Proposition 22: California’s new labor landscape

As the new year gets under way, the most significant changes in years to the state’s labor law are in effect. The landmark ballot initiative, Proposition 22, favored by six out of every 10 voters in November, defines the future of “gig work” in California.

But it continues to raise two basic questions: What is an employee? What is an independent contractor?

Proposition 22, which took effect in the middle of last month, exempts app-based employers — such as the ride-hailing and food delivery companies who sponsored the initiative — from classifying their workers as employees, identifying them instead as independent contractors.

Gig economy giants  easily put up a staggering $205 million in support of the proposition.

The proposition was billed as a way to maintain the flexibility and freedom currently offered by app-based work. However, detractors argued that the law would allow companies to skirt labor law and exploit workers.

The initiative’s passage sets an important legal precedent for companies like Uber and Lyft, the two largest ride-share companies in the country. Between the two of them, Uber and Lyft employ more than 30,000 workers, and are estimated to be worth in the tens of billions of dollars.

It is unsurprising, then, that these gig economy giants (along with delivery companies DoorDash and Instacart, themselves each worth more than $10 billion) easily put up a staggering $205 million in support of the proposition.

Understanding the broadest ramifications of Proposition 22 comes down to the difference between these two categories of workers: employees and independent contractors.

In September of 2019, California passed AB 5, a statute that defined the parameters by which a worker could be considered a contractor rather than an employee.

Employees are workers for a business, and their taxes, social security, and unemployment benefits are withheld by that business. They also are eligible for many legal protections, including the right to family and medical leave, the right to overtime pay, and protection under federal workplace safety laws.

Independent contractors, on the other hand, are afforded less of these legal guarantees in exchange for a greater degree of freedom. Independent contractors can normally decide when they work, for whom they work and sometimes how much they work. However, their taxes are not withheld by their employers, and they are not subject to the protections of both state and federal labor, workplace safety and anti-discrimination laws.

The origins of Proposition 22 can be traced back more than a year before it reached the ballot.

In September of 2019, California passed AB 5, a statute that defined the parameters by which a worker could be considered a contractor rather than an employee. These parameters, also called the “ABC test,” said that a worker would be considered an employee unless all of the following were met:

(A) 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.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

AB 5 had a number of exceptions to these rules written into it, including exemptions for lawyers, licensed real estate agents and engineers. However, app-based workers were not exempt, and thus were reclassified by the state to have employee status, and by extension were entitled to its benefits.

Uber described the possibility of a shutdown as a “looming crisis.”

The state and the gig companies sparred in court twice over AB 5, first in Olson v. California, and again in California v. Uber and Lyft.

In the first, Uber and Postmates, along with two of their workers, sued the state, alleging that AB 5 was “designed to target and stifle workers in the on-demand economy,” and that it violated parts of both the California and U.S. constitutions.

In the second, the roles were reversed, and this time the state of California sued Uber and Lyft, alleging that the two companies “made the calculated business decision to misclassify their on-demand drivers as independent contractors rather than employees” and continued to do so “in direct contravention of California law” .

In early August, a Superior Court granted an injunction to the State of California, and ordered the companies to comply with AB 5. In response, Uber and Lyft threatened to shut down operations in California entirely, instead opting to wait for voters to decide with a then unwritten ballot measure. When filing their appeal to the ruling, Uber described the possibility of a shutdown as a “looming crisis” and that “[t]he consequences to drivers and the public…will be catastrophic” .

At the time, Lyft co-founder and president John Zimmer claimed that the ride-sharing giant could not comply with the order “at a flip of the switch.”

Proposition 22 isn’t simply an exception for companies.

Uber CEO Dara Khosrowshahi gave a similar opinion, telling MSNBC, “This is a model that we built over ten years… it would be a significant amount of time to switch over” although a shutdown in California would be “really, really unfortunate”.

In the end, the “looming crisis” never came to pass, and instead Uber, Lyft and company focused their attention on passing legislation to circumvent AB 5. In late August, Uber, Lyft, and DoorDaash announced they would each contribute $30 million to a ballot measure campaign.

Thus, what was once considered a “Plan B” that Uber and others were “reluctantly funding,” to quote Uber’s chief legal officer Tony West, quickly ballooned into the most expensive ballot initiative in California’s history, with a familiar handful of companies spending excess of $200 million on its behalf.

However, Proposition 22 isn’t simply an exception for companies.

It also includes a number of concessions to drivers, including a minimum earnings requirement, compensation for additional expenses, non-discrimination protections, and ACA compliant healthcare. Needless to say, these changes will have some serious impacts on how much gig workers will actually take home.

Given the current statewide minimum wage, the requirement enacted by Proposition 22 actually ends up being at least $15.60 an hour.

Probably the most significant of these is the minimum earnings guarantee, which the bill requires be “tied to 120 percent of [the] minimum wage with no maximum,” as well as include a per-mile compensation fee of $0.30. Before the bill was drafted, Uber reportedly promised “a minimum wage of $21 per hour while a driver had a passenger or was on the way to pick one up” according to the New York Times.

