Proposition 22 and its impact on the restaurant industry
Update November 5th: On November 3rd, California voters approved Proposition 22, a ballot measure that allows gig economy companies (such as Uber and Lyft) to continue treating drivers as independent contractors. Had it have failed, third party driver delivery may have completely shut down in California, which would have had a major impact on restaurants almost completely dependent on delivery.
Proposition 22 is a November ballot measure seeking to provide ridesharing companies exemptions to California’s recent labor policy: Assembly Bill 5 (AB5). To fully understand Proposition 22 and its implications, it is useful to first dive into the history behind the original AB5 bill.
AB5 determined legal criteria for the difference between independent contractors and employees by creating a 3-step test to determine worker status. The three classification rules were as follows:
The worker is free to perform services without the control or direction of the company.
The worker is performing work tasks that are outside the usual course of the company’s business activities.
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed
If a worker passes all of these checks, they are a contractor; if they fail one, they are an employee. The bill was signed by Gov. Gavin Newsom in September 2019 and came into effect on January 1, 2020.
Shortly after the bill came into effect, many industries rushed to seek legal exemptions.
On September 4, 2020 Gov. Gavin Newsom signed Assembly Bill 2257 (AB2257), giving many industries exemptions to the AB5 criteria. The key benefactors from AB2257 were the music, entertainment, and media sectors. Notably absent from AB2257 were all ‘gig economy’ app-based services.
In a challenge to the government’s classification, Uber and Lyft threatened to shut down their services and cut all riders and drivers off in California. In response, California granted an emergency stay in court extending the timeline for ridesharing companies to operate on their existing business model. Seeking a more permanent solution, large ridesharing companies have put forth Proposition 22 to the voters of California.
So, what is actually in Proposition 22?
In short:
Gig economy drivers will remain classified as independent contractors, not employees
Drivers will receive between 120-130% of minimum wage for time spent picking up and driving passengers
Drivers will receive 30 cents for each mile spent driving or picking up customers (to help cover maintenance & gas costs)
Drivers will get rudimentary health benefits (at 15 hours per week)
It’s time for politics – brace yourself.
Argument For Proposition 22:
The argument in favor of the measure can be best understood by looking at the benefits to each of the parties involved: drivers, companies, and riders.
For drivers, the benefit of the measure is to preserve their right to self-schedule and put in hours as they please. The measure also ensures that drivers will see a wage above California’s minimum wage, on top of additional money to offset gas costs. Additionally, the proposition outlines a limited health benefits plan that drivers can access at 15 hours of drive time per week – however, the language around this clause has been notably vague.
For employers, the benefits are that the status quo will not change: third party apps get to continue to run their business in a seemingly normal fashion. No major upheavals to their business model and, due to some clever politics included in the document, proposition 22 cannot be altered without a seven-eighths majority vote of each house. In essence, there will be no more political maneuvering on the classification of gig economy drivers.
For riders, the benefits are a little abstract. The advertisements from the ‘Yes on Prop 22’ team have focused more on the benefit to the drivers to remain independent as opposed to focusing on benefits for the end rider. Uber has been very insistent that their business model depends on gig workers being independent and has indicated a willingness to shut down the service in the state of CA if the measure fails. Analysts see three likely benefits for riders if the measure passes: on-demand driver services will remain largely unaffected; lower ride costs; and faster response times to ride requests.
Argument Against Proposition 22:
The arguments against Proposition 22 come from a fairly unified block of ‘gig economy drivers’ who put in full-time hours and see themselves being robbed of the benefits usually conferred upon employees. Other key voices in the opposition come from labor groups. Carlos Ramos, leader at Gig Workers Rising, sums his party’s stance up fairly succinctly, “Companies know the people who power their business are full-time drivers who deserve those benefits.”
Indeed many drivers against Proposition 22 point to the numerous benefits that they would legally receive if classified as employees. As contractors, they are denied overtime, workers’ compensation, paid sick days, and unemployment insurance (outside of a temporary, federal COVID unemployment measure for this year). Drivers also face intense hour variation and flux whereas employees are aware of their future hours and have agreed terms with employers on hourly rates.
The biggest criticism that drivers’ level at ridesharing apps is that they are only paid for customer time, and not time spent waiting for customers. Wanting to be paid for time not spent working may sound odd, but the nature of ridesharing means that about a third of an active driver’s time is spent between rides waiting for a customer call. During down time, all of the compensation measures that Proposition 22 puts forth do not apply as a driver is not with a customer. In essence, every gig worker loses a third of their work time to non-billable hours.
It is somewhat telling that there is no ridesharing corporate argument for voting against Proposition 22. Larger labor organizations have capitalized on the one-sided nature of this bill as a point of accusation and a rallying cry for the opposition. The official California voters guide argument against Proposition 22 lambasts the legal process behind the bill saying, “Prop. 22 was written by Uber, Lyft, and DoorDash for Uber, Lyft, and DoorDash, NOT their drivers.”
