If you’re working late at the office tonight, chances are you’ll order food online. Trying to get home after a fun night out? A car is just an app away. If you’re having company over but haven’t had time to clean, maybe you’ll hire a house cleaner through the online service you just read about. Want to go grocery shopping without leaving your couch? A full fridge is available with just a few clicks or swipes. Snoop Dogg is even getting into the action with a delivery app for medical marijuana.

Welcome to the “on demand” economy.

This fast growing type of commerce—largely driven by tech startups—allows consumers to quickly and easily buy goods and services with their computers, tablets, and smartphones. The speed of delivery is possible because a fleet—literally or figuratively—of contract workers is available to provide these goods and services 24/7. These workers have the flexibility to accept many jobs per day as a primary source of income, or just a few per week as a secondary source. This model creates a fluid but deep pool of workers, who are classified under the law not as “employees” but as “independent contractors,” and who may freely pick and choose when and where they perform work for these online or app-based companies.

This blog has previously chronicled the difficulties of classifying workers as independent contractors in more traditional industries, such as janitors and cable installers. Lawsuits challenging the classification under the FLSA and state law are common, with plaintiffs seeking significant back wages and liquidated damages. We’ve also blogged extensively about litigation involving interns, another non-traditional job arrangement that shares many similarities with the independent contractor analysis. Interest groups for independent workers and freelancers are growing in strength and visibility, and these organizations may embolden workers to challenge their classification status. Compounding the risk are the increased efforts of the Department of Labor, IRS, and state agencies to crack down on worker misclassification.

The first wave of lawsuits has already arrived, with suits filed in California and New York against app-based firms that provide car rides, house cleaning and home repair, and personal assistant services.

In short, the “on demand” economy appears to be the newest front of wage and hour lawsuits targeting non-traditional and independent employment arrangements.

So how is a business supposed to know if a worker may be designated an independent contractor? The Supreme Court has never created a bright-line test. Rather, the Court supports a totality of the circumstances approach that evaluates the entirety of the economic relationship between the business and the worker. The Department of Labor summarizes those key factors as follow, and notes that no single one is regarded as controlling:

  1. The extent to which the work performed an integral part of the employer’s business;
  2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss;
  3. The relative investments in facilities and equipment by the worker and the employer;
  4. The worker’s skill and initiative;
  5. The permanency of the worker’s relationship with the employer; and
  6. The nature and degree of control by the employer.

The challenge of evaluating independent contractor status in app-based companies can be even more difficult. In two recent cases against Uber and Lyft, the companies sought summary judgment on the drivers’ independent contractor status. The judge in the Lyft case evaluated the relevant factors and pointedly noted, “Lyft drivers don’t seem much like employees … [b]ut Lyft drivers don’t seem much like independent contractors either.”

Although the judge in that case did not decide the ultimate issue, his balancing test highlighted the application of these legal standards to “on-demand” jobs.  Facts in favor of employee status were: the company retained a good deal of control over drivers’ conduct once they accepted a job; it published guides and FAQs that governed drivers’ behavior and their decision to choose rides and reserved the right to penalize drivers who did not follow its guidelines; the company could terminate a driver at any time, without cause; and the work performed by the drivers was “wholly integrated” into Lyft’s business. Facts supporting independent contractor status were: the drivers’ flexibility in deciding when and how often they work; the parties’ mutual belief that they were entering into an independent contractor relationship; and the drivers’ use of their own cars. Ultimately, these factors led the judge to conclude that a dispute existed as to whether Lyft drivers were properly classified as independent contractors, and that only a jury could make that factual determination.

Start-ups seeking to become the next high-profile player in the on-demand economy need to carefully consider these important legal issues. Rather than follow the lead of the established names in this space, they must evaluate the tasks their workers are performing, the permanency of the relationships, and the level of control the business will have over these individuals, among other factors. Failure to do so could be the recipe for a lawsuit, and with litigation comes potential liability for minimum wage, overtime, and a myriad of other legal obligations.