California Proposition 22 Overturns Employee Classification for Rideshare and Delivery “Gig Workers“
By Dina Klimkina and Bobby Silverstein
On Nov. 3, roughly 58.6% of California residents voted to approve California Proposition 22, which classifies app-based drivers working for rideshare and delivery companies — like Uber and Lyft — as "independent contractors" instead of "employees." Workers are only classified as employees if a company sets drivers’ hours, requires acceptance of specific ride or delivery requests or restricts working for other companies. Proposition 22 also requires rideshare and delivery companies to provide their drivers with certain minimum benefits and protections from discrimination.
Proposition 22 supersedes California AB 5, enacted in 2019, which limited the ability of rideshare and delivery companies to hire workers as independent contractors. The state Attorney General interpreted AB 5 to require rideshare and delivery companies to hire drivers as employees and filed lawsuits against several companies to abide by the Attorney General’s interpretation. As employees, drivers were entitled to standard job benefits and protections that other employees in the state are entitled to and that independent contractors do not receive. The rideshare and delivery companies did not agree that the new state law made their drivers employees. As such, Proposition 22 was adopted to delineate the legal status of drivers for rideshare and delivery companies as independent contractors, not employees.
While some states have established frameworks on how to classify workers as employees versus independent contractors, many states are grappling with similar questions of how to classify individuals in the “gig economy,” particularly those working on app-based platforms. Proposition 22 could establish a policy framework that other states follow. Thus, Proposition 22 has general implications for how states classify workers in the gig economy across the U.S., as well as the nature of worker benefits and protections and extent to which particular benefits and protections are made available.
What is the “Gig Economy”?
The gig economy is a domain in which companies hire workers for specific short-term projects or “gigs.” Gig economy workers complete tasks on a project-by-project or client-by-client basis, often by sharing and selling services and goods on web-based platforms.
Previous Legal Framework in California
In September 2019, California lawmakers enacted AB 5. The law requires the application of a version of the “ABC test” to determine if workers in California are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code and the Industrial Welfare Commission (IWC) wage orders. In California, the ABC test began with the presumption that all workers are employees, unless the individual is 1) free from control and direction in performance of the company’s service, 2) the service is performed outside the employer’s usual course of business, or 3) the individual performing duties is customarily engaged in an independently-established trade. The California Supreme Court first adopted the ABC test in Dynamex Operations West, Inc. v. Superior Court (2018).
AB 5 specified the intent of the legislature to codify the decision in the Dynamex case and clarified its application. The bill provided that the ABC test should be applied in order to determine the status of a worker as an employee or independent contractor for all provisions of the Labor Code and the Unemployment Insurance Code, unless another definition or specification of “employee” is provided.
For companies that provide ridesharing and delivery services, the California Attorney General interpreted the legislation to require that they treat workers as employees. In other words, these companies would incur the expenses of paying federal social security and payroll taxes, unemployment insurance taxes, state employment taxes and workers’ compensation insurance. Additionally, these companies would have to comply with numerous state and federal statutes and regulations.
Classifying workers as employees, rather than contractors, could potentially lead to higher costs and increased regulations for these companies. In some cases, these companies opted to no longer use gig workers for fear of incurring a high financial burden for each additional “employee.” In other cases, ridesharing and delivery companies threatened to pull out of California if forced to comply with AB 5, as interpreted by the California Attorney General.
For gig economy workers in California, AB 5 would have provided various standard employee benefits and legal protections, as well as increased access to benefits like healthcare. These standard benefits could be critical in providing a safety net for individuals who may be using gig employment as their only source of income. Individuals who need benefits and worker protections may include those who may need the flexibility of schedule due to disability or family needs, those who lack the financial ability to start an independent business, or those who may lack the education needed for other employment opportunity, among others.
Proposition 22 classifies app-based drivers as independent contractors instead of employees and provides independent-contractor drivers other compensation, unless the company sets drivers’ hours, requires acceptance of specific ride or delivery requests or restricts working for other companies. Proposition 22 declares that “Californians are choosing to work as independent contractors in the modern economy using app-based rideshare and delivery platforms to transport passengers and deliver food, groceries, and other goods as a means of earning income while maintaining the flexibility to decide when, where, and how they work.”
Proposition 22 exempts delivery and rideshare companies from providing standard benefits such as unemployment protections, minimum wage, sick leave and other benefits to California gig workers, which usually make up around 20% of employee costs for corporations. The proposition does provide, however, for a minimum earnings guarantee and some health care benefits like stipends and insurance for on-the-job injuries and legal protections. According to the California Legislative Analysis Organization, Proposition 22 includes the following protections:
- Companies must pay 120% of the local minimum wage for each hour a driver spends driving, but not time spent waiting.
- For those working more than 15 hours per week, (not including waiting time), this measure requires that companies help pay for health insurance.
- Companies must pay medical costs and replace some lost income when a driver is injured while driving or waiting.
- Drivers cannot work more than 12 hours in a 24-hour period for a single rideshare or delivery company.
- Companies must also ensure nondiscrimination against protected groups (e.g., race, gender, national origin, disability, sexual orientation) and (1) develop sexual harassment policies, (2) conduct criminal background checks and (3) mandate safety training for drivers.
Uber, Lyft, and other gig economy companies spent nearly $200 million to support the passage of the legislation, from the collection of petition signees to advertisements. The companies and other supporters of the proposition asserted that reductions in employee costs could allow companies to charge lower prices on fares and delivery fees, thereby potentially increasing use of company services and company profits. Drivers, in turn, could potentially see increased income and, as a result, pay increased state income taxes. Proponents of the law argued the bill would save hundreds of gig positions from being cut, allow for continued flexibility , and increased public safety.
Opponents of Proposition 22 believed that the proposition would allow for companies to develop their own exceptions to employment laws and deny drivers important rights and safety protections like sick leave, access to adequate pay and health benefits. Some opponents also felt that the minimum wage requirements required under Proposition 22 may be difficult or take too long to acquire. Opponents also felt as though the bill works to empower corporations, rather than workers, 78% of whom come from communities of color in California. Many argued that reductions in flexibility would only come by choice of the corporation and could be resolved between company and worker.
Overall, Proposition 22 can have significant implications for many other states grappling with similar laws, including the more than 20 states that utilize some form of the ABC test. Proposition 22 not only establishes a policy framework for classifying workers but also establishes a framework for providing minimum benefits and protections for workers in the gig economy and impacts how companies are developing and distributing web-based employment platforms.
For more information on state laws and legislation on the gig economy and worker classification, read The Future of the Workforce: Approaches to Increasing Access and Inclusion, developed by The Council of State Governments, and supported through funding from the U.S. Department of Labor Office of Disability Employment Policy’s State Exchange on Employment & Disability (SEED) in its efforts to foster a national workforce more inclusive of people with disabilities.