California Court Ruling Could Be Major Blow to ‘Gig Economy’ Firms

Ride-share companies like Uber and Lyft that use “independent contractors” for their core activities may have to rethink their business models under a new California court ruling. Photo: AP/REX/Shutterstock

It’s hard to think of a contemporary labor-law issue of more consequence than the line separating employees from independent contractors. For “independent contractors” who aren’t really independent, being classified that way typically means the loss of key employee benefits like health coverage, an inability to join unions or obtain protection from laws governing the employer-employee relationship (including minimum wage and maximum work-week rules), and increased tax liability. For businesses forced to treat today’s contractors as tomorrow’s employees, the shift could impose an estimated 20 to 30 percent more in costs per employee.

All sorts of federal and state agencies have all sorts of rules governing this distinction with respect to their own jurisdictions. But the fundamental laws defining employees are set by states. And now the largest state, California, has by virtue of a decision by its Supreme Court adopted perhaps the toughest standard in the country for employer treatment of its basic human capital as contractors. It would especially affect companies with a “gig economy” model, notably California-based enterprises like Uber and Lyft, which treat their drivers as independent contractors.

Here’s how Noam Scheiber explained the decision:

The court essentially scrapped the existing test for determining employee status, which was used to assess the degree of control over the worker. That test hinged on roughly 10 factors, like the amount of supervision and whether the worker could be fired without cause.

In its place, the court erected a much simpler “ABC” test that is applied in Massachusetts and New Jersey. Under that test, the worker is considered an employee if he or she performs a job that is part of the “usual course” of the company’s business.

Here’s a more detailed description from Todd Lebowitz, making it clear the burden of proof is now squarely on employers who want to classify people in their core business as “contractors”:

California’s new ABC Test starts with the presumption that, for claims covered under California wage orders, every worker is an employee. Then, to prove otherwise, the business retaining that worker must prove (all 3):

(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, and 

(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.

Fail just one part, and the worker is an employee under California wage and hour law. This new test is even stricter than most other states’ ABC Tests, which usually include two ways that Part B can be satisfied.

There’s no real appeal to this unanimous decision, which is from California’s highest court. Companies objecting to it have the recourse of trying to get the California legislature to change the underlying law (which has actually been in place, albeit with a different judicial interpretation, for a century). But the Democratic-controlled California House and Senate may not be the most hospitable venue for pro-employer relief.

Long-range implications aside, the decision may not represent an immediate existential crisis for California-based “gig economy” firms, as Scheiber notes:

[R]ide-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.

Even if Uber and the like are eventually forced to change their business model, however, that moment could be far off. Uber drivers typically sign an arbitration agreement stating that any disputes must be brought individually and outside the court system. While the United States Supreme Court recently heard a challenge to such agreements, it is widely expected to uphold them.

But the California decision will definitely shake up the already-unsettled landscape on this subject. For one thing, it could spur courts in other states to move in a similar direction. And for another, California provides an estimated 14 percent of the U.S. gross domestic product. Business models developed there are going to have an impact on the whole country.

California Court Ruling Could Be Major Blow to Lyft and Uber