What is the Status of Proposition 22?

Proposition 22—the controversial ballot initiative that allowed rideshare companies to keep classifying drivers as independent contractors rather than employees—was passed in November of 2020. Last month,  a California Superior Court judge ruled that Prop 22 was unconstitutional.

In part 4 of our gig economy series, Zachary Pyers and Kenton Steele will discuss the following questions:

• What led to the creation of Prop 22? Who supported it? Who was against it?
• What are the provisions of Prop 22?
• What is the current status of Prop 22?
• What impact does this legislation have on the gig economy as a whole?

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Transcript

KHS Kenton H. Steele, Esq. 

ZBP Zachary B. Pyers, Esq. 

ZBP 

In last week’s episode, Kenton explored the concept of a third classification for workers something in between that of an independent contactor and the actual full-fledged employee.  This week we’re going to explore a similar topic but around legislation that was addressed recently in California colloquially known as Proposition 22.  So Kenton as we kind of dive into this topic, if you could, just explain to us what is Prop 22? 

KHS 

So, at its most basic, Prop 22 is a, was a ballot initiative in California that received a lot of media coverage in that it was sort of a forefront of this question of creating a third classification of worker for gig economy type workers.  The actual provisions of Prop 22 really related to sort of a middle ground as it relates to providing employment type benefits to rideshare drivers or other gig economy workers.  Specifically, the provisions of Prop 22 would require that employers pay 120% of what the local minimum wage was for each hour that a worker spends actually working.  So for ridesharing drivers, that would be receiving 120% of the local minimum wage for each hour spent with a passenger in the car or in route to pick up a passenger.  So, it would not take into account times where the driver has the app open and are waiting to pair with a driver.  Also, drivers would receive .30 cent per mile expenses for each mile driven with a passenger in the vehicle or in route to a passenger.  The other provisions related to providing health insurance stipend for drivers who average more than 15 hours of drive time per week over a set period of time.  There would also be requirements that companies pay certain medical costs or lost income for drivers hurt while driving basically a modified version of workers compensation benefits and there would also be certain other typical employment law restrictions put in place that relate to workplace discrimination, sexual harassment policies and certain requirements for criminal background checks and mandatory safety training for ridesharing drivers.  And those are sort of the actual impacts and what the substance of Proposition 22 contained. 

ZBP 

Now, when you talk about these changes that were being explored via a ballot initiative, what led to the ballot initiative and why was it created and what was the driving force behind it. 

KHS 

So, what led to the need for, or the supposed need for Proposition 22 were some changes to the law in California and it really started with a decision by California’s Supreme Court in the Dynamix case.  For those who are not familiar, Dynamix operations is a company that was sort of a proto gig economy type company.  Dynamix is a delivery company.  It’s a nationwide courier that offers on demand same day pick up and delivery services to the public and it also has a large number of business customers.  So if you need something delivered on short term turnaround or like a one off delivery, Dynamix is a company that will do that.  They’ll hire a driver to make that single delivery.  Initially, Dynamix classified its drivers as employees but in 2004, Dynamix reclassified its workers to independent contractors.  So in 2017, a case made its way to the Supreme Court of California and in that decision related to Dynamix’s classifications of its workers, the California Supreme Court created or enforced a standard that would hold that Dynamix has misclassified its workers at independent contractors and that they were actually employees.  The standard that the Court used is now sort of known as the ABC test which are the three factors that a company must meet to show that its workers actually are independent contractors.  And that’s sort of an interesting point is that under this decision, this Dynamix decision, the California Supreme Court decided that it would be the burden of the company to establish that its workers were independent contractors.  And the three things that needed, the company needed to show to satisfy that burden were: 1) that the worker was free from control, that the worker was not being directed by the company in the performance of their work; 2) that the worker was performing a job that was outside of the hiring entities normal business; and, 3) that the worker customarily or generally engaged in independent contractor type work.  So really this was a codification of the standard that we talked about where if a restaurant hires a plumber to come in and fix the plumbing, you know, installing plumbing is not part of restaurant’s normal course of business.  So that’s an independent contractor.  But if a restaurant is hiring someone to come in and cook food or take orders, that is part of that company’s everyday business that is not something that’s typically done by an independent contractor.  So that would be an employee irrespective of what the employer calls them.  So that Dynamix decision comes out around 2017-2018 and quickly thereafter in 2018, the California legislature moved to actually take that standard from the Dynamix decision and codify it into law.  That was known as Assembly Bill No. 5 which was passed and really took that ABC test, set it out in a statute and made it the law of California.  Now, that standard obviously has a huge impact on the way that ridesharing drivers or other gig economy workers are classified.  The AB5 law was set to go in effect on January 1, 2020 and in response we saw large gig economy companies basically say that they were going to shut down operations in the state of California because that standard was a complete threat to their viability as a business.  So with that framework in place, the ridesharing and gig economy companies really saw it as necessary to change the legal framework that they were operating in within the state of California and the way they did that was through the Ballot Initiative known as Proposition 22.  Now we’ve already talked about sort of what the impacts of Prop 22 were, what the provisions of the law were but it was obviously something that received a lot of media attention and a lot of money went into the campaign for the passage of Prop 22.  Specifically, companies like Uber, Lyft, Door Dash, Instacart and Postmates were at the forefront of arguing for and campaigning for the passage of Prop 22.  And those companies together spent over $200,000,000 on that campaign making Prop 22 the most expensive Ballot Initiative in California history and likely in the history of the United States.  There was a significant amount of money that was spent opposing Prop 22 but I believe it was somewhere in the neighborhood of about an eighth of what was spend by the pro Prop 22 side of things.  Ultimately, Proposition 22 was passed in the 2020 election cycle in November 2020 and it passed with about 58% of the votes.  So, by a fairly wide margin it was enacted into law in California. 

