As any business leader today knows, the economy is shifting from a place-based, brick and mortar economy to an office-less “gig economy” populated by independent contractors often only linked to their employer by a phone app. While this shift dramatically changes the workplace dynamic, it also creates some unforeseen pitfalls for employers. The California Supreme Court recently added pitfalls to this complex landscape in its April decision, Dynamex Operations West, Inc., v. Superior Court, S222732 (Cal. 2018), which re-vamps California’s independent contractor test. Whether your business is just starting to engage gig economy employees or is a veteran of this new workplace, you need expert counsel to guide you through this rapidly changing landscape. The attorneys at SAC Attorneys LLP are positioned to provide you with that counsel, call us for your free consultation today at (408) 436-0789.
As a starting point, the gig economy is primarily premised on workers enjoying tremendous freedom—no boss, no office to report to, no specified hours. Usually, that freedom arrives because the workers’ productivity is managed through technology such as an app. This freedom is good news for employers, as it results in gig economy workers being classified as “independent contractors.” In trade for their freedom, independent contractors receive few benefits and legal protections, a benefit to employers. But not every employee can be an independent contractor. Under federal tax law, the IRS only allows workers that pass the “right to control” test to be deemed independent contractors, which means that the employer only controls the results of the employee’s work, not what work is done or how it is done. California has a more elaborate test, and employers need to understand that the test was recently revamped.
Independent Contractors vs. Employees, Understanding Changes to California Law
In California, a company must show that a worker passes a three-part test to prove that he or she is an independent contractor. This new “ABC” test represents a dramatic change in California’s employment law landscape, upending a complicated, multi-factor test that had been in effect since 1989.
The California Supreme Court held that “[i]n determining whether, under the suffer or permit to work definition, a worker is properly considered the type of independent contractor to whom the wage order does not apply, it is appropriate to look to a standard, commonly referred to as the “ABC” test, that is utilized in other jurisdictions in a variety of contexts to distinguish employees from independent contractors.” Under the ABC test, an employer must demonstrate that the employee meets the following factors to prove that the employee should be classified as an independent contractor:
that 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;
that the worker performs work that is outside the usual course of the hiring entity’s business; and;
that the worker is customarily engaged in an independently established trade, occupation, or business.
Under this new ABC test, if an employee fails any one of the above factors, he or she will be considered an employee, not an independent contractor. That means the employee will now be subject to wage and hour, overtime, benefits, and other laws that come at a significant cost to the employer.
The new ABC test changes the landscape of the gig economy. You will likely recognize part “A” of the ABC test from the pre-existing IRS “right to control” test discussed above. But B and C present new complexities that may deal a blow to the gig economy’s widespread use of independent contractors. Specifically, a company will want to clearly enunciate that their workers are not engaged in work that the company routinely engages in themselves to avoid prong B. For example, a package delivery company such as UPS or FedEx would likely have a hard time proving that its delivery drivers are independent contractors under the ABC test, as delivering packages is the core of their business. But it is unclear how ride-sharing companies such as Uber and Lyft will navigate that prong. Similarly, a company will want to demonstrate that employees are engaged in an “independently established trade, occupation, or business” such as freelance writing or cab driving to avoid prong C. This will be a difficult hurdle for some companies that want to employ freelancers in creative work or piecework. In the end, because independent contractor status is the foundation of the gig economy, the Dynamex decision will require gig economy businesses to sit down with experienced counsel and examine whether their employee designations remain viable.
Every business can benefit from expert business law advice. But if you are now employing workers in the gig economy, you need expert guidance to navigate the tax, employment, and business law pitfalls that surround this new workforce. For a free initial consultation, contact SAC Attorneys LLP today at (408) 436-0789. Based in San Jose, California, our firm is prepared to represent clients in San Jose, Mountain View, Los Gatos, Cupertino, Fremont, Palo Alto, Santa Clara County, Silicon Valley, and around the world.