California court ruling restricts the use of independent contractors

A recent California Supreme Court ruling will severely restrict the use of independent contractors.

In a decision that could have serious implications for many California businesses, especially those in the gig economy, the California Supreme Court recently issued a ruling that will make it harder for employers to categorize workers as independent contractors. As Reuters reports, the use of independent contractors is especially popular among gig economy businesses, such as Uber, Lyft, GrubHub, and TaskRabbit. However, with the recent court ruling, those companies could face claims and legal challenges about their reliance on independent contractors.

Reliance on independent contractors

Independent contractors enjoy fewer benefits than employees do. A company that hires an independent contractor does not have to pay payroll taxes, provide breaks, contribute to workers' or unemployment compensation funds, pay minimum wage or overtime, or pay for work-related expenses for that independent contractor. Employers generally have to cover all of those expenses for employees. As a result, using an independent contractor can cost 30 percent less than using an employee.

The use of independent contractors is especially popular among gig economy businesses, especially those that rely on digital platforms. As the Los Angeles Times reports, about 8.4 percent of U.S. workers are now classified as independent contractors, a huge increase from recent years.

Meeting new requirements

However, the widespread use of independent contractors by gig economy businesses could be up-turned by a recent California Supreme Court ruling. Previously, it was up to workers to show that a company controlled how they performed their jobs, among other factors, if those workers felt they had been inappropriately classified as independent contractors.

Now, thanks to the court ruling, the burden is on businesses to show that an independent contractor is not under their direct control, that he or she does not perform a core function of their business, and that the independent contractor has their own independent business. A ride-hailing service, for example, would be able to argue that an electrician that comes to fix a problem at the company's headquarters is an independent contractor, but it would have a much harder time arguing that its drivers are independent contractors since those drivers perform a core function of the business.

While the ruling means big changes for how many companies classify their workers, it would be a mistake to expect a huge rush of class-action claims brought by independent contractors against companies. That is because, as PBS Newshour reports, many gig economy workers have signed agreements that waive their rights to pursue class-action claims and which compel them to pursue claims through arbitration rather than litigation.

Employment law

Employment law is constantly changing in California, as the above ruling shows. Employers need to ensure that they are on the right of the law so as to avoid costly litigation and potential penalties. An employment law attorney can help employers ensure they are meeting their legal and regulatory obligations so as avoid problems from arising in the future.