California Proposition 22 upheld: Independent contractors live to drive another day

On July 25, 2024, the California Supreme Court unanimously upheld the constitutionality of Proposition 22 in Castellanos v. State of California. A victory for app-based rideshare and delivery companies for now, the decision permits these “network companies” to continue to classify drivers as independent contractors instead of employees.

Background of Proposition 22

In November 2020, California voters approved Proposition 22 (Prop 22), enacted as the Protect App-Based Drivers and Services Act and codified in Business and Professions Code sections 7448 – 7467. Since then, network companies have been able to classify their California drivers as independent contractors provided certain conditions are met.

Soon after Prop 22 took effect, plaintiffs filed a lawsuit, Castellanos v. State of California, in the Alameda County Superior Court, seeking to invalidate the law on four grounds:

(1) Prop 22 improperly limits the legislature’s authority set forth in article XIV, section 4, of the California Constitution, which provides that the legislature is “expressly vested with plenary power, unlimited by any provision of this Constitution, to create, and enforce a complete system of workers’ compensation[.]”

(2) Prop 22’s definition of what constitutes an amendment to the Act violates the separation of powers doctrine because it restricts the courts’ authority to interpret the Constitution.

(3) Prop 22’s amendment provision violates the separation of powers doctrine because it attempts to prevent the legislature from enacting laws on matters not substantively addressed within Prop 22.

(4) One aspect of Prop 22 violates the rule set forth in article II, section 8, of the California Constitution limiting initiatives to a single subject because Prop 22 imposes restrictions on subjects not substantively addressed in the initiative and it deceived voters into adopting restrictions that they did not understand.

In August 2021, the trial court agreed with the plaintiffs’ first, third, and fourth arguments, and issued a judgment declaring Prop 22 invalid and ordering the Department of Industrial Relations not to enforce any of its provisions.

In March 2023, the California Court of Appeal reversed the trial court. The Court of Appeal disagreed with the trial court’s conclusions that Prop 22 is unconstitutional because it violates the legislature’s plenary authority to enact workers’ compensation laws and the single-subject rule. The Court of Appeal agreed with the trial court that Prop 22’s provisions regarding amendments violated the separation of powers doctrine but held that these provisions could be severed from the Act, thus allowing the remaining portions of the Act to become effective.

The plaintiffs appealed, and the California Supreme Court accepted review on the issue of whether Prop 22 conflicts with article XIV, section 4 such that it should be deemed invalid in its entirety.

The Castellanos ruling

In a unanimous opinion, the California Supreme Court rejected the plaintiffs’ argument that the enactment of Prop 22 conflicts with the legislature’s “plenary power, unlimited by the other provisions of [the California Constitution],” to legislate on workers’ compensation as set forth in article XIV, section 4. Relying on prior precedent examining a similar provision of the California Constitution, the Court first concluded that the “unlimited” clause in article XIV, section 4, is ambiguous. The Court then reviewed the available ballot materials from 1918 when article XIV, section 4, was added to the California Constitution and concluded that there was no support for the position that the “unlimited” clause was intended to limit the initiative power. In short, the Court held that “section 7451 does not conflict with article XIV, section 4 because the latter provision does not preclude the electorate from exercising its initiative power to legislate on matters affecting workers’ compensation.”

The Court’s decision delivered a big win for the gig economy. Notably, however, the Court did not address other arguments not before it, such as whether the law improperly limits the legislature’s authority to enact future legislation – Prop 22 requires a seven-eighths majority vote to change the law. The Court further left open the question of whether the legislature can extend the workers’ compensation system to app-based workers.

What’s next?

For now, network companies providing rideshare and/or delivery services through the ever-growing convenience of online platforms can continue to enjoy this business-friendly law in California. The Court’s decision leaves Prop 22 intact, preventing what could have been a complete overhaul or even elimination of a massive industry in the state.

The likely focus going forward for new and existing network companies in California will be compliance with Prop 22’s legal requirements, including those related to delivery driver independence, contract and termination provisions, earnings guarantee, healthcare subsidy, loss and liability protections, antidiscrimination and sexual harassment prevention, criminal background checks, driver safety training, rest periods, income reporting, and more. In addition, we anticipate future challenges to Prop 22 on other issues, including those issues that the Court did not decide.

Network companies are also encouraged to monitor the landscape for other challenges and legislative initiatives related to gig workers.

For more information about Prop 22 or other wage-and-hour compliance issues, please contact any of the authors or your DLA Piper relationship attorney.