ZBP 

You Kenton as you were talking about the ABC test, I was waiting for you to lay out an acronym – an A, a B, a C and frankly it never came.  And so I was just looking briefly thinking okay well what does this ABC stand for.  There’s got to be some acronym somewhere that nicely fits into the ABC and I’ll you I can’t find it.  So, I appreciate you kind of laying that foundation out for us as it relates to, you know, what led up to or what was behind the passing of Prop 22.  Tell us what’s the current status of it?  Where are we as we sit right now in the status quo today, what’s going on? 

KHS 

So, as you might expect, there were immediate legal challenges to Prop 22 attacking the constitutionality of Proposition 22.  In August of this year, so fairly recently, a Trial Court in California determined that Proposition 22 is unconstitutional.  And the reason for that decision, there was actually a couple of different reasons, one was that the law, you know, improperly restricted the legislature’s ability to make changes to the law itself.  So, the Prop 22 included, in its provision, a requirement that it could only be amended or modified based on a seven eighths majority of California’s legislature.  So, a super, super majority would be necessary to change the law which, you know, borders on the impossible for even a state that is heavily tilted to one side of the political spectrum, a seven eighths majority is not realistic.  And so, for that, that was part of the reason that it was found to be unconstitutional.  Additionally, it was determined that the law violated a portion of California’s Constitution relating to Ballot initiatives being limited to a single subject matter.  So, at present, there is a decision that the law is unconstitutional.  That being said, the decision from the Trial Court did not suspend the enforcement of Proposition 22.  So, the law will remain in place as it works its way through the appellate system and I think ultimately what we’re likely to see is California Supreme Court will be left to decide whether or not Proposition 22 will stay in place.  So, somewhat of an open question but for the time being Proposition 22 remains effective in California. 

ZBP 

Now California can’t be the only state that’s looking at this issue.  Are there other states who are contemplating similar legislation, you know, what are they looking at or what are they thinking about and kind of how do you see the future as it relates to, you know, how Prop 22 may impact us kind of across the nation. 

KHS 

Yeah, so there are certainly, given the fact that Prop 22 passed with such a wide margin, obviously for companies that are engaged in the gig economy we can expect that this is an option they will explore further in other states where they need to.  I think on the one side, the companies will obviously be waiting to see if Prop 22 remains in place and what the impact is on the bottom line of those companies as it continues to be in place for a year.  It may be the case that it is not the, you know, financial benefit that the companies had hoped it would be in which case we may see a different approach.  The other thing is, for a lot of jurisdictions they don’t have the same employment law framework or context that exists in California.  So if you look at a more conservative type state, there is not the same need to change the existing law as it relates to what benefits are required for gig economy type workers.  So, in those jurisdictions, there’s less of a need to try and pass something like Prop 22.  For other jurisdictions, I think we can very much expect to see a similar approach utilized by gig economy companies where they band together and try to get the Ballot Initiative passed to sort of solidify what their, you know, sort of preferred classification of workers would be.  Going forward, we’ll see more of that come up in certain states but there will be sort of a wait see approach that these companies use as we: 1) wait to see what happens with Prop 22 itself, whether or not it remains in effect; 2) what the financial impact will be of Prop 22 remaining in effect; and, 3) what the current status of classification is in various jurisdictions throughout the U.S. 

ZBP 

Thank you for joining us on this most recent episode of the Reminger Report Podcast on emerging technologies.  This is going to be the final episode in our series as we explore the gig economy, the worker, third party classification and the legislative impacts of those issues.  Join us next time as we start to explore our series on other interesting topics in the area of emerging technologies.