Professional Perspective
California's Proposition 22

Carolynn Beck, Goldstein & McClintock

California's Proposition 22, which passed in November 2020, has been described as a blow to workers’ rights by some, and by others as an imperfect answer by gig-based applications, Uber, Lyft, and others, to Assembly Bill (AB) 5. This article surveys Prop. 22's background and to whom it applies, and takes a close look at employer duties under the law.

Background
     

Prop. 22 was proposed primarily in response to California's passage of Assembly Bill No. 5 (AB5), which codified and expanded the California Supreme Court's 2018 ruling in Dynamax Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal. 5th 903 (2018). Generally, AB5 applied a three-factor test for determining whether a worker is an employee under California labor laws.

Under AB5, California workers are considered employees unless the hiring entity can demonstrate that the worker is free from control and/or direction of the hiring entity, the worker performs work outside of the usual course of the hiring entity's business, and the worker is customarily engaged in an independently established trade, occupation, or business.

Though AB5, which went into effect on Jan. 1, 2020, includes a long list of specific workers who are exempted from its provisions, gig workers were not among them. As a result, AB5 classified many gig workers as employees, with all the benefits and protections that come with such a designation.

This was a significant change in policy from the standpoint of companies employing gig workers in California. Gig workers had generally been treated by their employers as independent contractors prior to AB5's passage (and, indeed, even after it passed). California employers are required to comply, generally, with a very different set of rules for employees versus independent contractors. By way of example, employers must pay into state unemployment insurance benefit plans and payroll taxes, and employers must pay minimum wage not just for “active” working hours, but also time spent by the employee being “available” to work. Thus, having employees is more expensive than having independent contractors.

Under the provisions of AB5, and prior to the passage of Prop. 22, drivers for Uber, Lyft, and other similar apps would arguably be owed pay not just for time spent driving passengers and delivering food, but also for waiting time—time they were available for passengers to request rides or food deliveries.

The requirements and costs associated with Prop. 22, classifying app-based gig drivers as independent contractors, are, critics argue, advantageous to the companies employing these workers They are less expensive for the companies, but at the expense of the drivers. Supporters of Prop. 22 argue, in essence, that if gig-based drivers were classified as employees, they would need to be paid more, the companies would be unable to employ enough drivers to meet demand, and the business model of Uber, Lyft, DoorDash, and others would become unsustainable as a result.

Regardless of one's personal or political feelings regarding Prop. 22, the measure is likely here to stay, at least for now. The proposition includes language providing that 87.5% of both the state senate and assembly must agree to any proposed changes, and that changes can be approved only if they are consistent with Prop. 22 and its purpose.

Following its passage, the Service Employees International Union has filed suit against the state of California seeking to overturn Prop 22. If the Union is successful in overturning Prop. 22, the employees currently subject to Prop. 22 would be classified as employees, and subject to AB5. Otherwise, the only way, at the state level, to make changes to Prop. 22 is through new voter-led ballot propositions.

Thus, it is worthwhile to consider what specific duties and obligations are now conferred upon companies by way of Prop.22.

To Whom Does Prop. 22 Apply?

Prop. 22's reach, for now, is limited. It applies only to app-based rideshare and delivery drivers in California, and the companies who employ them. DoorDash, Uber, Lyft, and other proponents of Prop. 22 are likely to pursue legislation in other states and at the federal level mirroring Prop. 22. Tony Xu, the chief executive officer of DoorDash, and Dara Khosrowshahi, the chief executive officer of Uber, have said they have plans to do so.

Employer Duties Pursuant to Prop. 22

Some of the main requirements of Prop. 22 are discussed below.

Written Agreement

Companies using app-based drivers must have a written contract with each driver prior to the driver receiving access to the company's application or platform. Additionally, the contract may not be terminated by the company unless it is for a reason specified in the contract. Moreover, drivers are entitled, by section 7452(c), to an appeal process for any termination of contract.

This provision does not provide any specificity regarding the appeals process. Thus, employers may comply with this provision simply by including some method by which drivers may appeal deactivation of their driver accounts.

Driver Independence

Prop. 22 forbids companies from controlling the specific dates, times of day, or minimum hours of their drivers. Drivers cannot be required to accept any specific rideshare service or delivery service requests as a condition of maintaining access to work through the app. And, companies may not restrict their drivers from working for other app-based rideshare or delivery companies except during engaged time, or in any other lawful occupation or business.

Minimum Pay

Prop. 22 provides that rideshare and delivery app companies must provide their app-based drivers with compensation equal to, or exceeding, the “net earnings floor,” defined as the total of 120% of the applicable minimum wage for engaged time, and the per-mile compensation for vehicle expenses, multiplied by the number of engaged miles.

Companies employing app-based drivers must compare the driver's net earnings against the net earnings floor for each earning period, which cannot exceed 14 calendar days, and compensate the driver(s) for any difference between the two no later than the next earnings period. Net earnings specifically exclude any gratuities, tolls, cleaning fees, airport fees, or other customer pass-through fees. However, incentives and bonuses are included in the net earnings calculation.

Note that the calculation of net earnings floor is complicated somewhat by the term “engaged time,” defined under this section as the time frame between acceptance of a rideshare or delivery request, and the completion of that request. Thus, excluded from this provision is any waiting time before a request is received and accepted, any time spent performing a request after it has been canceled by a customer, or any time spent on a request where the driver subsequently abandons performance of the service before completing it.

Companies are also entitled to exclude from the “engaged” time, time which they deem reasonably necessary to “remedy or prevent fraudulent use of the network company's online-enabled application or platform.”

Regarding the per-mile compensation, the company is required to use the rate of 30 cents per mile for gas and other vehicle-related expenses, with annual adjustments for inflation. Inflation under this provision is measured by the Consumer Price Index for All Urban Consumers, published by the U.S. Bureau of Labor Statistics.

