Gig economy workers, including drivers for popular ride-hailing services like Uber and Lyft, could find their employment status shift under a major new decision from the top court in California. The ruling will make it more difficult for companies to classify their drivers as independent contractors and avoid paying them wages and benefits as required by state law — a potentially huge setback for Uber and Lyft, which have built their multibillion-dollar businesses on the backs of a flexible, non-employed workforce.

The “ABC test”

The California Supreme Court ruled on Monday in favor of workers for a document delivery company called Dynamex Operations West that were seeking employment status. The drivers for the delivery service first brought their case over a decade ago, arguing that they were required to wear the company’s uniform and display its logo, while providing their own vehicles and shouldering all the costs associated with the deliveries.

Legal experts say the ruling could have wide repercussions for companies that use independent contractors, such as Uber, Lyft, Amazon, Instacart, DoorDash, GrubHub, and others. It could require those companies to apply the so-called “ABC test” to their drivers and couriers. Used broadly, the test is meant to determine whether workers should be considered employees or contractors using a specific criteria:

(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Spokespersons for Uber and Lyft did not immediately respond to a request for comment. But lawyers for business groups in California were already predicting that the decision will present major challenges for ride-hailing companies and other gig economy firms in how they define their relationship with their workers. Companies are more likely to downplay the driving and delivery services they provide, while emphasizing the backend technology work that their full-time software engineers help create.

a twist in recent case law

The ruling represents a twist in recent case law applying to the gig economy. Several recent court decisions have favored the classification of Uber drivers and other gig economy workers as independent contractors, including a US district court decision in early April that was said to be the first classification of Uber drivers under federal law.

In 2016, Uber agreed to settle two class action lawsuits challenging driver classification for as much as $100 million. A federal judge later rejected the settlement, saying it was neither fair nor adequate, and the case continues to lumber its way through the courts. Earlier this year, a federal judge in California ruled drivers for GrubHub are independent contractors, not employees. The ruling was seen as a big win for GrubHub due to California’s relatively high standard for establishing workers as independent contractors.