Castellanos: Rethinking the California Legislature’s Plenary Power Vis-à-vis Workers’ Compensation

By Hon. Susan V. Hamilton, Former Assistant Secretary and Deputy Commissioner, California Workers’ Compensation Appeals Board

Article XIV section 4, California Constitution:

The Legislature is hereby expressly vested with plenary power, unlimited by any provision of this Constitution, to create, and enforce a complete system of workers’ compensation, by appropriate legislation, and in that behalf to create and enforce a liability on the part of any or all persons to compensate any or all of their workers for injury or disability, and their dependents for death incurred or sustained by the said workers in the course of their employment, irrespective of the fault of any party. A complete system of workers’ compensation includes adequate provisions for the comfort, health and safety and general welfare of any and all workers and those dependent upon them for support to the extent of relieving them from the consequences of any injury or death incurred or sustained by workers in the course of their employment, irrespective of the fault of any party; also full provision for securing safety in places of employment; full provision for such medical, surgical, hospital and other remedial treatment as is requisite to cure and relieve from the effects of such injury; full provision for adequate insurance coverage against liability to pay or furnish compensation; full provision for regulating such insurance coverage in all its aspects, including the establishment and management of a State compensation insurance fund; full provision for otherwise securing the payment of compensation; and full provision for vesting power, authority and jurisdiction in an administrative body with all the requisite governmental functions to determine any dispute or matter arising under such legislation, to the end that the administration of such legislation shall accomplish substantial justice in all cases expeditiously, inexpensively, and without incumbrance of any character; all of which matters are expressly declared to be the social public policy of this State, binding upon all departments of the State government.

As amended over 100 years ago, Article XIV section 4 of the California Constitution expressly vests the Legislature with “plenary power, unlimited by any provision of this Constitution, to create, and enforce a complete system of workers’ compensation by appropriate legislation.” The wording of that Article seems unambiguous and has been generally understood to mean that when it comes to the formation and refinement of California’s workers’ compensation system, the legislature’s power is absolute and cannot be diminished or restricted by any other law. That understanding, which has long been the case for most workers’ compensation practitioners, may not be completely accurate. According to a recent decision from the Court of Appeal, the majority opinion tells us that we have been reading Article XIV section 4 too narrowly. Instead, the majority states that we should read Article XIV section 4 as though it said, “The Legislature or the electorate acting through the initiative power are hereby expressly vested with plenary power, unlimited by any provision of this constitution to create and enforce a complete system of workers’ compensation.” According to the majority, that power includes the right of the electorate to exclude app-based drivers entirely from California’s workers’ compensation system. The case is Castellanos, et al. v. State of California, et al. (March 13, 2023) 2023 Cal. App. LEXIS 183. In the dissent’s view, the implications of the majority’s opinion are radical.

Background

In 2020 the Legislature enacted Lab. Code § 2775, “Employee v. Independent Contractor,” which established a new test to distinguish between employees and independent contractors. Section 2775 states that for purposes of the Labor Code, the Unemployment Insurance Code and the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that three conditions are satisfied. First, the person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact. Second, the person performs work that is outside the usual course of the hiring entity’s business. Third, the person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

In response, Uber and Lyft, two large app-based rideshare companies, declared their intention not to comply with the law and to cease doing business in California. Later, in response to a court order, both companies indicated their intent to comply with Section 2775. Meanwhile two individuals supported by a group called “Protect App-Based Drivers and Services,” proposed Proposition 22, which gained enough signatures to qualify for the ballot in the 2020 general election. Among the supporters of Proposition 22 were rideshare and delivery companies such as Uber, Lyft and Door Dash. Anecdotal information reveals that Uber, Lyft and other App-based companies contributed over $205 million to the “Yes on Proposition 22” campaign, making it the most expensive ballot measure in California history.

Proposition 22

Proposition 22 proposed the additions of sections 7448-7467 to the Business and Professions Code. The purpose of the initiative is stated in Bus. & Prof. Code § 7450 as follows: (1) to protect the basic right of Californians to choose to work as independent contractors with rideshare and delivery network companies; (2) to protect the right of every app-based rideshare and delivery service driver to have flexibility to set their own work hours and determine when, how and where they will work; (3) to require rideshare and delivery service companies to provide new protections and benefits for their app-based rideshare and delivery drivers; and to improve public safety by requiring criminal background checks, driver safety training and other safety measures to ensure that such drivers do not pose a threat to customers or the public.

