The National Impact of California Proposition 22

By: Professor Seth Oranburg

The day after the 2020 Presidential Election, Americans still do not know who will run our country for the next four years. But something surprisingly definitive happened in California on November 3 that seriously impacts the future of the gig economy. The most expensive referendum campaign in California’s history resulted in the passage of Proposition 22. Prior to this successful referendum, California law AB5 classified ridesharing drivers and other gig economy workers as employees. Now, Uber, Lyft, and other ridesharing drivers can be classified for tax and employment law purposes as independent contractors—at least in California.

But the California Proposition 22 referendum is also likely to impact the national economy in at least three ways.

First, passing Proposition 22 puts more pressure on the federal government to create a new worker classification at the federal level. Without explicitly doing so, Proposition 22 effectively creates a new worker status. Rideshare workers are taxed like independent contractors, but receive healthcare benefits and antidiscrimination protections of employees, plus a guaranteed hourly wage that starts at 120% of the state minimum wage rate. There is no correlated status under federal law: workers must pay the IRS either through employer withholdings and a W-2 filing or personally through form 1099. California ridesharing workers might presumptively be “1099s” for federal income tax purposes, but they do not necessarily meet IRS tests. The doubtful nature of their status must be resolved, potentially by creating a new federal status for this independent-contractor-plus classification.

Second, repealing AB5 emboldens new startups to pursue a gig worker model. This business model’s popularity and political salience is now more secure. Being a technology platform that facilitates gig work just got less risky, so more companies are likely to try to get in that game. This could mean that all sorts of part-time or low-skill workers start to migrate between employers on a weekly or daily basis, using an app to connect jobs with workers in industries expanding from ridesharing and food delivery to include jobs such as waiters, cashiers, doormen, and even phlebotomists.

Third, using referendum to impact business regulation and employment law opens the door to a new political strategy. Startups may now increasingly leverage popular support to push a referendum on business-related law or regulation, instead of lobbying politicians. Only about half of the states, mainly the western ones, allow laws to be passed by referendum. But in those states, we might see more activity around referendum. It’s too early to call this a game-changer for regulatory politics, but it’s likely to see increasing activity in this space, at least in the near term.

While it’s still too soon to call the results of the 2020 Presidential Election, it’s clear that ridesharing is on the rise. Whoever wins the Presidency will need to figure out how to make federal tax and employment regulations work for the increasingly significant gig worker in our economy.

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