May 21 (Reuters) - Judges on California's top court on

Tuesday considered whether voters had the power to allow

app-based services such as Uber ( UBER ) and Lyft ( LYFT ) to

classify drivers in the state as independent contractors rather

than as employees with greater benefits.

The seven-member California Supreme Court heard oral

arguments in San Francisco in a lawsuit by the Service Employees

International Union (SEIU) and four drivers who say a 2020

ballot measure known as Proposition 22 was unconstitutional.

The measure exempts app-based drivers from a 2019 state law

that narrowed the circumstances in which many workers can be

treated as contractors.

Whether gig workers should be treated as employees or

contractors is a crucial issue for the ride service industry,

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 ( UBER ), Lyft ( 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 California, the largest U.S. state.

Prop 22, which was passed in November 2020 by nearly 60% of

voters in California, 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 drivers receive expense reimbursements and

subsidies to pay for health insurance.

A lower appeals court last year rejected SEIU's argument

that Prop 22 improperly limited the legislature's exclusive

power to regulate the state's workers' compensation system by

barring app-based drivers from receiving those benefits, which

are only granted to employees.

Most of Tuesday's arguments revolved around whether that

authority, outlined in the state constitution, was truly

exclusive.

At least three judges suggested that California's

constitution requires the legislature to share lawmaking power

with the electorate, just as it mandates that bills must be

presented to the governor before they become law.

They told SEIU's lawyer Scott Kronland that if the

legislature disapproves of Prop 22 it could pass laws extending

benefits to app-based drivers.

"Prop 22 ... only speaks of the classification as

employees or independent contractors for the purposes of the

labor code," Justice Goodwin Liu said, referring to California

employment law. "But the labor code is not frozen in time."

Kronland told the court that a provision in Prop 22

barring any amendments would make it difficult for lawmakers to

counteract the measure.

At the same time, the judges seemed skeptical of some

arguments by the state and Protect App-Based Drivers and

Services, an industry-backed group that intervened in the case

to defend Prop 22.

Two judges suggested that giving voters control over the

workers' compensation system meant that they could eliminate it

altogether, which would seem to infringe on the "plenary" - or

absolute - power that the constitution grants to the

legislature.

That "turns 'plenary' into 'it's plenary until it's

nothing.' That doesn't feel very plenary to me," Justice Joshua

Groban said.

NATIONWIDE BATTLE

California is just one front in a nationwide legal battle

over the 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 ( UBER ) and Lyft ( 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 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.

Last week a trial kicked off in a lawsuit by the

Massachusetts attorney general accusing Uber ( UBER ) and Lyft ( LYFT ) of

unlawfully classifying drivers as contractors to avoid treating

them as employees entitled to a minimum wage, overtime and

earned sick time.

The California Supreme Court typically issues rulings

within 90 days of hearing arguments.