The rise of independent contracting has delivered benefits for some, such as greater flexibility for workers and lower costs for employers. But it also ensnared some people in low-wage jobs without benefits, working schedules that can change daily.

Now, following a state Supreme Court ruling Monday, businesses across California could be forced to reclassify swaths of their workforces as employees, with profound effects on workers and companies.

By toughening requirements for when a worker is actually an employee, the California Supreme Court won praise from labor advocates who say the move will put more dollars in the pockets of previously misclassified workers. Independent contractors are not subject to minimum wage, overtime or workers’ compensation requirements. The ruling may force companies in certain industries, especially in the app-driven gig economy, to change their business model.

“Almost every industry has dipped their toe in the independent contractor, freelancer model,” said Rich Meneghello, a partner with Fisher Phillips, a national law firm that represents employers. “As of today, they are all going to have to apply this new test.”


A 2016 national study by economists at Harvard and Princeton universities found that construction had the highest percentage of independent contractors among nonfarm industries, at 16.2%. Service industries were close behind. Technology, Hollywood studios and other “information” companies also ranked high.

An attorney for the U.S. and California chambers of commerce said the organizations declined to comment on the ruling.

Ron Miller, executive secretary of the Los Angeles/Orange Counties Building and Construction Trades Council, said many subcontractors across the building industry don’t hire employees for jobs, but rather label workers independent contractors and pay them in cash. That undercuts companies he described as “playing by the rules.”


Miller said he expects the ruling to encourage more construction workers to be hired as employees, but he predicted change would be slow.

“The folks that are out there cheating are always going to look for a way to cheat,” he said.

Nick Cammarota, general counsel for the California Building Industry Assn., said he doesn’t expect the ruling to have much effect on the group’s large home builders. He said they hire reputable, experienced companies that use employees. But he noted others could face problems.

Experts said the greatest effect is likely to be on companies that hire contractors to perform work that would be considered a core part of their business. In its ruling, the California Supreme Court simplified a multistep test for qualifying as a contractor, centered on how much control an employer had over a worker. Those complicated rules were open to multiple interpretations.


In its place, the court set up a three-step test, the most important requirement being that a contractor must perform work outside the hiring company’s usual course of business.

Meneghello, who co-chairs Fisher Phillips’ gig-economy practice, said companies will find it difficult to argue that workers are independent if they have to answer “no” to the question “If you remove the people currently classified as independent contract workers, would that company still exist?”

Economist Chris Thornberg, founding partner of Beacon Economics, said the construction industry has a decent shot at convincing judges that many workers, such as plumbers and roofers, are independent. But gig companies, including Uber and Lyft, would have a harder time.

“You can’t parse Uber from driving people from point A to point B,” Thornberg said.


Indeed, the ruling was seen as a boon by some drivers, who have long accused the ride-hailing companies of controlling them like they’re employees, classifying them as independent contractors, and giving them the benefits of neither.

Edward Escobar, who has driven for Uber and Lyft in San Francisco for more than four years, said he can’t set his own rates or decide where he drives to. But he still must buy his own health insurance, maintain his own vehicle and pay for gas.

“You can’t get any worse than that,” said Escobar, who has advocated for driver benefits under the Alliance for Independent Workers.

Uber and Lyft declined to comment. But those companies and others in the gig economy have long argued that workers have the ability to set their own hours by turning on an app whenever they want to work. Many gig workers, the companies point out, use the jobs to supplement other work and only work part time.


Escobar also enjoys that freedom and said he hopes the ruling will push Uber and Lyft to treat drivers like “true” independent contractors who can set their own rates.

Change may not be immediate, though. Unless a company, on its own, wants to reclassify to avoid potential penalties, it can wait until it is sued by workers or state authorities and then present legal arguments why its independent contractor model is still valid.

For example, Massachusetts and New Jersey both have a standard similar to the one the California Supreme Court adopted, but Uber and Lyft drivers are still independent contractors there.

Two class-action lawsuits, filed in 2013 in California and Massachusetts, threatened to dismantle Uber’s business model and put the company on the hook for expenses such as mileage reimbursement, overtime payments, vacation days and other benefits. The cases, which allege workers are employees, remain tied up in U.S. District Court for the Northern District of California, where lawyers continue to fight over whether Uber’s arbitration agreements are enforceable.


Monday’s ruling also does not directly cover workers who are employees of staffing agencies and are contracted out to larger companies — an arrangement that is common among tech giants in Silicon Valley and warehouse companies in the Inland Empire.

Michael Rubin, a lawyer who represented labor organizations in the case, said those larger companies won’t have to directly hire agency-supplied employees, but it will be easier now for workers to hold that larger company accountable if they aren’t paid minimum wage or overtime by the staffing agency.

Michael Warren, a partner with law firm McManis Faulkner in San Jose, called the ruling “a pendulum swing by the court back to the employee classification.”

“It’s going to have a broad impact, not just on the gig economy, but on everybody,” he said.


Times staff writer Geoffrey Mohan contributed to this report.

andrew.khouri@latimes.com

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