California vs. the Gig Economy

On Monday, the California Supreme Court issued a ruling that will make it more difficult for employers in the state to classify workers as independent contractors. With this ruling, the court adopted a simpler standard– called the ABC test — which provides, most critically, that a worker is an employee, rather than a contractor, if she performs a job that is within the company’s “usual course” of business.

It isn’t the first time California has chastened fast-growing technology companies for how they categorize employees. In 2015, the California Labor Commissioner’s Office concluded that an Uber driver should be classified as an employee, not an independent contractor. Although the decision was limited to the one particular driver who sued the company, it was a notable ruling because California officials were specific about why they considered Uber drivers employees and set the stage for additional lawsuits to follow.

Why it matters: This ruling will have drastic cost implications for gig economy companies like Uber, Lyft and Postmates, whose business models rely on independent contractors. It could also prevent up-and-coming startups that rely on such workers from operating in California and other states that decide to follow suit.

The fact of the matter: The definition of work has rapidly evolved in the innovation economy because of how quickly these companies have grown and how successful they have become. The legal system’s view of employment was not designed with our emerging freelance economy in mind and will require a new approach that balances the benefits and stability workers have traditionally embraced alongside the flexibility and mobility that gig economy workers increasingly desire.