CA Supreme Court Nearly Vaporizes Independent Contractor Law – Setback to “Gig” Economy

In a recent sweeping ruling that helps labor unions but runs contrary to small businesses and Silicon Valley innovation and the developing “gig” economy inspired by companies like Uber and Lyft, the California Supreme Court has decided that hiring companies no longer have much a say in whether a person who provides services for hire is classified as an “independent contractor” or an “employee.” The implications of the new ruling, filed on April 30, in the “Dynamex Operations” decision are huge, as it will extend onerous state employment and labor laws to new classes of workers, and will force the reclassification of tens of thousands of business relationships in the state between businesses and their former contractors, in the process, eliminating or raising the costs of goods and services to average Californians, while standing as a major obstacle to new popular ideas in technology such as ride sharing and delivery services.

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The facts of the case itself center on a delivery driver for a company who claimed he was misclassified as an independent contractor. The attorneys for the driver successfully argued against the current standard, which used a multi-factor test to determine the proper classification of a worker.

Many new technology-aided companies like Uber and Lyft depend on workers who want independence with flexible hours and who want to set their own pace of work. However, workers classified as employees under the state and federal labor laws are generally guaranteed more expensive health care benefits and worker compensation, as well as collective bargaining rights, especially in California. Unions are particularly opposed to independent contractor relationships and they seek leverages in the law to add more members and therefore more political power. Citing the need for more “worker-friendly” laws, one lawyer in support of the change said, hyperbolically, “as the federal government increasingly abandons its past commitment to protecting workplace rights, the states are stepping up to fill the gaps.”

Under the new rules, businesses have almost no say in how their business relationships between employees and contractors are separated and classified. The opinion or business model of a business that prefers to classify a relationship as independent contractor doesn’t matter much any more. Now, in California, the determination is made by applying the so-called three-pronged “ABC” test, which puts all the burden on the employer to show the worker is not an employee. Under the test, to establish independent contractor status, the business must show: 1.The worker is free from the control and direction of the hirer in connection with the performance of the work; 2. The worker performs work that is outside the usual course of the hirer’s business; and 3. The worker is customarily engaged in an independently established trade, occupation, or business of the same natures as the work performed for the hirer.

The second and third factors of the new test are seen as the most troublesome, especially for “gig” economy businesses. If a person is delivering the public food, for example, is the delivery part of the fundamental business of that entity? If it is, then the deliverer becomes a far more expensive employee, covered by state wage and hour and other labor laws, entitled to health care, and entitled to collective bargaining rights. If this is the case, then what are the implications to the state? Well, people who want flexible hours and the ability to work when they want as deliverers, will find lost business opportunities. And the cost of food delivery will likely go up dramatically. This implication is just the “tip of the iceberg.” The implications resonate throughout the economy to the detriment of not only gig businesses, but largely small businesses that do not want to be saddled with costly labor law enforcement issues, and even nonprofits who use skilled workers attempting to offer things like compassion and health services to the poor.

A copy of the Court’s decision can be accessed here: http://www.courts.ca.gov/opinions/documents/S222732.PDF