California Prop 22: Impact on Employee Benefits

UPDATE: Prop 22 was passed.

On November 3, 2020, California voters will go to the polls and decide the fate of California Proposition 22 (Prop 22), App-Based Driver as Contractors and Labor Policies Initiative.

• If Prop 22 passes, app-based transportation (rideshare) and delivery drivers will be classified as “independent contractors” and be provided with certain benefits and protections.
• If Prop 22 fails, the “ABC” test codified under California Assembly Bill 5 (AB5) can be used to determine whether app-based drivers will be classified as “independent contractors” or “employees.” Under the ABC test, so-called “gig-workers” can be more easily classified as an “employee” and thus, be legally entitled to certain employee benefits.

Why does the distinction between who is an “independent contractor” and who is an “employee” matter?

The determination between a worker being classified as an “independent contractor” rather than an “employee” has significant implications on how employers must legally treat them. Employers may be required to provide employees with health care, unemployment insurance, overtime pay, workers’ compensation, minimum wage, and other benefits that they are not legally required to be provided to independent contractors. See the table below for a comparison of the benefits that must be provided to employees versus independent contractors.

What is AB5 and the “ABC” test?

In September 2019, California Governor Newsom signed AB5 into law, which requires employers to use the “ABC” test when determining whether workers are considered “employees” or “independent contractors” for purposes of the California Labor Code, Unemployment Insurance Code, and Industrial Welfare Commission wage orders. Under the “ABC” test a worker is presumed to be an employee unless the employer can show:

1. They are free from the employer’s control;
2. They perform work that is not central to the employer’s business; and
3. They are engaged in an independently established business that performs the same services provided to the employer.

For more on California AB5, see our blog post.

What has happened since AB5 was initially passed?

AB5 took effect on January 1, 2020 and was immediately opposed by businesses, who signaled their intention to introduce a ballot initiative (i.e. Prop 22) to overturn AB5. On May 5, 2020, California Attorney General and the City Attorneys of Los Angeles, San Diego, and San Francisco filed a lawsuit against certain app-based companies alleging they misclassified their app-based drivers as independent contractors rather than employees in violation of AB5. On August 10, 2020, a Superior court judge issued a preliminary injunction ordering these companies to stop classifying app-based drivers as independent contractors pending further action by the court. On October 22, 2020, an appeals court upheld the preliminary injunction and ordered companies to comply with the injunction within 30 days, unless Prop 22 is passed.

What does Prop 22 do?

Prop 22 primarily does two things:

1. Exempts app-based companies with app-based drivers from AB5 and provides for a new independent contractor test for app-based drivers.
2. Provides app-based drivers certain additional benefits and protections that are not afforded to independent contractors.

New Independent Contractor Test for App-Based Drivers

If Prop 22 is passed, companies that provide transportation or delivery services through an app would not be required to use AB5’s “ABC” test to determine the classification of their app-based drivers. Instead, an app-based driver would be classified as an “independent contractor” for purposes of the California Labor Code, the Unemployment Insurance Code, and the Department of Industrial Relations if the company:

1. Does not unliterally prescribe specific dates, times of day, or a minimum number of hours that the driver must be logged onto the company’s platform;
2. Does not require the driver to accept any specific rideshare service or delivery service as a condition of maintaining access to the company’s platform;
3. Does not restrict the driver from performing rideshare or delivery services through other companies except during engaged time; and
4. Does not restrict the driver from working in any other lawful occupation or business.

App-Based Driver Benefits

Prop 22 would also require companies to provide app-based drivers with certain medical benefits and protections that employers are not required to provide to independent contractors. These benefits are outlined below:

• Earnings Guarantee: Prop 22 would guarantee drivers are paid 120% of minimum wage and 30 cents per mile (adjusted for inflation) for “engaged” driving time. “Engaged time” would include the time from when a driver accepts a ride-share or delivery request to the time they complete that request, but would not include time drivers are waiting to accept a ride-share or delivery request.
• Healthcare Subsidies: Prop 22 would provide drivers with a quarterly stipend they can use to buy insurance through Covered California, California’s marketplace exchange. The amount of the stipend would depend on the average monthly premium of bronze-level plans sold through Covered California and the weekly average hours spent on “engaged time” during the preceding calendar quarter.
  • For drivers working 15-25 hours per week: The stipend would be greater than or equal to 50% of the average employer contribution toward a Covered California Plan.
  • For drivers working 25+ hours per week: The stipend would be greater than or equal to 100% of the average employer contribution toward a Covered California Plan. Supporters of Prop 22 claim that this would amount to an average of $367 per month to drivers.
• Loss and Liability Protection: Prop 22 would require companies to carry, provide, or make available Occupational Accident Insurance to cover medical expenses (up to at least $1,000,000) and lost income (equal to 66% of the driver’s average weekly earnings) resulting from injuries suffered when the driver is on the company’s platform. Prop 22 would also require Occupational Death Insurance, which would provide benefits to spouses, children, or other dependents of drivers if the driver was injured and died while they were on the platform.
• Anti-Discrimination and Public Safety: Prop 22 provides anti-discrimination provisions, sexual harassment prevention, criminal background checks on drivers, safety training for drivers, zero tolerance policies, and required driver rest time.

What benefits must be provided to “employees” but not “independent contractors”?

Below is a comparison of employee benefits that must be provided to independent contractors and employees today, and to app-based drivers if Prop 22 passes.

How will employers be impacted if Prop 22 passes?

It is important to point out that Prop 22 only impacts app-based rideshare and delivery drivers and businesses. Other businesses would still be required to use the “ABC” test when determining independent contractor status, unless they fall under one of the AB5 exemptions.

If Prop 22 passes, app-based rideshare and delivery businesses will be able to classify their drivers as “independent contractors” (if certain requirements are met) and will not be required to provide drivers with the same benefits legally required to be provided to employees. Instead, these businesses will be required to provide the “earnings guarantee,” stipends for medical coverage, and other benefits and protections outlined under Prop 22.

How will employers be impacted if Prop 22 does not pass?

It is important to point out that if Prop 22 does not pass, it does not automatically re-classify drivers as “employees.” Rather, the “ABC” test must be used to determine whether app-based drivers are “employees” or “independent contractors.” The question of whether these drivers are “employees” under the “ABC” test is unsettled law and is currently the subject of ongoing litigation. The companies subject to the August 10, 2020 preliminary injunction would, however, be required to classify their app-based drivers as employees pending further action by the court.

Employers can choose to reclassify their California independent contractors to employees but should only do so after speaking with legal counsel. If employers choose to reclassify their independent contractors, they should be aware that these employees will be subject to wage and labor laws. In addition, certain employers may have to offer their full-time employees health care coverage under the ACA.

Additional Resources

• Text of Proposition 22
• Text of Assembly Bill 5
• California Department of Industrial Relations: Independent Contractor v. Employee
• Sequoia Blog: California Passes AB5

Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2020 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved

Emerald Law – Emerald is a Client Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Emerald enjoys stand-up comedy, live music and writing non-fiction.