With the passage of Proposition 22 in the November 3, 2020, general election, California's gig economy scored a victory over the state's efforts to classify app-based rideshare and delivery company workers as employees rather than independent contractors. Proposition 22, also known as the "App-Based Drivers as Contractors and Labor Policies Initiative," permits certain app-based rideshare and delivery companies to classify their drivers as independent contractors rather than employees, provided those companies meet certain conditions identified in the new law. The measure, which at present is passing with 58 percent of the vote, adds new Chapter 10.5 to Division 3 of the Business and Professions Code (beginning with Section 7448).

What Does the Law Do?

Proposition 22 provides that, notwithstanding any California law to the contrary (including the California Labor Code, the Unemployment Insurance Code, and any Department of Industrial Relations orders, regulations, or opinions), an app-based rideshare and delivery company driver (such as those driving for Uber, Lyft, DoorDash, and Instacart) is an independent contractor and not an employee or agent of the app-based driver's "network company."¹ Significantly, however, a network company can only classify its drivers as independent contractors if it does not:

1. unilaterally prescribe dates, times, or a minimum number of hours during which the app-based driver must be logged into the company's online-enabled app or platform;
2. require the app-based driver to accept any specific rideshare service or delivery service request as a condition of maintaining access to the online-enabled app or platform;
3. restrict the app-based driver from performing rideshare services or delivery services through other network companies except during engaged time; or
4. restrict the app-based driver from working in any other lawful occupation or business.

While Proposition 22 permits a network company to classify its drivers as independent contractors and not provide health insurance (where the law otherwise required such an obligation), unemployment insurance, and other benefits or protections that may generally be available to employees, the new law requires a network company to provide significant benefits and protections not typically available to traditional independent contractors. These benefits include a healthcare subsidy consistent with the average contributions required under the Affordable Care Act; a new minimum earnings guarantee tied to 120 percent of minimum wage (which can vary based on applicable state or local minimum wage rates) with no maximum for the time that a driver is "engaged" (i.e., on a trip with a passenger or en route to a pickup); compensation for vehicle expenses (30 cents per "engaged" mile versus the IRS rate of 57.5 cents per mile that employees receive when using their vehicles for work purposes); limitation from working more than 12 hours during a 24-hour period unless the driver has been logged off for an uninterrupted six hours; occupational accident insurance to cover, at least in part, on-the-job injuries; and protection against discrimination and sexual harassment, as well as related anti-harassment education requirements. Network companies also must comply with certain background check obligations as well as provide safety training to workers.

To be clear, unless an app-based company meets the non-trivial requirements established by Proposition 22, its workers remain subject to applicable California law. In most instances, this will require the employer to meet the so-called "ABC" test adopted by AB 5.² Even businesses that can satisfy the ABC test and properly classify workers as independent contractors may feel ripple effects from Proposition 22—both within and outside California—and feel compelled to reassess the benefits they provide to independent contractors in order to maintain workers in a tight labor market.

Finally, while the new law makes clear how a network company can ensure that its drivers will be classified as independent contractors on a go-forward basis, there will undoubtedly be litigation as to whether those same drivers are entitled to damages retroactively for the period prior to the effective date of the new law. Pending lawsuits seeking such damages, therefore, will likely continue, and additional lawsuits will be filed where network companies do not meet the full scope of requirements mandated by the new law. Employers should remember that in California, the statute of limitations for wage and hour claims resulting from misclassification can be as long as four years.

When Does the Law Become Effective?

As the measure itself does not specify an effective date, Proposition 22 will take effect on the fifth day after the Secretary of State certifies the election results. Results must be certified by December 11, 2020. The law does not address whether it is intended to have any retroactive effect.

What Should Employers Do in Response to the Passage of Proposition 22?

While the passage of Proposition 22 affords app-based rideshare and delivery companies an avenue pursuant to which they can classify their drivers as independent contractors, only those that fully comply with its requirements may successfully do so. Those network companies eligible to avail themselves of the new law's protections should immediately take steps to understand what they must do to comply with the law and assess whether they can adjust their business practices accordingly. Doing so will likely require legal input, increased costs, the adoption of new practices and procedures, review of applicable payroll and compensation practices, assessing disability insurance options, app functionality and time reporting, as well as the preparation and dissemination of contractor agreements and communications advising drivers of the changes. Those network companies making the business decision not to comply with Proposition 22's requirements, yet continuing to classify their drivers as independent contractors, should understand the risks associated with doing so. As noted above, the risk of misclassification lawsuits remains high for network companies and non-network companies alike.

Of course, and equally important, most employers are not covered by Proposition 22 and cannot enjoy its protections. Considering the increasing risks of misclassification lawsuits, non-network company employers must continue to take steps to minimize the risks associated with misclassifying workers as independent contractors. Such employers should:

• Evaluate whether existing independent contractors meet the "ABC" test set forth in AB 5, including whether one of the law's exceptions applies.
• Review existing agreements to ensure that they support the employer's position that the worker is in fact an independent contractor.
• Appreciate the risks associated with the misclassification of contractors, including exposure to individual, class, and/or California Private Attorneys General Act (PAGA) wage and hour lawsuits over employee status, back pay, overtime, meal and rest period violations, paystub violations, interest, penalties, etc. In addition, employers should consider potential liabilities associated with the failure to withhold or pay state and federal employment-related taxes.
• Ensure that employment and consulting agreements contain mandatory arbitration and class action waiver provisions. California employers should note that, notwithstanding the existence of these provisions, waivers of PAGA claims are unenforceable under state law.
• Take disputes with contractors seriously. Where the risk of misclassification is high, employers should consider resolving the dispute early and securing a release of claims to the extent possible. Similarly, employers should not take agency claims or inquiries for granted as these may escalate into audits, PAGA lawsuits, or class action lawsuits.

[1] Proposition 22 defines a “network company” as a business entity that is a delivery network company (DNC) or a transportation network company (TNC). A DNC is 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 also keeps a record of the engaged time and miles accumulated by couriers. Deliveries are facilitated on an on-demand basis if the entity does not require the courier to accept any specific delivery request as a condition of maintaining access to its online-enabled application or platform. A TNC means an entity operating in California that provides prearranged transportation services for compensation using an online-enabled application or platform to connect passengers with drivers using a personal vehicle.

[2] For Wilson Sonsini’s prior discussion of AB 5, see WSGR Alert: California Has Now Enacted Controversial Law Making Use of Independent Contractors Harder: What Should Employers Do in Response?, September 20, 2019.