California Supreme Court upholds AB5 exemption for gig workers

Uber and Lyft drivers in California will continue to be protected from the state’s AB5 independent contractor classification law following a decision by the state’s Supreme Court. The ruling possibly ends a legal battle that has gone on almost since November 2020 when California voters approved Proposition 22, creating the gig drivers’ exemption. 

In a unanimous decision, the California Supreme Court ruled that the workers’ compensation provision of Prop 22 were not illegal and the gig driver exemption could remain law. The issues in the case were complex, relating to whether the workers’ comp provision in Prop 22 were illegally enacted given other laws that appeared to give full authority over workers’ compensation to the State Legislature.

Prop 22 established that gig drivers such as those who work for Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT) were not covered by the state’s workers’ compensation laws. But as the court recounted, the plaintiffs who brought the lawsuit against Prop 22, which includes the Service Employees International Union, argued that the workers’ compensation provision in Prop 22 “conflicts with … the California Constitution, which vests the Legislature ‘with plenary power, unlimited by any provision of this Constitution, to create, and enforce a complete system of workers’ compensation, by appropriate legislation.’”

In March 2023, the Court of Appeals for the 1st Appellate District reversed part of the August 2021 decision that Prop 22 was unconstitutional, citing the issues regarding workers’ comp. The case was then appealed to the Supreme Court, which handed down its ruling Thursday.

The initiative power in California, which is what was used in the Election Day 2020 vote that approved Prop 22, includes “the power to abrogate existing [laws],” the court said, citing an earlier precedent. “Accordingly, the people may alter existing workers’ compensation policy without running afoul of article XIV, section 4.”

The Supreme Court agreed with a lower court ruling that the law “does not … limit the legislature’s power to enact workers’ compensation laws.”

AB5, enacted in 2019, establishes legal definitions of when a worker can be considered an employee or when the worker is legitimately an independent contractor.

ABC test is the core of AB5

It has at its heart the ABC test, a three-pronged guideline that says a worker can be considered independent if:

• The worker 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.
• The worker performs work that is outside the usual course of the hiring entity’s business.
• The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

The B prong has proved particularly problematic for independent owner-operator truck drivers and gig drivers, since the entities they provide their services for are transportation companies and they are providing transportation while being classified as independent. No exemption from AB5 has been granted to independent owner operators.

In a prepared statement, the Uber- and Lyft-based group Protect App Based Drivers + Services called the decision “an overwhelming victory for voters’ rights and the integrity of our state’s initiative system.”

The statement, quoting spokeswoman Molly Weedn, said the decision is “not just a win for the nearly 1.4 million drivers who rely on the flexibility of app-based work to make ends meet, but for millions of consumers and thousands of businesses who rely on app-based services across the state. The courts have spoken, and this issue can finally be put to rest.”

What Prop 22 does say about workers’ comp

Prop 22 did call for some degree of compensation for injuries or illnesses on the job, according to a blog post by the law firm of Boxer & Gerson before the 2020 vote.

In the post signed by Julius Young, the law firm said Prop 22 “provides that the companies must maintain occupational accident insurance to cover medical expenses and lost income ‘resulting from injuries while the app-based driver is online with a network company’s online-enabled application or platform.’”

But Young added that the proposition did not define what constitutes injuries.

He also noted the limits of the coverage specified in Prop 22. “Prop 22 would require occupational insurance cover medical expenses incurred only up to one million dollars,” Young wrote. “While this might seem like a big number, in catastrophic injury claims medical bills can sometimes exceed one million dollars. If  a worker has a long hospitalization, multiple surgeries, a long period of rehabilitation, and followup care over a period of years, bills can be astronomical.”

Young summed up his post by noting he was voting against Prop 22.

The Prop 22 case put the state of California in the odd position of defending an action meant to limit AB5 while at the same time defending AB5 in the still-ongoing California Trucking Association case against the law. But the state’s position is to defend the people, who had voted on Election Day 2020 in favor of Prop 22, which had been backed and financially supported by Uber and Lyft.

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