Proposition 22 and the Potential Effect of its Failure on Gig-Workers and Franchising

By Amanda D. Dempsey

While all eyes are the presidential race, the franchise industry is watching California’s ballot initiative, Proposition 22. The passage of Proposition 22 would exempt “gig companies” from many of the requirements of CA-AB 5, legislation that became effective on January 1, 2020.

CA-AB 5 codified a revision to the independent contractor standard in California, which has resulted in the re-classification of many independent contractors as employees. The re-classification from independent contractor to employee requires employers to provide workers with benefits such as overtime pay, health care, paid sick lease, unemployment insurance and workers’ compensation.

Companies that employ drivers through apps, such as Lyft, Uber, DoorDash and Instacart have traditionally classified workers as independent contractors, which has given drivers flexibility in scheduling, desired work hours per week, etc., but does not provide them with benefits.

If Proposition 22 passes, gig companies would be permitted to keep workers classified as independent contractors, but must still provide certain benefits, including pay at least 120% of minimum wage, health care subsidies, and accident insurance. If Proposition 22 does not pass, some gig companies have indicated they would be forced to cease operations in California, or modify their business to a franchise or licensing concept, similar to FedEx’s fleet licensing model.

However, as discussed in our prior blog post, AB5 calls into question the viability of the franchise model in California. The new independent contractor definition appears to create a presumption of an employment relationship between franchisees and franchisors. While franchises were not the intended target of the law, the legislature refused to amend it to specifically exempt franchises this fall.

As franchisors assess the future of their brand in California, the passage of Proposition 22 would limit the impact of AB5 and could suggest that there is support for similar modifications to the application of the law on franchises.

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