Prop 22 is an initiative for rideshare drivers, like Uber, Lyft, and Doordash, to be classified as independent contractors instead of employees. It advocates that these workers would then be independent contractors who have the labor and wage policies specific to the companies they work for instead of employee benefits of: 

• Overtime 
• Paid sick leave
• Health care 

California Supreme Court overturned Prop 22 because it was deemed unconstitutional.  The Bill, which was signed into law in 2021 had a “forever” provision that effectively ties the hands of future legislators – which is – as the court says – unconstitutional. This may influence rideshare apps and their future in California. Read more on Prop 22 explained. 

Prop 22 Overturned by CA Supreme Court Explained

“So the California Supreme Court recently held that Prop 22 is unconstitutional. That puts into question everything that Uber and DoorDash have done to try to exclude their workers as employees. The statute was really interesting, because first in chronological order came AB5. AB5 as of January, 2020 gives a different standard for how workers are going to be classified as contractors or employees. 

All of the drivers for Uber and DoorDash and all the rideshare companies potentially could have been reclassified as employees and that business model that Uber has and DoorDash have, and Lyft doesn’t really jive with having workers as employees.

Because what are you going to do? You’re going to have somebody sit for eight hours a day waiting for a passenger to say, “Hey, I’ll click on the app. I need to ride to the airport.” It’s not profitable. The people who are driving don’t really want to be treated as employees. They want to be able to work three or four hours when they want to. They don’t want the company saying, “Hey, you need to be available for eight hours. Hang out on this corner or go to the airport and hang out for eight hours until somebody comes through.” 

That just doesn’t make any sense.

So the California Supreme Court held that to be unconstitutional and now we’re going to have to see exactly where this goes. The federal government, there’s a bill that’s been circulating. I believe it passed the House potentially on its way to the Senate. It’s called the PRO Act. 

The PRO Act is going to take what California did with AB5 and make it a federal law, which now means there are three elements about whether a company can classify a worker as a contractor. Those will become federal and it makes it much harder for anybody to be a freelancer, right?

So imagine the bookkeeper you hire that works out of their house, the marketing person, anybody, your CPA, maybe they’re a small company, they don’t have employees, they don’t have an office, they don’t have a lot of clients, they don’t do any advertising, how are you going to confirm and show the government that this person really is an independent contractor?

It’s going to be pretty hard. So it’s going to make it challenging and more costly for businesses and really prevent people from finding work that’s suitable for them.

Maybe these might be retired people who don’t want to work long hours and they just want to have one or two clients and that’s all they really want. There’s a lot, the majority of businesses out there in the United States and California are small companies. That’s really the majority of what we’re dealing with as small business owners. This Prop 22 basically says that the legislators’ hands are tied for eternity. They could never change anything.

That’s an interesting thing. They say it’s unconstitutional, but they might have directions to bring it down to the lower court that says, Here are the instructions, what you can do. You can up your Prop 22, but limited. There’s probably going to be some limitations on it.”

What is the difference between Prop 22 and AB5?

“So AB5 was how we classify the workers. Prop 22 says we’re never going to even get to AB5. When it comes to being a driver for a rideshare company or DoorDash, as long as you meet a couple of elements of that definition, you’re delivering people or product, then it eliminates that analysis and basically, you’re automatically going to be a contractor. So it literally sidestepped to AB5 and basically said you’re automatically a contractor. We’re not even going to worry about AB5.

So what that means is if the U.S. Supreme Court finds that Prop 22 was truly unconstitutional, then all of these workers will have to go through that AB5 analysis. The chances are they may not be true contractors under that new analysis. So Uber and Lyft and DoorDash threaten to leave California and that’s I think what we’re looking for – potentially in a lot of different states who are going to follow the same.

AB5 is not just California. It’s the ABC test. There are many states that have that. In fact, about half of all states use the ABC test. Maybe not in the same with all three elements, some might have A and C or A and B or C and A, different variations of that, some might have all three elements, but they do have some form of that. So it’s going to affect a lot of people in a lot of different states.”

How does the Department of Labor’s final ruling relate to this pro bill?

“Well, the Department of Labor basically, it’s funny that the notes they had under that clarification they put out, in a sense, it was just regurgitating what they’ve always been saying and making it harder to treat a worker as a contractor. But when the PRO Act comes out, if it does pass the Senate and it becomes law in all 50 states, then they’re going to just come out with a whole another decision and interpretation that says, “Well, forget about what we said before.” 

All of these rideshare drivers, any drivers are really going to be employees. So it’s actually going to make it even harder. They’re going to change it again.”

How does this impact my business?

“I mean, you’re going to have to do a lot more. You’re going to have to be more established. Just simply having a couple of clients and no website and if you don’t have an EIN number and you don’t have a business entity, it’s going to be much harder. In the state of California, you actually have to have a business license really to pass AB5 at minimum for a lot of those exemptions.

So yeah, you’re going to have to spend a lot more money, which means you’re going to have to hire potentially a CPA who’s going to have to prepare another business tax return, that’s going to cost more money for the business owner, which is going to increase prices. In a sense, people are going to have to be forced to become employees when they really don’t want to.” 

New laws and regulations require meticulous care when identifying and submitting tax forms for your employees. Completing a got1099 report correctly classifies your employees from independent contractors, and helps you stay ahead of an EDD audit. 

We provide clear facts on your hires so you can make better decisions. If we find an independent contractor is actually an employee, this allows you to make the correct changes – whether that be to actually hire the contractor as an employee, or correctly classify them. 

Still have more questions about EDD Audits? Read more here to help save your business.