The recent passage of Proposition 22 in California represents a big win for rideshare and delivery companies who hire independent contractors.
With companies like Uber, Lyft, and DoorDash relying on independent contractors to remain profitable, lawful classification is essential for avoiding lawsuits or fines. Independent contractors are exempt from receiving minimum wage, overtime, and health benefits. They enable companies to avoid the high cost of unemployment insurance and workers’ compensation, as well as liability under discrimination or harassment laws.
However, more new policies affecting the so-called “gig economy” could be on the horizon at the state and federal levels. This makes it essential for companies to stay up-to-date and be prepared to adapt should regulations change.
Let’s take a closer look at the impact of Proposition 22, and federal policies that may be enacted over the next 12 months.
California Voters Approve Proposition 22
On November 3, California voters approved Proposition 22 by a wide margin of 58.6% to 41.4%. The new law classifies app-based drivers as independent contractors rather than employees. It also sets new compensation regulations for independent contractor drivers.
Proposition 22 exempts rideshare and delivery app drivers from the state’s Assembly Bill 5 (AB5), which went into effect on January 1, 2020. AB5 codifies the strict “ABC test,” under which all workers are presumed to be employees unless the employer can prove all of the following criteria:
- The worker is free from control and direction of the employer, both under contract and in fact.
- The worker performs duties that are 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 the work performed.
In addition to classifying app-based drivers as independent contractors, Proposition 22 also mandates some new benefits for such drivers:
- Earnings minimum: Companies must pay 120% of the local minimum wage for each hour spent driving, but not for time spent waiting for riders or deliveries.
- Health insurance stipend: Companies will be required to offer a stipend to help with individual health insurance for drivers who work more than 15 hours per week.
- On-the-job injuries: Companies must pay medical costs and replace a portion of lost income for independent contractors who suffer an injury while driving or waiting for riders or deliveries.
- Rest policy: Drivers may not work more than 12 hours over a 24-hour period for a single rideshare or delivery company.
The new law requires companies using independent contractors to prohibit workplace discrimination, develop sexual harassment policies, conduct criminal background checks, and mandate driver safety training.
Nationwide, regulations pertaining to gig workers vary across different jurisdictions. Some states, including Illinois, currently are considering laws similar to California’s AB5, which would mean a stricter test for classifying workers as independent contractors. Massachusetts Attorney General Maura Healey has filed a lawsuit claiming that rideshare drivers should be classified as employees under the state’s current Wage and Hour Laws.
Potential Policy Changes at the Federal Level
Some are speculating as to whether stricter federal standards for independent contractors may come into effect after President-elect Joe Biden takes office on January 20.
The Department of Labor (DOL) issued a proposed rule in September which would apply an “economic reality test” for classifying contractors. On January 6, 2021, the DOL finalized the rule, approximately two weeks before Biden takes office. Given the timing of the final rule’s release, its continued viability after the inauguration is in doubt in light of indications from the incoming administration that recently enacted rules such as this one could be “frozen” pending further review.
The final rule requires the DOL to consider two core factors in deciding whether a worker is properly classified:
- The nature and degree of the worker’s control over his or her work
- The worker’s opportunity for profit or loss based on his or her own initiative and/or investment in their business
Other factors that also may influence the DOL’s analysis would include the amount of skill required for the work, the degree of permanence in the working relationship in question, and whether the work is part of an integrated unit of production.
For his part, Biden has expressed support for the ABC test, and likely would sign legislation creating stricter standards for independent contractors if such a bill were to reach his desk. He favors more aggressive enforcement of misclassification violations under existing laws and may push Congress for stiffer penalties for such violations. He also supports the PRO Act, which passed the House of Representatives in early 2020 and would make it easier for workers to form unions. Among other provisions, the bill would give independent contractors the status of employees for the purpose of organizing. With a closely divided Congress, however, it remains to be seen what new legislation in this area may be enacted.
At McMahon Berger, our experienced attorneys have drafted contractor and employment agreements for large and small businesses representing a number of industries. We work closely with clients to ensure that all agreements are fully compliant, and to amend contracts as needed in response to policy changes.
If you need assistance drafting or updating independent contractor agreements for your business, contact us to schedule an appointment.