Case Study 2 — The Gig Economy Regulatory Battle: California AB5 vs. Proposition 22
In 2019, California passed AB5 — a law that reclassified many gig workers as employees, entitled to minimum wage, overtime, health insurance, and unemployment insurance. Uber, Lyft, DoorDash, and other gig companies fought the law aggressively. In 2020, they spent $200 million on Proposition 22 — a ballot initiative that exempted them from AB5. Prop 22 passed with 59% of the vote.
The economics of AB5
AB5 used the "ABC test": a worker is an employee unless they (A) are free from the company's control, (B) perform work outside the company's usual business, AND (C) have an independently established trade. Gig drivers failed the test — they work under the platform's rules, driving IS the company's business, and most don't have independent businesses.
The case for AB5: gig workers who drive 40+ hours/week are functionally employees. They depend on the platform for income, have no bargaining power, and bear all the risk (no benefits, income volatility, vehicle expenses). Contractor classification is a loophole that lets platforms avoid $10K+/year in per-worker labor costs.
The case against AB5: many gig workers genuinely value flexibility. AB5 threatened to eliminate flexible part-time gig work entirely (companies might shift to fixed-schedule employees only). Some freelancers in other industries (writers, musicians, translators) were unintentionally affected.
Proposition 22
Prop 22 exempted app-based drivers from AB5. Instead, it guaranteed: minimum earnings of 120% of the local minimum wage for "engaged time" (not waiting time), a healthcare stipend for drivers working 15+ hours/week, and accident insurance. It did NOT provide: full employee benefits, unemployment insurance, workers' comp, or the right to unionize.
The ongoing debate
The battle is not over. The EU is moving toward a "presumption of employment" for platform workers. Some U.S. states have followed California's approach; others haven't. The federal government has not weighed in definitively. The question — how to classify and protect workers in the gig economy — is one of the most important labor-market questions of the 2020s.
Discussion questions
- Should gig workers be classified as employees or contractors? What are the tradeoffs?
- Uber, Lyft, and DoorDash spent $200M on Prop 22. Apply the political economy framework: concentrated interests vs. diffuse interests.
- Could a "third category" (neither employee nor contractor) work? What would it include?