The recent California Supreme Court ruling that makes it harder for employers to classify workers as independent contractors shines a light into a sizeable yet mysterious segment of the workforce in L.A. County.
There’s been a gap for years between the number of L.A. County residents who report to state officials that they are working and the significantly smaller number of jobs that show up on the payrolls of employers in separate surveys. The circumstance continues amid a tight labor market, with L.A. County’s jobless rate around 4.5 percent.
The gap has been around 500,000 jobs in recent years – a difference of about 10 percent of the county’s total of just under 5 million. The state Employment Development Department – the primary agency charged with tracking jobs throughout California – doesn’t have details about where those jobs exist, what they entail or who does them.
About the only conclusion that can be drawn about the unidentified jobs by the EDD or the many agencies and organizations that make use of the state agency’s data is that the 500,000 or so jobs that fall into the data gap likely are filled by workers who are not treated as full-time employees. That means they don’t have taxes withheld from their pay, and the companies or people they work for do not provide them with workers’ compensation coverage or other benefits.
This group is widely thought to consist of two major subsets of workers: those who are part of the underground economy and get paid in cash “under the table,” and those considered as independent contractors – including the so-called “gig economy” workers – many of whom could be affected by the court ruling.
Los Angeles County is regarded as a center for both types of workers.
“Most assuredly, the Los Angeles region is one of the major centers for independent contractors – both because of the industries we have here that use them heavily, such as the entertainment and logistics sectors, and the fact that we have a large concentration of undocumented workers,” said Chris Thornberg, economist and founder of Beacon Economics, a Los Angeles consulting firm. “But that’s just an informed opinion – we don’t have the data to put numbers to this.”
L.A. County in any case stands to be one of the regions most impacted by the ruling in the Supreme Court case, Dynamex Operations West vs. the Superior Court of Los Angeles County. The ruling sets out a three-point test for determining whether a worker can be classified as an independent contractor, with the central point focused on ensuring that the work performed by the independent contractor is not similar or identical to a company’s core business.
The test replaces a much vaguer standard based on the degree of control the company had over the worker. The new test is generally regarded as more friendly to workers seeking to void classifications as independent contractors and gain status as full-time employees.
Employers who classify workers as independent contractors will likely face more lawsuits seeking to use the Supreme Court standards to overturn those classifications, according to Todd Scherwin, managing partner of the Los Angeles office of Atlanta law firm Fisher Phillips.
Arbitration clauses in many of the employment contracts might pose some additional hurdles for worker plaintiffs, but they won’t stop the lawsuits, Scherwin said.
“Ultimately, companies will have to look at what their business model is and decide whether to meet this test set out by the court,” he said. “In some cases, companies may reach a decision that they cannot continue to turn a profit by converting their [indepdendent contractors] to [full-time] employees.”
It’s difficult to gauge how the ruling will play out in L.A. County because of the dearth of data on independent contractors. The shortfall has been exacerbated by the rise of online platform-based employers – such as Uber Technologies Inc. or Postmates Inc., both of San Francisco – that classify their workers as independent contractors.
For instance, there is little data on how many independent contractors voluntarily structure their working relationships with employers to define themselves as sole proprietors or freelancers, or whether the companies they primarily work for have classified them as independent contractors to save money and reduce their administrative burden.
These are vital distinctions because members of the latter group – those who have the designation of independent contractor assigned to them by companies – are more likely to use the state Supreme Court ruling to challenge the classification by suing employers.
Main vs. supplementary
Data are similarly lacking for the percentage of workers for whom independent contracting is their main job versus the percentage for whom it is a source of supplementary income.
One recent study from the University of California Berkeley Labor Center attempts to provide a rough statewide percentage of the number of workers whose main jobs are as independent contractors. The 2017 study by Annette Bernhardt, director of the low-wage work program at the labor center and Sarah Thomason, a research and policy associate there, found 8.5 percent of independent contractors in California counted the work as their main employment, significantly ahead of an estimated 6.3 percent rate for the U.S. as a whole.
But numbers fail entirely when Bernhardt and Thomason tried to gauge how many workers use independent contractor jobs for supplementary income, such as a full-time bank teller who earns extra income on the weekends as an Uber driver.
“We don’t have a good sense of how sizable this supplementary income has become, or, importantly, whether it is new or just now being recorded,” the study’s authors wrote. “Some of it could, for example, represent the moonlighting of old, now recorded because of the availability of on-line transaction platforms. This is a vital area for future research in California.”
Bernhardt and Thomason concluded: “For a group of workers that is seen as the archetype of the 21st century economy, what we don’t know about independent contractors far exceeds what we do know.”
The survey authors and local economists are hoping a study from the U.S. Bureau of Labor Statistics to be released next month will shed more light on the independent contractor picture.
“We’ve seen the contingent workforce growing in recent years, with more participation in the ‘gig’ economy and more people working as independent contractors, and the nature of employer-employee relationships seems to be changing,” Somjita Mitra, director of the Institute for Applied Economics at the Los Angeles County Economic Development Corp., said in an email. “(But) the extent to which gig jobs have replaced traditional jobs instead of providing a supplemental source of income has been difficult to measure. The BLS report will enable us to understand the growing importance of the contingent workforce on our regional economy.”
At stake is not only the scope and impact of the Supreme Court ruling but also how to train the region’s future workforce.
“As this independent contractor/gig economy trend continues, we can’t merely train people in an occupation – we also have to train them in the management of self-employment,” said Richard Verches, L.A. County director of the Los Angeles/Orange County Regional Consortium of community colleges. “This means training them to negotiate the scope of their work, do their own taxes, manage their own health care insurance, and to market themselves more as their own business.”
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