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Gig Economy Business Model Deals a Blow in California Verdict



In a verdict with potentially far-reaching consequences for the so-called gig economy, the California Supreme Court on Monday made it harder for companies to classify workers as independent contractors and not as employers.

The decision may eventually require companies like Uber, many of which are based in California, to follow minimum wage and overtime laws and pay workers' and unemployment insurance and payroll taxes that may turn their business models upside down.

Industry executives have ranked these and other drivers Gig-workers as employees tend to cost 20 to 30 percent more than they classify as subcontractors. But there are also benefits that can offset these costs, such as the ability to control schedules and the type of work.

"It's a formidable thing – definitely a game that forces everyone to re-examine the issue," said Richard Meneghello, a co-chair of the Gig Economy practice group at management firm Fisher Phillips.

The court essentially dismissed the existing test for determining the employee status that was used to assess the degree of control over the worker. This test was based on about 10 factors, such as the level of supervision and whether the worker could be fired for no reason.

In its place, the court established a much simpler "ABC" test, which is used in Massachusetts and New Jersey. In this test, the employee is considered to be an employee if he or she carries out an activity that is part of the "normal course of business" of the enterprise.

As an example, the court called a plumber who was hired by a store to repair a bathroom leak reasonably not considered an employee of that store. But seamstresses who sew at home with materials from a clothing manufacturer would probably be considered as employees.

In addition, a company must demonstrate that it does not control and direct the worker, and that the worker is truly an independent contractor

While companies like Uber have succeeded in arguing that they do not exercise sufficient control over the drivers, In order to qualify as an employer, it would be hard to argue that drivers perform a task that is not a standard feature of their business.

In a recent case involving the restaurant ordering and delivery service GrubHub, for example a California judge found that food delivery was a regular part of the company's business in Los Angeles, where the plaintiff worked, potentially the ABC Test. But she decided in favor of the company and concluded that she had not exercised sufficient control over the employee to be considered an employer.

Shannon Liss-Riordan, the plaintiff's lawyer, said she would request a re-examination in the light

GrubHub said in a statement that he was aware of Monday's verdict but did not comment on the appeal proceedings in the case could, except to say that it "will continue to ensure that supply partners enjoy the benefits of the flexibility they enjoy from working with our company."

Uber declined to comment.

The case, which the court ruled on Monday, was brought by delivery drivers to a company called Dynamex, which was considered an employee before 2004. The company changed the relationship to a contractual agreement.

If the courts were to find that workers in companies such as GrubHub and Uber, as they are now constituted, were employees and not contractors, companies could resume their work in various ways. They could simply turn their workers into employees instead of leads.

Alternatively, companies like Uber might decide to curb their operations by providing a more limited platform on which drivers and passengers can negotiate prices and terms of service.

Although Uber and Co. will eventually be forced to change their business model, this moment may be a long way off. Uber drivers usually sign an arbitration agreement stating that all disputes must be filed individually and outside the court system. While the United States Supreme Court recently heard a challenge to such agreements, it is generally expected that they will support them.


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