How Can You Stay Compliant With Labor Laws in a Gig Economy?
The rise of the gig economy has created new opportunities for businesses across California. Companies now work with independent contractors for everything from delivery services to digital marketing. Businesses must take care to comply with labor laws, which can vary based on how they classify their workers.
Misclassification, wage violations, and benefit disputes are just a few issues that can arise. Below, we at The Law Offices of Steven E. Springer will examine key steps businesses can take to manage legal obligations while continuing to benefit from a flexible workforce.
Worker Classification Rules
One of the most critical issues for businesses operating in the gig economy is proper worker classification. In California, the default assumption is that a worker is an employee unless the hiring entity can prove otherwise. The state uses the “ABC test” to evaluate independent contractor status.
Under the ABC test, a worker is considered an independent contractor only if:
The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
The work performed is outside the usual course of the hiring entity’s business.
The worker is customarily engaged in an independently established trade, occupation, or business.
Failing any part of this test typically means the worker should be classified as an employee. Misclassification can trigger wage claims, penalties, and audits.
Adapting to AB 5 and Related Legislation
Assembly Bill 5 (AB 5), which went into effect in 2020, codified the ABC test into California law. Since then, multiple amendments and exemptions have been passed, impacting a range of industries.
For example, app-based transportation and delivery companies gained partial relief through Proposition 22, though parts of that measure continue to face court challenges.
Businesses must stay updated on how these legal shifts affect their operations. Even those who believe their workers fall under exemptions should regularly evaluate their classifications in light of court decisions and state agency guidance.
Creating Clear, Written Agreements
While written contracts do not determine employment status on their own, they can help clarify the relationship between businesses and their independent contractors. Contracts should describe:
The nature of the services provided
Payment terms
Deadlines or schedules
The contractor’s independence in deciding how to complete tasks
Avoid clauses that grant the business too much control, as this could be used as evidence of an employment relationship. It's also important to revisit contracts periodically to make adjustments based on evolving practices or laws.
Complying With Wage and Hour Standards
Even when a worker is classified as an independent contractor, wage and hour laws still apply to employees. If a worker is misclassified, businesses may be held responsible for unpaid wages, missed meal and rest breaks, and overtime.
California law mandates:
A minimum wage higher than the federal rate
Overtime pay for work exceeding eight hours a day or 40 hours a week
Meal breaks after five hours of work
Paid sick leave under certain conditions
Businesses should keep detailed records of hours worked and payments made. Investing in proper payroll systems helps reduce the risk of accidental violations.
Managing Tax and Insurance Obligations
Proper classification also affects tax responsibilities. Independent contractors pay self-employment taxes and receive a 1099 form, while employees receive a W-2 and are subject to withholding.
Employers must contribute to:
Social Security and Medicare
State Unemployment Insurance (SUI)
Employment Training Tax (ETT)
Workers’ compensation insurance
If a business treats a worker as an independent contractor but the state deems them an employee, the business may be responsible for unpaid contributions and penalties. Employers should verify that their classification aligns with state and federal tax rules.
Using Business Law Guidance to Stay Current
The gig economy evolves quickly, and so do labor laws. Relying on general assumptions or outdated policies may lead to costly disputes. Companies should work with business law counsel who stay current with statutes and court interpretations.
Labor issues often intersect with other areas of business law, including contract drafting, tax compliance, and regulatory filings. Understanding how these areas interact can help businesses reduce risk while remaining adaptable.
Implementing Internal Compliance Policies
Internal audits can identify potential problems before they grow into legal challenges. Businesses can establish policies that promote compliance, including:
Annual classification reviews
Contract checklists for independent contractors
Recordkeeping procedures for hours and payments
A system for responding to worker concerns
Training supervisors and managers on labor law standards can also help reduce missteps. When workers feel they’re treated fairly, they’re more likely to raise issues early, allowing the company to respond promptly.
Recognizing Red Flags in Gig-Based Relationships
Certain patterns may signal that a business is exercising more control than is appropriate for an independent contractor relationship. These include:
Requiring fixed work hours or daily check-ins
Providing equipment or uniforms
Prohibiting the worker from taking on other clients
Evaluating performance in ways that resemble employee reviews
These elements might be acceptable in some industries, especially when a worker meets a narrow exemption. However, businesses should evaluate the total working relationship and seek guidance when unsure.
Addressing Disputes Before They Escalate
Disputes over classification or unpaid wages can lead to state investigations or private lawsuits. Taking early steps to address complaints can prevent larger problems. Businesses may consider:
Offering a review process for independent contractors who raise concerns
Working with mediators to resolve wage disputes
Adjusting policies when patterns of complaints emerge
The longer a business waits to respond to a potential violation, the greater the risk of liability. Timely review and correction are often more cost-effective than litigation.
Preparing for Audits and Enforcement
California’s Labor Commissioner and Employment Development Department (EDD) frequently audit businesses suspected of misclassification or wage violations. Companies selected for audit must produce:
Worker classification records
Contracts and payment records
Schedules and timesheets
Tax filings and insurance documents
Being prepared for such reviews can reduce penalties and demonstrate a good-faith effort to comply. It’s also wise to respond promptly to requests for information and communicate clearly with regulators.
Balancing Flexibility With Legal Obligations
Gig-based business models offer scheduling and cost advantages, but those benefits shouldn’t come at the expense of compliance. Businesses can still work with contractors, but only when the relationship meets the state’s criteria.
When workers should legally be classified as employees, companies must be ready to meet wage, hour, and benefit standards. Avoiding that responsibility by mislabeling workers creates risk, not savings.
Understanding how to comply with labor laws allows businesses to build sustainable relationships and focus on growth rather than litigation.
Final Considerations for Long-Term Compliance
As California continues to respond to shifts in the labor market, businesses must remain attentive and responsive. Compliance isn’t a one-time task—it requires regular review, updated contracts, and clear internal policies.
Key takeaways include:
Use the ABC test to evaluate independent contractor status
Monitor legislative and judicial changes affecting labor classification
Maintain detailed records of worker hours, payments, and agreements
Review and revise contractor relationships periodically
Seek business law guidance when evaluating policies or resolving disputes
A proactive approach can help businesses avoid penalties while maintaining flexibility in their workforce models
Call The Law Offices of Steven E. Springer Today
Applying business law principles across classification, contracts, payroll, and tax filings allows companies to maintain compliance in an environment that continues to evolve. Labor laws may shift, but a consistent, informed approach helps businesses move forward with confidence.
We serve clients in San Jose, Morgan Hill, and throughout Santa Clara County. Contact The Law Offices of Steven E. Springer today to get started.