The California Supreme Court recently upheld Proposition 22, which permits app-based drivers to be classified as independent contractors and not employees. This development is important for other industries as well.

Before we get to the new decision, let’s review California law regarding independent contractors. 

AB 5 and the ABC Test

In January 2020, AB 5, known as the “gig worker bill,” went into effect. This law requires most individuals formerly classified as independent contractors to become employees and accordingly receive the benefits and protections provided to employees under California law, such as minimum wage, health insurance, and workers’ compensation.

One of AB’s key provisions requires the application of the “ABC Test” to determine whether a worker lawfully may be classified as an independent contractor. The California Supreme Court first articulated this three-part test in its 2018, decision, Dynamex Ops. West. v. Superior Court. The Court set forth three factors that a hiring authority must establish to overcome the presumption that a worker is an employee:

• Factor A: the worker is free from control and direction of the hiring entity in connection with the performance of the work;
• Factor B: the worker performs work that is outside the usual course of the hiring entity’s business; and
• Factor C: the worker is engaged in an independent business of the same nature as the work performed for the hiring entity.

The ABC Test is difficult to satisfy because the hiring authority must prove each element. It is more stringent than the test previously used to show independent contractor status, which is commonly referred to as the “Borello” test.

As we previously noted in this blog, many groups reacted negatively to AB 5, including independent contractors who did not want to be treated as employees.  Consequently, the Legislature passed AB 2257 in September 2020, which created a number of exceptions to AB 5. Since then, the Legislature has created several other exceptions in various bills.

Proposition 22

Proposition 22 (“Prop 22”), the “Protect App-Based Drivers and Services Act,” was another response to AB 5. The majority of the voters approved it in November 2020. Led by rideshare and delivery driver app companies Uber, Lyft, and DoorDash, this ballot initiative exempts app-based drivers from the ABC Test and classifies them as independent contractors, unless the hiring entity sets the drivers’ hours, requires acceptance of specific ride and delivery requests, or restricts working for other companies. Prop 22 also states that the drivers are not covered by various state employment laws, such as minimum wage, unemployment insurance, and workers’ compensation. However, unlike traditional independent contractors, workers covered under Prop 22 are entitled to other benefits, including minimum earnings, healthcare subsidies, and vehicle insurance.

Soon after voters approved Prop 22, labor unions challenged the legality of the initiative. They argued that Prop 22 violates Article XIV of the California State Constitution, which grants the Legislature power to enact workers’ compensation laws, by preventing the Legislature from including app-based drivers in the workers’ compensation system.

On July 25, 2024, the California Supreme Court unanimously decided that Prop 22 does not violate the State constitution. In Castellanos v. State of California, the Court ruled that voters may pass initiatives relating to the workers’ compensation system, and Prop 22 does not prevent the Legislature from enacting workers’ compensation laws that affect app-based drivers. Because the Legislature had not yet passed any such law, however, the Court concluded that there was no conflict to resolve. In effect, the Court’s decision maintains the status quo: app-based drivers may continue to be classified as independent contractors if they meet the requirements of Prop 22.

So What?

The Court’s decision is an important reminder that workers in California are presumed to be employees. Organizations that seek to retain the services of independent contractors must ensure their potential contractors satisfy a number of requirements. At a minimum, a contractor must have a Federal Employee Identification Number and some corporate structure, such as a corporation or partnership. Only then does the ABC Test come into play.

Employers with questions about independent contractors should consult with experienced counsel.