Uber and Lyft’s California Proposal Is a Mishmash of Old Ideas for Fixing the Gig Economy
The past is our best guide for understanding the future of ride-hailing apps
Uber and Lyft are at war with the state of California after a judge ruled last month that ride-hailing companies, like other businesses, should be subject to a new law that classifies their workers as employees rather than independent contractors.
Instead of complying with the ruling, which would fundamentally change how the companies operate and make its workers eligible for protections and benefits, Uber and Lyft have floated the idea of becoming franchises and have also threatened to shut down completely. Their preference, though, is that a compromise of sorts be instated by a California ballot initiative called Proposition 22: They want to keep their workers categorized as independent contractors but provide them with a handful of benefits.
Uber and Lyft say they’ve created a new type of work that deserves new rules. Their opponents say that what these companies have created is an app for an old type of work — employment — and that they only want new rules because it is less expensive than following the existing rules, which guarantee employees protections like minimum wage, overtime, and the right to form a union.
California residents will vote on the ballot initiative in November, but we already know how the debate around it is likely to shape up. That’s because Proposition 22 is a mishmash of old ideas that have already been well-hashed by think tanks, advocacy groups, labor advocates, and other attempts at legislation.
By the middle of the past decade, a debate was brewing over the business model of companies like Handy, Postmates, Lyft, and Uber. Workers in the United States who are classified as employees are entitled to benefits and labor protections. Independent contractors are not.
“Gig economy” companies had put their workers in the less expensive no-rights bucket, arguing that their apps created freelancing jobs because workers could decide when to work. But these companies also managed workers, via those apps, in ways that felt employee-like: The workers had little power to negotiate the terms of their contracts or control which jobs they took. Meanwhile, a solution for addressing this conundrum was making the rounds in academic circles: A third category of workers — neither employee nor independent contractor, but something in the middle and still entitled to some protections.
Former National Labor Relations Board Chair Wilma Liebman says she supported the idea at the time, thinking of how a third category of workers operates in countries such as Canada and Germany. This category had rights beyond those of independent contractors, giving drivers in Canada, for example, the right to collective bargaining. A Wall Street Journal article quoted her as favorable to the idea.
Then Liebman started getting calls from Uber-like companies — they liked it, too. But learning more about their interest made her start to rethink her support.
“What I quickly realized,” Liebman says, “was they were interested in [a third category of workers] not in the way that I was interested in it, but as a way to immunize the platform if they were to provide a range of benefits.”
About a year after the Wall Street Journal article was published, Handy, a house cleaning and handyman services company created a proposal that would do just that. The company passed around a draft of New York State legislation that would create a deal of sorts: If “gig economy” companies opted into the program, they agreed to divert 2.5% of every transaction into a benefit account that workers could use to purchase health insurance or other benefits. In exchange, workers — even past workers who no longer did anything for the company — would be designated as independent contractors. They would, in other words, be immune from lawsuits challenging their workers’ status — and laws like the one recently passed in California.
Considering that federal and state payroll taxes alone cost employers about 12% of payroll, this 2.5% commitment would require much less investment from Handy — the target of many employee misclassification lawsuits — than would classifying its workers as employees. “The amount of money that’s supposed to be put into these portable benefit funds seems so meager,” Larry Engelstein, executive vice president of 32BJ Service Employees International Union (SEIU), told Reuters at the time. “The actual benefit a worker is getting hardly warrants what the worker is giving up.”
“The right path forward would be to say let’s put a solution in place, try it out, and see if it works.”
The legislation never made it to the New York State Assembly floor. But the company did end up pursuing (and in some cases passing) laws in several states that preemptively categorized its workers as independent contractors, with no benefits guaranteed.
Proposition 22 is built on the same concepts as the Handy proposal, such as a third category of employment. That idea was most recently proposed in the United States by Alan Krueger, an economist, and Seth Harris, a former deputy secretary of labor under the Obama administration, in a 2015 white paper proposing a “dependent worker” category. Another is “portable benefits,” or benefits that could be detached from a traditional job, with companies paying toward workers’ benefits depending on how much they work and regardless of their employee status. That idea has been championed by the Aspen Institute and U.S. Senator Mark Warner, who has advocated for funding portable benefits pilot programs, but has many variations. In the Handy proposal, “portable benefits” meant companies diverting a small percentage of wages into a benefits account, but more ambitious proposals have advocated for portable benefits systems capable of funding a robust safety net.
If Proposition 22 were to pass when it comes to a vote in November, it would, like the “dependent worker” paper suggested, force companies to provide occupational accident insurance and ban them from discriminating against drivers. And like previous portable benefits proposals, Proposition 22 would require companies to pay drivers some benefits. Those who complete an average of at least 15 hours of “engaged time,” for instance, would earn a health care subsidy.
Back in 2015 and 2016, both Krueger and Harris’ “dependent worker” proposal and Handy’s draft legislation also suggested that companies should be protected from lawsuits alleging that providing some benefits is evidence they are acting as employers and therefore should classify their workers as employees. The Uber- and Lyft-backed ballot initiative does the same. It designates drivers as independent contractors “notwithstanding any other provision of law.” It also goes as far as to mandate that companies provide safety and sexual harassment training, both of which would arguably improve their services, but could also, without Proposition 22, be used as evidence that workers are being misclassified.
Whether you call it a third category of workers, portable benefits, or Proposition 22, carving out a special rulebook for how a certain set of companies treats its workers depends upon the idea that the work they provide is meaningfully different from employment and freelancing. And this question is at the heart of both the old and new debates.
