Prop 22 ruling adds uncertainty to sizeable industry

On Aug. 20, in a surprise decision with potentially far-reaching consequences for ride sharing companies and other companies that utilize app-based drivers, the Alameda County Superior Court issued an order striking down Proposition 22 -- a 2020 initiative statute that categorically classified app-based drivers as independent contractors for purposes of California labor law, among other things. Castellanos v. California, RG21088725 (Cal. Super.).

In Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), the California Supreme Court adopted strict standards restricting the workers who may be classified as independent contractors, as opposed to employees. In a 2019 law known as Assembly Bill 5, the California Legislature codified the Dynamex standards and expanded their application to most industries statewide. Under AB 5, courts held that app-based drivers, such as drivers for ride sharing and food delivery services, could not be classified as independent contractors. See People v. Uber Techs., Inc., 56 Cal. App. 5th 266 (2020).

In response to Dynamex and AB 5, the ride sharing industry (among others) sponsored Prop. 22, which categorically exempted app-based drivers from most facets of California's labor regulations, and instead adopted a unique series of labor and wage policies specific to app-based drivers, including an earnings floor, limits on working hours, healthcare subsidies, and occupational insurance benefits. The voters overwhelmingly approved Prop. 22 in the November 2020 general election after the most expensive ballot measure campaign in state history.

After Prop. 22 took effect, a group of plaintiffs including the Service Employees International Union challenged several of Prop. 22's provisions as inconsistent with the California Constitution. Judge Frank Roesch of the Alameda County Superior Court sustained three of those challenges, and issued a writ of mandate striking down Prop. 22 in its entirety.

First, the court agreed with the plaintiffs that Prop. 22's central provision defining app-based drivers as independent contractors ("Section 7451") unconstitutionally diminishes the Legislature's power to establish a workers' compensation system. A 1918 amendment to the California Constitution gives the Legislature "plenary power, unlimited by any provision of [the] Constitution, to create, and enforce a complete system of workers' compensation." Cal. Const. art. XIV, Section 4. A different provision of the state Constitution, however, provides that the Legislature can only amend or repeal a statute passed by the voters by conducting a subsequent referendum. Cal. Const. art. II, Section 10(c). The court concluded that Prop. 22 conflicts with the Legislature's "plenary" authority to create a complete workers' compensation system by removing app-based drivers from the workers' compensation system via a statute that the Legislature cannot repeal without the consent of the voters.

Second, the court partially sustained the plaintiffs' challenge to a provision of Prop. 22 that allows the Legislature to amend Prop. 22 only with a 7/8 supermajority in each chamber. The state Constitution allows the Legislature to amend or repeal initiative statutes with a simple majority vote in each chamber, and subsequent approval by the voters in a second referendum. Cal. Const. art. II, Section 10(c). The court held that Prop. 22's supermajority requirement for amendments conflicts with the amendment procedure set forth in the state Constitution. To resolve the conflict, the court construed Prop. 22's supermajority requirement as only applying to Legislative amendments that are not backed by a subsequent referendum.

Third, the court agreed with the plaintiffs that Prop. 22's provision prohibiting the Legislature from adopting any amendment that would allow app-based drivers to collectively bargain is unconstitutional in two respects. One, the court ruled, a Legislative act allowing collective bargaining would not actually amend Prop. 22's provisions or conflict with its purposes, and therefore the provision was an invalid restriction on the Legislature's authority. Two, Prop. 22 does not otherwise address collective bargaining, and its provision disabling the Legislature from allowing app-based drivers to collectively bargain violates the constitutional rule that ballot measures can only address a single subject.

Ordinarily, when a court finds certain provisions or applications of a ballot measure unconstitutional, it strikes down the offending provisions or applications, and allows the rest of the measure to stand. However, Prop. 22's proponents included a highly unusual severance provision stating that "if any ... application of Section 7451 ... is for any reason held to be invalid," then Prop. 22 is void in its entirety. Bus. & Prof. Code Section 7467(b). Because the court found that Section 7451 could not apply to California's workers' compensation regime, it applied Prop. 22's severance provision to strike down the entire law

The court's decision is a potentially significant blow to the ride sharing and app-based delivery industries, as well as the large number of app-based drivers who supported Prop. 22, and is likely to create near-term chaos in labor conditions for app-based drivers. If the court's decision is not stayed or reversed on appeal, app-based drivers may immediately become subject to state wage, hour, overtime and workers' compensation rules, which may restrict operational independence for drivers and introduce sizable new costs and regulatory scrutiny for ride-sharing companies. While Prop. 22's supporters will likely appeal the court's decision, it is unclear whether the California Court of Appeal (and potentially the state Supreme Court) will disagree with Judge Roesch's reasoning, particularly in light of Prop. 22's unusually expansive severance provision that strikes down the entire law if even a single application of its core provision is held invalid.

If Prop. 22's proponents are not successful in getting the court's decision reversed on appeal, they could potentially attempt a second initiative campaign to amend the state constitution to remove the provisions that conflict with Prop. 22. However, it is unclear whether the measure's backers would be willing to undertake that expense in light of the hundreds of millions of dollars that were spent in 2020 to pass Prop. 22 in the first place. Moreover, it is unclear whether a more expansive ballot measure amending the state Constitution would enjoy the same broad-based political support that Prop. 22 engendered.

In short, the court's decision adds considerable uncertainty to a sizable industry that thought its core rules had been settled by Prop. 22's passage. Regardless of Prop. 22's ultimate fate, it seems likely that working conditions for app-based drivers will remain unsettled for the next several years at least.