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Change In Criteria For Classifying Workers As Independent Contractors; Implications For Gig Economy

World of Business	1286 VIEWS
World of Business
1286 VIEWS

Friday, September 13, 2019 / 06:24M / By Angel List / Header Image Credit: Uber Eats

The gig economy might be in trouble-at least in California.

On Wednesday, California's state legislature passed a bill that changes the criteria for independent contractors. Now, for a company to classify a worker as an independent contractor, it must prove three things (you may hear this being called the "ABC Test"). If they can't, then the worker is treated as an employee.

First, companies must prove "the worker is free from the control and direction of the hiring entity in connection with the performance of the work." In other words, companies can't manage contractors the way they would employees.

As an example, if a catering hall contracted a chef to prepare food events, but controlled how the chef prepared the food-giving them custom orders from customers, giving a strict schedule for production, and instituting standard procedures-they would likely not satisfy this part of the test.

Second, companies must prove "the worker performs work that is outside the usual course of the hiring entity' business." This means a company like Uber has to prove that driving users from location to location is outside the company's usual course of business.

Uber said as much in a press release, contending that the company is actually a "technology platform for several different types of digital marketplaces."

Third, the companies must prove "the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed." For example, an electrician doing contract electrical work is still a contractor. It's unclear if ride sharing or meal delivery companies will be unable to clear this bar.

The gig economy has provided the backbone of countless startups' business models-hence the much-used "Uber for X" tagline. Under this new law, all of these contractors could earn employee status if the companies can't satisfy the ABC test-which greatly increases the company's overhead. Worker's compensation, benefits, tax implications-it would be a serious reshaping of these companies' finances.

If California's law inspires similar legislation across the country, it could deal a serious blow to the entire gig economy. Bradley Tusk, president of Tusk Ventures and Uber's first political strategist, told The Verge, "A domino effect [is] not just possible, it's all but guaranteed."