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California Supreme Court Creates Harder Test For Classifying Independent Contractors

In a landmark ruling, California’s Supreme Court has unanimously underwritten a stricter rule for defining independent contractors, fundamentally altering the labor landscape across the State, the San Diego Tribune reports. The Court’s unanimous decision could have an especially large impact on the sizable and still-growing gig economy, including leading ride-sharing apps Uber and Lyft.

California Supreme Court Strikes Blow To Gig Economy Businesses

Over the last decade, more and more workers have switched to an independent contractor relationship with businesses, earning cash without the protection of federal and state labor laws that guarantee a minimum wage, overtime pay, meal and rest breaks and other benefits of real employment. At the same time, so-called gig economy businesses, from Uber to Postmates, have drawn tens of thousands of people back into the workforce, allowing them to set their own schedules.

Uber Driver

Uber, Lyft Drivers Dispute Contractor Classification

But in a series of high-profile lawsuits, Uber and Lyft drivers, along with delivery drivers for GrubHub, Caviar and other app companies, have argued that calling them independent contractors is inaccurate.

We’re bona fide (true) employees, the plaintiffs claim, because Uber, Lyft and all of the other gig economy companies exert enormous control over our working lives, withholding the right to cancel our working relationship at their own discretion and structuring pay incentives to create de facto work schedules.

These lawsuits have met with mixed success. Many courts have been unwilling to follow the plaintiffs fully in their logic, ruling in many cases that the Uber and Lyft drivers are properly classified as independent contractors. And those court decisions have left most gig economy workers without the powerful labor protections of state labor law and the Fair Labor Standards Act, the federal law that lays the groundwork for basic wage requirements like the minimum wage and overtime pay.

CA Judges Rule On Independent Contractors

The California Supreme Court’s recent decision, however, is likely to complicate matters; in fact, it could force thousands of employers in the State to reconsider their workers’ classifications immediately. In the coming months, we could see tens of thousands of California workers switch from independent contractors to bona fide employees overnight.

So what did the California Supreme Court actually say? While the unanimous decision’s import on-the-ground is as yet unknown, the State’s highest court has shifted the burden of worker classification fully onto employers.

Shifting The Burden Of Classification To Employers

Workers in California will now be presumed to be bona fide employees, unless the business can prove otherwise. In order to classify a worker as an independent contractor, the Los Angeles Times writes, “businesses must show that the worker is free from the control and direction of the employer; performs work that is outside the hirer’s core business; and customarily engages in ‘an independently established trade, occupation or business.”

California’s New 3-Step Test For Contractors

It’s a so-called ABC test, with three elements. Each of these three points is deeply important.

1. “Control & Direction”

The first question to be asked, the Court says, centers around the question of “control and direction.” This question has been at the heart of independent contractor classification for decades. Multiple US Supreme Court decisions, along with guidance orders from the Department of Labor, have established that the work of a bona fide employee is controlled to a substantial extent by their employer.

Independent contractors, on the other hand, are free to devise their own ways of completing a job, sourcing their own materials, developing their own techniques, marketing their services to other potential customers, setting their own schedules and negotiating their own wage rates.

Who Controls The Work?

The Court offers several examples to illustrate this point.

A plumber who is temporarily hired to fix a leak, for example, has the freedom to solve the problem on their own. The plumber comes in, assesses the problem, figures out how to solve it and does so on their own, in most cases using his or her own tools and knowledge to complete the job.

An in-house plumber, on the other hand, would probably use tools provided by his or her employer and work under the guidance of a supervisor.

2. Outside Or Inside The Hirer’s Core Business?

The ruling becomes more interesting when we turn to the Court’s second point, that independent contractors perform work “outside the hirer’s core business.” This second question is likely to bedevil employers in California for years to come.

What Business Are Uber & Lyft In?

Are Uber drivers “core” to Uber’s business? Obviously, if no one drove for Uber, the company wouldn’t have much of a business. On the other hand (and this is certainly what Uber will argue), the company’s “core business” could also reasonably be construed as offering a technology service – creating and maintaining a phone app.

Needless to say, the company has bona fide employees to take care of those “core” duties – all of the coders and management personnel who propel the company’s day-to-day operations. The drivers, one could argue, are free to use the app or not. Of course, you could also argue that, if no drivers used Uber, there wouldn’t be any riders to use the app, either. And those customers are integral to Uber’s continuing revenues, which are how the company is able to pay all of those coders and management personnel.

Are Drivers Integral To Uber’s Business?

Under this interpretation, the drivers are obviously inside Uber’s “core business.” That’s how Michael Chasalow, a law professor at the University of Southern California, sees things. Speaking to the Los Angeles Times, Chasalow said that “drivers for Uber and Lyft should be classified as employees because those companies’ usual course of business is providing rides.”