To achieve these purposes, Bus. & Prof. Code § 7451 states that notwithstanding any other provision in the Labor Code, the Unemployment Insurance Code, and any orders, regulations or decisions of the Department of Industrial Relations and its divisions and boards, an app-based driver is an independent contractor and not an employee of the rideshare or delivery services company so long as the following four criterion are met. First, the rideshare or delivery service company does not set specific dates, times of day, or a minimum number of hours during which the app-based driver must be logged into the company’s online platform. Second, the rideshare or delivery service company does not require its app-based drivers to accept any specific rideshare or delivery service request as a condition to maintaining access to the company’s online application or platform. Third, the rideshare or delivery service company does not prohibit its app-based drivers from providing such services through other similar app-based companies except during engaged time. Fourth, the rideshare or delivery service company does not prohibit its app-based drivers from working in any other lawful business or occupation.

Bus. & Prof. Code §§ 7452-7456 cover specified benefits and compensation to which app-based drivers are entitled. These include a minimum compensation floor, a healthcare subsidy for eligible app-based drivers, occupational accident insurance, anti-discrimination and termination rights.

Bus. & Prof. Code § 7465 discusses amendments to Proposition 22. For example, it states that the Legislature can amend Proposition 22’s provisions with a statute passed by 7/8ths majority in both houses, so long as the statute is both consistent with and furthers the purposes of the proposition. Subdivision (c) makes clear that any statute that would amend the definition of app-based drivers as independent contractors, does not further the purpose of the proposition thereby effectively prohibiting the Legislature from amending that provision without voter approval. Additionally, subdivision (c)(4) states that a statute that authorizes any entity or organization to represent the interests of app-based drivers in connection with their relationship with rideshare and delivery service companies or compensation, benefits or working conditions is an amendment.

Finally, Proposition 22 has a severability clause so that if any provision is held to be invalid, the remainder of the proposition shall remain in effect (see, Bus. & Prof. Code § 7467) except if the provision that declares app-based drivers to be independent contractors and not employees is invalidated, then the entire initiative is also invalidated.

Proposition 22 was approved by a majority of voters in the November 2020 general election. As a result, sections 7448 to 7467 were added to the Business and Professions Code.

The Lower Court Challenge

Shortly after Proposition 22 went into effect, a mandamus action requesting the proposition be declared invalid was filed in the Supreme Court. The Supreme Court denied the petition and a mandamus action was filed in Alameda Superior Court by several individuals and unions (plaintiffs). Plaintiffs argued that Proposition 22 is invalid because it improperly offends and limits the Legislature’s plenary authority in Article XIV, section 4 of the California Constitution to create a complete system of workers’ compensation. Plaintiffs also claimed that the provision describing the types of statutes that would constitute amendments to the proposition violates the separation of powers doctrine by restricting the courts’ authority to interpret the Constitution. Further, plaintiffs argued that the provision declaring that any statute that authorizes an entity or organization to represent the interests of rideshare drivers and rideshare and delivery companies to be an amendment also violates the separation of powers because it attempts to prevent the Legislature from enacting laws on matters not addressed in the proposition. Finally, plaintiffs claimed that the proposition violates the requirement that it be limited to a single subject.

The trial court found that Proposition 22 violates the Legislature’s plenary power in Article XIV section 4 of the California Constitution to create a complete system of workers’ compensation by imposing limits on that power. It also found that the proposition’s amendment provisions violate the separation of powers. It then issued a judgment declaring Proposition 22 invalid in its entirety.

The Appeal

The proponents (defendants) appealed the judgment, arguing that the trial court was wrong on all points. In a 63-page majority opinion, along with a concurring and dissenting opinion of equal length, the majority held that Proposition 22 does not impermissibly intrude on the Legislature’s plenary authority over California’s workers’ compensation system or violate the rule that propositions be limited to a single subject. However, the majority found that the proposition’s definition of what constitutes an amendment violates separation of powers principles. Since that unconstitutional provision can be severed from the rest of the proposition, the court affirmed that portion of the trial court’s judgment declaring the amendment provisions invalid, but reversed the trial court judgment to the contrary and found the balance of Proposition 22 constitutional.

The Majority’s Analysis

At the outset, the majority observes that whether Proposition 22 is unconstitutional turns on the interplay between the language of the proposition and constitutional provisions governing workers’ compensation law (Art. XIV § 4), the initiative power (Art. II § 8) and separation of powers (Art. III § 3).

