DOL Says Certain Gig-Economy Workers Aren’t Employees

 

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According to a recent opinion letter from the U.S. Department of Labor (DOL), at least some gig-economy workers who find jobs through smartphone apps—such as drivers for ride-hailing services—are not covered by the federal Fair Labor Standards Act (FLSA).

"An employee, as distinguished from a person who is engaged in business for himself or herself, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent upon the business to which he or she renders service," the DOL said.

The distinction between an employee and an independent contractor is significant: Employees are entitled to minimum wage, overtime pay and other benefits that are not afforded to independent contractors, who may work for themselves or for several businesses.

The DOL concluded that the workers who use a technology platform or "virtual marketplace" to connect with consumers—as described in the request for an opinion letter— are independent contractors rather than employees of the platform provider.

The virtual-marketplace company provides a referral service, the DOL said. The letter did not name a specific service provider or technology platform but noted that virtual-marketplace companies offer a wide range of services, including transportation, delivery, moving, cleaning and household services.

"This letter confirms the legal test that the agency will apply whenever it is confronted with a misclassification question," said Richard Meneghello, an attorney with Fisher Phillips in Portland, Ore.

Trend Toward Greater Flexibility

"This is a continuation of the trend coming out of the DOL in recent years that is giving greater flexibility to companies with nontraditional relationships with workers," said Michael Puma, an attorney with Morgan Lewis in Philadelphia.

The previous guidance from 2015 under former President Barack Obama's administration advocated for a more narrow view on what was considered an independent contractor, which would result in most workers being classified as employees.

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"This new opinion letter gives a fair amount of freedom to businesses on how to engage workers outside of the normal employee models," Puma said.

DOL opinion letters describe how the agency would enforce applicable statutes and regulations in specific circumstances presented by an employer, worker or other party who requests the opinion.

"While it's not a binding regulation, the guidance could be persuasive to courts," Puma noted.

Economic-Realities Test

The DOL applied its longtime independent-contractor analysis to the facts presented, which considers whether the worker is economically dependent on the hiring business. The analysis is fact-specific and individualized for each worker, the department noted. When determining economic dependence the DOL considers six factors:

  • The nature and degree of the potential employer's control.
  • The permanency of the worker's relationship with the hiring business.
  • The amount of the worker's investment in facilities, equipment or helpers.
  • The amount of skill, initiative, judgment or foresight required for the worker's services.
  • The worker's opportunities for profit or loss.
  • The extent that the worker's services are integrated into the potential employer's business.

Other factors also may be considered. The DOL "does not determine employee status by simply counting factors but by weighing these factors in order to answer the ultimate inquiry of whether the worker is 'engaged in business for himself or herself' or 'is dependent upon the business to which he or she renders service,' " the letter said.

In the circumstances described in the letter, the DOL found that the hiring company:

  • Doesn't seem to exert control over its service providers. The company appears to give workers flexibility and the opportunity to pursue gigs through other outlets.
  • Doesn't appear to have a permanent working relationship with its service providers that would suggest an employer-employee relationship.
  • Doesn't invest in facilities, equipment or helpers on behalf of its service providers. Workers are required to purchase their own equipment and resources and aren't reimbursed by the company.
  • Doesn't provide workers with training, which would increase their economic dependence.
  • Doesn't set a predetermined wage. Although the company sets default prices, it allows workers to choose different types of jobs with different prices, take as many jobs as they want and negotiate the price of their jobs. Furthermore, workers can control their profit or loss by using several competing platforms to find clients.
  • Doesn't integrate workers into its referral business. Workers who use the virtual platform "do not develop, maintain or otherwise operate that platform," the DOL observed. "Rather, they use that platform to acquire service opportunities."

Based on these facts, the DOL said the workers can be properly classified as independent contractors.

"The key is almost always control," said Mark Spund, an attorney with Davidoff Hutcher & Citron in New York City. "How much control is exerted over how the worker gets the job done?"

Employer Takeaway

"I think any industry that relies heavily on independent contractors, not just the gig economy, can take away a lot from this guidance," Puma said. Employers should give their workers the ability to control their own schedule, hire others to help, choose whether to accept a project, and keep the freedom to work in other businesses or jobs, he said. "They should also expect workers to come in with their own skills and not plan to provide … training other than basic orientation."

The DOL has also confirmed that businesses can provide some oversight of contractors for quality control or compliance reasons without establishing an employment relationship.

The opinion letter serves as "a great step in the right direction for gig-economy businesses that utilize independent contractors," Meneghello said. Generally speaking, if a business follows the same model as the company discussed in the opinion letter, business leaders should feel fairly confident that the company will prevail in a DOL investigation, he said. "But it's no magic bullet."

Most employment laws are state-based rather than federal, and state courts and enforcement agencies may have stricter standards for classifying workers as independent contractors.

"As a result, I wouldn't expect a major impact in states that are inclined to define most gig workers as employees," Spund said.

For instance, California and Massachusetts follow the stringent "ABC" test, which makes it very difficult for employers to classify workers as independent contractors.

Additionally, large ride-hailing companies have recently stopped hiring drivers in New York City because of strict taxi regulations and wage requirements, according to Politico.

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