The gig economy has become an essential component of the lives of most Americans. Gig economy companies are generally characterized as app-based businesses, and to date most have been involved in transportation and delivery services. Hailing an Uber ride, getting groceries delivered by Instacart or those late-night snacks delivered by DoorDash are familiar to many of us. A recent California Superior Court ruling struck a blow to the operations of these gig companies, however, and it could have far-reaching ramifications for the gig economy across our country. We expect this controversy to continue and intensify in other states. Employers and especially gig companies in all states should carefully monitor this process to ensure that they are prepared for the consequences of the courts’ decisions in the states in which they operate.
At the heart of this controversy is the classification of workers in gig companies. Most of these companies classify their workers as independent contractors rather than employees because the workers have the freedom to choose to work or not work whenever they want. The workers rather than the companies are entirely in control of their schedule. Because the workers are classified as independent contractors, companies do not have to provide benefits to these workers and the companies do not have to withhold or pay certain employment-related taxes in connection with these workers. This provides economic benefits to the gig companies, and it has been a component of the success that many of them have enjoyed.
In 2019 the California legislature passed Assembly Bill 5, which generally required certain gig economy companies to classify their workers as employees subject to certain narrow exemptions. After prolonged controversy a new ballot initiative called Proposition 22 arose in the November 2020 California state elections. Proposition 22 would generally allow gig companies to classify their workers as independent contractors, and gig company workers would receive certain new advantages.
Proposition 22 was approved in November 2020 by approximately 58% of California voters. In response to a lawsuit filed by drivers and a labor advocate, however, a California Superior court declared on August 20, 2021 that Proposition 22 was unconstitutional and unenforceable. Gig company workers and labor advocates cheered this ruling, but the gig companies vowed to file an appeal. These issues will now need to be resolved by the California appellate courts, and it appears that Proposition 22 will remain in effect pending the outcome of this appeal process.
A fundamental underlying problem here is that the nature of how we work has radically changed over recent years. It’s no longer easy to strictly classify workers as employees or independent contractors. While it’s difficult to predict what will happen in this context, we believe that we may see a new hybrid category of workers emerge from this controversy. This may end up being the best result for all sides if it allows a more equitable assessment of a worker’s position. Don’t get too excited on this, though – it’s liable to take a while before any meaningful changes come down.
The gig companies may be able to overturn the California court’s ruling and restore Proposition 22, but it appears that a multi-state movement regarding this worker classification is beginning to emerge. These same issues appear to be arising in New York, Illinois and Massachusetts, and they will likely come up in other states. Companies, especially gig companies, should be prepared for the courts’ decisions and seek legal advice if needed to ensure they are compliant.
This client alert is a joint project by Gunster’s Technology Law and Emerging Companies and Labor and Employment Law practice groups. Our ability to seamlessly combine our competence areas allows us to quickly add significant value to our clients’ situations.
Please reach out to us if you have any questions on the matters discussed in this alert or any other technology, emerging company or labor and employment topic.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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