Last month, California’s Supreme Court transformed millions of independent contractors into full-time employees with the stroke of a pen. The decision will effectively limit workers’ freedom and reduce employment opportunity. The more states that follow California’s lead, the worse it will be for the nation’s economy.
For businesses, the distinction between the classifications is massive. Employees and employers owe expensive duties to each other that independent contractors, by virtue of their autonomy, do not face. In the Dynamex v. Lee decision, the court adopted a new test for classifying workers that begins with the assumption that workers are employees, with companies needing to prove that a given worker is actually an independent contractor.
It’s a decision that flips the old classification system on its head.
Now, California firms seeking to classify a worker as an independent contractor must show: 1) that the company does not direct the worker in the performance of her job, 2) that the worker performs work outside the scope of the company’s typical business (such as a freelance artist who designs fliers for a moving company), and 3) that the worker has made the affirmative decision to go into business for herself, perhaps by incorporating or starting an LLC.
This new test will harm workers and companies alike because it revokes their agency. The problem is one of flexibility. Instead of allowing companies and workers to negotiate the terms of their relationship, the test largely dictates the terms for them. And, under the new test, many workers formerly classified as independent contractors will be reclassified as employees – with all their attendant costs and limitations.
The vast majority of independent contractors are happy with their status. In fact, according to a 2018 survey by the Bureau of Labor Statistics, “Fewer than 1 in 10 independent contractors would prefer a traditional work arrangement.” This stands to reason because, as independent contractors, workers enjoy enhanced flexibility, like setting their own hours.
Meanwhile, employers who hire independent contractors gain affordable access to much-needed talent. A UCLA study estimates that companies save 33 cents on every dollar using independent contractors instead of full-time workers.
This system is working and it’s an essential part of our emerging 21st-century economy. That’s why the scale of the Dynamex problem is just now becoming apparent. Buzzwords like “gig economy” and “sharing economy” have obscured the fact that independent contractors are found in all sorts of professions — ranging from writing and web design to law and landscaping. Dynamex will affect them all, especially if it becomes the model for other states.
In the Golden State alone, there are — conservatively speaking — 1.4 million independent contractors. Hundreds of thousands of them could be reclassified as full time workers under the new test, costing California businesses over $6.5 billion annually. This change will especially hurt low-margin businesses like retail stores, many of which will be forced to lay off workers or even close because of the increased labor costs.
A flexible worker classification system is an essential part of our emerging 21st-century economy. If courts and legislatures continue shackling workers and companies to antiquated conceptions of labor, American businesses will be less competitive and workers will have fewer opportunities.
In light of Dynamex, it’s vital that Congress begin to pay closer attention to this issue and to seek innovative approaches to labor classification. Such approaches must reflect the modern realities of freelance, part-time and independent-contract work; not try and pound the round pegs of 21st-century workers into the square hole of the 20th-century economy.
Modern labor classification needs to move away from the false binary of the full-time worker — entitled to extensive legal protections and a broad array of benefits — versus the independent contractor, who only gets a paycheck and the convenience of being their own boss. Public policy should recognize the value of flexible engagement and make it easier for employees to combine smaller benefits packages offered by different contract employers — as is proposed in so-call “portable benefit” models.
If California’s flawed test is adopted elsewhere, its harm to both workers and employers will only become more profound. Congress has an opportunity to create a nationwide, 21st-century vision for worker classification – one that acknowledges the changing nature of work in an economy dependent on freelance and contract labor. The time for action is now.
Ian Adams is associate vice president, and Brian Jencunas is a state affairs associate, for the nonprofit R Street Institute.