Who's an employee? California ruling updates debate for the gig economy.

The California Supreme Court this week handed down a ruling that makes it harder for employers to classify their workers as independent contractors. The decision could not only shake up Silicon Valley companies like Uber and Lyft that rely on gig workers, labor analysts say; it also draws an important new level of attention to a long-running battle for worker protections against misclassification.

The ruling, handed down Monday in a case involving drivers for Southern California courier company Dynamex, requires employers to pass a three-step, or ‘ABC,’ test before they can legally classify their workers as independent contractors. (That test is already the standard in Massachusetts and New Jersey.) The new standards could force ride-hailing platforms and other Silicon Valley start-ups to reassess their business models, since employees qualify for higher pay, benefits, and legal protections that contractors don’t. They could also apply to conventional companies in delivery service, transportation, and construction, among others.

Employer defense attorneys worry that the ruling could further discourage industry in California, already notorious, they say, for a tangled web of anti-business regulations and worker protection laws. Labor advocates say the decision is a win for those working to ensure that companies, including those in the gig economy, comply with traditional labor laws. It also gets the public thinking again about the abusive practice of misclassification – and more broadly, the social contracts in our labor system.

“Uber and Lyft are kind of the poster children to some extent for this debate,” says Celine McNicholas at the left-leaning Economic Policy Institute in Washington. “We become more aware of these issues, and it’s wonderful to have these decisions shine a light on the reality of what folks delivering our FedEx packages and driving us to and from friends’ houses are experiencing.

“It’s about giving thought to the economy we’re supporting,” she adds.

'Alternative work arrangements'

Employers and labor advocates have been butting heads over worker misclassification for decades. In some ways, the debate parallels the history of the taxi industry, which saw labor activists secure strong protections for drivers via collective bargaining in the early and post-New Deal 20th century. Those protections began to erode in the 1960s and ’70s, as policymakers pulled back from labor bargains and union power declined. Cab companies started to reclassify drivers as independent contractors, setting off, in the ’80s and ’90s, a push to regain employment status from non-union worker groups.

Ride-sharing firms – the taxis of the new economy – inherited that history and added to it: Today they’re the most visible players in litigation over whether workers are contractors or employees.

But “alternative work arrangements” – in which employers hire independent contractors, on-demand workers, or temps instead of full-time employees – are a growing element of the entire US labor market. From 2005 to 2015, the number of people in traditional employee positions dropped by 400,000, while those in nonstandard arrangements rose by more than 9 million. “A perhaps more striking way to put it is that during those 10 years, all net job growth in the American economy has been in contingent jobs,” Politico’s Danny Vinik wrote in January.

The Dynamex ruling pushes back against that trend, employment lawyers say. The decision carries extra weight because it was made by the highest court in California – a state with a workforce of 19 million that prides itself on directing the flow of progressive policy. “I wouldn’t be surprised if other state courts picked up this ruling and looked at it carefully if similar issues were presented to them,” says Matthew Ginsburg, associate general counsel at the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), the nation’s largest federation of unions.

Small businesses hit hard?

Employer defense lawyers counter that the ruling is especially bad for small businesses. Hiring independent contractors, they say, has allowed employers to avoid high up-front costs and the slew of requirements – such as paid family leave and health care – that California in particular requires of companies with five or more employees. Small business owners are far less equipped than the Ubers and Lyfts of the world to handle class-action suits or the penalties associated with even minor violations against employees.

“Every time there’s a violation, you get more claims and more money changing hands,” says Benjamin Hill, a lawyer with Inhouse Co., an employer defense firm with offices in Silicon Valley and Orange County. “That can be death for a small business.”

It’s the kind of thing that drives businesses out of the state toward places with friendlier regulatory regimes, adds John Fagerholm, whose Los Angeles-based firm, METAL Law Group, also handles cases against employers and entrepreneurs. And when that happens, he and others say, those hit hardest are the people who have to rely on independent contract work to make ends meet – single moms who need flexible hours or, say, folks with criminal records looking for a second chance.

“I don’t think it’s going to benefit employees,” Mr. Fagerholm says. “More people might get money off lawsuits but it’s not going to help the average employee. It’ll now be tougher to find work.”

Labor advocates say labor laws exist for a reason and that they should apply to all businesses. Startups and small entrepreneurs – known for their innovation – shouldn’t have a problem coming up with models that both profit their companies and comply with worker protection laws. The Dynamex decision, they say, is an opportunity for those businesses – as well as the public – to reassess how they want to treat the people who provide services in a rapidly changing world.

“It opens up opportunities to think again about … how do we want to shape the future of work?” says Saba Waheed, research director of the University of California, Los Angeles Labor Center.