Prop 22 violated the California Constitution because it limited the Legislature’s power to include app-based workers within the scope of California’s workers’ compensation laws. “If the people wish to use their initiative power to restrict or qualify a ‘‘plenary’’ and ‘‘unlimited’’ power granted to the Legislature,” Judge Roesch reasoned, “they must first do so by initiative constitutional amendment, not by initiative statute.” He also found that Prop 22’s attempt to apply conditions to the Legislature’s ability to amend the initiative “unconstitutionally limited” the Legislature’s ability to pass unrelated future legislation. As such, Judge Roesch deemed Prop 22 “unenforceable.”

The state of California and intervenor Protect App-Based Drivers and Services, an industry organization backed by Uber and Lyft, appealed to California’s First Appellate District.

A divided panel upholds most of Prop 22

On March 13, a divided panel of the California Court of Appeal largely reversed Judge Roesch’s decision in Castellanos v. State of California.

The majority agreed with Prop 22’s proponents that it “does not intrude on the Legislature’s workers’ compensation authority.” To that point, it held that the California Constitution does not give the Legislature exclusive authority over workers’ compensation laws – rather, it gives such authority to the Legislature or the voters. The majority also noted that the California Constitution “does not require every worker to be covered by workers’ compensation.” Because “[t]he Legislature or the voters may exclude app-based drivers entirely from workers’ compensation benefits,” the majority concluded that Prop 22 does not violate the California Constitution on this ground.

However, the majority did strike down certain subsections of Bus. & Prof. Code § 7465 (section 7465) on the grounds that “the initiative’s definition of what constitutes an amendment violates separation of powers principles.” Section 7465 – which was added to the Business and Professions Code by Prop 22 – allows the Legislature to amend Prop 22 only under certain conditions, including a requirement that any amendments must be enacted by a seven-eighths majority and must further the purpose of the initiative. Sections 7465(c)(3) and (4) address the distinct question of what future legislation constitutes an amendment of Prop 22 that would be subject to its conditions. More specifically, section 7465(c)(3) refers to any statute that would place unequal regulatory burdens on app-based drivers, such as a rule that prohibits only app-based drivers from performing particular services, while section 7465(c)(4) concerns the Legislature’s ability to enact laws that allow drivers to collectively bargain.

First, the majority found that the challenged sections are facially invalid on separation of powers grounds because they intrude on the judiciary’s authority under the California Constitution to determine what constitutes a legislative amendment. Second, the majority agreed with the plaintiffs that section 7465(c)(4) usurps the Legislature’s authority to enact collective bargaining legislation even though Prop 22 does not otherwise directly address that subject. As such, the majority found that section 7465(c)(4) intrudes on the Legislature’s authority to address a related but distinct matter that Prop 22 does not specifically authorize or permit. Accordingly, the majority severed sections 7465(c)(3) and (4) and “allow[ed] the rest of [Prop] 22 to remain in effect, as the voters indicated they wished.”

In a lengthy dissent, Justice Jon B. Streeter said that Prop 22 should be struck down in its entirety because the ballot measure takes away lawmakers’ power to create and enforce workers’ compensation laws and creates a conflict between voters’ power and the Legislature’s power. “I would affirm the judgment, but I prefer to go further,” Justice Streeter wrote. “I believe we must invalidate Proposition 22 in its entirety.”

What’s next?

The majority’s decision not only preserves the independent contractor model for app-based rideshare and delivery network companies in California but could also push other industries not expressly excluded from AB 5’s requirements to pursue similar ballot initiatives. Indeed, private companies are increasingly turning to the ballot box to challenge unfavorable state laws. In fact, the fast-food industry recently passed a referendum pausing implementation of the Fast Food Accountability and Standards Recovery Act, which was signed into law in 2022, giving California voters the opportunity to decide whether to uphold or repeal the law, which establishes a council to set minimum standards on wages, working hours and other working conditions for covered fast-food workers.

Still, the battle over Prop 22 isn’t over yet. The SEIU is expected to seek review of the decision from the California Supreme Court – but, in the meantime, the core of Prop 22 remains in effect.

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