The California Supreme Court dealt a major blow to the gig economy on Monday in a decision that will have far-reaching effects not just for the likes of Uber and GrubHub, but for many different types of employers.

The court ruled that employers must treat workers who do work related to a company's "usual course of business" as full-fledged employees. For example, if a store hires a plumber to fix a sink, that plumber wouldn't need to be considered an employee because the store isn't in the plumbing business. But if a clothing company paid someone to sew clothes at home, then that person should be considered an employee, entitled to minimum wage, breaks, and other benefits of employment.

The case only directly applies to delivery company Dynamex, but it sets a precedent that could affect many types of workers in California, including care givers, dog walkers, hair stylists, and, of course, drivers for Uber and other gig economy companies, says Eve Wagner, a founding partner of Sauer & Wagner LLP with a background in employment law.

"The number of employment lawsuits is going to explode," she says.

The decision won't affect people outside of California but work for companies based in the state, says Wagner. In other words, Uber drivers in New York will still be considered contractors, unless New York decides to follow California's example. But it could have a big impact in the nation’s largest state, home to many of gig-economy companies.

The big question is whether gig economy companies can stay afloat if they hire all their workers as full-fledged employees. Payroll taxes and other expenses associated with converting contractors to employees could increase an employer's costs by about 25 to 40 percent per worker says Andrei Hagiu, a visiting associate professor at the MIT Sloan School of Management.

Gig economy companies already face difficult economics. Uber lost $1.1 billion in the fourth quarter of 2017, according to the Wall Street Journal. Some companies that tried to convert workers from contractors to employees have already folded or changed their business models, including on-demand shipping company Shyp, food-delivery company Sprig, and caregiving company HomeHero. "They're operating on very thin margins," Hagiu says. "I don't think they can afford it."

Uber and GrubHub declined to comment. Uber rival Lyft said it is reviewing the decision.

Stanford business school professor Jeffrey Pfeffer argues that the model of many gig economy companies was not sustainable. "When those without workers’ compensation get injured, society pays," he tells WIRED. "This is cost transfer from the wealthy (companies) to the (comparatively) poor workers. Holding aside any particular court decision, this was and is completely unsustainable in the long run."

New York University Stern School of Business professor Arun Sundararajan says the gig economy will survive, but prices will be higher, at least in California, and push companies to adopt more automation. "It doesn't threaten the long-term viability of businesses as a whole, but I think it will shrink their market in the short term because it will decrease sales," Sundararajan says.

Sundararajan says newer, smaller companies will have a much harder time than well-funded companies like Uber and Lyft, which will be better able to absorb costs and have established large labor forces. By classifying workers as independent contractors, new companies don’t need to hire a large number of employees. Instead, part-time laborers can handle work as it comes in, when they are available. Hiring employees and guaranteeing them minimum wage increases the costs and risks for startups.

Hagiu has long argued that US employment law needs a new classification for gig-economy employees. A "dependent contractor" classification, for example, might require employers to pay for some benefits, such as workers’ compensation insurance. In cases where contractors work for multiple companies, like those who drive for both Uber and Lyft, benefits might be split between companies based on total hours worked.

Sundararajan says new classifications could help, but they could also create more confusion and more lawsuits. What's really needed, he says, is a better social safety net. "The more we focus on legislation to extend benefits beyond the full time employees and into the broader workforce, the happier the contingent workforce is going to be," he says.

The Gig Economy