A recent ruling from the California Supreme Court will have business owners across the state questioning whether they need to re-classify independent contractors as employees. The ruling could have serious ramifications for employers and employees connected to the state’s growing “gig economy” companies.
In a unanimous ruling, the court found that for a worker to be correctly classified as an independent contractor, businesses must prove that the worker meets all three of the following conditions:
- “The worker is free from the control and direction” of the company
- “The worker performs work that is outside the usual course” of the company’s business
- “The worker is customarily engaged in an independently established trade, occupation or business” similar to the work being done for the company.
The ruling comes as part of a class-action lawsuit filed by delivery drivers against Dynamex Operations West Inc. The drivers argue that they should be classified as employees, as they are performing the core function of the company.
What the ruling means for employers
Employers in California and across the country are relying more on independent contractors to control costs, because these workers are not subject to the same minimum wage, overtime and benefits laws as employees.
However, the new three-point test will likely make it much tougher for many businesses to hire contractors. For example, the court offered an example of a plumber or electrician hired by a business to be a properly classified contractor. Conversely, the ruling could mean that companies like Uber and Lyft now need to reclassify all their drivers as employees. Those drivers’ jobs are in line with the core function of those companies.
For these companies and others across the state that rely on independent contractors, failure to properly classify employees could mean facing a costly audit from the state Employment Development Department over whether the company is paying the proper amount in payroll taxes.