California Voters Approve Prop 22, Allowing Uber & Lyft Drivers to Remain as Independent Contractors
California ride-hailing providers Uber Technologies Inc. and Lyft Inc. will be able to keep their drivers as independent contractors in California as voters overwhelmingly approved Proposition 22, an amendment to the state's Assembly Bill 5 (AB5) that passed last year.
Last September, California became the first state in the U.S. to pass a law designed to protect so-called "gig economy" workers, when the state's residents voted to approve AB5. The measure went into effect on Jan 1, 2020, but was challenged in court.
AB5 required that California-based ride-hailing companies Uber and Lyft, as well as other app-based delivery companies, classify a majority of their drivers working over 40 hours each week on the platform as full-time employees. By doing so, it would have required Lyft and Uber to pay their drivers overtime, sick days, and other benefits that full-time employees in California are entitled to by law.
By classifying drivers as independent contractors, ride-hailing companies such as Uber and Lyft are saving money, since they don't have to pay a minimum wage, overtime or sick pay to drivers. However the state of California loses out on millions in revenue from payroll taxes.
Reclassifying drivers could have amounted to more than $392 million each for Uber and Lyft in annual employee-related costs, according to data gathered by Reuters. Lyft argued that 4 out 5 of its California drivers do not support AB5 and would rather remain independent contractors.
Although the final votes are not officially tallied, current polling shows that 58% of California voters support the measure, with nearly 99% of precincts at least partially reporting. The results still must be certified.
"The future of independent work is more secure because so many drivers like you spoke up and made your voice heard - and voters across the state listened," Uber wrote in an email to its California drivers.
Both companies, along with delivery companies DoorDash, Instacart and Postmates, have collectively poured more than $205 million into the campaign to convince voters to support Proposition 22.
The approval by voters sent the stock of both Uber and Lyft higher on Wednesday. Uber's shares rose 16%, while Lyft jumped 18%.
Prop 22 allows drivers to remain as independent contractors, but provides them with some additional benefits, including minimum pay rates, healthcare subsidies and accident insurance.
As an alternative to AB5, Uber and Lyft proposed implementing a minimum earnings guarantee and a healthcare subsidy that drivers can tap into for medical expenses. Uber in an email to California drivers on Tuesday night said it looked forward to providing the new benefits as soon as possible and would offer more details in the coming weeks.
Over the summer, Uber threatened to suspend its operations entirely in California when the law requiring the company to reclassify its drivers as employees was supposed to take effect on August 21. But hours before the deadline, an appeals court in California allowed Uber and Lyft to continue treating their drivers as independent contractors as their appeal process worked its way through the court.
Uber and Lyft warned that if Prop 22 was not approved by voters on Tuesday, the companies would be forced to cut roughly 80% of its drivers and double fares in California. The state represented 9% or roughly $1.63 billion of Uber's 2019 global rides and food delivery gross bookings, and some 16% of Lyft's total rides.
Despite the presumed passing of Prop 22, Uber and Lyft are still facing pressure from investors to become profitable as publicly traded companies.
Although revenue from Uber's food delivery business Uber Eats rose significantly since the pandemic began in March, Uber has not been able to find a way to make its ride-hailing business profitable in the long term, and the global pandemic reduced demand for its core ride-hailing business.
Uber reported $2.2 billion in revenue in the second quarter this year, but gross bookings for the ride-hailing side of its business declined $10.2 billion, down 35% year-over-year. Uber said in February that it still expects to lose a total of more than $1 billion this year.
Uber is scheduled to report third-quarter results after the closing bell on Thursday.
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