TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, May 2, 2018

NY Times: California Supreme Court Deals Major Blow To Gig Economy Business Model, Treats Workers As Employees Rather Than Independent Contractors

New York Times, Gig Economy Business Model Dealt a Blow in California Ruling:

In a ruling with potentially sweeping consequences for the so-called gig economy, the California Supreme Court on Monday made it much more difficult for companies to classify workers as independent contractors rather than employees.

The decision could eventually require companies like Uber, many of which are based in California, to follow minimum-wage and overtime laws and to pay workers’ compensation and unemployment insurance and payroll taxes, potentially upending their business models.

Industry executives have estimated that classifying drivers and other gig workers as employees tends to cost 20 to 30 percent more than classifying them as contractors. It also brings benefits that can offset these costs, though, like the ability to control schedules and the manner of work. ...

The court essentially scrapped the existing test for determining employee status, which was used to assess the degree of control over the worker. That test hinged on roughly 10 factors, like the amount of supervision and whether the worker could be fired without cause.

In its place, the court erected a much simpler “ABC” test that is applied in Massachusetts and New Jersey. Under that test, the worker is considered an employee if he or she performs a job that is part of the “usual course” of the company’s business.

By way of an example, the court said a plumber hired by a store to fix a bathroom leak would not reasonably be considered an employee of that store. But seamstresses sewing at home using materials provided by a clothing manufacturer would probably be considered employees.

In addition, a company must show that it does not control and direct the worker, and that the worker is truly an independent business operator, not just classified that way unilaterally.

While companies like Uber have had some success arguing that they don’t exert sufficient control over drivers to be considered employers, it would be hard to assert that drivers are performing a task that isn’t a standard feature of their business.

Heather Field (UC-Hastings), Tax Implications Of The Dynamex Worker Classification Ruling:

[I]s independent contractor status or employee status better for workers? This question involves complicated employment/labor law and tax law tradeoffs. For example, despite the tax disadvantages of employee classification mentioned above, employee status can benefit workers for employment tax and tax compliance purposes. Others (including Shuyi Oei here, Shuyi Oei and Diane Ring herehere and here, and Kathleen DeLaney Thomas here) have written extensively on worker classification/taxation topics, and at least some of them have additional articles forthcoming on these topics. I will defer to them for more details as I am not an expert (at least right now) on worker classification or its tax implications. But even I know that, when analyzing the implications of the Dynamex case, it will be important for commentators to consider the tax, not just employment/labor, consequences.

https://taxprof.typepad.com/taxprof_blog/2018/05/ny-times-california-supreme-court-deals-major-blow-to-gig-economy-business-model-treats-workers-as-e.html

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Comments

CA has, for years, continued to benefit from its geographic diversity; however, the tax and regulatory burden is going to "roost." Saw today that Alliance Bernstein is relocating its headquarters to Nashville, TN, from New York.

For the natives, I'm ready to bring back a 1980's era bumper sticker: "Welcome to Nashville, Y'all Go Home Now - Hear"?

Posted by: Tom N. | May 2, 2018 1:44:02 PM

So isn't this a matter of all Uber drivers just obtaining an EIN and filing schedule C as a sole prop or single member LLC?

Posted by: Susan Ashe | May 3, 2018 9:58:12 AM

The ABC test is a good one. I'd have qualified as an employee when I worked for Microsoft and Microsoft Press. I proofed and edited books and manuals. The IRS eventually clamped down on what it was doing.

Posted by: Michael W. Perry | May 3, 2018 3:55:39 PM

What does this do for tech contractors? Businesses routinely outsource coding to contractors [even though they have coders on staff] to adjust for project schedules as well as for specialized knowledge. Are all of these contractors now employees too?

What affect will this have on the coder contractor space?

Posted by: JustAsking | May 4, 2018 5:46:16 AM

Could have serious implications for the pharmaceutical/ medical device consulting industries. They hire armies of consultant to deal with engineering and regulatory related tasks. Good write up, for a lawyer.

Posted by: Ed | May 4, 2018 5:55:36 AM

When I lived in Oregon in the early 90’s, there were bumper stickers with the admonition: Don’t Californicate Oregon. And, for a short time on I-5 outside Ashland (at the border) an officially-printed road sign on the northbound side of the road that read “Welcome to Oregon, Now go home.”

Posted by: L | May 4, 2018 6:08:39 AM

The whole idea of a difference between an employee and an independent contractor shouldn't exist, as it presumes to say some workers are free laborers whilst others are serfs or slaves. People need to understand that the Marxist Globalists want to abolish free labor and make everyone a ward of their employer, which means the employer can treat you like their personal property, with a fig leaf of the appearance of having certain social rights which do not make up for the loss of independence, not for a mature and capable individual.

Posted by: James Solbakken | May 4, 2018 9:37:19 AM

So does Uber operate in NJ and MA with its usual business model?

Posted by: Larry | May 4, 2018 10:12:10 AM