In their 2015 paper, Harris and Krueger argued that Uber and Lyft, and companies like them, did not meet the definition of either independent contractors or employees for a variety of reasons. They wrote:
On the one hand, independent workers have the ability to choose when to work, and whether to work at all. They may work with multiple intermediaries simultaneously, or conduct personal tasks while they are working with an intermediary. It is thus impossible in many circumstances to attribute independent workers’ work hours to any employer. In this critical respect, independent workers are similar to independent businesses. On the other hand, the intermediary retains some control over the way independent workers perform their work, such as by setting their fees or fee caps, and they may “fire” workers by prohibiting them from using their service. In these respects, independent workers are similar to traditional employees.
In a response to Harris and Krueger, the Economic Policy Institute (EPI) wrote a paper noting that Uber drivers cannot keep their apps open and reject rides without being penalized by Uber for having a low acceptance rate. It also noted that Uber operates a “guaranteed earnings” program that keeps track of work time and basically functions like a minimum wage. “We disagree with the proposal to deny minimum-wage and overtime protections to Uber drivers and see no need for a third employment status,” the paper concluded.
Harris declined to comment on Proposition 22. Krueger died in 2019.
In today’s version, Proposition 22 makes the case that flexibility is what makes Uber and Lyft drivers unlike employees. “Recent legislation has threatened to take away the flexible work opportunities of hundreds of thousands of Californians, potentially forcing them into set shifts and mandatory hours, taking away their ability to make their own decisions about the jobs they take and the hours they work,” the proposal states. This is disingenuous: No law prevents employers from giving their employees flexibility. Employers may choose, however, to schedule shifts or set mandatory hours, and in a court petition, Uber argued that it would need to do so in order for the time drivers spend on the app to be “economically productive for Uber.”
If Proposition 22 passes, drivers will be entitled to a “minimum earnings guarantee” equal to 120% of the California minimum wage. This isn’t quite the same as a minimum wage, because only the time when a driver actually had a passenger in the car would count as work — not time between trips, which one analysis suggests accounts for 33% of a driver’s time. In other words, what Uber and Lyft call an hour of “engaged time” might actually represent 90 minutes of a driver’s actual time. Uber and Lyft would be required to pay an hourly “minimum wage” per hour of engaged time, not real time.
Which brings us to another old debate: Whether “waiting time” counts as work. The EPI paper cited a 1940 Supreme Court decision that noted, “Readiness to serve may be hired, quite as much as service itself,” as well as cases in which on-call firefighters and forestry workers were considered to be “working” even as they awaited a blaze, for example. It argues that drivers should fall into the same category:
If [a driver] does not turn off the app, she cannot “go to her traditional job, undertake another moneymaking activity, drive her children to school, or park by the side of the road and take a nap.” Given that she has to monitor the app and respond to pings within 15 seconds, none of those activities is a realistic possibility.
Second, while she can refuse customers or wait until after she has completed her personal activities to accept a ride request, she cannot do so without adverse consequences, including possible termination. She has to respond to requests within 15 seconds or lower her acceptance rate, and a lower acceptance rate can foreclose Uber’s guaranteed pay rate and lead to deactivation.
The EPI suggested that in the case of a driver with two apps turned on, the one with which they ultimately accept the job should be required to pay for the waiting time.
Taking into account unpaid waiting time, unreimbursed expenses while waiting, taxes, and other costs of the independent contractor classification, UC Berkeley’s Ken Jacobs and Michael Reich have calculated the value of the pay package proposed by Proposition 22 as $5.64 per hour. (Other estimates based on different assumptions, such as only counting time with a passenger in the car as work, have concluded Uber currently pays drivers as much as $23 per hour.)
Even if the value of Proposition 22’s protections to drivers turns out to be low, says Arun Sundararajan, a professor at NYU Stern School of Business and the author of The Sharing Economy, Proposition 22 is a good starting point. “The right path forward would be to say let’s put a solution in place, try it out, and see if it works,” Sundararajan says. “And if it turns out that the floor that the solution is creating is too low, let’s introduce new legislation that raises this floor based on data.”
That could be a difficult change to bring forward. Proposition 22 notably goes the opposite way of Harris and Krueger’s recommendation that “dependent workers” should have a right to organize, instead requiring that any law seeking to grant that right be made as an amendment, with seven-eighths of the legislature’s approval.
In the end, the debate once again comes down to whether Uber and Lyft drivers are doing work that is meaningfully different than work that has previously existed. Sundararajan, like most supporters of the ballot initiative, believes that drivers aren’t employees and that the restraints on flexibility created by algorithms that incentivize and punish certain behaviors don’t amount to management. “It is more fluid. It is more flexible. It is more ad hoc,” he says of working for Uber and Lyft, compared to a job at a factory. “It does allow you in one hour to take a job from three different platforms. It’s hard for me to wrap my head around the idea that this is just like any other employment. It’s not.” From his perspective, Proposition 22 would give drivers more rights than they currently have as nonemployees.
In California, where Uber and Lyft drivers have already been determined to be employees under the new law, passing the ballot initiative would reduce the rights drivers currently have.
“Why is it that you reject the other aspects of employment status?” Liebman says of the list of benefits outlined in Proposition 22. “What is it that applies to other employers in the state of California that is so threatening? It’s kind of a technology mindset that thinks you’re just in another universe.”