In an effort to even the playing field, a unanimous decision by the California Supreme Court recently put business owners across the state in somewhat of a chokehold. With a ruling that could change the workplace status of people across the state, they’ve made it harder to classify workers as independent contractors.
The ruling came as a result of a class-action lawsuit against Dynamex Operations West, Inc. The suit charged that Dynamex, a package and document delivery company, misclassified its delivery drivers, calling them independent contractors when they were actually employees.
If they did misclassify, they are not the only company doing the same thing. The ruling has implications for the expanding gig economy, an environment in which organizations contract with independent workers for short-term engagements.
Companies such as Uber and Lyft are also being targeted but it could extend to other business models. Hiring independent contractors versus employees is a swiftly growing trend.
The trend is popular in part because it makes good financial sense for businesses. With employment overhead rising over the last couple of decades, employers are backing away from the would-be money-suck and instead hiring independent contractors for the jobs once held by fulltime and part-time employees.
In recent years, the trend toward hiring independent contractors instead of employees has gone through the roof. A 2016 study by economists at Harvard and Princeton universities estimated 8.4% of the U.S. workforce is classified as independent contractors.
That’s 12.5 million people.
It’s a no-brainer really. Companies that hire independent contractors are not bound by the rules governing employment.
No workers comp.
No piles of paperwork.
No minimum wage or overtime pay.
A 1099 at the end of the year does it, and they’re good to go. Contractors are in charge of managing their own responsibilities to the IRS and state governments.
End of story.
But the story doesn’t always have a happy ending.
If workers are misclassified, the business doing the hiring faces stiff fines. Employment lawyers say many are questioning whether it would be best to reclassify before someone waves a red flag in their direction.
What is an Independent Contractor?
According to the court ruling, independent contractors:
- Perform work outside of the hirer’s core business
- Engage in an independently established trade, occupation or business.
- Would not reasonably be viewed as working for the hiring business.
The court says businesses that hire workers must show that the workers are working in their own established businesses, free from the control and direction of the employer. That means, no established hours or expectations as would be expected of an employee.
The afore mentioned ruling did not resolve the Dynamex case, but it did help define independent contractors for lower courts grappling with the dispute. The court said wage and hour laws were adopted to enable people to earn a subsistence standard of living and to protect workers’ health and safety. The laws also shield the public from having to assume financial responsibility for workers earning substandard wages or working in unhealthy or unsafe conditions, the court noted.
“This is an effort to level the unequal playing field — misclassified workers have been taken advantage of for decades,” said Gutman Dickinson, a partner at Bush Gottlieb.
The risk of misclassifying workers—intentionally or otherwise—is substantial. A worker may be denied the status of employee “only if the worker is the type of traditional independent contractor — such as an independent plumber or electrician — who would not reasonably be viewed as working in the hiring business,” the court said.
Examples of Independent Contractors:
- Computer Tech
As long as the worker is temporarily hired he or she would be classified as an independent contractor. But a cake decorator who works on a regular basis custom-designing cakes—even from home—would be an employee.
This discussion is significant on many levels, not the least of which concerns the California labor Commission. According to their website, the misclassification of workers as independent contractors costs the state roughly $7 billion in lost payroll taxes each year.
To follow these changes and others, connect with one of our tax experts.