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How California’s Supreme Court Ruling Will Affect the Gig Economy

 Posted on May 09, 2018 in Taxation Law

employee classification, independent contractors, San Jose business tax lawyer, gig economy, payroll taxesIn today’s economy, millions of people across the United States act as freelance workers, either as a primary job or as a way to supplement income. The digital tools available to companies and workers in the gig economy allow many people to earn an income by transporting passengers, renting property to travelers, or performing a variety of other tasks. 

While many people and companies have benefited from the sharing economy, the increased prevalence of this type of labor has raised a variety of legal issues as employees seek to receive fair compensation and government entities ensure that taxes are applied correctly.

A recent ruling by the California Supreme Court will have a significant impact on gig economy workers and employers, affecting issues such as employee classification and taxes.

Classifying Workers as Employees or Independent Contractors

One of the primary issues that arises in the gig economy is how workers are classified. Employers may garner various benefits by classifying workers as independent contractors. However, workers may prefer to be classified as employees, thus allowing them to receive certain benefits.

The California Supreme Court’s ruling in Dynamex Operations West, Inc. v. Superior Court has changed the method for determining whether a worker is considered an employee or an independent contractor. The ruling specifies a three-part “ABC test” for determining a worker’s classification. This test looks at:

  • Whether a worker performs his or her job as part of a company’s usual course of business;
  • Whether a worker is controlled and directed by the party for whom he or she performs the work; and
  • Whether the independent contractor (as opposed to employee) classification is mutual between the worker and the party for whom the services are performed, or whether the classification is unilateral on the part of the party for whom the work is performed.

Following this ruling, any state or federal tests that had previously been used to determine a worker’s classification are no longer controlling in the state of California.

For employers, this ruling will affect state and federal payroll taxes and employment agreements for employees and/or independent contractors. Employers should also be aware of their exposure or safety when engaging the services of a worker for whom unemployment insurance is required.

For workers, this ruling may affect their rights to make state unemployment insurance claims to the Employment Development Department and/or federal unemployment insurance claims to the Department of Labor. 

Contact a San Jose, CA Business Law Attorney

Following this ruling, California employers should be sure to take steps to protect themselves and proactively address any legal issues. At John D. Teter Law Offices, we can assist with determining worker classification, resolving issues with federal and state payroll taxes, creating employment and/or independent contractor agreements, and addressing concerns related to unemployment insurance and coverage. Contact a San Jose business tax lawyer at 408-866-1810.


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