(Bloomberg) — Consumers in California may be on the hook for pricier ride shares and food delivery after a state judge struck down a voter-approved ballot to let gig-economy giants like Uber Technologies Inc. and Lyft Inc. continue to classify app-based drivers as independent contractors.
DoorDash Inc., Instacart Inc., Lyft, and Uber bankrolled a $200 million campaign last year that promised California voters they would save money if Proposition 22 passed, exempting the companies from a state labor law requiring them to hire workers as employees and provide them with benefits.
The judge on Friday found the ballot, which Californians approved with 58% of votes in November, violated the state’s constitution. A coalition of gig companies supporting the initiative said it will immediately appeal the decision. Uber shares were down about 5% in early trading in New York on Monday. Lyft was down 4.6% and DoorDash declined 3%.
If the ruling is upheld, companies could see costs increase anywhere from 10% to 20%, according to Gad Allon, a professor at the University of Pennsylvania’s Wharton School of Business, who studies the gig economy.
“If the appeal isn’t successful, the new equilibrium will be more expensive and consumers will pay the price,” Allon said. “A challenge to the status quo was inevitable, it’s been years in the making. It will absolutely be destructive in the short-term and customers will be the first to lose.”
Fares have already been climbing as a shortage of drivers coincided with more demand while concern about Covid-19 eased and people began to venture outside. Charges for Uber rides jumped 53% more in June than they did in January, according to research firm Rakuten Intelligence.
Meanwhile, DoorDash tacked on additional consumer fees to delivery orders to offset the impact of price controls in certain markets during the pandemic. Several cities have capped the commissions food delivery companies could charge to restaurants to help struggling businesses keep a larger slice of profits during the pandemic.
The gig giants already had a reputation for price gouging due to surge pricing policies and extra charges. Uber, for instance, rolled out a “California Driver Benefits Fee” while Instacart raised its service fee to 8% from 5% in California.
The increases went into effect after Prop 22 passed in an effort to cover concessions companies made, including offering health insurance to drivers who work 15 hours or more a week and expanded mileage reimbursement.
Central to companies’ argument for classifying its drivers and couriers as independent contractors is the promise of flexibility. But what began as a side hustle has increasingly become a full-time job for a growing number of app-based workers that ferry around people, meals or groceries, amplifying the need for expanded labor protections.
The court decision is a small victory for worker-led advocacy groups like Gig Workers Collective and Rideshare Drivers United who have called for a minimum wage, paid sick leave and workers compensation benefits.
“This gig economy model was never sustainable,” said Wharton’s Allon. “Companies had a chance to build a new framework that accounts for worker benefits in their cost structures. This ruling shows they lost that opportunity. They’re not dictating the terms anymore.”
A protracted legal battle will create more uncertainty around the labor economics of gig economy companies, according to Bloomberg Intelligence analyst Mandeep Singh.
Uber spokesperson Noah Edwardsen said the ruling “ignores the will” of California voters and “defies both logic and the law,” while DoorDash said it was “a direct attack on Dashers’ independence.” Instacart didn’t immediately respond to requests for comment.
In Friday’s ruling, the California judge found that Prop 22 limited the legislature’s ability to allow workers to collectively bargain in gig work, thus violating the state’s constitution.
But the ballot’s challengers are still a long way from an outright win. The next fight will be about whether Prop 22 will remain in place or if companies’ exemption will be rescinded while the appeal process plays out, said Catherine Fisk, a professor at University of California Berkeley School of Law.
“It’s still very unpredictable,” she said, adding the legal battle could take at least a year or more and eventually lead to California’s Supreme Court.
While California was widely seen as a blueprint for other states grappling with gig worker classification, the ruling adds fresh uncertainty, compounded by each state’s unique labor laws, according to Fisk. Most recently, gig companies petitioned to place a similar measure on the ballot in Massachusetts and have held talks in New York aimed at forging a compromise.
“There’s a chance the federal government steps in. The Biden Administration has already said this is a priority,” she said. “Otherwise, gig companies have a huge incentive to misclassify because it lowers their labor costs and gives them the ticket to say ‘it’s somebody else’s problem.’”
(Updates with shares in third paragraph.)
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