Given the current statewide minimum wage, the requirement enacted by Proposition 22 actually ends up being at least $15.60 an hour, and around $18 in areas like Los Angeles and San Francisco.

Factoring in the per-mile compensation, that figure is sure to increase. However, it becomes a bit more difficult to calculate, since the length of a given ride-sharing or delivery trip can vary from just a few blocks to dozens of miles.

Using some rough numbers, though, we can get an approximate picture.

In 2016, the company SherpaShare, which provides analytics for drivers, published numbers that placed the average length of an Uber ride at 5.7 miles during the first three months of the year, and 6.4 miles during the last three. Assuming a driver takes one assignment in an hour, someone working at the state minimum wage should earn around $17.31 – $17.52 in that hour on Uber.

All of that is also without tips, which Proposition 22 now prevents from being used to subsidize the driver’s base wage.

However, people don’t normally take just one assignment, and on average a typical driver will cover about 20 miles in an hour, or $6.00 in per-mile payment. This brings our minimum wage estimate up to $21.60 for an hour’s worth of work on Uber.

If that person is driving in Los Angeles, that figure is increased again to around $24, and if they are driving in San Francisco, they should make around $24.70. If that person is driving in Emeryville, which touts the highest minimum wage in both the state and the nation, the wage for an average hour on Uber should be around $25.56.

All of that is also without tips, which Proposition 22 now prevents from being used to subsidize the driver’s base wage (as was common practice for DoorDash and Instacart in years prior). Not everyone tips, but of those who do the average runs about $3.

With that added in, a driver for Uber who gets tipped well could theoretically make an easy $25 for a single hour of labor under Proposition 22. If they live in a higher paying area, those earnings could be closer to $30.

However, as in most hypotheticals, the word ‘should’ is doing the heavy lifting in this scenario. As good as $21-per-hour wages sound for drivers, there are a lot of factors that are left unaccounted for in this model.

“The initiative’s lower figure assumes the drivers already have a vehicle and are driving just a few hours a week…” —  Labor Center, UC Berkeley

Just days before the November election, the Labor Center at UC Berkeley released a report that explored some of these factors, and painted a discouraging picture of Proposition’s 22’s consequences.

The report pointed out several holes in the ballot measure’s extension of worker benefits, and suggested that drivers would actually be earning significantly less than projected.

According to the Labor Center study, Proposition 22 only requires payment for time spent on the way to a customer or with a customer in the car. This means that all the time that drivers have to spend driving home or have to wait between orders is left unpaid for. Additionally, the $0.30 per mile payment was decidedly lower than the amount needed to cover the costs of driving and maintaining a car.

“[T]he IRS estimates that the real per mile costs of owning and operating a vehicle are 58 cents per mile. The initiative’s lower figure assumes the drivers already have a vehicle and are driving just a few hours a week; it does not include all the fixed costs of acquiring, owning and operating a vehicle” the report reads.

Finally, the report noted, as independent contractors, drivers would be required to pay “both the employer and employees share of payroll taxes.” After subtracting the worth of these unpaid expenses from the adjusted minimum wage of $15.60, drivers are only left with low guaranteed earnings of only $5.64.

While there is explicit language for things like healthcare, disability insurance and anti-discrimination measures in Proposition 22, there is no such guarantee of sectoral bargaining.

The report also notes that paid rest and lunch breaks, unemployment insurance and sick leave are not provided under the legislation, and that the ACA compliant health care stipend advertised by the proposition would be out of reach for the “vast majority” of drivers.

But these aren’t the only benefits that seem to be lost in the mix. Collective bargaining was also on the table in the days before the bill’s actual drafting.

The New York Times reported that companies were also going to advocate for sectoral bargaining. “The companies said they would also push for so-called sectoral bargaining, which would allow drivers across the ride-hailing industry to band together in labor negotiations” said the Times.

Sectoral bargaining is a variation of traditional collective bargaining where agreements are made between workers and management that have an effect across companies, presumably setting industry-wide standards. In many European countries, sectoral bargaining is common, and facilitates more workers reaping the benefits of labor agreements.

“It’s a priority for us  to work with governments across the U.S. and the world to make this a reality.” — Dara Khosrowshahi

However, while there is explicit language for things like healthcare, disability insurance and anti-discrimination measures in Proposition 22, there is no such guarantee of sectoral bargaining.

Almost immediately after Proposition 22’s passage, the gig companies made it known they meant business, and that Proposition 22 represented a national trend.

“We are committed to working with lawmakers across the country and in Washington to develop tailored solutions that reflect the 21st century economy,” DoorDash CEO Tony Xu said on the company blog the day following the election.

Uber CEO Dara Khosrowshahi mirrored Xu’s sentiment.

“Going forward, you will see us more loudly advocate for new laws like Prop. 22, which we believe strike the balance between preserving the flexibility that drivers value so much, while adding protections that all gig workers deserve.”

“[I]t’s a priority for us” Khosrowshahi added, “to work with governments across the U.S. and the world to make this a reality.”