The sentiment around a piece of legislation put forth as an exemption on behalf of four companies has not gone un-noticed. Gina Miller, partner at Snell & Wilmer added a slightly prescient comment when she noted, “Prop. 22’s passage may also prompt other industries affected by AB5 to seek their own ballot measures for an exemption.”
Indeed, this has already happened. Music and journalism industry players have filed and won exemptions from the law leaving many labor experts to suggest that AB5 will, in time, be ineffective due to the large number of exemptions added to the bill.
Analysis:
Overall, whether a driver will vote to ratify Proposition 22 or reject it largely comes down to his or her perspective on the trade-off of being an employee or a contractor. Workers who put in 40+ hours a week for third party companies tend to value the consistency and benefits provided by full-time employment and care less about the flexibility of putting in hours whenever they feel like. Workers that approach third-party apps more casually or to supplement an income stream (e.g. side hustlers, students, and retirees) likely prefer the random start and stop and are willing to sacrifice the benefits of full-time employment.
On the corporate side, there is a massive elephant in the room. All ridesharing platforms want this measure to pass and have spent a state record of over $200 million on this proposition (The biggest donors being Uber with $52 million, Lyft, $49 million, DoorDash $48 million, and Instacart $28 million). On top of this generous sum to help this proposition succeed, the proposition itself was written and brought to the ballot by ridesharing companies and clearly reflects third party ridesharing companies’ priorities.
Uber’s app actually reminds all riders that if they vote no on this measure they will have to pay more for each ride. Another ad, funded by ‘Yes on Prop 22’, led to outrage when it implied that voting against the measure is fundamentally dangerous to young adults due to the likely increase in drunk driving that could occur if third party companies fail.
For riders, it is a personal choice. Like any piece of legislation, there are going to be winners and losers. Proposition 22 passing will maintain the status quo and keep easy and affordable access to third party drivers. Proposition 22 failing will lead to great change for the riders. Whether third party companies can continue to run their companies with employees is unknown, higher costs are certain, and great market shake up will happen. However, there is a good chance that even if current tech giants can’t figure out how to operate at higher costs, new industry players will rise.
If no-one can figure it out, we’ll just have to add a taxi company’s number back into our phone!
But... restaurants?
Yes, I know; took a little while to get here. But, understanding what the legislation is matters for understanding how to prepare for Proposition 22’s passing or failing. It also helps you be a good citizen.
If Proposition 22 fails, there will be an incredibly large shake up. All third party companies will need to adapt and change their business models by November 4, 2020 or cease operation in the state. That means that each ridesharing business will have to effectively hire, screen, and schedule every Uber, Lyft, DoorDash, and Instacart employee – in about week. Based on the money that has been thrown trying to get this legislation to pass, these ridesharing companies don’t have a good idea for how to handle if it fails. That means something big:
Shutdowns.
Even if they are temporary, third party driver apps in California may go down – entirely - on November 4th. If you are a restaurant and you’re following California ordinance, your interior dining is closed. Your likely source of delivery is a third-party driver from one of the many ridesharing companies. Maybe you even set up all four.
If the companies you outsourced delivery too don’t exist, then your delivery doesn’t exist and – although I don’t have to tell you – times were already pretty hard. Many restaurants are counting on delivery and pick-up for main sources of business. If you’re up in Northern California, or our more mountainous regions, outdoor seating isn’t going to be viable for much longer. Even if you do have a patio, you need to start formulating plans to find ways to get food to your customers without them entering your restaurant and not relying on third party companies.
The answer is pretty simple; you need to build a way to bring third party delivery in-house.
Wrap-up:
If Proposition 22 passes, the status quo is preserved. As a restaurateur, you can continue to rely on third party delivery as you always have. But do you want to?
COVID has impacted many restaurants and forced operators to rely increasingly on curbside pickup and delivery to drive revenue.
Third party companies charge huge commissions (ranging from 25-35% of each order), up-charge food prices, and pass on high delivery fees to the customer. Even with Proposition 22 passing, every driver’s salary has increased to above minimum wage and third party companies are going to pass that onto you - or your customer.
Historically, many restaurants wrote these delivery costs – and practices – off due to small delivery volume and the secondary importance of delivery orders compared to on-premise dining. The industry has always known that third party commissions erode profitability of delivery in the long-run and represent an avenue where businesses lose control over both their customer and the customer’s experience.
With COVID-19 still growing despite months of safety precautions and third party companies’ future operations precarious, many restaurateurs are revisiting the in-house delivery question. The need to act on in-house delivery will only get more critical as colder weather hits, outdoor dining closes, fewer customers want to leave their homes, and fewer delivery services remain viable.
Take a look at our third party cost calculator so you know the real cost of leaving delivery to third-party companies. If you’re getting tired of losing roughly 30% of each order and having lazy or sloppy deliveries that hurt your brand, it might be time to bring delivery in-house.