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A California court introduced a test for classifying employees and contractors.
This story was originally published Stateline, an initiative of The Pew Charitable Trusts.
SACRAMENTO, Calif. — It started with installing some red and green LED lights. Then came the disco balls, neon eyeglasses and a gold Bluetooth karaoke microphone.
Daniel Flannery had transformed the car he drives for Uber and Lyft into a party on wheels.
“You put everything together, and it encourages people to loosen up,” he said. “Sometimes, I have people call me up and say, ‘We don’t want to go anywhere—we just want to drive around and sing.’”
Flannery, who drives to supplement his retirement income, said he loves the freedom that comes with it—setting his own schedule and adding his own flair to what he dubs his “Swag Rides.”
Much of that freedom comes from being classified as an independent contractor. But a 2018 California Supreme Court decision could change the nature of working in the gig economy while providing a model for other states.
The “Dynamex decision,” as it’s commonly called, established a new test for how businesses in California must classify workers. Depending on how the state legislature acts, employment experts say the decision likely will require a range of businesses—from ride-hailing companies to trucking firms to barber shops—to reclassify independent contractors as employees or to restructure their business models.
Critics argue the decision threatens to disrupt industries that have traditionally relied on independent contractors. Some contractors, like Flannery, say they are worried that being reclassified as an employee would limit the professional freedom they currently enjoy in their work schedule, habits and rates. But labor advocates argue the decision can help ensure that the growing number of gig workers receive benefits, such as health insurance coverage, and workplace protections, such as a guaranteed minimum wage, overtime and workers’ compensation.
The California labor department estimates that the practice of wrongly classifying workers as contractors instead of employees costs the state about $7 billion a year in potential payroll tax revenues.
While some businesses have started reclassifying workers under the new court test, others are awaiting the outcome of an ongoing battle in the California legislature. Lawmakers might codify the test in state law, override the decision or create carveouts for specific industries.
“We want to clear up any confusion about the new test,” said Democratic Assemblywoman Lorena Gonzalez, who introduced a bill in December to preserve the court’s decision in the state labor code. “Instead of going piece by piece through the court system, we want to codify it in law.”
Employee vs. Independent Contractor
The new test established three criteria for employers to use to identify a worker as an independent contractor: The worker must be free from the employer’s “control and direction” in carrying out duties; must perform a job outside the employer’s usual line of work; and must regularly do the same type of work as will be done for the employer.
The court reached its decision in a lawsuit filed by drivers for Dynamex, a delivery and logistics company that ships goods to consumers. In 2004, the company reclassified its employees as independent contractors. Drivers now had to use their own vehicles and cover work-related expenses, such as liability insurance, fuel and vehicle repairs.
The drivers pushed back, taking legal action to preserve their status as employees. The court’s decision determined Dynamex’s drivers should be classified as employees. The decision set a precedent that would ostensibly apply to all employers in California.
The Dynamex test is modeled on nearly identical tests established in other states. Massachusetts changed its labor laws in 2004 to apply the same test criteria, which has sparked legal challenges by independent contractors aiming to be reclassified and by businesses that want to continue to classify workers as independent contractors.
In February 2018, for example, a Massachusetts appeals court ruled against GateHouse Media, finding the company must classify its newspaper delivery drivers as employees.
New Jersey’s labor laws apply the same test, but state elected officials disagree over its application and enforcement.
In 2013, then-Gov. Chris Christie vetoed a bill that would have automatically classified truck drivers as employees and imposed harsh penalties against trucking companies that misclassified drivers. The Republican argued it would make New Jersey “unfriendly to the trucking industry.”
The requirement that a worker perform a job outside the employer’s usual line of work is the most crucial part of the test, said Lukas Clary, a Sacramento-based labor and employment attorney at Weintraub Tobin Chediak Coleman Grodin Law Corp.
“Almost all pre-Dynamex independent contractors were hired to perform work that is within the scope of the company’s business,” Clary told Stateline.
Clary said some industries, such as the trucking industry, see the new test as an “existential” threat.
“This decision will potentially put me out of business—and thousands of people like me,” said John Pitta, the owner-operator of a trucking business in Salinas.
Pitta drives a dump truck, a niche that makes his services in demand. He contracts with larger trucking companies as an independent contractor. He said he fears the Dynamex decision will dissuade large trucking companies from hiring him because they won’t want to classify him as an employee.
In July, the Western States Trucking Association, which represents large trucking outfits and independent truckers in 11 states, filed suit against the state of California in federal court, claiming the Dynamex decision is pre-empted by the Federal Aviation Administration Authorization Act of 1994. That law prohibits states from enacting laws “related to a price, route, or service of any motor carrier.”
