On November 3, 2020, California voters passed Proposition 22. The measure adds a chapter to the Business and Professions Code allowing app-based rideshare and delivery platforms to designate their workers as independent contractors, in addition to providing these drivers with new benefits and protections.

1. Background

In 2019, the California Legislature passed AB 5, which codified the 2018 decision of the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018). As a recap, that case established a test that presumed workers were employees unless an employer could satisfy a three part test called the “ABC” test. One of the factors of that test is that the person performs work that is outside the usual course of the hiring entity’s business.

AB 5 resulted in a host of litigation and adverse rulings against app-based companies like Uber, Lyft, and DoorDash, who treat their drivers as independent companies rather than employees. Among other things, courts found that these companies could not demonstrate that their drivers were performing work outside of their usual course of business in order to properly treat them as independent contractors.

2. Proposition 22

In response to AB 5 and the resulting litigation, several app-based companies funded Proposition 22. The measure passed on November 3, 2020 with nearly 60% of votes in favor of the proposition. Proposition 22 will create Chapter 10.5 in the Business and Professions Code which will be called the Protect App-Based Drivers and Services Act. It will go into effect five days after the California secretary of state certifies the election results.

a. Entities Covered

The new law applies to delivery network companies (“DNC”), transportation network companies (“TNC”) and charter-party carrier of passengers (“TCP”). The new law defines each of these phrases. For example, “delivery network company” is defined as a “business entity that maintains an online-enabled application or platform used to facilitate delivery services within the State of California on an on-demand basis, and maintains a record of the amount of engaged time and engaged miles accumulated by DNC couriers.”

b. App-Based Drivers Are Independent Contractors

The biggest impact of the new law is that app-based drivers will be deemed independent contractors if certain requirements are met. Specifically, the new law states that “an app-based driver is an independent contractor and not an employee or agent with respect to the app-based driver’s relationship with a network company” if the following four conditions are met:

(1) The network company does not unilaterally prescribe specific dates, times of day, or a minimum number of hours during which the app-based driver must be logged into the network company’s online-enabled application or platform.

(2) The network company does not require the app-based driver to accept any specific rideshare service or delivery service request as a condition of maintaining access to the network company’s online-enabled application or platform.

(3) The network company does not restrict the app-based driver from performing rideshare services or delivery services through other network companies except during engaged time.

(4) The network company does not restrict the app-based driver from working in any other lawful occupation or business.

This portion of the new law essentially exempts app-based driver companies from the requirements of AB 5 and the ABC Test if the above conditions are met.

c. Benefits

In addition to clarifying that the app-based drivers are independent contractors, the law mandates that the companies provide certain benefits to the drivers. Under the new law, the companies must ensure that app-based drivers are compensated at not less than a net earnings floor. The floor is a total of 120 percent of the applicable minimum wage for “engaged time” plus per-mile compensation for vehicle expenses for “engaged miles.” Further, the companies must provide a quarterly health care subsidy to qualifying app-based drivers based on the drivers “engaged time.” Additionally, the companies must carry, provide or otherwise make available certain occupational accident insurance.

d. Other Impacts Of The Proposition

The new law includes requirements related to antidiscrimination, sexual harassment prevention, criminal background checks, and safety training. The law also limits the number of hours that an app-based driver may be logged in and driving. It also implements a process for the reporting of payments made to drivers to the Franchise Tax Board.

3. Takeaway

Proposition 22 is a big win for app-based companies, who will continue to be able to classify their drivers as independent contractors and not as employees. Further, applicable app-based drivers will gain certain protections from the new law including health care benefits and an earnings guarantee.

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