Seyfarth Synopsis: The California Supreme Court, in Dynamex Operations v. Superior Court, has agreed to address the legal standard for determining whether a worker classified as an independent contractor is really an employee. The Supreme Court’s opinion is expected to be significant for anyone thinking of using independent contractors in California.

The Future of Work: A Surging Demand for Independent Contractors

Recent years have seen tremendous growth in the sharing economy, aka, the “gig economy,” which reflects the technological ability to quickly summon goods or services through a smart phone. While the new economy has grown rapidly, the relevant legal standards have not. Yet business owners continue to invest heavily into business models that have created tens of thousands of flexible jobs for workers classified as independent contractors. In the absence of legislative guidance tailored to the realities of the new economy, California courts and administrative agencies have struggled to apply the law developed during an earlier age.

The new economy is a powerful fact of life. According to Seyfarth’s “Future of Work” Outlook Survey, 45% of respondents expect their company’s demand for independent contractors to grow in the next five years. Companies in the areas of information technology and telecommunications are among those most likely to experience these developments, as opposed to companies in the areas of real estate and consumer staples. (A deeper analysis of our survey’s findings appears here.)

These survey responses provide a valuable snapshot, but employers are likely to change their tune based on the regulatory environment and any significant judicial rulings narrowing the use of independent contractors.

One such potential ruling could come in Dynamex Operations West, Inc. v. Superior Court. The California Supreme Court has agreed to review a Court of Appeal decision that stunned employers by expanding the definition of “employee.” That definition of employee arguably could encompass many individuals traditionally retained as independent contractors.

When determining whether workers were independent contractors, many companies previously considered how much control the company exerted over a worker and how much a worker economically depended on the company. This framework provided some consistency.

Taking a turn, the Court of Appeal in Dynamex adopted the Wage Order’s much-broader definition of “employ,” meaning “to engage, suffer or permit to work.” As a result, the Court of Appeal expanded the meaning of the term “employee,” arguably extending it to nearly every labor relationship a company would be likely to have with an individual. The potential ramifications of such a definition upon the future use of independent contractors cannot be overstated. Indeed, the U.S. Chamber of Commerce and California Chamber of Commerce have both warned that a decision to affirm the lower court’s expansive ruling “would effectively eliminate independent contractor status for any use in California.”

Consequences of Misclassification

Making it more difficult to properly classify an independent contractor would only increase the risks of costly litigation. By now, readers should know that misclassifying California employees as contractors has dire consequences, including statutory penalties of $5,000 to $15,000 for each “willful” violation. Failing to properly classify workers can create liability for back wages, penalties, fines, and the assessment of back taxes. Additional exposure can also arise when misclassified workers, who would otherwise be entitled to employee benefits, have not received those benefits. California state agencies in search of employment-tax revenues have increased their enforcement efforts, including audits. In fact, the California Labor and Workforce Development Agency has agreed to jointly investigate independent contractor misclassification with the IRS, reflecting both agencies’ desire to increase enforcement.

California employers with operations in other states should also note that increased misclassification enforcement is not peculiar to the Golden State. In July 2015, the U.S. Department of Labor’s Wage and Hour Division issued its Administrator’s Interpretation, concluding that “most workers are employees under the FLSA” in part due to the “expansive definition of ‘employ’ under the FLSA”; we previously observed this position to be an “unapologetic effort to restrict the use of independent contractors.” Today, it still remains to be seen whether the Trump Administration will redirect federal enforcement priorities away from independent contractor issues. But even if the federal government backs off of these issues, there is no indication that state governments and the ubiquitous plaintiffs’ bar will stop aggressively challenging independent-contractor classifications.

Scrutinize Your Existing Relationships with Independent Contractors

As always, employers should remain vigilant for new legal developments and should consult their employment counsel to scrutinize existing relationships with independent contractors.