California’s New Definition of Employee Survives Initial Challenge – A Sign of Things to Come?

In early 2020, a California law went into effect that was meant to make it more difficult for gig companies, such as Uber and Postmates, who provide percentage-based payments to workers who provide services to web-based application users, to hire those workers as contractors and avoid paying into unemployment, workers’ compensation, and health insurance for the workers essential to the operation of the businesses with which they contract.  The legislation codified an earlier decision of the California Supreme Court that found the workers to be employees based on the business models of the gig companies, but ran contrary to the Department of Labor opinion that declared gig-workers independent contractors.

The law has been met with strong resistance by gig companies, who have refused to comply with the law, and instead filed a federal lawsuit challenging the law, as well as lobbying heavily to create a ballot measure to exempt themselves from the law.  However, in the interim, the state of California filed suit seeking an injunction against both Uber and Lyft, requiring them to comply with the law.

Instead of attempting to argue that the law did not apply to them, both Uber and Lyft filed several motions against the injunction, including a motion to compel the state to arbitrate its claim against the companies despite the lack of any arbitration agreement involving the state.  The judge quickly dispensed with the defendants’ motions, and found that the state would likely prevail on the merits of suit, and that there would be significant harm if a preliminary injunction was not issued and the defendants continued to violate California’s law.

In coming to its decision, the court examined the California law, which states:

A person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

  1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance and in fact.
  2. The person performs work that is outside the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The judge found that the defendants would not be able to prove all three prongs of the test, and found that the law would apply to them.

This is a California case, and both the California legislature and courts have a reputation for being far more progressive than other states and judicial circuits.  However, California also has a history of influencing lawmakers and courts across the country.  Because of this, gig businesses need to become familiar with the changes seen in the sunshine state, as they could easily make their way east.  Many states are noting the lack of contribution from gig companies in regard to unemployment and workers’ compensation, while noting the (pre-Covid-19) profits earned by those companies off of uninsured gig workers.  Especially with the DOL’s opinion that gig workers are independent contractors, many states could take it upon themselves to create legislation to protect those workers.

The classification of employees versus independent contractors is tricky business, and often involves a complex analysis of multi-factored legal tests, no matter what industry you’re in.  Moreover, the consequences of improper classification can be very costly.  If you or your organization need guidance on how to classify your workers, contact the Wiley Law Office, for employee classification advice that works.