Could Court Case Gig the Gig Economy?

Businesses in California could use some good news, but one wonders when — and sometimes if — any will ever come. At the same time, there seems to be no end to the bad news, at least when government authorities are involved. The most recent example is a California Supreme Court decision in the Dynamex case that could gig the gig economy.

On April’s last day, the court adopted, according to law firm Fisher Phillips, “a new legal standard today that will make it much more difficult for businesses to classify workers as independent contractors, drastically changing the legal landscape across the state.”

“The decision will directly affect the trucking and transportation industry because the workers involved in the case were delivery drivers, but also has the potential to affect nearly every other industry—including the emerging gig economy.

Fisher Phillips, which has a gig economy practice group, says the court didn’t merely expand the definition of “employee,” it also imposed on businesses “an affirmative burden on companies to prove that independent contractors are being properly classified.” This means every California business that utilizes independent contractors “will need to conduct a thorough evaluation of such workers to determine whether they are properly classified.”

Workers who are eventually classified as employees rather than contractors will fall under laws and regulations that govern minimum wage, overtime, payroll taxes, income tax withholdings, insurance coverage, and unemployment benefits. This will increase costs for their employers, as much as 20 percent to 30 percent, according to the New York Times.

Erin Mulvaney, writing in’s The Recorder, says “the gig economy’s structure is at stake” while New York magazine says the court’s ruling could be a “major blow to ‘gig economy’ firms.” The Christian Science Monitor calls it “seismic shift” and Engadget reports that it “could upend gig economy giants.”

No matter how it’s characterized, the decision will surely have a negative impact on innovation in California. Resources presently dedicated to research and development will instead be directed to cover the added costs of employing, rather than contracting, workers. Startups that would count on contract workers rather than employees to get up and running might never get up in California.

Worker advocates, of course, see this as a victory for those they claim to represent. But that’s not so clear. Not only are there likely to be fewer jobs available under the new framework, those who are fortunate enough to hold them are probably going to take a hit on their federal income taxes.

“Independent contractors can generally deduct their business expenses above-the-line and may be able to take the new Section 199A deduction equal to up to 20 percent of qualified business income (significantly reducing the effective tax rate),” Boston College Law School tax and regulation professor Shuyi Oei wrote last week on the TaxProf Blog site.

“Employees, on the other hand, can do neither. Thus, the employment/labor law win for workers in the Dynamex case may come with some unexpected and unwanted tax losses for these same workers.”

Don’t be surprised if the big winners will not be workers but lawyers. They will be awarded a fine bounty to sort out the confusion that the court has authored.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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