California’s Top Court Sets Tougher New Rules on Hiring “Gig Workers”

California employers who classify their workers as independent contractors will be consulting their lawyers today, says A. Mark Pope, an attorney who helped persuade the state’s highest court to establish sweeping new restrictions on hiring so-called “gig workers.”

The California Supreme Court on Monday set new standards that will make it harder for companies in the state to define their workers as outside contractors rather than as employees who would qualify for the minimum wage, workers’ compensation coverage, and other benefits.

The state high court ruling could transform the business models of technology companies in a state where startups such as Uber have pioneered “sharing economy” businesses—originally envisioned as marketplaces where people earn extra money by offering occasional services. But the popular term for this model has shifted to the “gig economy,” as more and more workers draw their primary incomes from employers that compensate them as independent contractors.

Drivers at Uber, and workers at other California companies, have challenged the hiring practice. But their lawsuits have been judged under former state standards that allowed an employer to classify workers as independent contractors if it does not have the same close control over their schedules and other working conditions as it would have with an employee.

Now the state high court, in its 7-0 opinion in a civil suit brought against delivery company Dynamex Operations West, has laid down a new rule called the ABC standard. This standard is used in New Jersey and Massachusetts, says Pope, one of the attorneys representing workers now classified as independent contractors at Dynamex. The California court put the burden on companies to prove that their employment of an independent contractor meets each of  three tests.

Quoting from the opinion, the criteria are:

(A) “the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact,
(B) “the worker performs work that is outside the usual course of the hiring entity’s business, and
(C) “the worker is customarily engaged in an independently established trade, occupation, or business”

The Dynamex case now goes back to the trial court, for its workers’ claims to be sorted out under the new standards. The high court decision didn’t settle all the details about its application under existing state employment laws and regulations, Pope says. But he says all California companies now have to consider whether they would be vulnerable to class action lawsuits by their contract workers.

Attorneys for Dynamex could not be reached immediately for comment.

The California Supreme Court likely has the last word on these state employment issues, Pope says. An appeal to the U.S. Supreme Court would likely be fruitless, he says, because in his opinion there would be no grounds for a federal court to take action.

The high court ruling has an advantage for California employers, who have been living under some uncertainty about the legal benchmarks for hiring workers as contractors, Pope says.

“Now if there’s a bright line, they may not like it, but they can plan accordingly without worrying about liability down the road,” Pope says.

Uber workers, however, may have a harder time winning the standing of employees under the new criteria, Pope says, because their contracts require them to settle their workplace disputes in private arbitration.

But Pope expects that more class action suits will be filed against companies whose workers believe they have been wrongly classified as independent contractors. And the effects could be felt outside California, he says.

“It’s going to have reverberations, I expect, in other states,” Pope says. California is a large state with an outsized economy, he says, but it’s also an influential state when it comes to evolving legal standards. Legal concepts originated in California have tended to spread to other states, Pope says.

Lawyers for the Dynamex contract workers were surprised by the way the ABC test arose in the case, Pope says. The plaintiff’s side hadn’t asked for that standard to replace the existing state rules, he says. But after all the briefings were done, the court on its own initiative asked for supplementary filings from the parties on “whether the ABC test could be useful,” Pope says.

In its unanimous ruling, the court outlined what it thought was at stake as it tightened the rules for hiring independent contractors.

“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.”

The court also said companies that wrongly classify workers as contractors gain an unfair competitive advantage over market rivals that properly define similar workers as employees. The opinion continues:

“In recent years, the relevant regulatory agencies of both the federal and state governments have declared that the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled.”

Pope says he was somewhat prepared for a consideration of the ABC standards. But still, he was surprised by the ruling.

“They really went all in on that,” Pope says. “I didn’t know they would actually go that far.”

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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