What happened?

On July 25, 2024, the California Supreme Court in Castellanos v. State of California unanimously upheld Proposition 22, the 2020 ballot measure that allows gig economy businesses like Uber and Lyft to legally classify their drivers as independent contractors, rather than employees. 

What are the details?

The Background:

• Proposition 22 is a 2020 ballot based on voter initiative, which allows gig economy companies to classify drivers for their delivery services as independent contractors rather than as employees.

• In November 2020, nearly 60% of California voters passed Prop 22 so that app-based rideshare and delivery drivers could remain independent contractors while also being able to receive new benefits, including guaranteed earnings and access to a health care stipend. 

• The proposition benefits businesses and consumers because the flexibility that the independent contractor model provides can maximize efficiency and serve the needs of those people who strive for the flexibility that being a gig worker provides.

• Proposition 22 mathematical formula.

The California Supreme Court Decision

• The California Supreme Court reaffirmed that Proposition 22 does not infringe upon the California Legislature’s authority to regulate workers’ compensation systems. The court rejected claims that the law is unconstitutional because it interferes with lawmakers’ authority over matters dealing with workers’ compensation.
  • Proposition 22 does not permanently restrict the Legislature from extending benefits to independent contractors in the future.
  • The decision leaves open questions about whether the California Legislature can properly extend workers’ compensation benefits to app-based workers without violating Proposition 22 and if doing so would be considered an amendment, or a new law altogether

• This ruling alleviates significant regulatory uncertainty and eliminates a very significant legal risk for gig economy companies.
  • Had Proposition 22 been invalidated, these companies would have potentially faced substantial additional costs associated with reclassifying drivers as employees.
  • The upholding of Proposition 22 provides stability but does not eliminate potential future legal and regulatory challenges.

For a good breakdown of the case.

Business Considerations

• Employers should maintain the independent contractor status of their gig workers because this classification supports a flexible business model that has been pivotal for scaling operations and managing labor costs. Continue to leverage this model while ensuring all legal requirements for classifying workers as independent contractors are met.
• Employers should stay informed and adaptable: California gig businesses need to be aware of changes in the regulatory environment and be ready to adapt their business practices, accordingly, including keeping abreast of court rulings, potential changes to laws, and shifts in the interpretation of existing laws.
• Employers should prepare for potential changes: although the Court did not expressly address whether state lawmakers could properly extend the workers’ compensation system to include app-based workers, it is recommended to be prepared for the possibility that such changes could occur in the future.
• Employers should monitor legislative actions: there is some speculation that the Legislature might consider extending workers’ compensation benefits to drivers and making such benefits mandatory. Monitor legislative actions closely and consider how such changes could impact your businesses.

Source References

• Castellanos v. State of California

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