Key Insights for Gig Employers: California Proposition 22 Update

The gig economy’s future hinges on an upcoming ruling from the California Supreme Court.

Key players like Uber, Lyft, and DoorDash are in the midst of a legal battle that could redefine how the gig economy operates. California’s Proposition 22—the case currently under review—carries massive implications for gig employers who may potentially face worker reclassification.

Gig workers constitute over one-third of the U.S. workforce, and this trend shows no sign of slowing. Projections indicate that gig workers could surpass half of the U.S. workforce by 2027.  If Proposition 22 is overturned, gig economy giants will be forced to swiftly reclassify hundreds of thousands of independent workers to employees or run the risk of facing substantial financial penalties.

Read on for a high-level overview of what gig employers need to know about the case, including how the ruling could influence legislation in other states and proactive steps your company can take to prepare for potential changes.

Quick overview of Proposition 22: What is it and who does it impact?

What is Proposition 22?

Proposition 22, a California law enacted in 2020, allows app-based drivers and food delivery workers to be classified as independent contractors instead of employees. This proposition was introduced by major gig companies Uber, Lyft, and DoorDash in response to California Assembly Bill 5 (AB 5), which requires gig employers to classify contractors as employees.

Current impact

Proposition 22 impacts California gig-based platforms such as Uber, Lyft, DoorDash, Postmates, and Instacart, among others. This law classifies drivers and delivery workers as independent contractors, affecting around 1.4 million active app-based workers in California. Given that nearly half (46%) of Californians have earned income through these platforms, the law has a significant influence on a large portion of the state’s workforce. Although not all gig apps currently fall under Proposition 22, the outcome will set a precedent that could inspire similar legislation in the future.

The broader influence of Proposition 22

Currently, California is the only state with a law like Proposition 22. However, as the most populous state and the world’s fifth-largest economy, California has the power to influence legislative trends. Just take California’s Clean Car Act (AB 1493) as an example; when it was signed into law in 2002, 13 states followed with similar legislation, including New Jersey, New York, and Pennsylvania. Frederick Boehmke, a Political Science Professor at the University of Iowa, has studied the adoption of policy across the U.S., noting that California’s adoption of new ideas often leads other states to follow suit.

Where might we see the earliest signs of legislative development following California? Likely in states with the highest concentrations of gig workers—Florida, Illinois, Texas, Massachusetts, New Jersey, New York, Ohio, and Pennsylvania. In fact, Uber and Lyft recently agreed to mandate a minimum hourly wage and additional benefits for drivers in Massachusetts. The settlement also includes provisions for Uber and Lyft to stop support for a ballot initiative that would solidify drivers’ status as contractors. This agreement underscores a significant shift in gig economy legislation, setting a new precedent for worker rights in this rapidly evolving industry.

What happens next? Recent cases and potential risks

As of July 2024, Proposition 22 remains in effect while the California Supreme Court reviews the case after verbal arguments. A decision is expected by August 2024, if not sooner.

Since Proposition 22 was originally passed with significant voter support, the court is carefully examining each side of the argument, including the potential for a compromise. Those advocating for the overturn argue that gig workers are underpaid and lack essential benefits, such as worker compensation. In contrast, supporters of Proposition 22 emphasize the flexibility it offers workers, along with guaranteed earnings for the time they spend driving or delivering.

In a separate but related case, Uber’s recent attempt to overturn AB 5 was unsuccessful, arguing that Uber is held to unfair standards in comparison to other gig employers. This outcome underscores concerns about the gig economy as a whole. Key issues such as regulatory fairness, worker classification, and labor laws are all pivotal to how policymakers, companies, and society at large address the evolving nature of work in the digital age.

If Proposition 22 is overturned, new legislation could take effect within 60 days, requiring companies to act fast to avoid penalties. Recent legal actions in Denver, Colorado, where Gigpro and Instawork face hefty penalties for worker misclassification, highlight the significant financial risks for gig companies that do not meet new compliance regulations.

Forward-thinking measures for other states

With opening arguments against Proposition 22 beginning earlier in the year, many California-based gig employers are well underway in preparing for potential changes. However, states with a high percentage of gig workers may consider proactively creating a plan of action should similar legislation be introduced in their state.

Here are three proactive steps companies can take:

1. Consult with a legal team: By seeking legal counsel early on, companies can assess their current practices against upcoming proposed regulations, identify necessary adjustments, and proactively mitigate legal risks.
2. Prepare clear communication plans: Transparent communication reduces the risk of losing stakeholders and workers during times of regulatory uncertainty. Companies may develop comprehensive communication strategies to keep their community informed about potential changes in classification laws. Clear and timely communication helps build trust, reduces uncertainty, and minimizes potential disruptions to operations.
3. Evaluate the financial and operational impacts: Reclassifying workers to employees would include an overhaul of financial and business operations. Analyze the impact on labor costs, such as adjustments to wages, benefits, and taxes. Operationally speaking, implementing the necessary processes and software can take upwards of six to nine months. Evaluating the impact in advance allows companies to strategize about how to maintain operational efficiency while adhering to new compliance requirements.

In addition to staying ahead of the curve, developing a plan to reclassify before any new legislation is passed could help app-based companies gain a competitive edge. This shift would allow them to provide benefits like health insurance and paid time off, potentially attracting workers who currently work across multiple platforms and improving overall workforce stability.

Implement technology to support your transition

Our team at WorkBright is closely monitoring this situation and is prepared to help companies follow the latest rulings to maintain the highest level of compliance. We understand the potential risks and the challenges of meeting new regulations, especially at scale.