California Prop 22, a Wayfair for business licenses?

The approval of California Proposition 22 in November 2020 allowed app-based delivery and rideshare companies to hire drivers as independent contractors (gig workers), and not as employees. Had voters rejected Prop 22 back then, such companies would have been required to make rideshare and delivery drivers W-2 employees.

Now the fate of Prop 22 — as well as the fate of affected gig workers and the companies that rely on them — is in the hands of the California Supreme Court. But before we dive into the possible ramifications of the Supreme Court decision, what is California Proposition 22?

Prop 22 allows companies to classify app-based delivery and rideshare drivers as “independent contractors” rather than as “employees.” It overrode aspects of Assembly Bill 5, exempting rideshare and delivery companies from a 2019 law requiring businesses to classify many workers as employees instead of independent contractors. 

Per the California Secretary of State official voter information guide:

• A YES vote on this measure means: App-based rideshare and delivery companies could hire drivers as independent contractors. Drivers could decide when, where, and how much to work but would not get standard benefits and protections that businesses must provide employees.
• A NO vote on this measure means: App-based rideshare and delivery companies would have to hire drivers as employees if the courts say that a recent state law makes drivers employees. Drivers would have less choice about when, where, and how much to work but would get standard benefits and protections that businesses must provide employees.

Additionally, Prop 22 entitles app-based rideshare and delivery gig workers to several new benefits, including guaranteed minimum earnings, a healthcare subsidy, compensation for vehicle expenses, and occupational accident insurance.

Californians approved Prop 22 by a notable margin: Close to 59% voted in favor of Prop 22 on November 3, 2020, while just over 41% voted against it.

The validity of Prop 22 is being challenged. Whether app-based rideshare and delivery companies can continue to hire and retain drivers as independent contractors or must classify them as employees is now up to the California Supreme Court.

Lower courts have been split on this issue.

On Tuesday, May 21, 2024, the California Supreme Court heard arguments for and against Prop 22. The oral arguments were reportedly lively, with justices focusing largely on whether initiative power (Prop 22) can or should take precedence over legislative power (AB 5).

The decision should be announced within three months.

If the state Supreme Court finds Prop 22 to be invalid, app-based rideshare and delivery companies will have to classify their drivers as employees and provide them with certain benefits. This will obviously come at a cost — not just due to the price of paying workers the California minimum wage and covering overtime or sick leave.

Should Prop 22 be overturned, rideshare and delivery companies would likely need to register with every city and county where drivers operate. That would be an enormous burden for them.

Currently, as gig workers, drivers are responsible for obtaining and updating any necessary business licenses. Depending on local requirements, one driver operating across two counties and three cities could need to register with five different local governments.

There are 58 counties in California and 482 municipalities. Large companies like Amazon, DoorDash, Lyft, and Uber could potentially face registration requirements in every local jurisdiction. While smaller delivery and rideshare companies operating in fewer locations may not have to register at that scale, they may be less equipped to handle any additional registration and licensing requirements.

Proposition 22 applies only to companies operating in California and their California drivers and deliverers. But states don’t exist in a vacuum — they tend to watch what other states are doing and, if something seems like a good idea, follow suit.

Massachusetts is already deliberating whether ride-share companies should classify their drivers as employees or contract workers. As the California Supreme Court determines the future of Prop 22, Massachusetts courts are deciding whether to allow a similar initiative on the November 2024 ballot.

If you’re familiar with the United States Supreme Court ruling in South Dakota v. Wayfair, Inc. (2018) and its impact on remote sales tax, you have an idea of what Prop 22 could unleash.

The Wayfair decision overturned the physical presence requirement that prevented states from imposing a sales tax obligation on remote businesses (aka, businesses with no physical presence in the state). Within a few years, every state with a general sales tax had adopted an economic nexus law to tax remote sales.

Prop 22 could be the Wayfair for business licenses. Should California reject Prop 22 and require rideshare and delivery companies to classify their workers as employees, other states may look to do the same.

And if Prop 22 is deemed to be sound policy, California (and other states) could impose similar measures on other industries that rely on gig workers.

“Both Wayfair and Proposition 22 illustrate significant regulatory changes for marketplaces,” says George Trantas, Senior Director of Global Marketplaces at Avalara. “Being prepared for the California decision and anticipating future decisions in other states will be key to lasting success. Because the nature of marketplaces is to disrupt the status quo and the goal is to survive long term, they need to balance compliance and growth in a world of constantly changing regulations.”

Avalara can help businesses comply with registration requirements throughout California and other states. We offer two levels of service.

Avalara License Professional Services is ideal for businesses facing major disruptions, like the expanded registration requirements the overturning of Prop 22 could create. Businesses seeking to simply reduce the in-house resources they currently devote to managing business licenses may prefer Avalara License Managed Services. Learn more about our business license solutions.

The fate of Prop 22 is unknown at this point. The court may reject or uphold Prop 22 in its entirety, or in part. It may provide clarification, or require the legislature to do so. Change could take effect immediately or over time.

App-based delivery and rideshare companies should watch closely and prepare for any eventuality. If ultimately required to obtain business licenses throughout the state of California, automating business license management can help. Schedule a call to find out more.