The Legislature’s Plenary Power to Create and Enforce a Complete System of Workers’ Compensation

Next, the majority looks to prior decisions interpreting these and similar Constitutional provisions. It turns first to Independent Energy Producers Assn. v. McPherson (McPherson) (2006) 38 Cal. 4th 1020. That case similarly involved the initiative process in Article II section 8 of the Constitution and its impact, if any, on the Constitution’s grant of plenary power to confer additional authority and jurisdiction on the Public Utilities Commission (PUC). Following the electrical energy crisis in California in the early 2000’s, an imitative measure that would give the PUC more regulatory authority over independent energy producers qualified for the ballot in the November 2005 general election and was designated Proposition 80. A group of independent energy producers filed a mandamus action in the Court of Appeal, arguing that Proposition 80 was unconstitutional because it usurped the Legislature’s plenary power to confer additional authority and jurisdiction upon the PUC. The gravamen of their argument was that any expansion of the PUC’s regulatory authority by other than the Legislature could only be achieved by initiative to amend the Constitution rather than through the (legislative) imitative process based on the clear wording of Article XII, section 5. That section states: “The Legislature has plenary power, unlimited by any other provisions of this constitution but consistent with this article, to confer additional authority and jurisdiction upon the PUC, to establish the manner and scope of review of commission action in a court of record, and to enable it to fix just compensation for utility property taken by eminent domain.”

The Court of Appeal agreed that the language of Article XII, section 5 grants only the Legislature and not the people acting through the initiative process, the power to grant additional authority upon the PUC. Proposition 80 was ordered removed from the ballot.

Emergency relief was sought in the Supreme Court, and the court granted review. It determined that the constitutionality of Proposition 80 did not have to be determined prior to the election and ordered the Secretary of State to place the measure back on the ballot. Proposition 80 lost in the general election. Nonetheless, the Supreme Court decided to retain jurisdiction and issue an opinion on the merits to answer the important question of whether Article XII, section 5 precludes the use of the initiative process to confer additional authority on the PUC.

In a decision that carefully reviews the historical context giving rise to the Constitutional provisions relating to the initiative power, the legislative power, and the powers conferred on the legislature vis-à-vis the PUC, the McPherson court reversed the lower court’s judgment and approved long-standing authority establishing that references in the California Constitution to the authority of the Legislature to enact specified legislation must generally be interpreted to include the people’s reserved right to legislate through the initiative process. (McPherson, supra, 38 Cal. 4th at p. 1043.) The court described the power of the electorate to enact statutes through initiative as coextensive with the power of the Legislature. Moreover, the court acknowledged that the Constitution’s initiative and referendum provisions must be liberally construed to maintain maximum power in the people. It expressly rejected the notion that the phrase, “plenary power, unlimited by any other provision of this constitution,” means that the Legislature has unlimited power that trumps other constitutional provisions, like the initiative and referendum powers that are expressly reserved to the people in Article II, section 8.

The Supreme Court’s decision in McPherson, supra, is particularly germane to and relied on by the majority opinion in Castellanos because of the similarities between the Legislature’s “plenary power” vis-a vis the PUC (Article XII, section 5) and the Legislature’s plenary power under Article XIV, section 4 to create and enforce a complete system of workers’ compensation. The majority emphasizes that MacPherson, supra, requires them to read article XIV section 4 as though it said, “The Legislature or the electorate acting through the initiative power are hereby vested with plenary power, unlimited by any provision of this constitution, to create and enforce a complete system of workers’ compensation. The majority acknowledges its duty to guard the initiative power and to resolve any reasonable doubts in favor of its exercise (citing Briggs v. Brown (2017) 3 Cal. 5th 808, 827) without considering or weighing the economic or social wisdom or general propriety of the initiative. In this regard, the majority points out that Article XIV, section 4 is not concerned with the allocation of power between the Legislature and the electorate, but rather ensuring that the law-making bodies, jointly and severally, have authority to create and enforce a complete system of workers’ compensation. Thus, if the electorate enacts an initiative to modify the workers’ compensation system, they have exercised the plenary power within Article XIV, section 4, and satisfied that aspect of the Constitution. Additionally, says the majority, plaintiffs failed to present any evidence indicating that when Article XIV, section 4 was added to the Constitution the voters intended to free the Legislature from the initiative power. The majority opinion concludes that Proposition 22 does not intrude on the Legislature’s plenary power to create and enforce a complete system of workers’ compensation.

Does Proposition 22 Violate the Single Subject Requirement?

The trial court found that Proposition 22’s proposed Bus. & Prof. Code § 7465(c)(4) violates Article II, section 8 of the Constitution (the single subject rule for initiatives) because it is not reasonably germane to the purpose of the proposition. Bus. & Prof. Code § 7465 is entitled, “Amendment,” and it describes the circumstances under which the Legislature can amend Proposition 22 without voter approval. Section 7465(c)(4) statute is an amendment if it authorizes any entity or organization to represent the interests of app-based drivers in connection with the drivers’ contractual relationships with rideshare companies, or drivers’ compensation, benefits or working conditions.

