Note to Readers: In this two part-series, we will discuss major developments in California’s gig economy landscape this week. Part 1 discusses a lawsuit filed by Uber and Lyft drivers challenging the constitutionality of Prop 22. Part 2 will discuss a ruling by the California Supreme Court that the 2018 Dynamex decision, which established the ABC test in California, will apply retroactively.
Introduction: On January 12, 2021, Uber and Lyft drivers became the first gig workers to challenge Proposition 22, just two months after voters passed it into law on the November 2020 ballot. Prop 22 permits app-based hiring entities to classify workers as independent contractors rather than employees, provided they meet certain conditions, such as a minimum wage, reimbursement for vehicle expenses, occupational accident insurance, healthcare subsidies, and other protections. (Prop 22 is discussed in further detail here). Absent Prop 22, California-based drivers for app-based entities providing ride-sharing and/or delivery services such as Uber, Lyft, Postmates, and Doordash, were arguably subject to the stringent requirements of the ABC test under AB 5, (discussed in-depth here) and were facing lawsuits brought by California and major cities (discussed here). Prop 22 seemingly brought a reprieve.
The Lawsuit
That seeming reprieve is now being challenged. In Hector Castellanos et al. v. State of California et al., the Service Employees International Union, the California Labor Federation, and a group of drivers for Uber Technologies Inc., Lyft Inc., DoorDash Inc. and Instacart Inc. this week urged the California Supreme Court to rule that the ballot initiative directly conflicts with the state’s constitution by preventing the legislature from enacting laws governing the drivers’ rights to workers’ compensation coverage. The Complaint further alleges that Prop 22 usurps the courts’ role in determining whether a ballot initiative is an amendment by specifically defining what constitutes an amendment to Prop 22 and requiring a 7/8 majority of the legislature to amend Prop 22.
The complaint also alleges that Prop 22 violates the “single-subject rule,” which requires ballot initiatives to only deal with one policy at a time, by preventing the legislature from providing collective bargaining rights and/or other benefits to the drivers.
Likely Impact
Although the petition was just submitted, such challenges are not without precedent and, in fact, several propositions have been ruled unconstitutional in the past. For example, Proposition 8, which was passed in 2008, was a California ballot measure that amended the California Constitution to end the right to marry between same-sex couples, and Proposition 187 limited the rights of immigrants to healthcare, public education, and other services. Both of these propositions were ruled unconstitutional by federal judges shortly after their passage.
However, to overturn Prop 22, the California Supreme Court would first have to determine whether to take the case, and if it does, whether the California Attorney General is obligated to defend Prop 22 or to appoint independent counsel to do so. The court also could send the matter to lower courts first, in which case, it could take years to resolve the question of constitutionality. In the meantime, Prop 22 will likely face continuing challenges in federal and state courts as well as in Washington DC, where a Democratic President-elect and a new Democratic majority in Congress may be more inclined to expand or adopt California’s ABC test. This could preempt Prop 22 as an exception to the general ABC test under AB 5.
These challenges will likely have wide-spread implications. Although Prop 22 was originally intended to apply directly to the online app-based ride-sharing and delivery businesses, in the month since it took effect, Prop 22 has already been incorporated into the retail and grocery sectors as some entities have explored transitioning from using their own delivery drivers (employees) to using independent contractor drivers on an on-demand basis.
If Prop 22 is suddenly rendered ineffective, reverting to their original business models could impose significant costs, even if the legislature eventually incorporates parts of Prop 22 in a subsequent bill. Alternatively, as in the lawsuits filed by the State of California versus Uber and Lyft last year, courts have opined that in the absence of Prop 22, these drivers were unlikely to be classified as independent contractors, which could also impose significant costs in treating these workers as employees.
Given the complex issues implicated and the numerous twists and turns that California’s laws on independent contractors have taken in just the past few months, it is likely that the story is far from over. We invite your comments and questions about the fate of AB 5 and the future of the gig economy.
If you have any questions regarding this Alert, please contact the authors, Jack Schaedel, jschaedel@fordharrison.com, and Jamin Xu, jxu@fordharrison.com. Of course, you may also contact the FordHarrison attorney with whom you usually work.