In a recent opinion letter, the US Department of Labor has provided new guidance on factors that may lead service providers in the gig economy to be classified as independent contractors rather than employees.
By: Salvador Simao, David S. Kim and Priya Amin
On 29 April 2019, the United States Department of Labor (DOL) released a new opinion letter, FLSA2019-6, examining whether service providers for a virtual marketplace company (VMC) are employees or independent contractors. This opinion letter provides a road map for online brokers of services provided by independent contractors to ensure they are not misclassified as employees.
The DOL issued its opinion letter in response to an inquiry from a VMC, which was described as: ‘
‘an online and/or smartphone-based referral service that connects service providers to end-market consumers to provide a wide range of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting and household services.’
The VMC discussed in the opinion letter is a typical online broker or online matchmaker, partnering users seeking a variety of services with potential service providers.
The opinion letter sets forth an extremely detailed set of background information, including but not limited to the fact that the service providers can use the platform to engage directly with the consumer; that, while the platform uses default pricing tiers, the service provider may negotiate different rates with the customer; service providers retain the right to accept, reject or ignore service opportunities; and the service provider is able to offer its services on competing VMCs or other platforms.
Although the detailed factual analysis indicates that such matters are factually complex, the DOL noted that the touchstone of independent contractor versus employee status is ‘economic dependence’ and that in determining such independence, it considers the six factors derived from prior US Supreme Court precedent:
- the nature and degree of the potential employer's control;
- the permanency of the worker's relationship with the potential employer;
- 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; and
- the extent of integration of the worker's services into the potential employer's business.
The DOL utilised these factors to determine that the service providers in question were independent contractors and not employees of the VMC. Significantly, as part of the analysis, the DOL noted the business’ ‘primary purpose’ is not to provide services to end-market customers, but to provide a referral system that connects service providers with customers.
Specifically, the DOL found that the VMC did not appear to exert control over the service providers because it did not impose any strict duties and allowed service providers the flexibility to choose if, when, where, how and for whom to work. This gave service providers the ability to pursue any and all external opportunities. The VMC also allowed service providers to work simultaneously for other VMCs, enabling service providers to pick the best opportunity on a job-by-job basis. In addition, the VMC did not inspect the provider’s work or rate his or her performance. Any requirements imposed by the VMC, such as background and identity checks and the right to remove a service provider from the platform for frequent job cancellations, were found to be neutral requirements given the lack of control the VMC exercised over service providers.
Moreover, the DOL determined that the VMC did not have a permanent working relationship with the providers that would indicate any sort of employment relationship and, instead, the service providers had a high degree of freedom to terminate their relationship with the VMC. Also, the VMC did not invest in facilities, equipment or helpers on behalf of the service providers nor did it reimburse service providers for any resources they purchased for their work. The DOL found that investment in the virtual platform was not enough to establish an employer-employee relationship.
Additionally, the VMC did not provide training or exercise any managerial control over the providers, and the service providers had great opportunity for profit or loss depending on the jobs they chose, the platform they worked with, and whether they cancelled jobs, which the DOL found to weigh in favor of independent contractor status. The DOL also found the service providers were not an integral part of the VMC’s business operations, since the VMC only provided a referral system.
Ultimately, the DOL stated that the facts demonstrated economic independence, rather than economic dependence, establishing the service providers’ status as independent contractors.
Bottom Line for Employers
Although this opinion letter is based on complex factual circumstances described in the letter, the letter provides a great roadmap for broker or matchmaking types of businesses that heavily rely upon independent contractor status. As many may recall, under the Obama administration, the Labor Department had issued guidance suggesting gig workers, such as drivers for Uber, were likely to be employees; this opinion indicates a change in position. Under President Trump, the DOL rescinded the guidance related to Uber drivers and has provided a methodology for conducting such an analysis with this opinion letter. In determining joint employment liability under wage and hour laws, companies must still look at state laws, which may be much more restrictive. The road map provided by the DOL only outlines the economic reality test utilised by the FLSA and not the plethora of other tests utilised under federal, state or even municipal laws.