Employers frequently and improperly classify workers as independent contractors rather than employees. Recently, the California Labor Commissioner ruled that an Uber driver is actually an employee, not an independent contractor. Uber argued that the drivers choose their own hours and use their own cars, but the driver claimed that she was an employee because she was screened, trained and was required to adhere to a disciplinary system.

While this particular ruling applies only to one driver, it calls into question Uber’s business model. Furthermore, Uber and Lyft are defending themselves in multiple class action lawsuits challenging the status of their drivers. If the companies lose, they will need to pay the workers overtime pay  among  other  things,  including  penalties  for  missed  meal  and  rest periods, and failure to provide paycheck stubs. In moving forward, the companies will incur increased costs arising from payroll taxes, workers’ compensation and other insurance, medical benefits, mandatory sick leave in certain jurisdictions (including California) and family medical and pregnancy leave laws. It will force a change in the business model and will require significant investments in administrative support as well.

As the cases against Uber and Lyft are unfolding, the Department of Labor (DOL) recently published an “Administrator’s Interpretation” of the definition of “employee” under the federal Fair Labor Standards Act (FLSA). Under the FLSA, to “employ” a person means to “suffer or permit” a person to work. In the interpretative bulletin, which can be found here, the DOL encourages an “economic realities” test to determine if a worker is an independent contractor or employee.

The economic realities test includes these factors: (A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer. No single factor is determinative, but all are taken into account when analyzing whether a worker is an employee.

We recommend that in light of the increased focus by the DOL and state agencies on the issue of classification – in addition to continuing litigation by the workers themselves – employers take a renewed look at their workforce to ensure that they have correctly identified workers who should be on payroll.