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California's new standards change contractor classification

The Ninth Circuit recently made a decision with wide-reaching implications on the gig economy of California. The ruling will expand a previous decision from the California Supreme Court that gave stricter restrictions to defining workers as contractors.

This decision may force employers in the golden state to reevaluate any workers that they have already hired as contractors.

What does the decision do?

In April of last year, the California Supreme Court set stricter guidelines for what constitutes a contractor. An employer can only classify a worker as a contractor if the employer can demonstrate that:

  • They do not directly control the worker
  • The worker's job falls outside the usual course of business
  • The worker is engaged in an independently established trade

The latest ruling from the Ninth Circuit expands on this decision. It requires employers to follow this guideline even for workers they hired prior to April of 2018.

The decision impacts most small businesses

The court's decision impacts any business in California that has utilized contractors in their business model. Some businesses may find that they can no longer categorize certain workers as contractors and must restructure their business plans.

While this ruling has huge consequences for large companies such as Uber-whose drivers have been previously classified as contractors-it will also impact most small businesses. According to a LinkedIn workforce report, 70% of small businesses have utilized a contractor in the past. In addition, 52% of small business hiring managers plan to increase the number of contractors in their company, and over a third said that they plan to maintain the number of contractors they employ.

One reason that small companies benefit from hiring contractors is that they can easily and quickly bring in specialists as needed. Using contractors is also more flexible and cost effective than hiring full-time employees. Under the new ruling, small businesses may not be able to utilize contractors to fill business needs as often.

Continuing developments

In the near future, there will be legal and legislative battles to further define contractor employment practices. Industry lobbyists are already calling for new laws to exempt certain gig-economy workers from these standards.

While state legislation may lag, the ruling remains for now. This means that many businesses in California may need to reevaluate the status of their contractors to stay compliant.

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