What does California’s Prop 22 mean for the gig economy?

Prop 22’s victory could have significant implications for the gig economy across the US. However, the challenges “gig” companies face, especially after the coronavirus pandemic, have not gone away.

One of the things you may have missed in a United States election headlined by Democratic challenger Joe Biden’s victory over incumbent Republican President Donald Trump was California voters voting on a ballot measure known as Proposition 22.

Proposition 22, officially, “App-Based Drivers as Contractors and Labor Policies Initiative,” proposed to continue the classification of drivers for ride-hailing and other “gig” companies as “independent contractors,” not “employees.”

The measure stems from a yearslong battle between California regulators and startup companies including Uber Technologies Inc. and Lyft Inc. over the classification of their employees.

California lawmakers in 2019 had passed a labor law that would have classified Uber and Lyft drivers as “employees,” thus entitling them to greater rights than “independent contractors.”

Uber and Lyft threatened a shutdown of their operations in California should they be forced to comply, with the two ride-sharing services placing their hopes on maintaining their workers as “contractors” on the Prop 22 ballot measure, which the companies poured hundreds of millions of dollars worth of funding into.

As results came in on election night, Proposition 22, backed by the likes of Uber and Lyft, was projected to have achieved a resounding victory. The victory means the continued classification of their workers as “independent contractors” and a defeat for California lawmakers and drivers unions who had forcefully opposed the measure.

Prop 22’s victory could also have significant implications for the gig economy across the US. However, despite their success, the challenges “gig” companies face, especially after the coronavirus pandemic, have not gone away.

Gig wars

California’s recent passage of Prop 22 is the latest development in a yearslong conflict between tech startup companies such as Uber and Lyft and California regulators and labor rights activists who challenged the “gig” companies’ classification of their employees as “independent contractors.”

In 2019, California lawmakers had passed a law, known popularly as AB5, which instituted a test whose criteria must be met for a worker to be defined as an “independent contractor.” Under this test, Uber and Lyft drivers, of which there are millions in California, would have been classed as “employees” and not “contractors.”

In the wake of the law, Uber and Lyft had threatened a shutdown of their operations in the state, all the while challenging the law in the courts. Classifying their workers as “independent contractors” allowed Uber and Lyft to pay less in payroll taxes and admit less liability for their workforce.

Uber and Lyft argued they were merely a “platform,” connecting independent contractors to consumers. Uber’s chief executive officer Dara Khosrowshahi argued that reclassifying their workers as “employees” would have a significant impact, causing prices to go up for consumers and some casual Uber drivers being forced out.

For Uber and Lyft, these fears did not come to pass.

Proposition 22, maintaining the classification of gig workers as “independent contractors” and not “employees,” successfully passed in California on election night. The measure, in a small concession to labor activists, provided some new protections, including a wage floor and small health insurance benefits, but continued to lack the full rights and entitlements of full employees.

Uber, Lyft and other tech companies in the state had spent upward of US$200 million in support of the ballot measure. The tech companies’ grassroots challengers, including driver advocacy groups and organized labor, spent just over US$20 million.

This tech company spending may not have had a huge impact on the final count, however. As Jonathan Whitney, founder of Gigsharks.com, told TMS, “many consumers living in an already expensive state of California may not have wanted to see price increases in rideshare and food delivery” that could’ve resulted from a reclassification of gig workers as “employees.”

For the gig companies, the significant spending in support of the ballot measure was cheaper than facing the costs of reclassifying workers as “employees.” In the aftermath of the vote, Uber’s stock jumped 14%, with Lyft’s climbing 11%.

The small changes to the rights given to independent contractors as a result of Prop 22’s passage will increase Uber’s labor costs by about 5%, according to Morgan Stanley analysts. This is significantly less than was projected should Uber’s workers be classified as “employees.”

Driver advocacy groups and activists who had opposed the measure were crestfallen. The Gig Workers Rising group released a press release stating that “Companies shouldn’t be able to buy elections.” It went on to say that “Gig work is real work, and gig workers deserve fair and transparent pay, along with proper labor protections.”

Gig companies are already looking to extend their success in California nationwide. Tony Xu, CEO of DoorDash, stated that “we’re looking ahead and across the country, ready to champion new benefits structures that are portable, proportional and flexible.”

Challenges remain

But the challenges facing tech startup “gig” companies are far from over. Outside the US, Uber, in particular, is facing growing scrutiny by courts and regulators in a number of countries, though especially in Europe. In France, courts ruled an Uber driver was an “employee,” not an “independent contractor” as the company argued.

Challenges remain across the rest of the US as well. Laws similar to California’s AB5, the law that inaugurated the Prop 22 ballot measure and could’ve reclassified gig workers as “employees,” are already being considered in a number of states, including New Jersey, New York and Massachusetts.

Gig startups also face continued challenges outside of their never-ending labor disputes. Uber Technologies Inc. continued to report big losses for the third quarter of 2020, which deepened to US$625 million as a result of the continued setback in business following COVID-19.

Prop 22’s success provides a small reprieve to these losses, but these companies remain very much in the negative. Prop 22 is expected to have a US$18 million impact on adjusted earnings for Uber (with some new rights given to workers), as opposed to US$91 million should the company have been made to reclassify its workers as “employees.”

Ultimately, Prop 22’s passing represents not the end, but merely a brief pause in the continued fight between regulators, activists and tech companies offering “gigs” such as Uber and Lyft.

As Mark Kruthers, an attorney at Fennemore Dowling Aaron and an expert in employment issues argued, “I highly doubt we have seen the last of the challenges to this way of doing business so the future remains uncertain.”

But, as Kruthers told TMS, “for now, Californians can still open an app on their phones, get a ride or food delivered for a relatively affordable price, and help keep the economy moving forward.”

Whether this relative status quo remains the future is dependent on the next moves made by tech startups and regulators themselves.

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