California’s Proposition 22 Passes – App-Based Drivers Classified as Independent Contractors
On November 3, California voters passed Proposition 22, the Protect App-Based Drivers and Services Act, which addresses the classification of workers performing rideshare and delivery services and strikes a compromise between businesses and drivers. Rideshare and delivery service companies that use an online-enabled app or platform to facilitate their services, such as Uber and Lyft, may engage drivers as independent contractors if the following four conditions are met:
- The company must not require drivers to be logged into its app at specific times or dates.
- The company must not require drivers to accept any specific rideshare or delivery service requests as a condition of maintaining access to the app.
- The company must allow drivers to work for other rideshare or delivery companies.
- The company must allow drivers to work in other lawful occupations or businesses if they choose.
However, Proposition 22 also provides benefits for the drivers, including:
- A net earnings floor based on 120% of California’s minimum wage,
- A per-mile compensation component that is adjusted annually according to a consumer price index,
- A healthcare subsidy for drivers working at least 15 hours per week, and
- The availability of occupational accident insurance by or through the rideshare or delivery service provider.
While these benefits sound like employment benefits, the new law states that they are not, and therefore rideshare and delivery service businesses will not be required to withhold and pay payroll taxes and workers compensation for these workers. This law comes nearly two weeks after the California First District Court of Appeal refused to overturn a lower court’s ruling that Uber and Lyft must classify their drivers as employees and during the first year in which California’s new worker classification legislation (AB5) became effective.
Proposition 22 reflects a public sentiment that embraces the gig economy and the right to work. However, businesses should view this as a narrow carve-out of California’s AB5 requirements for app-based drivers only, and exercise caution when classifying their workforce in California. Look out for additional analysis and commentary from Alvarez & Marsal on AB5 in the coming weeks. Alvarez & Marsal can help you understand payroll tax issues related to worker classification, and businesses are encouraged to reach out to one of our professionals if they have questions as this topic continues to evolve.
