California’s top state court on Tuesday will consider a labor union’s challenge to a ballot measure allowing app-based services such as Uber and Lyft to classify drivers in the state as independent contractors rather than as employees with more benefits.

The seven-member California Supreme Court will hear oral arguments in San Francisco in a lawsuit by the Service Employees International Union (SEIU) and four drivers who say the 2020 ballot measure known as Proposition 22 was unconstitutional.

Whether gig workers should be treated as employees or contractors is a crucial issue for the industry, as employees are entitled to the minimum wage, overtime pay, reimbursements for expenses and other protections that do not extend to independent contractors, who as a result can cost companies up to 30% less, according to several studies.

Uber, Lyft and other app-based services spent more than $200 million on a campaign to pass Prop 22 and have said that without it, the increased costs could force them to stop doing business in the largest U.S. state.

A study released on Monday by researchers at the University of California, Berkeley, found that most gig drivers in five major U.S. cities — including Los Angeles and San Francisco — earn significantly less than the minimum wage when full costs are taken into account, including downtime. Drivers in California were paid less than their counterparts in Boston, Chicago and Seattle, according to the report.

Joseph Bryant, SEIU executive vice president, said the Prop 22 case is a key piece in a campaign to secure basic legal protections for gig workers across the country and “reverse more than a decade of exploitation.”

“No matter the outcome, we will not be intimidated by corporations’ unconstitutional attempts to dictate law in California,” Bryant said in a statement.

The California Attorney General’s office, which is defending Prop. 22, declined to comment, deferring to its filings in the case.

Protect App-Based Drivers and Services, an industry-backed group that has intervened in the case on behalf of the state, provided a statement from Stephanie Whitfield, an Instacart driver who said the flexibility of her job has allowed her to focus on her medical health while earning a living.

“It’s not just about me – it’s ensuring the people and families I deliver to are able to continue to have access to the services they rely on,” Whitfield said.

Nationwide battle

California is just one front in a nationwide legal battle over the proper classification of gig drivers and other contract workers. Lawmakers in Minnesota passed a measure over the weekend that would set a minimum wage of $1.28 per mile and 31 cents per minute for gig drivers, replacing a higher minimum adopted by Minneapolis that spurred Uber and Lyft to threaten to cease operating in the city.

Earlier this month, the top court in Massachusetts heard arguments over whether competing ballot proposals that would redefine the relationship between app-based companies and drivers in that state should be allowed to go before voters in November. One proposal supported by industry groups mirrors Prop 22, while another would allow drivers to unionize.

And last week a trial kicked off in a lawsuit by the Massachusetts attorney general accusing Uber and Lyft of unlawfully classifying their drivers as contractors to avoid treating them as employees entitled to a minimum wage, overtime and earned sick time.

The U.S. Department of Labor, meanwhile, is contending with several legal challenges to a rule that would make it more difficult for companies in many industries, including app-based services, to treat workers as independent contractors.

Prop 22 was approved in November 2020 by nearly 60% of voters in California. It exempts app-based drivers from a 2019 state law known as AB5 that narrowed the circumstances in which many workers can be treated as contractors.

Instead, Prop 22 allows app-based transportation services to classify drivers as independent contractors as long as they are paid at least 120% of the minimum wage while passengers are in the car and receive expense reimbursements and subsidies to pay for health insurance.

A state judge in 2021 found that Prop 22 violated the state constitution because it limited the legislature’s power to include gig drivers within the scope of California workers’ compensation law.

A mid-level appeals court last year disagreed and revived the measure. That court said the California Constitution permits the state’s electorate, along with the legislature, to make changes to the workers’ compensation system.

—Daniel Wiessner, Reuters