September 23, 2021
California voters approved Proposition 22 last year to to give app-based companies like Uber and Lyft an exception to Assembly Bill 5, which required gig workers to be treated as employees. With the proposition’s passage, voters elected to treat gig drivers as independent contractors. Its passage had monumental implications for rideshare companies such as Uber and Lyft.
A court last month struck the proposition down, holding that it violated the California State Constitution. The California Constitution gives the legislature power to create worker’s compensation laws"'unlimited by any provision of this Constitution." The Court found that when this section was ratified in 1918, “the statutory initiative power already existed in the Constitution… [and that a] grant of plenary power to the Legislature conflicts with a limitation on its power to amend an initiative…” The court ultimately held that “if the People wish to use their initiative power to restrict or qualify a 'plenary' and 'unlimited' power to the Legislature, they must first do so by initiative constitutional amendment, not by initiative statute.”
California appears to be moving away from classifying app-based workers as independent contractors. This shift comes as many individuals in the “gig economy” use rideshare apps like Uber and Lyft as a way to earn a living. The overturning of Proposition 22 means that, at least in the interim, companies like Uber and Lyft will need to provide their California drivers with benefits options and treat them as employees.
This decision, if it stands, will likely have ramifications in other industries using contractors as well.
Taxpayers should carefully consider their business models and consider whether they may now be required to treat certain California contactors as W-2 employees for state taxes.
Because the case is pending appeal, the decision is not yet settled law. The case will be decided by the California Court of Appeals and then likely reach the California Supreme Court.
If in the end the court’s decision stands, it will inevitably lead to higher prices for services companies like Uber and Lyft provide.
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