California Supreme Court Strikes Blow against Gig Economy

UberThe California Supreme Court has issued a ruling making is harder for companies to classify workers as independent contractors rather than employees.

Many "gig economy" companies, like Uber and Lyft, pay workers as contractors and are based in California, so this ruling would apply to them.

As the court's decision notes,

On the one hand, if a worker should properly be classified as an employee, the hiring business bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing worker’s compensation insurance, and, most relevant for the present case, complying with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees. The worker then obtains the protection of the applicable labor laws and regulations.

On the other hand, if a worker should properly be classified as an independent contractor, the business does not bear any of those costs or responsibilities, the worker obtains none of the numerous labor law benefits, and the public may be required under applicable laws to assume additional financial burdens with respect to such workers and their families.

Delivery Services

The case involved a delivery company called Dynamex. Two of its delivery drivers filed a complaint stating that they'd been mis-classified as independent contractors rather than employees.

The case was eventually certified as a class action relevant to all of the company's drivers in similar circumstances.

As the court noted, the drivers

are required to provide their own vehicles and pay for all of their transportation expenses, including fuel, tolls, vehicle maintenance, and vehicle liability insurance, as well as all taxes and workers’ compensation insurance.

Drivers are paid either a flat fee or an amount based on the client's payment for the delivery.

"ABC" Test

The court applied a simple "ABC" test, as applied in Massachusetts and New Jersey, rather than a more complex 10-factor test previously used in California, to determine whether a worker was a contractor or an employee.

Under the ABC test, a worker is considered a contractor if he or she:

  1. is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  2. performs work that is outside the usual course of the hiring entity’s business; and
  3. is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

For example, as the court noted, a plumber or electrician brought in for repair work would be considered a contractor.

What Now?

As the New York Times noted,

Were the courts to find that workers at companies like GrubHub and Uber, as now constituted, were employees rather than contractors, the companies could respond in several ways. They could simply make their workers employees rather than contactors.

Alternatively, ride-hailing companies like Uber might choose to rein in their operations, providing a more limited platform in which drivers and passengers can negotiate prices and the terms of the service.

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