Last week, 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. While this decision provides significant clarity for these companies and others in the gig industry, it does not mark the end of their regulatory battles in California. 

Here is a summary of what the ruling means and some ongoing implications for both gig workers and businesses.

The Ruling and Its Implications

The California Supreme Court’s decision reaffirms that Proposition 22 does not infringe upon the California Legislature’s authority to regulate workers’ compensation systems, which is what the plaintiffs were arguing. Justice Goodwin H. Liu, who authored the opinion, emphasized that while the California Constitution permits voter initiatives to impact workers’ compensation, Proposition 22 does not permanently restrict the Legislature from extending benefits to independent contractors in the future. However, the court did not expressly address whether state lawmakers could properly extend the workers’ compensation system to include app-based workers. 

For gig economy companies, this ruling alleviates a significant regulatory uncertainty and eliminates a very significant legal risk. Had Proposition 22 been invalidated by the California Supreme Court, these companies, and others, would have potentially faced substantial additional costs associated with reclassifying drivers as employees and potential retroactive liability for violations of various wage and hour and other employment laws. This could have led to a complete disruption of the current business model for driver-based app companies, and even resulted in these companies ceasing operations in California.

Industry Reactions and Future Considerations

The ruling is crucial for businesses in the gig industry, reaffirming the viability of maintaining independent contractor status. This classification supports a flexible business model that has been pivotal for scaling operations and managing labor costs.

Glenn Spencer, Senior Vice President of the U.S. Chamber of Commerce Employment Policy Division, commented on the ruling, stating, “Today's decision by the California Supreme Court is a win for workers who choose independent contracting for its greater work-life balance, flexibility, and the opportunity to be their own boss. And it’s a win for California consumers who benefit from services provided by independent workers and digital platforms. Congress, other state legislatures, and government agencies should take note,” (as appeared on the U.S. Chamber of Commerce website linked here).

While Proposition 22's upholding provides stability, it does not eliminate potential future legal and regulatory challenges. Ongoing debates about worker classification and rights are likely to influence legislative and regulatory trends nationwide, and especially here in California.

Potential Legal Challenges and Legislative Responses

The California Supreme Court’s decision leaves open questions about whether the California Legislature can properly extend workers’ compensation benefits to app-based workers without being in violation of Proposition 22. Some speculate that the Legislature might consider extending workers’ compensation benefits to drivers and making such benefits mandatory. The court’s decision did not address whether a law granting gig workers automatic access to the workers’ compensation system would be considered an amendment to Proposition 22, or a new law altogether. This uncertainty could lead to further litigation because, if it is an amendment, California law dictates that the Legislature needs a seven-eighths (7/8) super majority vote to amend any Proposition. Even in California, that will be difficult to achieve.

Looking Ahead

The California Supreme Court’s decision underscores the ongoing tension between business interests and worker advocacy in the evolving gig economy. Unions and other groups are pushing hard to expand the number of workers that qualify as “employees” and are hoping to secure various employee rights for gig workers, including the right to organize and bargain. Businesses and many consumers are looking for the flexibility that the independent contractor model provides to maximize efficiency and to serve the needs of those workers who strive for the flexibility that being a gig worker provides.  

California gig businesses should stay informed and adaptable as regulatory environments continue to shift. CDF Labor Law LLP attorneys constantly monitor the changes in the law and landscape. Special thanks for this update to our San Francisco-based summer law clerk, Mikayla Seiler, who helped research and draft this blog entry.  

CDF Labor Law LLP will continue to update you on California gig worker issues through this blog. Stay tuned.