Study: One-Size-Fits-All Approach to Independent Contractors Ignores Value to California’s Economy

A wholesale reclassification of workers would have significant consequences for many different sectors in the state’s economy, according to a recent study by Beacon Economics.

“Since the nature of, and reliance on independent contracting varies by industry, a one-size-fits-all policy ignores the complexity and nuance of such work arrangements, and the value they bring to California’s economy,” the study states.

As many employers know, the California Supreme Court outlined a new test in Dynamex Operations West, Inc. v. Superior Court, No. S222732 (April 30, 2018) to determine whether a worker must be classified as an employee, rather than as an independent contractor, and subject to all the laws governing wages, hours and rest breaks, as well as the withholding of taxes.

The Supreme Court replaced a totality of circumstances test that it had created with a decision in 1989 and replaced it with an “ABC” test of three factors, the most significant being that the worker performs work which is not the hiring entity’s usual business.

Beacon Economics Executive Summary

 In the executive summary of its report, Beacon notes that the California Supreme Court decision in Dynamex has the potential to be a “watershed moment” for the state’s economy.

The court’s guidelines for determining whether certain categories of workers should be considered as employees or independent contractors have far-reaching consequences in relation to worker regulations and their protection under California law, Beacon points out. While specifically related to the delivery service industry, the Dynamex decision “will potentially make it more difficult for companies to classify workers as independent contractors in other sectors of the economy. The decision is part of a broader legislative and judicial effort to define and understand the changing nature of employer-employee relations.”

Beacon goes on to comment: “While worker classification and ‘alternative’ work arrangements have received widespread media attention with the advent of the gig economy, alternative work arrangements have long been a part of modern economies.”

The Beacon analysis aims to shed light on independent contractors and similar alternative work arrangements by:

  • First measuring the scope of the independent contractor and alternative worker labor market in California.
  • Second, the study examines trends in the data and evaluates whether there has been an increasing reliance on independent contractors and other alternative work arrangements in the state recently.
  • Third, it reviews the available evidence on worker preferences for alternative work arrangements—for example, it will consider whether independent contractors might otherwise prefer standard forms of work.
  • Finally, the report considers the potential effect of the Supreme Court decision on work arrangements in California.

Key Findings

The Beacon study finds that:

  • Independent contracting and so-called alternative work arrangements existed long before the rise of the modern day economy. Even at the height of industrial production in the U.S., many workers worked in informal, temporary, and secondary labor markets.
  • Independent contracting and alternative work arrangements are generally defined in relation to standard work arrangements, which typically refer to full-time, permanent employment by a particular business enterprise.
  • Independent contracting is used across a variety of industries, which challenges the suggestion that independent contracting is something specific to emergent sectors of the economy, such as the gig economy. In California, the entertainment, professional, scientific and technical services, transportation and real estate industries rely heavily on independent contractors.
  • The extent of the use of independent contractors varies by industry; the contracting model works for some industries and not for others. In some industries, employers must upsize and downsize their workforce on a project-by-project basis. In the construction industry, for example, no two projects require the same number of workers.
  • A failure to recognize that the effective operation of some industries requires a level of flexibility in recruitment practices could have an unprecedented and unpredictable impact on the state’s economy.
  • In California, traditional forms of employment are growing far more quickly than the number of independent contractor positions. For example, in California over the period 2010–2016, five employees have been added for every independent contractor job.
  • The U.S. Department of Labor survey of contingent workers is the most comprehensive survey of alternative work arrangements in the U.S. economy. It asks “contingent” workers whether they are satisfied with their work arrangement, or whether they would prefer a traditional form of employment. In 2017, the survey found that 79.1% of independent contractors preferred alternative work arrangements, while only 8.8% of survey respondents expressed displeasure, stating their preference for a traditional work arrangement.
  • Another measure of worker satisfaction is found in statistics relating to the number of part-time workers who would otherwise prefer full-time employment, but cannot find it due to unfavorable economic conditions. In California, the number of workers who fall into this category has decreased markedly the further the economy has moved from the Great Recession. Since 2010, the number of workers within this category has fallen by 54%.
  • Direct costs to employers of reclassifying workers from independent contractors to employees include the cost of conforming to minimum wage laws, and the payment of payroll taxes and employee benefits.
  • The cost of payroll taxes and other benefits represents a direct cost to companies and anywhere up to an additional 44% in the cost of employing a worker.
  • Restraints on independent contracting also affect the benefits that many workers enjoy from such arrangements, such as the flexibility of choosing when and how many hours they work, and the opportunity to supplement primary sources of income.
  • There would be benefits to some workers from gaining employee status. A small minority of workers engaged in alternative work arrangements would prefer traditional forms of work. Yet the benefits to such workers must be weighed against the broader costs of worker reclassification—including costs to other workers who benefit from alternative work arrangements, the added costs to employers, the reduction in socially valued services, and inefficiencies that are introduced into the economy.
  • A key question for policy makers is whether there are more effective and efficient ways to assist the minority of workers who engage in alternative work arrangements, but would prefer traditional forms of work, that do not generate such risk for the economy.

The full report, “Understanding California’s Dynamex Decision 2018,” is available on the Beacon Economics website.