A New Supreme Court Ruling on State Sales Tax Collection Could Harm Small Businesses

Disrupting the Disrupters: California Supreme Court Redefines Employee Classifications

Classifying independent contractors and employees has remained a hotly contested debate within labor law for some time. On April 30, 2018, the Supreme Court of California issued a ruling in Dynamex Operations West, Inc. v. Superior Court that may have clarified this ongoing conversation. The Court clarified the standard for classifying employees or independent contractors for purposes of wage orders adopted by California’s Industrial Welfare Commission.[1] Prior to 2004, delivery drivers at Dynamex were considered employees until the company changed the relationship to a contracting arrangement.[2] Two individual delivery drivers, suing on their own behalf and on behalf of a class of drivers, filed a complaint against Dynamex, a nationwide package and document delivery company, alleging that Dynamex had misclassified its delivery drivers as independent contractors rather than employees.[3] Ruling unanimously, the Court abandoned the previous, more flexible rule, with Chief Justice Tani Cantil-Sakauye stating “Individual workers generally possess less bargaining power than a hiring business […] and may lead them to accept work for substandard wages or working conditions.”[4] The Court has broadened the standard, and has attached an implied presumption that a worker is an employee, which could have inevitable consequences for industries relying on contracted workers.[5]

Changes to the Standard

The Court adopted an “ABC” test, already used in New Jersey and Massachusetts, which states that a worker is considered an employee if he or she performs a job that is part of the “usual course” of the company’s business.[6] Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,”[7] and thus, an employee for wage order purposes, unless the employer proves: (A) that the worker 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; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.[8] In doing so, the Court ultimately rejected the previously accepted Borello test[9] for a more worker-friendly standard, embracing a presumption that all workers are employees instead of independent contractors.[10] In Borello, the Supreme Court held that the “right to control” the means of work is the most important of the factors in determining whether a worker is an employee.[11] This test was recognized as more flexible because it balances the different factors to arrive at a classification based on a case-by-case analysis.[12]

Defining the Gig Economy

The gig economy has been promised as a means of letting workers become entrepreneurs, with discretion in determining their hours and opportunity to make extra cash in their free time.[13] However there is mounting evidence that gig economy workers tend to be poorer and are more likely to be minorities than the population at large.[14] Compared with the population as a whole, almost twice as many of them earned under $30,000 a year, and 40 percent were black or Hispanic, compared with 27 percent of all American adults.[15] But the growth of the gig economy shows how widely popular the services are for consumers. For example, Uber, which started in 2009, quickly grew to 700,000 active drivers in the United States, nearly three times the number of taxi drivers and chauffeurs in the country in 2014.[16]

Furthermore, from 2002 to 2014, while total employment increased 7.5 percent, gig economy workers increased by between 9.4 percent and 15.0 percent, depending on the definition of gig economy workers.[17] Between 2010 and 2014, growth in independent contractors alone accounted for 29.2 percent of all jobs added during that time period.[18] According to the GSS data, all employed people in the United States in 2014 worked an average 46.7 weeks in 2013.[19] Gig economy workers, on the other hand, worked an average 41.8 to 44 weeks.[20] Meanwhile, 6.7 percent to 12 percent of gig economy workers have been laid off from previous work.[21] That’s substantially higher than the 5.4 percent rate for all employed people in the country. The fewer hours indicate that workers in the gig economy are less attached to the workforce and many may turn to those opportunities for additional income after getting laid off.[22]

Significance for California Businesses

The Court in Dyanmex frames their decision within the specific context of determining whether workers should be classified as employees or as independent contractors for purposes of California wage orders.[23] As a result, any businesses who operate in the gig economy may be exposed to heightened regulations concerning their employees under the purview of wage orders. Being that the gig economy is characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs, those industries that rely on contracted workers will have to consult with legal counsel to review the employee relationship under the ABC test. These companies have long argued that because their workers have flexibility when it comes to their hours, they should be categorized as independent contractors, but in light of this ruling, determining appropriate wages and hours will require further review. Following Dynamex, entities doing business in California that treat some workers as independent contractors will want to review their relationship to determine whether any or all such workers should be reclassified.

[1] Dynamex Operations West, Inc. v. Superior Court (Cal., Apr. 30, 2018, No. S222732) 2018 WL 1999120, at 1.

[2] Id. at 2.

[3] Id. at 2.

[4] Id. at 27.

[5] Id. at 13.

[6] Id. at 32.

[7] Id. at 22.

[8] Id. at 29.

[9] Id. at 6.

[10] Id. at 13.

[11] Id. at 7.

[12] Id. at 7.

[13] The Gig Economy’s False Promise, The New York Times (2017), https://www.nytimes.com/2017/04/10/opinion/the-gig-economys-false-promise.html (last visited May 21, 2018).

[14] Id.

[15] Aaron Smith, Gig Work, Online Selling and Home Sharing Pew Research Center: Internet, Science & Tech (2016), http://www.pewinternet.org/2016/11/17/gig-work-online-selling-and-home-sharing/ (last visited May 21, 2018).

[16] The Gig Economy’s False Promise, The New York Times (2017), https://www.nytimes.com/2017/04/10/opinion/the-gig-economys-false-promise.html (last visited May 21, 2018).

[17] Douglas Holtz-Eakin, Ben Gitis & Will Rinehart, The Gig Economy: Research and Policy Implications of Regional, Economic, and Demographic Trends. The Aspen Institute (2017).

[18] Id.

[19] NORC at the University of Chicago, “General Social Survey,” University of Chicago, http://gss.norc.org/

get-the-data.

[20] Id.

[21] Id.

[22] Id.

[23] Dynamex Operations West, Inc. v. Superior Court (Cal., Apr. 30, 2018, No. S222732) 2018 WL 1999120, at 2.

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