“Trucking companies … will either have to dramatically increase their prices to account for all of the additional costs associated with hiring employees, or they will have to dramatically reduce the quantity and quality of services they provide,” according to the association.
Clary said many California businesses have started to reclassify their workers as employees, while others are attempting to adjust their business model.
“Misclassification can be extremely costly,” Clary said. “If enough workers are misclassified, the claims can be brought as class or representative actions, and the damages could be multiplied across the workforce.”
Drivers and Barbers
About 1 in 10 Californians in the previous year had participated in the gig economy, such as driving for companies like Uber and Lyft, a 2018 survey found. Conducted by the Public Religion Research Institute, a nonpartisan polling group, the survey found that nearly half the Californians who participated in the gig economy were low-income.
The decision should extend employee benefits, such as guaranteed minimum wage, health care coverage and overtime pay, to gig economy workers, argues Shannon Liss-Riordan, a class action attorney and partner at Lichten & Liss-Riordan, P.C. in Boston.
Liss-Riordan said she has filed lawsuits on behalf of workers against all major gig economy employers, including Uber, Lyft, Postmates and DoorDash.
Liss-Riordan is currently representing a worker in a lawsuit against Grubhub in the U.S. Court of Appeals for the 9th Circuit in California. The case seeks a declaration from the court that the worker is an employee under the new Dynamex test.
But Loni Mahanta, vice president of public policy development at Lyft, said in a statement that the company’s drivers “are independent contractors who decide when, where and for how long they wish to drive,” and that “they tell us that this flexibility is incredibly important to them.”
Flannery, the Uber and Lyft driver, said the flexibility goes beyond the lights and karaoke microphone in his car — he also has a medical condition that can prevent him from working, so he said he needs to have control over his schedule.
Uber, DoorDash and Grubhub did not respond to requests for comment.
To comply with the Dynamex test, Sacramento barbershop and cocktail lounge Bottle & Barlow last summer reclassified its barber staff as employees, instead of independent contractors. The shop’s seven barbers quit.
“It was strictly a business decision for me,” one of the barbers, Adrian Olivares, 27, said in an interview. “We would be making minimum wage plus commission, [but] you can’t live off that. We all have bills to pay, and a lot of us have kids.”
Olivares, who is married with a young daughter, estimates that switching to minimum wage plus commission would have cut his pay by 60 percent.
Within three weeks of quitting, Olivares and three co-workers leased a storefront, gutted the space and refurbished it with fresh paint and new barber chairs. The shop opened under the name Midtown Barbershop, but Olivares and his associates operate as individual businesses, and they pay rent to control their respective chairs.
But Midtown Barbershop, at least on paper, is not a barber shop—it’s a real estate company. That allows the barbers to rent the chairs and classify themselves as independent contractors. But it also means the barbers have to secure a business license, on top of their state barber license.
Assemblywoman Gonzalez in an interview said she intends to include a carveout in her bill for hair stylists and barbers to remain independent contractors but for not truckers, saying that historically they have been employees.
Jennifer Barrera, executive vice president of the California Chamber of Commerce, which has criticized the Dynamex decision, said she anticipates a vigorous debate in the legislature over who should be exempt from the test under the proposed legislation.
“Some [carveouts] we’ll agree on, and others we won’t,” Barrera said in an interview.
Meanwhile, Republican Assemblywoman Melissa Melendez has introduced a bill that would implement a “multifactor test” for classifying workers, overriding the Dynamex test and making it easier for employers to classify workers as independent contractors.
“Without clear legislative action, the Dynamex case could unravel gig and tech economies and threaten the traditional business models of Realtors, teachers, beauticians, truck drivers, construction trades and countless other professions,” Melendez said in a statement.
Last year, nine gig economy companies, including Uber and Lyft, signed a letter addressed to then-Gov. Jerry Brown’s secretary of labor and cabinet secretary, warning that the Dynamex ruling could “decimate businesses” and “stifl[e] innovation.”
Another company to sign the letter, the delivery service Postmates, doesn’t want to reclassify its workers as employees, according to its vice president of global public policy and strategic communications, Vikrum Aiyer. But, Aiyer added, Postmates and other tech companies “have an obligation to work with labor unions and policymakers to explore creative ways to achieve the best practices and protections for workers.”
Lyft also is working with drivers and lawmakers to find a potential middle ground, Mahanta said in a statement. “We are engaging with drivers, labor and policymakers to actively explore options to allow drivers to maintain this flexibility while also addressing the lack of benefits for independent contractors.”