California Court Decision Affects Startups Using Independent Contractors

Many companies use smartphone technology that leverage platforms to harnesses the talents or manpower of dispersed individuals and offers their services to end customers.  Founders and investors of companies like these may not contemplate that the service-providers on the platform could be viewed as Company’ “employees” for various legal purposes.  The consequences of not considering employment status through these platforms is very real and just became realer in the state of California.

Why does it matter whether workers are independent contractors or employees? 

“Employees” are entitled to protections and benefits that independent contractors are not. Some of these benefits include minimum wages, potentially overtime pay, government safety-net programs (unemployment insurance, worker’s compensation), potential reimbursement of business expenses, potential health insurance coverage amongst others.  The line between employees and independent contractors can get blurry, and the business models that depend on floating that line run significant risks.

The Old Rules Collide with the Smartphone

The traditional test for distinguishing an employee from an independent contractor looks at factors such as whose tools are being used to complete work, how much control the company has over the way the work is performed, the degree to which the worker controls his or her own profitability, and other fact-specific questions.  The origins of the test not only pre-date the smartphone and the internet, but also the industrial revolution itself.

Now, companies can coordinate and monetize interactions between service providers and customers facilitated through an app, without requiring service providers to work set schedules or be present at particular locations.  The traditional test for employee status does not map neatly onto these new capabilities.  One judge described applying the traditional test to Lyft drivers like being “handed a square peg and asked to choose between two round holes.”

California’s New, Simplified Test

Recently, the California Supreme Court changed the key test as it applies to many workers in California.  To treat a worker as an independent contractor under California’s wage orders, three showings must now be made:  “(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.”  See Dynamex Operations (Cal. Apr. 30, 2018).  Now, if, for example, an on-demand driving service or house-cleaning app is using a fleet of independent contractors to perform the work that makes up “the usual course of the hiring entity’s business,” courts in California seem more likely to determine that the drivers or cleaners are employees of the company.

Only time will tell how courts will apply the new test, but if your business pays service providers as 1099 independent contractors rather than W2 employees, make sure you understand the impact of this new testing guideline in California.


*This piece reflects the views of its author – a guest contributor not affiliated with Westaway. It is a general update on a recent development in the law, not legal advice. Jhaveri-Weeks Law is a boutique litigation firm in San Francisco — 

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