What the Passage of Proposition 22 in California Means for Employers

November 5, 2020 6 min Read Time

California voters have passed a state statute that will exempt gig economy companies like Uber and Lyft from a state law that would force them to treat their drivers as independent contractors rather than employees.

Worker classification has emerged as a hot topic with the rise of smart devices and apps. This measure, known as Proposition 22, is the latest effort to address the complex issues that surround how employers determine the legal status of their workers.

If you're not a company like Uber, you may be wondering what this has to do with you. In reality, the conversation surrounding the approval of Prop. 22 has reached far beyond gig workers on app-based driving platforms to include employers at large. In this overview, we’ll dissect Prop. 22 and explore what it means for how employers tackle worker classification now and in the future. 

What is Proposition 22?

Prop. 22 is a ballot initiative that exempts some businesses from the three-factor test to determine whether workers are independent contractors, known as Assembly Bill 5 (AB-5). Under this “ABC test,” a worker would qualify as an independent contractor if:

  • They are free from the employer’s control and direction in the performance of work
  • They are responsible for work outside of the employer’s usual course of business
  • They are engaged in a trade, occupation or business of the same nature as the work being performed

Under this test, gig economy companies like Uber, Lyft and DoorDash would no longer be able to classify their workers as independent contractors. Those three companies launched funding and were joined by Instacart and Postmates to ultimately funnel more than $200 million into changing the initiative.

Prop. 22 allows these businesses to continue defining app-based rideshare and delivery drivers as independent contractors and enacts labor and wage policies specific to these types of workers. These policies require companies to:

  • Set a "net earnings floor" that guarantees a certain level of income
  • Provide benefits like healthcare subsidies and occupational accident and accidental death insurances
  • Develop anti-discrimination and sexual harassment policies

Why do companies employ independent contractors?

Employers hire independent contractors for many reasons, but principally for the cost savings associated with this worker status. For workers classified as employees, companies must comply with payroll tax requirements and pay half of Social Security and Medicare (FICA) taxes, as well as unemployment insurance and worker’s compensation insurance. Full-time employees are also expensive in terms of health insurance and other benefits, and their employment is governed by a whole host of regulations covering wages, overtime, paid leave and more.

On the other hand, hiring independent contractors helps companies avoid those high costs and strict regulations. Employers are no longer required to withhold and pay FICA taxes or provide a comprehensive benefits package.

Companies save up to 30% when they hire independent contractors over employees, according to the National Employment Law Project. These workers offer greater flexibility and are ideal for short-term, project-based work, but they also require employers to adopt a more hands-off approach, since independent contractors typically have greater control over how they complete their work.

These workers are growing in number. Around a sixth of enterprise workers were on company payrolls as independent contractors and freelancers or as short-term W-2 employees, according to a report from the ADP Research Institute. In the last decade, the number of gig workers at companies has grown by 15%, with more than 70% of these workers saying they made the active choice to perform gig work for the flexibility it allows them.

Why is Proposition 22 so controversial?

Many states already have laws that attempt to define independent contractors versus employees, but labor advocates argue that companies often intentionally misclassify workers to save on costs. Laws such as AB-5 are meant to combat worker exploitation and provide greater worker protections.

However, there has been backlash from businesses and workers alike, as many companies are unable to meet the stricter standards and consequently can no longer afford these workers. After AB-5 became law in California, Vox Media fired more than 200 freelancers to comply with the provision that limits written content submissions to 35 per year.

Prop. 22 was borne from these concerns, and advocates say it allows gig work to continue while also providing workers some new benefits.

How does this impact employers?

The approval of Prop. 22 is a win for employers that rely on contract work, serving as a potential blueprint for other states. While the initiative targeted rideshare and delivery drivers, its passage may be significant for other types of freelance and contract workers.

In recent years, other states have considered their own versions of AB-5, including New York, Illinois, Wisconsin, Oregon and Washington. But the approval of Prop. 22 signals a lack of public support for these bills and may dissuade states from adopting new standards for worker classification.

It may also affect efforts to adopt federal legislation like the Protecting the Right to Organize Act—supported by former Vice President Joe Biden— which would use the same three-factor test as AB-5 to determine who qualifies as an independent contractor. It seems that legislators will need to bring workers and companies into the conversation and amend these proposals if they want to address the issue of worker classification in the future.

Two million Americans began performing freelance work in 2020, according to Upwork. 36% of workers said they freelance full-time, up 8% from a year earlier. 58% of workers not familiar with freelance work reported they would now consider it with the rise of remote work during the coronavirus pandemic.

These numbers indicate freelance work is a growing trend employers may need to consider in the future to attract top talent, and Prop. 22 is a good sign for their ability to do so without restriction.

However, companies must still ensure they are not misclassifying workers under current state laws. Noncompliance includes:

  • Fines and penalties of $50 for each W-2 form that should have been filed
  • A penalty of 1.5% of the wages and 40% of the FICA taxes that were not withheld from the employee
  • Another penalty of 100% of the matching FICA taxes the employer was responsible for

Gig and freelance work are clearly here to stay, so it will become more important than ever to form HR policies for this type of work that are compliant and competitive. A business intelligence platform can help you remain compliant with current employment laws—regardless of worker classification—by collecting verified, up-to-date labor law and compliance information in one place. Relying on the potential minefield of inaccurate information from internet research opens your business up to costly penalties and fines. Contact us here to learn more.

About Expandopedia:

Expandopedia is a global compliance and business intelligence platform designed for HR professionals and business strategists.

Headquartered in Chicago, Expandopedia is powered by a global network of HR & Legal professionals to provide the intelligence that businesses need to thrive and remain compliant when running a multinational business.

Expandopedia provides all the knowledge and insights to successfully onboard, retain and offboard employees as well as data-driven analysis to empower strategic decision making.

Written by Annalisa Rodriguez


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