But again, decisions made under this second guideline are likely to be ambiguous. Uber could easily argue that its “usual course of business” isn’t providing rides, but providing an app through which drivers and riders can find one another. It’s definitely not as clear-cut as Chasalow makes it out to be.

What Is “Core” To A Company’s Business?

The issue of a company’s “core business” could also muddy the water in other working situations.

Let’s say a plumber is brought in to fix a broken pipe in a coffee shop. The pipe supplies water to the shop’s espresso machine. Since serving espresso, lattés and cappuccino is obviously “core” to the coffee shop’s business, we could probably argue that the plumber’s work is inside “the hirer’s core business” – if that pipe isn’t fixed, the coffee shop can’t serve coffee.

Court’s Factors Likely To Create Ambiguity

So is the plumber an employee or an independent contractor? If we consider only the Court’s second determining factor, we won’t be able to answer that question. It’s ambiguous. That’s when the first and third factors kick in; each of the Court’s three points must be balanced against one another.

It’s highly probable that the plumber comes in, figures out how to fix the broken pipe on his or her own and uses their own tools and independent knowledge to repair the pipe. Control doesn’t seem to be a problem; under the Court’s first determining factor, the plumber is almost certainly an independent contractor.

3. Independence & Independently-Established Business

Now, we can turn to the Court’s third factor, which is probably the most explicit but also the most controversial. The California Supreme Court says that independent contractors are customarily engaged in ‘an independently established trade, occupation or business.” “Independence” is key to this factor; independent contractors, the Court writes, independently decide to engage in an independently established business.

But the analysis of this third factor is also likely to become contentious. Do Uber drivers “independently decide” to drive for Uber? It certainly seems like it. Drivers can go days and days without working, then drive an entire day, at their own discretion. And around half of all Uber drivers stop using the app within 1 year of signing up.

Is This An Independently-Established Trade?

The real question, then, is whether or not Uber and Lyft drivers are engaged in “an independently established trade, occupation or business.” In further comments, the Court’s opinion makes clear that, in referring to “independently established trade[s], occupation[s] or business[es],” it means traditional lines of employment, like a plumber or electrician, things you get a business license or certification for.

These certifications, importantly, are not conferred by the people or businesses who hire the worker, but by the State. So the question, in Uber’s case at least, becomes whether or not Uber drivers are engaged in a trade that exists independent of Uber itself.

Is Driving For Uber Its Own Trade?

The answer to that question depends on how you define the work that Uber and Lyft drivers do. Are they just for-hire chauffeurs, like taxi and limo drivers? If so, there’s little doubt that they’re engaged in an established trade. People have been transporting other people to their destinations for centuries, usually on their own initiative.

To contradict that fact, you would have to argue that Uber and Lyft have created their own new trade out of whole cloth. If you do, if you consider the temporary jobs made possible by the gig economy to be a qualitatively new type of work, the question becomes more difficult.

Lyft and Uber are competitors. And many Uber drivers also take riders using Lyft. So you could reasonably argue that Uber and Lyft drivers are engaged in an independently-established trade; it’s just a new independently-established trade, the trade of ferrying-riders-around-using sophisticated-apps.

Court Focuses On “Traditional” Trades

It’s unlikely that the California Supreme Court has taken this line of thinking. As we’ve seen, all of the Court’s examples come from traditional lines of work, like plumbing. The opinion doesn’t step forward to tackle questions that are likely to emerge as the nature of work in America is changed fundamentally by digital systems.

Cleaving to tradition in this context, however, seems somewhat dangerous. In a sense, the California Supreme Court’s decision is an attempt to claw back the radical changes to working relationships introduced by gig economy set-ups. The Court’s intent, at least implicitly, is to reserve the independent contractor classification for types of workers who have already been considered independent contractors for decades.

Can Uber, Lyft Survive With Employee-Drivers?

There’s also the question of long-term financial stability. Uber and other gig economy companies argue that classifying workers as independent contractors is central to their business model. Being forced to pay overtime wages and other benefits to drivers, the companies say, could put them out of business entirely.

Uber is not yet a profitable company, in large part because the company subsidizes each ride, making it cheaper for riders to use the service and, in effect, hiding the true price of using Uber. Lyft does the same thing. In other words, the business model on which these companies rely is still largely untested. If Uber and Lyft stopped paying a portion (around 40% by some estimates) of the fee for riders, the price of each ride would skyrocket and many riders, assumedly, would stop using it.

At that point, the company’s losses could become unmanageable, forcing the firm to fold. Then no one would be able to drive or ride using Uber, which would obviously cancel out any benefits drivers could gain by becoming employees of the company, rather than independent contractors.

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