Worker Freedom at Risk in California

When the state Supreme Court issued a ruling last year threatening workers’ ability to operate as independent contractors, it sent a chill through the gig economy. The temperature dropped a few more degrees recently when the U.S. 9th Circuit Court of Appeals determined the standards outlined by the California court could be applied retroactively.


The gig economy means good income for about 2 million Californians. It also means flexibility, which is critical for many whose lives don’t fit the 9-to-5, 40-plus-hours-a-week structure. Quite often the freedom to work as an independent contractor is the difference between having an income and being unemployed.


Freelancing also allows full-time employees to supplement their incomes through a “side hustle.” This latitude is vitally important in California, where only about 7.6 percent of workers’ incomes are left over after they’ve paid household expenses. In only one other state — Hawaii — do workers have less money remaining after covering cost-of-living obligations than in California.


The ability to move from job to job also benefits workers who prefer to be free from constant supervision, others always looking for interesting projects, and those who feel the need to escape frustrating workplaces. The gig economy is also a practical choice for students who need incomes but have limited availability due to school schedules.


Despite these advantages, and against workers’ wishes — four in five prefer freelancing over traditional employment — the California Supreme Court set back the gig economy a year ago when it issued its Dynamex ruling. The Court established a three-pronged, or“ABC test,” to determine which jobs are “gigs” and which are company positions. The test sets an unreasonably high bar for workers to be classified as independent contractors. According to the court, they must be “free from control and direction over performance of the work” by the “hiring entity,” engaged in work “outside the usual course of the business for which the work is performed,” and carry out similar duties for other companies.


The 9th Circuit followed that up by ruling in May that “Dynamex should be applied retroactively.”


Jason Geller, an employment attorney at Fisher Phillips, told PRI the latest ruling is “certainly troubling.” It opens companies to exposure by allowing workers who claim they had been incorrectly classified as independent contractors in the past rather than employees.


Companies’ exposure on past wage-and-hour issues is confined to four years under California’s statute of limitations. But for some companies, especially startups that haven’t been in business long and succeeded only because they utilized independent contractors, being forced to pay back wages is a potentially fatal burden. Jeffrey Horton Thomas, an attorney at Akerman LLP, told Bloomberg News the 9th Circuit’s ruling could be “devastating to many businesses and requires their attention now.”


Geller is also uneasy with the 9th’s treatment of the franchisor-franchisee relationship. He said he found it worrisome, as it opened up the possibility that franchisors can be held responsible for violations committed by franchisees. Matthew Haller, a senior vice president at the International Franchise Association, has similar concerns.


“Short of legislative relief or intervention by the U.S. Supreme Court, California’s 76,000 franchise hotels, gyms, restaurants, and retail stores will live in legal uncertainty for the foreseeable future,” Haller told Bloomberg.


The 9th Circuit, he added, “has created an anti-business atmosphere that will make both franchise investors and entrepreneurs skeptical of opening or expanding in California.”

The “anti-business atmosphere” is not new to California. The 9th’s decision is just another act in a long list of policy and judicial offenses committed against California business, not the least of which is the Legislature’s intention to codify the state Supreme Court’sDynamex ruling into state law.


Just as a worker’s right to freelance can mean the difference between being employed and unemployed, the right to contract freelancers can determine life or death in business. It’s fair to ask if gig economy companies, such as TaskRabbit, Postmates, DoorDash, Instacart, Uber, Lyft, and many other job-creating entrepreneurs, would be profitable, and have attracted tens of billions in investments — or have even existed at all — without independent contractors. When companies aren’t weighted down by a mountain of employment laws and regulations, they have more time and resources available to innovate.


Given the events of the last year, it’s quite clear that meddling lawmakers and overactive courts are at war with worker freedom. Stated claims to be pro-worker can’t change the fact that their policies and decisions will kill jobs, reduce incomes, and increase workplace rigidity.

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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