The majority wasted no time in rejecting the trial court’s conclusion in this regard. Calling the Supreme Court’s jurisprudence in the area of the single subject requirement “well-developed,” the majority explains that because the initiative process occupies such a favored status in the California constitutional scheme, the single subject requirement should not be interpreted in such a narrow manner that would preclude the use of the process to accomplish broad-based reform in an area of public concern. All that is required is that the various provisions of an initiative be reasonably related to a common theme or purpose. It points out that the trial court failed to identify a common purpose for the entire proposition; rather, it listed four separate components without analyzing the proposition’s over-arching purpose. Here, the common theme of Proposition 22 is the creation of a new balance of benefits and obligations for app-based drivers in lieu of traditional employment or traditional independent contractor status. The majority concludes that Bus. & Prof. Code § 7465(c)(4) is reasonably germane to this purpose.

Does Proposition 22 Violate the Separation of Powers in Article III, Section 3?

The majority finds persuasive respondents’ claim that Proposition 22 violates the separation of powers provision in California’s Constitution. Article II, section 3 describes the powers of state government as legislative, executive, and judicial, and makes manifestly clear that persons charged with the exercise of one power may not exercise either of the other powers unless permitted by the Constitution. The judicial power is conferred upon the courts, which, in turn confers upon the judiciary the right to interpret the law, including the Constitution.

Here, the majority has no trouble upholding the trial court’s conclusion that Bus. & Prof. Code §§ 7465(c)(3) and (c)(4) are facially unconstitutional because they intrude on the judiciary’s power to define what constitutes an amendment to Proposition 22.

Similarly, the majority agrees with the trial court’s ruling that section 7465(c)(4) is unconstitutional for the additional reason that it intrudes on the Legislature’s authority to adopt a statute authorizing collective bargaining. The majority observes that the doctrine of separation of powers is intended to protect the Legislature’s sphere of control to ensure that it remains unrestrained in its ability to enact laws addressing the general subject matter of an initiative or a related but distinct area of law that the initiative does not specifically authorize or prohibit. Section 7465(c)(4) does not specifically bar app-based drivers from collectively bargaining, which leaves open the possibility for legislative action addressing that issue.

Having concluded that, Bus. & Prof. Code §§ 7467(c)(3) and (c)(4) violate the separation of powers as set forth in Art. III, section 3 of the Constitution, the majority imposed the remedy of severing both of those sections and allowing the rest of Proposition 22 to remain in effect.

The Dissent

In a 64-page concurring and dissenting opinion, Justice Streeter explains why he would invalidate Proposition 22 in its entirety. As a preliminary observation, the dissent provides thoughtful discussion and historical context underlying the evolution of California’s century-old workers’ compensation system that further illuminates the significance of the majority’s decision to uphold Proposition 22. But within the confines of this article, only brief discussion of the dissenting Justice’s most salient points is possible.

McPherson is Distinguishable

At the outset, the dissent explains why McPherson, which the majority heavily relies on in reaching its conclusion that Proposition 22 is a valid exercise of the elector’s legislative power, is not precisely on point. The petitioners in McPherson argued that the initiative statute to expand the PUC’s regulatory authority over electric service providers violated the Legislature’s exclusive, plenary authority to expand the PUC’s regulatory jurisdiction. In other words, the petitioners argued that the constitutional grant of lawmaking authority to the Legislature in Article XII, section 5 precludes any use of the initiative power to legislate on the subject addressed by that constitutional provision. The dissent points out that the complaint in this case is not that Article XIV, section 4 prohibits the use of the initiative power to legislate in the workers’ compensation arena. Rather, that Proposition 22 so fundamentally undermines the basic architecture of the workers’ compensation system that was written into the Constitution in 1918, that it could only have been validly adopted by ballot amendment to the Constitution. Additionally, the dissent takes issue with the majority’s characterization of the elector’s legislative initiative power as coextensive with that of the Legislature. While the elector’s ability to adopt laws through the initiative process is a similar power to that of the Legislature, it is the dissent’s position that because only the Legislature has constitutional power to act pursuant to Article XIV, section 4, the most accurate way to characterize these two powers is that they are concurrent.

