ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – PROPOSITION 22 IS HELD UNCONSTITUTIONAL – WHAT NOW?
By Robert S. Schriebman
If you ever watched a Laurel and Hardy movie, you may remember a famous tag-line, “Well, here’s another fine mess you’ve gotten us into!” On August 20, 2021 a California Superior Court judge in Alameda County ruled that Proposition 22 was unconstitutional in all of its parts. Castellanos et all v. State of California et al., Case No. RG21088725.
The case was decided by Judge Frank Roesch and is round one of appeals that will eventually be decided by the California Supreme Court. What disturbed Judge Roesch was Proposition 22’s attempt to prevent the Legislature from creating constitutional amendments modifying Prop. 22 and by restricting any passage of Legislation from a simple majority vote in both houses to a 7/8s majority that would make any amendment problematic.
By way of background, Prop. 22 was passed in the 2020 general election ballot. It makes app-based and delivery drivers independent contractors and also prevents them from any type of unionization. All the commercials touted the benefit to the little guy of being in business for themselves and being allowed to have the usual freedoms associated with independence. But a careful reading of Prop. 22 reveals it is not for the little guy at all. It only protects the economic interests of the network companies in having a divided, ununionized workforce. It also saves the network companies tons of money in not having to pay workers compensation or payroll taxes – big business wins again.
What Bothered Judge Roesch?
Being a judge in the Superior Court is not all “Judge Judy.” Tough and controversial decisions sometimes have to be made. An unpopular decision can cause a judge to lose his/her office. This case is one of them. Judge Roesch pointed out that before Prop. 22 went into effect the Legislature passed an act adopting the “ABC Test” for employment status which, when passed, was understood to reclassify app-based drivers as employees. Prop. 22 exempts app-based drivers from the ABC Test of AB-5 and AB-2257 that would otherwise be applied to determine their status as employees or independent contractors. But Judge Roesch discovered that Prop. 22 runs afoul of Article XIV, § 4 of the California Constitution which gives the Legislature plenary power to legislate or challenge constitutional amendments or voter initiatives. Also, the Legislature has this absolute and unrestricted power to create a worker’s compensation program. Prop. 22 seeks to limit the Legislature’s power to create laws relating to worker’s compensation. Any limitation on this power is unconstitutional. According to Judge Roesch:
“Proposition 22’s Section 7451 is therefore an unconstitutional continuing limitation on the Legislature’s power to determine what workers must be covered or not covered by the worker’s compensation system.”
The people of California have the right to create legislation by initiatives such as Prop. 22. But any attempt to limit the power of the Legislature cannot be done unless by an amendment to the California constitution and not by a proposition or an initiative. This is the first reason Judge Roesch held Prop. 22 unconstitutional.
The second thing bothering Judge Roesch was an attempt by Prop. 22 to prevent further changes by the Legislature by requiring a 7/8s majority vote instead of a simple majority as is usually required. This restrictive requirement has the real-world effect of making any changes to Prop. 22 problematic. This also caused Prop. 22 to be held unconstitutional.
The third thing bothering Judge Roesch was the inclusion in Prop. 22 of restricting app-based drivers and delivery drivers from forming any type of collective bargaining unit, such as a union. According to the network companies, drivers can create a guild through which independent contractors would bargain collectively their contract terms and working conditions. It is improper to include these provisions in a proposition that creates app-based drivers as independent contractors. These provisions violate the single “subject” requirement. According to Art. II § 8(d) of the California Constitution: “An initiative measure embracing more than one subject may not be submitted to the electors or have any effect.”
Judge Roesch’s Ruling
Judge Roesch ruled Prop. 22 unconstitutional throughout, as follows:
- The primary provision § 7451 is unconstitutional because it limits the power of a future legislature to define app-based drivers as workers subject to worker’s compensation law.
- Section 7465 is unconstitutional because the proposition contained laws relating to restriction on collective bargaining.
- The entire Prop. 22 must fall even though portions of it may be constitutional.
I must admit that it took many readings of this case on my part to finally figure out all the constitutional issues involving Prop. 22. I think I got it. So now what? App-based drivers and delivery drivers are now driving in a heavy fog – ‘are we independent or not?’ It is going to take many months before the California Supreme Court makes a final interpretation of Prop. 22. Are the network companies now required to comply with the ABC Test of AB-5? Are they now required to pay payroll taxes? Must they also take out worker compensation policies? Laurel and Hardy were right in retrospect – here’s another fine mess we are in.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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