The California Supreme Court issued a landmark ruling this week on the classification on independent contractors. The decision is expected to have big ramifications in California and elsewhere.

(Photo: Victor Xok/Unsplash)

Earlier this week, the California Supreme Court issued a unanimous ruling in a class-action lawsuit brought by a group of drivers for Dynamex Operations West, a delivery company that provides contract delivery services for companies like Amazon. The suit was first filed in 2005 after Dynamex re-classified its drivers as "independent contractors" not eligible for protection under California's wage laws (i.e. minimum wage and overtime).

The court ruled in favor of the Dynamex drivers, agreeing that they had been misclassified as independent contractors and are, in fact, employees. The ruling also concluded that employers could only classify as independent contractors those workers who meet the conditions laid out in the "ABC standard" established in other states:

(a) that the worker is free from control and direction over performance of the work, both under the contract and in fact; (b) that the work provided is outside the usual course of the business for which the work is performed; and (c) that the worker is customarily engaged in an independently established trade, occupation or business (hence the ABC standard).

Under the ABC standard, according to an example provided in the ruling, a clothing store who hires a plumber to fix a leaky bathroom would not have to classify that plumber as an employee, but a clothing manufacturer who "hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company" would be required to classify those seamstresses as employees because "the workers are part of the hiring entity's usual business operation." The ruling is expected to force other prominent California companies who rely heavily on independent contractors—Uber and Lyft, for example—to rethink their business models.

Between 1995 and 2015, the percentage of the United States' workforce engaged in "alternative work arrangements" increased from 10.7 percent to 15.8 percent, according to research from the economists Lawrence F. Katz and Alan B. Krueger. There's mixed evidence on the role that independent contractors have played in this trend, but the evidence is clear that they constitute a meaningful segment of the workforce—6.2 percent of all workers (or almost 10 million workers), according to a brief published in 2017 by Karla Walter and Kate Bahn of the Center for American Progress.

While some of these workers may be independent contractors by choice, others, like the Dynamex drivers, were forced into the classification by employers looking to save money. The National Employment Law Project estimates that employers can reduce payroll and other taxes by up to 30 percent by re-classifying employees. State-level studies on the issue, meanwhile, have uncovered extremely high misclassification rates—a series of audits in Ohio found that 47 percent of workers were misclassified. (This misclassification, not surprisingly, costs federal, state, and local governments hundreds of millions of dollars in lost tax revenues.)

In response to these trends, the misclassification of workers has emerged as a new front in labor law. Workers in a variety of industries have brought high-profile lawsuits against employers abusing the trend. At the state level, attorney generals have sued employers and lawmakers in some states have passed stricter laws governing the classification of workers. And under the Obama administration, the Department of Labor ramped up investigation and enforcement actions around employee misclassification.

In keeping with its emphasis on deregulation, the Department of Labor under President Donald Trump revoked last year two crucial Obama-era guidances on employee misclassification. Labor advocates also worry the department is less likely to pursue meaningful investigations of employers who misclassify employees. The California decision, however, suggests that the states are ready to step into the void.