California Court Of Appeal Holds That App-Based Driver And Delivery Businesses Can Properly Classify Workers As Independent Contractors

CDF Labor Law LLP

On March 13, 2023, in Castellanos v. State of California, the California Court of Appeal handed down a pink unicorn decision in favor of app-based driver and delivery businesses that permits them to properly classify workers as independent contractors. In so doing, it breathed life back into Proposition 22 (Bus. & Prof. Code sections 7448-7467) and California’s gig economy.
Proposition 22’s Roots In AB5

In 2019, the California Legislature codified the holding in Dynamex by enacting Assembly Bill No. 5 (“AB5”), which established a test for distinguishing between employees and independent contractors. The net effect of AB5 is that workers are presumed to be employees with few narrow and complicated exceptions. Consequently, AB5 made it nearly impossible for workers and businesses of any kind to lawfully engage with each other on an independent contractor basis and for businesses to retain independent contractors without incurring the risk of, at best, being placed into an arduous audit process or, at worst, being deemed to have improperly classified its workers, and all of the repercussions associated with that finding. AB5 has, not surprisingly, been the subject of much litigation in the time since its original enactment.

One such lawsuit the State of California brought against Uber and Lyft claimed that these businesses violated AB5 by failing to classify their drivers as employees. In response, several app-based companies (including DoorDash and Instacart) asked California voters, in ballot measure Proposition 22, to exempt app-based drivers and delivery businesses from AB5. Proposition 22 made certain guarantees to workers in lieu of standard employee benefits – including 120% of minimum wage for active driving time (but not for waiting time), a partial health care subsidy for drivers who clocked enough hours per week, and covering costs for on-the-job injuries. Proposition 22 passed in November of 2020 with 58% of the vote.  

Despite Proposition 22’s success at the ballot box, legal battles over employee/independent contractor classification waged on. Critics of Proposition 22 contend that it is unconstitutional because it: (1) limits the State Legislature’s oversight of workers’ compensation for app-based drivers and delivery workers; (2) restricts these workers from collective bargaining; and (3) establishes an unachievable 7/8s majority vote to amend Proposition 22’s collective bargaining terms. At the front of this war was Castellanos, wherein a group of app-based drivers in California and the Services Employees International Union sought a writ of mandate, claiming Proposition 22 unconstitutionally limits the power of California’s legislature to govern by removing its abilities to grant workers the right to organize and give access to the state’s workers’ compensation program. The presiding California Superior Court judge agreed and ruled that Proposition 22 violates the California Constitution and is unenforceable, because it interferes with the state’s legislative authority and future ability to pass legislation. The Court of Appeal’s reversal of this ruling allows Proposition 22 to stand with the exception of its limitation on lawmakers’ ability to enact legislation that amends Proposition 22, such as allowing gig workers to unionize. On this issue, the Court of Appeal scuttled Proposition 22’s clause that restricts collective bargaining by workers because it invades the legislature and judiciary’s authority.

It’s Not Over Until It’s Over

This reversal by the Court of Appeal restores some rights to classify workers as independent contractors, and for California citizens to choose to work on an independent contractor basis. But it’s best not to grow too attached to this decision as it is fully expected that it will be appealed. Also, Proposition 22 is significant not only for its impact on the gig economy in California but also for its somewhat groundbreaking attempt to undo legislation that has already been passed and enacted. It will be interesting to see whether the Court of Appeal’s decision, validating not only the terms of Proposition 22 and implicitly the method undertaken to disempower the legislature, has a precipitous effect in other industries and on other legal issues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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