Companies May Need to Rethink Gig Economy After Court Ruling

(Bloomberg) -- Workers won a major victory over employers this week in the California Supreme Court. The ruling could force Amazon.com Inc., Uber Technologies Inc., Lyft Inc. and other purveyors of the gig economy to rethink their relationships with workers in America's most populous state.

Whether it's Amazon Prime Now delivery workers, Uber or Lyft drivers, or food delivery couriers working for DoorDash or Postmates, these companies have insisted that their workers are independent contractors. That designation has deprived those people of minimum wage guarantees, some Social Security benefits, workers compensation provisions, mandated breaks and other protections to which employees are entitled. The companies argue that an independent contractor designation gives people the flexibility to work for multiple companies at once, set their own hours and schedules, and to work the way they want.

In a game-changing ruling, California expanded protections for workers, placing the burden on employers to prove that workers are independent contractors, not employees. The court wrote that minimum requirements for employees are meant to “‘prevent the type of race to the bottom' that occurs when businesses implement new structures or polices that result in substandard wages and unhealthy conditions for works.”

The 82-page ruling in Dynamex Operations West Inc. v. Superior Court of Los Angeles is worth a read if you want a look at the evolution of labor protections in California. Here's the gist:

Dynamex oversees a fleet of workers who make deliveries for companies like Home Depot and Office Depot. In 2004, Dynamex—after years of designating its delivery workers as employees—decided to start calling them independent contractors. The next year, a former Dynamex deliveryman named Charles Lee filed a lawsuit arguing that the workers were being denied protections to which they were entitled. The case has been winding its way through the courts since then as the delivery drviers have fought to take the class action to trial.

On Monday, the state Supreme Court effectively expanded protections for workers, handing down a ruling that implements what's called an “ABC” test. A similar model has been embraced by other states, including Massachusetts, creating a three-part standard to decide whether a worker is an independent contractor. If any one of the components isn't met, then the worker is considered an employee by law. The three conditions in California are as follows:

(a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

(b) that the worker performs work that is outside the usual course of the hiring entity's business; and

(c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed

In the Dynamex case, the court found that the company failed to meet either provision (b) or (c). That Dynamex is itself a transportation company should be particularly worrying for delivery and ride-hailing services. If you think that Uber and Lyft are primarily transportation companies, then the work their drivers perform seems pretty core to their businesses, raising the specter that they could run afoul of provision (b). These are not plumbers and electricians dropping by the office—they're core to the service.

“I think this is huge deal for Uber,” said Michael Chasalow, a professor at the University of Southern California's law school. Uber could react swiftly to the ruling, he said. “I would be surprised if Uber has not already anticipated this, at least as a contingency and has considered different legal ways to address this,” Chasalow said.

While this ruling only affects California, it's a state that casts a long legal shadow. Other courts or legislatures could follow its lead. And as the home state for many of the world's largest technology companies, it could force them to rethink how they label their workers, potentially raising the cost to provide their services. The case is a clear sign for ride-hailing companies that the employment status of their drivers hasn't been resolved, even if it's out of the headlines. These court cases—as we see in Dynamex, which began in 2005—can take years to come to a resolution. I have to expect that when Uber and Lyft file to go public as early as next year, the dubious legal status of their drivers will rank among the companies' risk factors—unless they act before then.

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And here's what you need to know in global technology news

Xiaomi filed to go public in Hong Kong. The company generated $18 billion in revenue in 2017, up 68 percent after a painful 2016. The Chinese smartphone maker could be worth anything from $70 billion to $100 billion. Read this Bloomberg Businessweek profile of the company's founder.

Activision Blizzard had an earnings fiasco. News Corp.'s Dow Jones News Service said it “inadvertently” broke an embargo, putting out headlines before the gaming company announced earnings. Activision's stock price whipsawed and was halted for more than an hour.

Tesla's stock price plummeted, after its own self-induced disaster. Tesla fell as much as 8.6 percent Thursday after Elon Musk brushed off analysts' questions in favor of those from a YouTuber.

--With assistance from Peter Blumberg

To contact the author of this story: Eric Newcomer in San Francisco at enewcomer@bloomberg.net.

To contact the editor responsible for this story: Mark Milian at mmilian@bloomberg.net.

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