Alert

Court Upholds Law Classifying App-Based Drivers as Independent Contractors: Does What Happens in California, Stay in California?

July 31, 2024

The California Supreme Court recently upheld a California law that classifies drivers for app-based transportation companies, such as Uber, Lyft, or DoorDash, as independent contractors and not employees, provided the company does not (1) set drivers’ hours, (2) require acceptance of specific ride and delivery requests, or (3) restrict working for other companies. As a result, app-based drivers are not covered by California workers’ compensation laws, which generally apply to employees and not to independent contractors.

The California law classifying app-based drivers as independent contractors was enacted by the voters through Proposition 22 in 2020. (Codified as CA Bus. & Prof. Code, §§ 7448–7467) The law was challenged on the basis that it conflicts with the California Constitution. The California Supreme Court found no such conflict.

Will the rationale behind Proposition 22 and the outcome of the California Supreme Court’s ruling stay in California? On the one hand, app-based transportation companies, as well as other app-based companies, clearly like the outcome and would like it to be the result in all states. Similarly, drivers who have another job as an employee with benefits and moonlight as drivers likely prefer the flexibility of being classified as independent contractors. On the other hand, drivers who drive for a living and do not have employee benefits from another job likely would prefer being classified as employees. Government agencies also prefer workers to be classified as employees.

Background

California, like a number of states, has a ballot initiative process. This process gives California citizens a way to propose laws and constitutional amendments without the support of the governor or the legislature. California Assembly Bill 5 (AB 5), passed in 2019, was designed to determine a worker’s status as an independent contractor or an employee. AB 5 codified into law the California Supreme Court’s decision in the case Dynamex Operations West, Inc. v. Superior Court of Los Angeles, (2018) 4 Cal.5th 903, which established the ABC test for determining a worker’s status. The ABC test presumes a worker is an employee, rather than an independent contractor, unless the “employer” can prove all three parts (A, B, and C) of the ABC test, which are:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB 5 took effect on January 1, 2020. In October 2020, the California Court of Appeal in People v. Uber Technologies, Inc., (2020) 56 Cal.App.5th 266, prohibited Uber and Lyft from misclassifying their drivers as independent contractors under AB 5. In response, Proposition 22 was placed on the California general election ballot in November 2020 and passed.

Some App-Based Drivers’ Protections Lost

The provision that was the subject of the appeal to the California Supreme Court is Section 7451 of the CA Bus. & Prof. Code. It provides:

Notwithstanding any other provision of law, including, but not limited to, the Labor Code, the Unemployment Insurance Code, and any orders, regulations, or opinions of the Department of Industrial Relations or any board, division, or commission within the Department of Industrial Relations, 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 conditions are met:

(a) 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.

(b) 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.

(c) 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.

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

While the California Supreme Court’s decision in upholding Proposition 22 may appear at first blush to be a win for app-based drivers, it actually nullifies the protections AB 5 was intended to provide. The California legislature believed the misclassification of independent contractors was a significant factor in the erosion of the middle class and the rise in income inequality. It codified the ABC test to ensure that misclassified workers have the basic rights and protections they deserve under the law, including a minimum wage, overtime wages, workers’ compensation if they are injured on the job, unemployment insurance, paid sick leave, paid family leave, and health insurance.

By classifying app-based drivers as independent contractors, the drivers are denied many of these protections or at least the level of protection that employees receive. Having said that, Proposition 22 ensures drivers receive certain benefits: a guaranteed minimum hourly wage, health insurance subsidies, medical and disability coverage, and anti-discrimination and sexual harassment policies and training. It also requires criminal background checks for drivers.

Where Does this Leave App-Based Drivers?

App-based drivers operating outside California should not be affected by the California Supreme Court’s ruling. There is no uniform test for determining whether a worker is an employee or independent contractor. Government agencies, such as the Internal Revenue Service (IRS), the U.S. Department of Labor (DOL), and the National Labor Relations Board (NLRB), each look at their own set of factors. The same is often true of the state where the business is located. The California Supreme Court ruling does not change this. Businesses and drivers will need to follow their state laws, as well as the federal laws.

For app-based drivers and the app-based driver companies operating in California, Proposition 22 provides clarity for California law, but raises the potential for disparate treatment under federal law.

Currently, it appears that the IRS is willing to treat app-based drivers as independent contractors. See IRS Gig Economy Tax Center. The Wage and Hour Division of the Department of Labor issued the final regulation effective March 11, 2024, under the Fair Labor Standards Act. Employee or Independent Contractor Classification Under the Fair Labor Standards Act. See also Frequently Asked Questions – Final Rule: Employee or Independent Contractor Classification Under the FLSA.

It is unclear whether DOL will classify app-based drivers as employees under these regulations. According to Uber, “This rule does not materially change the law under which we operate, and will not impact the classification of the over one million Americans who turn to Uber to earn money flexibly.” But this is just Uber’s opinion. Earlier this year, the U.S. Chamber of Commerce joined the Coalition for Workforce Innovation’s lawsuit over these regulations. While this and other lawsuits against the DOL regulations work their way through the courts, app-based drivers inside and outside California likely will continued to be treated as independent contractors for federal law purposes.