Prop 22 passes in California, exempting Uber and Lyft from classifying drivers as employees

(CNN) In a major win for gig economy companies, CNN projects California voters have passed a costly and controversial ballot measure to exempt firms like Uber and Lyft from having to classify their gig workers in the state as employees rather than as independent contractors.

Backed by more than $200 million from Uber, Lyft, DoorDash, Instacart and Uber-owned Postmates, Proposition 22, or Prop 22, is the costliest ballot measure in California's history, according to Ballotpedia, underscoring how important its passage was to the future of their businesses.

Uber (UBER) and Lyft (LYFT) stocks are both up over 11% percent on the news.

Prop 22, or the App-Based Drivers as Contractors and Labor Policies Initiative, side-steps a new law, Assembly Bill 5, which went into effect on January 1 and codifies an "ABC" test to determine if workers are employees who are entitled to labor protections and benefits, therefore making it more difficult for the gig economy companies to continue treating their drivers as independent contractors who are not entitled to basic rights and protections.

"California has spoken and millions of voters joined their voices with the hundreds of thousands of drivers who want independence plus benefits," the Yes on 22 campaign said in a statement shortly before midnight local time. "Prop 22 will protect drivers' preference to be independent contractors with the flexibility to work when, where, and how long they want."

The outcome has significant ramifications for how gig economy companies operate in their home state and beyond.

A reclassification of gig workers would have represented a radical shift for the companies, which have scaled through building up massive fleets of workers by treating them as independent contractors and not providing them benefits that they would be entitled to as employees, such as minimum wage, overtime, paid sick leave and unemployment insurance.

Prop 22 will allow ride-hail and delivery drivers to continue to be treated as independent contractors with some benefit concessions granted by the proposition, including a minimum earnings guarantee based on "engaged time" when a driver is fulfilling a ride or delivery request, but not the time they spend waiting for a gig.

Critics of Prop 22 have argued it undermines the spirit of AB-5, which is intended to ensure workers aren't exploited by gig companies. Notably, for all its concessions, Prop 22 does not offer explicit protections such as workers' compensation, unemployment insurance, family leave, or sick leave, or allow workers to unionize.

"Billionaire [corporations] just hijacked the ballot measure system in CA by spending millions to mislead voters," a coalition of gig workers opposing Prop 22 said on Twitter. "Uber, Lyft, & the other gig [companies] took a ballot measure system meant to give voice to ordinary Californians and made it benefit the richest [corporations] on the planet."

Terri Gerstein of the Harvard Labor and Worklife Program and Economic Policy Institute said in an email to CNN Business that the result will "leave thousands of California workers in a precarious and perilous position, without basic rights like workers' compensation, unemployment insurance, or the right to a safe workplace."

Two weeks prior to Election Day, a California appeals court said Uber and Lyft must reclassify their drivers as employees rather than independent contractors in the state, affirming an earlier court decision as part of the ongoing lawsuit between the two companies and the state of California over the classification of their drivers.

The state, which sued the companies in May, has argued that by classifying their drivers as contractors, Uber and Lyft deprive their workers of benefits they are entitled to under AB-5, which mandates that companies can only treat their workers as independent contractors if those people are free from company control and perform work outside the company's core business.

In August, after a California court first ordered Uber and Lyft to reclassify their drivers in the state as employees, both companies threatened to shut down in the state if they were forced to reclassify their workers. The companies were granted a temporary reprieve as they appealed the ruling.

The appeals court decision put added pressure on the outcome of the Prop 22 vote, which the gig companies have aggressively pushed to workers and Californians. (Uber was sued late last month by some of its drivers over alleged "pressure" to support Prop 22; the company called the lawsuit "absurd," and a California judge said last week that it is "unlikely that plaintiffs will ultimately prevail on the merits," rejecting the drivers' request for an injunction order on Prop 22 in-app messaging.)

Other legal battles in California are similarly challenging the classification of workers of the on-demand food and grocery delivery companies.

The opposition to Prop 22, backed by labor and union groups, put in about $20 million into fighting the initiative, according to California Secretary of State records. But as Tim Rosales, a California-based political strategist, previously pointed out to CNN Business, "money does not always equal success" when it comes to ballot initiatives.

"David can absolutely beat Goliath," he said, adding that "passing an initiative is always much more difficult than opposing an initiative."

Robert Reich, a public policy professor at UC Berkeley and former Secretary of Labor in the Clinton administration who endorsed a No vote, told CNN Business last week that the outcome of the vote will be "very significant."

"Uber and Lyft figure if they win in California they can win political fights in the rest of the states, and probably Congress," said Reich in an e-mail. "Labor unions recognize its importance as well. If Uber and Lyft win this, more employers around the country will classify more of their employees as contract workers. That would mean big savings to employers, since contract workers don't get Social Security or worker's compensation, minimum wage, or other labor protections. By the same token, workers would be disadvantaged."

Veena Dubal, a labor law professor at University of California, Hastings, and a vocal advocate for labor rights, previously told CNN Business that the implications for labor could be much broader than the drivers covered by Prop 22. "There is a strong likelihood that if [Prop 22] passes, it would create lower labor standards across the board for the delivery and logistics industry," she said.