For clarity, the underlying figures outlined above are used only for calculating a net earnings floor, which is then compared to a driver's earnings during the given earning period. If the driver's pay is equal to, or exceeds, the net earnings floor, the company is technically in compliance with the minimum pay provision of Prop. 22.

Regarding gratuities, companies must pay the driver the full amount of any gratuity left by a customer, regardless of the payment method chosen by the customer. In other words, companies may not deduct fees for credit card processing, if the customer opts to pay gratuity using a credit card.

Insurance Benefits Required Under Prop. 22

In addition to the minimum pay requirements, companies that employ app-based drivers must provide certain healthcare and insurance benefits, including the following:

Health-Care Subsidies: Companies must pay health-care subsidies for their drivers quarterly, based upon the average number of hours worked per week of engaged time in the calendar quarter. Drivers are entitled to 100% of the average Affordable Care Act contribution for the applicable average monthly covered California premium for each month in the quarter, if they work an average of 25 hours or more per week in the given quarter. For drivers who work between 15 and25 hours per week, companies must contribute 50%.

Occupational Accident Insurance: Companies must provide their workers with occupational accident insurance covering work-related medical expenses and lost income with a minimum of $1,000,000 in coverage for medical expenses, and disability payments equaling 66% of the driver's average weekly earnings. Accidental death insurance must also be provided, for the benefit of spouses, children, and other dependents of app-based drivers. These benefits provide some, but not all, of the protections to which employees are entitled under California's worker's compensation laws.

Automobile Liability Insurance: Companies must maintain automobile liability insurance which covers up to $1,000,000 in third-party injury or loss caused by the operation of an app-based driver's vehicle during engaged time. They must also comply with articles 4 and 7 of Division 2 of the California Public Utilities Code, which govern, generally, Transportation Network Companies in California.

Mandatory Policies

Companies that employ app-based drivers must also institute the following policies pursuant to Prop. 22:

Rest Periods: Drivers may not be permitted to log in and drive on a company's app or platform for more than 12 cumulative hours in any 24-hour period unless the driver has logged off for an uninterrupted period of six hours.

Anti-Discrimination Policies: Companies are required to develop sexual harassment policies intended to protect not just drivers, but also members of the public using their services. The policy must establish a process for app-based drivers, customers, and rideshare passengers to submit complaints, for the company to conduct an impartial and timely investigation, and take remedial actions and resolutions based upon the investigation.

Background Checks: Prop. 22 mandates that companies must run local and national criminal background checks for all their app-based drivers. Additionally, it permits the company to suspend a driver for being arrested for certain crimes, including alleged misdemeanor assault or battery, domestic violence offenses, or driving under the influence. The company is permitted to lift the suspension upon the disposition of an arrest for any applicable crime which does not result
in conviction.

Safety Training: Companies must require their drivers to undergo app-based driver safety training. App-based drivers who entered into a contract with a company to whom this provision applies prior to Jan. 1, 2021, must undergo the safety training by July 1, 2021 in order to continue providing app-based rideshare or delivery services.

Zero Tolerance Policy: Companies must institute a “zero tolerance” policy mandating prompt suspension of a driver's access to the company's application or platform in the event of a report from any person who reasonably suspects that the driver in question is under the influence of drugs or alcohol while providing rideshare services or delivery services. The company must promptly suspend the driver's account and conduct an investigation.

The text of Prop. 22 does not contain enforcement provisions. Presumably, relevant state and federal agencies will continue to enforce the various labor, insurance, and workers’ compensation-related provisions within Prop. 22 as appropriate. Of note, any pre-existing claims, such as the 2020 lawsuit filed against Uber and Lyft by the California Labor Commissioner's Office against Lyft and Uber for wage theft, will continue to go forward, as the measure is not retroactive. See, Department
of Industrial Relations, State of California, Release No. 2020-65 Labor Commissioner's Office Files Lawsuits Against Uber and Lyft for Engaging in Systemic Wage Theft (2020).

Otherwise, any gaps in Prop. 22's anti-discrimination provisions are likely to be filled by existing employment laws in California, which are fairly extensive, and in some instances still regulate employer obligations with respect to independent contractors they employ.

Conclusion

It remains to be seen whether Prop. 22 will result in tangible benefits to app-based rideshare and delivery drivers beyond those which were already generally being provided to them prior to its passage. In terms of pay, the measure does not provide for drivers to be compensated for waiting time, or any time which they spend generally available, but not actively engaged in a delivery or rideshare request. This was already the case for app-based drivers employed by the biggest
companies employing them, even following the passage of AB5, and prior to Prop. 22's passage, and why the California Labor Commissioner filed 2020 lawsuit against Uber and Lyft. Additionally, many of the benefits required under Prop 22 fall short of protections required under California employment laws, including, for example, the occupational accident insurance requirement, which requires only very limited protections for drivers when compared to California workers compensation insurance.

Additionally, it seems many of the other provisions had been implemented or would arguably have needed to be implemented pursuant to other applicable legal regulations already in effect in California, such as sexual harassment policies, and for general risk management purposes, such as insurance coverage for third-party injuries.

President Joe Biden and Vice President and former California Senator Kamala Harris opposed Prop. 22 during their campaigns. More specifically, Biden promised on his campaign website that he would propose a federal version of California's AB5. Assuming such a federal law passes the deeply-divided Congress, and assuming such a statute addressed gig workers, it would likely pre-empt Prop. 22 and any other state laws that conflict with it. For now, however, companies that employ app-based rideshare and delivery drivers in California can treat these employees as independent contractors, subject to the provisions of Prop. 22.

Reproduced with permission from Copyright 2021.  The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com.