In California, Misclassifying Employees Just Got Harder.

Late last month, the California Supreme Court handed down a decision involving a package delivery service that had classified its drivers as independent contractors.  The decision was unanimous.

The court set out clear guidelines for establishing when wage orders setting minimum wages will apply to workers, stating that, in order to classify a worker as an independent contractor, a business must show that the worker (a) is free from the direction and control of the business; (b) performs work that is outside the hiring company’s core business; and (c) engages in “an independently established trade, occupation or business.”

To illustrate, the court gave several examples:  A plumber engaged to fix a leak in a bakery is an independent contractor; a cake decorator who regularly provides custom decorated cakes for sale by a bakery would be an employee.

The case has broad implications for companies like Uber or Postmates; the services provided by Uber drivers and Postmates couriers are the core businesses of providing rides and deliveries, respectively.  It is more likely than not that the decision will have wide application to other app-driven businesses.

At the heart of the court’s decision is the recognition that wage and hour laws enable workers to earn a subsistence wage and shield taxpayers from financial responsibility for workers who earn substandard wages or work in unhealthy or unsafe conditions.  Misclassification of workers results in losses to the federal and state governments of billions of dollars in employment taxes, undermining the ability of those governments to deliver unemployment, worker compensation and retirement benefits to millions of workers.  In California, the state Labor Commission estimates that misclassification results in the loss of approximately $7billion dollars in employment taxes annually.

California follows the lead of states like Massachusetts and New Jersey in setting clear guidelines for the classification of workers.  New Jersey signaled an emphasis on enforcement when Governor Philip Murphy recently issued an executive order establishing a Task Force on Employee Misclassification.  The task force will (a) examine and evaluate existing enforcement of classification regulations; (b) Develop best practices for coordination and information-sharing among departments and agencies charged with enforcement of existing regulations; (c) develop recommendations to foster compliance; and (d) review existing law and applicable procedures related to misclassification.