Proposition 22 Violates the Separation of Powers in Article III, section 3

The dissent concurs with the majority that Proposition 22 violates California’s constitutional doctrine of separation of powers in two aspects. First, as regards the courts’ judicial powers, and second, regarding legislative powers. While the dissent agrees with the majority that Proposition 22 impermissibly intrudes on the courts’ judicial powers to define what constitutes an amendment, it identifies an additional aspect in which the proposition improperly usurps judicial powers. That is this: since Article XIV, section 4 provides for an adjudicative function constitutionally committed to the judicial branch (i.e., resolution of claims by an administrative agency exercising judicial power), Proposition 22, unconstitutionally usurps that judicial power by baring app-based drivers from seeking to have their employment status adjudicated within the judicial branch. The dissent calls this bar to adjudication an example of the proposition’s dismantling of the constitutionally ratified workers’ compensation dispute resolution scheme, resulting in a violation of article II, section 3.

Proposition 22 Violates Article XIV, Section 4

The gravamen of the dissent is that Proposition 22 so violates Article XIV, section 4 that it cannot withstand scrutiny and must be invalidated in its entirety. First, the dissent argues that Proposition 22 fundamentally undermines the complete system of workers’ compensation that is expressly defined in Article XIV, section 4 by removing app-based drivers from that system and then establishing a new, privatized scheme that falls short of the basic features of a complete system of workers’ compensation. Proposition 22 does not include health and safety provisions; it does not provide compensation provisions for permanent disability sustained by an app-based driver; and it lacks any provisions for an administrative body exercising judicial power to resolve disputes in an expeditious manner with direct review in the Court of Appeal. Said another way, Article XIV, section 4 establishes a minimum constitutional baseline to California’s workers’ compensation system that no statute can go below. Proposition 22, the dissent claims, fails to meet that minimum baseline. Moreover, it deprives the Legislature of its authority to remedy deficiencies by prohibiting any legislative amendments unless passed by seven-eighths vote of both houses of the Legislature. Even worse, it includes a literal catch-22 by requiring any legislative amendment to be consistent with and further the purpose of the proposition. Proposition 22 adopts an incomplete system of workers’ compensation (for app-based drivers) that fails to meet the requirements of Article XIV, section 4 and prevents the Legislature from acting to remedy the situation.

In Conflicts Between Legislation Adopted by the Legislature Pursuant to Article XIV, Section 4 and an Initiative Adopted by the Electors, Deference Must Be Given to the Legislature

As the dissent emphasizes, Proposition 22 is in direct conflict with Assembly Bill 5, which the Legislature adopted in 2019 pursuant to its Article XIV, section 4 power to clarify that app-based drivers and couriers are included within the existing workers’ compensation system. The dissent points to footnote 9 in McPherson, supra, in which the Court recognized such potential conflict. In the dissent’s view, the conflict here is a clash between concurrent powers, and for that reason, the dissent believes the conflict can only be resolved by examining the text of Article XIV, section 4 to discern any preference for either legislative-based or initiative-based lawmaking to resolve the conflict.

In a thoughtful, thorough review of the evolution of Article XIV, section 4, case precedent and constitutional principles, the dissent concludes that we can discern a preference and that preference is for lawmaking by the Legislatures. The dissent’s rationale is straightforward. The Legislature’s lawmaking power under Article XIV, section 4 is not discretionary or self-executing. Rather, that provision charges the Legislature with an ongoing duty to carry out and abide by the terms of the constitutional mandate to create and enforce a complete system of workers’ compensation. Article XIV, section 4 defines the necessary components of such a system and mandates the Legislature to enact laws to give effect to each provision. In contrast, when voter electors pass an initiate statute, their lawmaking power is discretionary. They have no duty to do anything. The Legislature, on the other hand, has an obligation to fulfill its constitutional mandate. When the Legislature acts within the boundaries of its authority under Article XIV, section 4, the dissent believes that it is entitled to deference.

The dissent reminds that the Legislature must make statutory changes to California’s workers’ compensation system when it determines that such changes are necessary to ensure its effectiveness. The voters, by initiative statute, may do so, too, but only if they do so in a manner that is consistent with prior judgments of the Legislature made by appropriate legislation. Proposition 22 conflicts absolutely with AB 5. By effectively removing app-based drivers from California’s workers’ compensation system, by depriving these workers of the essential components of that system, and by forbidding the Legislature from acting contrary to its provisions, the dissent is adamant that Proposition 22 violates Article XIV, section 4 and must be invalidated.

Castellanos’ Implications

For the time being at least, Castellanos preserves the independent contractor model for app-based rideshare drivers in California. No doubt other industries will be tempted to explore a similar path to create alternative paradigms to the traditional employee-employer model. Does Castellanos foretell the demise of California’s workers’ compensation system? Only time will tell. In the meantime, it seems unlikely that the Court of Appeals’ opinion is the last word on the matter. Be on the lookout for a petition for review in the Supreme Court.

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