Independent contractors vs. employees: California's Supreme Court tightens the rules

Are you classified as an independent contractor or an employee? With the growing gig economy, the line's been blurry. But how you’re classified can mean the difference between getting overtime and rest breaks — or not.

In a significant ruling this week, the California Supreme court clarified the definitions. Here's what you need to know:

Why is this important?

It’s about worker protections. Employees are covered by governmental regulations on things like minimum wage, overtime and meal breaks. Independent contractors have no such safeguards. Employees can also have their business expenses reimbursed, unlike independent contractors.

Why have companies been so keen to classify workers as independent contractors?

There's a big financial incentive. Companies don't have to pay social security taxes, payroll taxes or workers compensation insurance for independent contractors. For federal and state treasuries, that means billions of dollars in lost tax revenue.

What's been the way to classify workers up till now?

It's focused primarily on whether the business controlled how the work was performed, e.g. what hours someone worked, or where they worked.

So what did the California Supreme court say this week?

Chief Justice Tani Cantil-Sakauye laid out three things a business must show for a worker to be classified an independent contractor:

1. The worker is free from the control and direction of the employer
2. The worker performs work that is outside the hirer’s core business
3. The worker customarily engages in “an independently established trade, occupation or business”

So what would that mean in practice? Any examples?

Here’s a couple from the court:

“A plumber temporarily hired by a store to repair a leak or an electrician to install a line would be an independent contractor. But a seamstress who works at home to make dresses for a clothing manufacturer from cloth and patterns supplied by the company, or a cake decorator who works on a regular basis on custom-designed cakes would be employees."

Was there some kind of lawsuit that sparked this?

There was a class-action lawsuit by delivery drivers against Dynamex Operations West Inc.,  a package and document delivery company. The drivers said they were misclassified as independent contractors when they considered themselves employees. This ruling doesn't resolve that case, however. 

Any other states that have similar rulings?

California is following Massachusetts and New Jersey, who have also restricted which workers can be called independent contractors.