California officials often tout the growing tech industry as evidence of the state’s vibrant economy as they rebut criticisms that our regulatory policies are depressing business growth. But a state Supreme Court ruling last year imperils that economic bright spot — and earlier this month the U.S. 9th Circuit Court of Appeals exacerbated the problem.
California businesses that have been waiting for the next shoe to drop have just heard a resounding thud. The federal court’s ruling hasn’t gotten much attention, but its decision to apply the California high court’s wage edict retroactively will force many businesses to revise their employment model and impose a barrage of new costs on them.
In the Dynamex decision, the California Supreme Court made it difficult for California businesses to classify workers as contractors. The case involved a delivery service that had turned its crew of drivers into independent operators, thus freeing the company from following the wage, overtime and benefit rules that apply to those who work for a company on a full-time basis.
The court created an “ABC” test for determining whether a worker can be considered a contractor. To do so, a) the company must not direct the worker’s on-the-job performance; b) the worker must not be performing work within the scope of the company’s business; and c) the worker must be engaged in an independent enterprise. Under this test, a company could, say, contract with an outside electrician or IT consultant, but not much else.
Transportation-network companies such as Uber or Lyft consider their drivers to be contractors, but the court’s ruling could force them to become regular employees. The decision didn’t just target newfangled app-based businesses, but will change the way many traditional workers (real-estate salespeople, hairdressers, franchisees) must operate. Other courts are still wrestling with details and the Legislature still can fix the problem, but big change is coming.
In the latest ruling, the 9th Circuit declared that a Georgia-based janitorial firm with 10 franchises in California would not only have to begin treating its workers as regular employees, but pay years of back wages and overtime. Cleaning office buildings is as old line an industry as one might find, but the decision has sparked particular concern in California’s high-tech world given the design of many of these firms’ business model.
Both decisions have vast implications. Once companies have to comply with Dynamex, they can expect labor costs to rise precipitously. The decisions also will limit the choices made by workers. Surveys show that the overwhelming majority of contractors prefer their newfound schedule flexibility. Not everyone wants to work 9-5 for one company. The rules will likely threaten the future of many of the state’s most innovative firms. Employment could fall. Consumers will suffer, also, as they find that popular services no longer are available or cost-competitive.
The 9th Circuit opined that its ruling will put that janitorial firm “on equal footing with other industry participants who treated those providing services for them as employees.” But it’s not the job of the courts to protect existing industries. Frankly, California can’t celebrate the economic benefits of an entrepreneurial economy while imposing industrial-era work rules that make innovation impossible. Something has to give. We will soon see what that’s going to be.
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