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Why a California Supreme Court Ruling Could Change the Course for the Gig Economy

A recent California ruling could force companies to reclassify contractors as employees–a move that could upend some companies’ business models.

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BY Emily Canal - 01 May 2018

PHOTO CREDIT: Getty Images

The California Supreme Court issued a ruling on Monday that makes it more difficult for companies to label workers as independent contractors rather than employees, a decision that could dramatically increase the costs for startups reliant on the gig economy.

The court abandoned the existing test for deciding a worker's employee status, which included factors like whether a person could be fired without cause and amount of supervision. Now, workers are considered employees if their job is considered to be the "usual course" of the business operations.

What's more, the firm must prove it does not direct the worker or control them in order to prove that that person is an independent contractor. Delivery drivers at Dynamex, a Dallas-based business that tracks packages and offers nationwide services, brought the case after the company's California workers were reclassified as contractors in 2004. Under the new rules, if you're a delivery driver and you're a contractor for a delivery business, making deliveries would qualify.

This decision could greatly impact companies like Uber and Lyft--which are based in California and have built business models dependent on the cheaper labor of independent contractors--by requiring them to pay workers' compensation and unemployment taxes, along with following the minimum-wage and overtime laws, according to The New York Times. Categorizing gig workers as employees tends to cost between 20 and 30 percent more than classifying them as contractors, the Times reported.

It's unclear whether the company directly implicated by this decision will seek to overturn the ruling; a call to Dynamex's attorney, Robert G. Hulteng, at Littler Mendelson in San Francisco, wasn't immediately returned. The California Supreme Court is the highest court in the state, and all other state courts must abide by its ruling.

It's also worth noting the California ruling follows a New Jersey Supreme Court decision that offers the more worker-friendly test. Several other states offer similar tests to determine how to classify an employee. The California decision may, in turn, drive other states to revisit their standards, suggest legal analysts.

If it was determined workers at startups like Uber and Lyft are, in fact, employees instead of contractors, the businesses could switch their employment status. The companies could also change the business models so drivers and passengers could negotiate prices, the Times found.