The California Supreme Court has issued a new ruling that will severely restrict the gig economy in the state. The growth of gig jobs is based on workers being classified as independent contractors, who are not subject to employment taxes, employee benefits or worker’s comp being paid by the company hiring them. Amounts paid to independent contractors are reported on a 1099 rather than a W2 and the worker is responsible for his or her own employment tax and insurance.
Businesses like hiring independent contractors, because it tends to reduce their overall cost to have workers and limits exposure to employment laws. A lot of workers like being an independent contractor because it gives them flexibility and in many cases more opportunities to work.
The federal government and most states have had a long list of factors that determine the appropriate classification of a worker as either an independent contractor or employee. Businesses take all the factors into consideration and determine the correct classification based on all the factors.
The California Supreme Court has scrapped the existing test and imposed a simpler but much more stringent test of who can be an independent contractor. Rather than 10 factors there are now only 3 factors and you start out by assuming that everyone is an employee unless they meet all three of the independent contractor tests.
A-the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under a contract for the work and in fact
B-the worker performs work that is outside the usual course of the hiring entity’s business
C-the worker is customarily engaged in an independently established trade, occupation or business.
Fail any of the tests and the worker must be classified as an employee. For example a software engineer hired on a contract basis to write code for a software development company would fail test B. Drivers for Uber and Lyft are commonly classified as independent contractors because the company does not control their schedule or rides they choose to accept, but obviously driving passengers is exactly what the usual course of business is for Uber and Lyft.
Only time will tell how this plays out for California based businesses, but it could soon become a lot more difficult to grab an Uber in the state.