Labor Department says gig workers are not employees

Federal agency’s ruling gives some direction on worker classification

Businesses participating in this 21st century workplace model have been struggling with how to classify gig economy workers for years — as employees or independent contractors. At least for one virtual marketplace company, the U.S. Department of Labor DOL says they are independent contractors.

Also known as the “on-demand” or “sharing” economy, this workforce involves individuals who take temporary jobs or short-term engagements; they can take as many or as few “gigs” as they choose. Using online and/or smartphone-based platforms, companies — including Etsy, Airbnb, eBay, Uber, Lyft, Grubhub and TaskRabbit — connect these on-demand workers to end-user consumers who need a particular good or a service..

In its recently issued opinion letter, the DOL determined that some gig workers are independent contractors under the Fair Labor Standards Act, or FLSA, which applies to “employees.”

While the definition of employee — any individual whom an employer suffers, permits, or otherwise employs to work — is very broad, not all workers are employees. Some workers may be independent contractors, and therefore outside of any FLSA requirements. The opinion letter signals the test this agency is expected to use when considering classification of workers under federal law.

Proper classification is significant because there are key differences in being found an employee rather than an independent contractor.

For example, companies must pay employees minimum wage and overtime pay. Independent contractors do not have this protection. Misclassification of workers as contractors rather than employees can result in significant costs and penalties to a company.

In its opinion letter, the DOL redacted the identity of the virtual marketplace company seeking the guidance. What we do know is that it helps consumers connect with service provider workers through a software platform.

“The platform also allows its service providers to communicate with consumers — including through mobile app messaging or masked telephone calls — to exchange details about the requested service, including adjustments to the scope, price, or time.” Opportunity for repeat business is also provided.

There is no interview of service providers or required training by the unnamed company. Onboarding is online, and service providers can provide work to customers once the account is activated without any requirement for reviewing materials or physically reporting to any office. The unnamed company receives no services from the service providers.

In determining the company’s classification of these service providers, the DOL used its “economic realities test.” Its analysis under this six-factor test established independent contractor status:

1. Nature and degree of potential employer’s control: The DOL found the unnamed company did not exert control over the workers, which supported contractor status. Instead, the company gave them “significant flexibility,” including how much they worked, when, where and for whom, required no minimum quotas, quality checks or ratings on their work, and allowed for worker profit and personal advantage.

2. Permanency of the worker’s relationship: The DOL found the workers could work for competitors at the same time or at any time after the relationship ended and that they could exit the relationship at any time, which supported contractor status.

3. Worker’s investment in the facilities, equipment or helpers: The company did not invest in any facilities, equipment or helpers for the workers; rather, it required them to have all resources needed and did not provide any reimbursement. The only investment was the virtual platform used. All of this supported contractor status.

4. Skill, initiative, judgment or foresight required for worker’s services: The DOL found workers exercised managerial discretion by choosing between different service opportunities and using competing virtual platforms. There was also no mandatory training required by the VMC.

5. Worker’s opportunities for profit or loss: The DOL noted the workers control the “major determinants of profit or loss” (see control factor above) in that they set or negotiate their prices, take jobs they see fit and choose whether to cancel a job. There is also a fee charged for canceled services, putting the risk on the service provider.

6. Integration of the worker’s services into potential employer’s business: The unnamed company operates and maintains the platform used by the service providers. The service providers use the platform to obtain service opportunities, and therefore they are consumers of the platform and not operationally integrated into the business.

The DOL noted that “appropriate weight” for each of the six listed factors would depend on the circumstances, and that other factors may also come into play. The key factor came down to how much “control” the virtual marketplace company had over the service provider workers in doing the job. In the end, the DOL found that the gig workers who use this company’s platform are independent contractors.

Getting some direction from the DOL on the standard it will use in reviewing these classification issues is helpful. These opinion letters, however, are not precedent for courts, although courts may defer to the DOL’s interpretation. The opinion is also limited to federal law.

Many states have their own tests for determining independent contractor status, and under those state tests, the same facts may lead to a different result.

In New Hampshire, the state DOL’s test for classification changed in 2012 to a seven-part test. Companies wanting to engage gig workers as independent contractors should be careful of this classification minefield and seek legal assistance.

The growth in popularity of this 21st century model has put center stage the question of worker classification. Are these gig economy workers independent contractors or employees, or do they fall into a new category of classification? Whatever the conclusion, one thing is clear: the gig-economy is here to stay.

Jennifer L. Parent, chair of the Litigation Department and a director of McLane Middleton, can be reached at jennifer.parent@mclane.com.

Categories: Law

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