While national elections have dominated the news cycle, many transformative legislative propositions and regulatory measures were also on the ballot. One of the most consequential and possibly controversial was Proposition 22 (Prop 22), which passed in California, the country’s most populous state. The proposition grants app-based transportation and delivery companies a special exception to California’s Assembly Bill 5 (AB5) by classifying their drivers as “independent contractors”. Jack Plotkin, a financier and investment strategist who has spent nearly a decade at Goldman Sachs, weighs in on the national relevance of Prop 22.
Support for Prop 22
Jack Plotkin begins by explaining that the five major gig companies poured an unprecedented amount of funding into the “vote Yes” campaign for Prop 22, turning it into the most expensive ballot measure in California’s history. According to Plotkin, it is estimated that Uber, Lyft, Instacart, Postmates, and Doordash contributed more than $200 million to campaigns supporting Prop 22. On the other hand, labor groups such as Rideshare Drivers United and Gig Workers Rising, headed by the California Labor Federation, made up the opposition to Prop 22. With more limited access to funds, they spent less than $20 million on the “vote No” campaign. Given this disparity, it is not surprising that, based on unofficial results, Prop 22 passed with 58% support. Almost immediately, Uber (UBER) and Lyft (LYFT) stocks were up by 15% or more.
According to Plotkin, California’s Assembly Bill 5, which went into effect on January 1, 2020, ensured that gig economy workers would be entitled to minimum wage, workers’ compensation and other benefits by requiring companies to apply stricter guardrails to the determination of whether someone could be classified as an independent contractor. More specifically, companies would only be able to classify their workers as independent contractors if they were free from company control and performed work outside the company’s core business. Rideshare giants were heavily critical of the new bill, stating that it would be destructive for their business models. Jack Plotkin points out that the majors have refused to comply with the bill, threatening to shut down their operations in the state if they are not exempted from the law.
Following pitched legal battles, California courts ordered the gig companies to classify their workers as employees. They were later granted a temporary reprieve as they appealed the decision, attaching even greater importance to Prop 22. Other legal battles in California are similarly addressing the contractor classification for on-demand food and grocery delivery companies. App-based companies hailed the voting result as a victory for independence and flexibility of rideshare and delivery drivers.
The Impact of Prop 22
Under Prop 22, the gig workers will still be entitled to some benefits, like vouchers for subsidized health insurance, guaranteed hourly earnings in the amount of 120% of the minimum wage, 30 cents per engaged mile for expenses, protection against discrimination and sexual harassment and occupational accident insurance. Guaranteed earnings are based on a driver’s engaged time, but not the time that is spent waiting for the gig. The benefits are less extensive, and therefore more acceptable to the gig companies, than they would have been under the AB5 law.
Uber and Lyft have long claimed that California regulations do not appropriately account for the complexity of their business models and that they should be treated as technology platforms rather than transportation providers. Jack Plotkin points out that they have argued that reclassifying their drivers as employees would cause them irreparable harm. On the other hand, public attorneys claimed that Uber and Lyft gain an unfair competitive advantage by classifying their workers as independent contractors. In an October ruling, a California judge stated that the financial burden from implementing the AB5 law would not cause either company irreparable harm. With Prop 22 passed, the ruling is rendered largely irrelevant.
Jack Plotkin points out that the labor organizations have publicly vowed to continue their fight. The biggest concern is that the gig companies’ financial advantage made the playing field uneven. Worker unions’ representatives argue that Prop 22 is a dangerous precedent and that other companies could be encouraged to seek exemptions from labor laws. Such moves, if successful, could significantly lower the labor standards for workers in the delivery and logistics industry. They also believe that the incoming Biden administration will be sympathetic to their cause. California Governor Gavin Newsom, who signed AB5 into law, did not take sides on Prop 22, but encouraged a compromise solution on which both the companies and the unions could agree.
What Does it Mean?
The passage of Prop 22 in the home state of many gig economy companies is likely to be seen as a precedent for legislation around the entire country. Jack Plotkin, who spent nearly a decade at the leading investment bank Goldman Sachs, adds that it would not be surprising to see more legal and legislative action addressing the gig economy across the US. After spending unprecedented amounts of money in California, app-based companies are going to be encouraged to bring the fight to other states. As the gig economy continues to grow and make up larger share of the US and global economy, the implications of the fight between app-based companies and labor organizations will be closely watched by markets and felt by people around the globe.