In what appears to be a first, the U.S. Department of Labor (DOL) has weighed in on the status of gig economy workers under the Fair Labor Standards Act (FLSA) in the form of an opinion letter. The DOL concluded that the workers reviewed in the letter are independent contractors. This opinion may have a wide effect in jurisdictions that apply the FLSA in making determinations regarding independent contractor classifications and could portend a trend in some areas to extend independent contractor classifications. However, employers may want to use caution in relying on this letter in states (such as California) that apply their own state laws when making independent contractor determinations.
In Opinion Letter FLSA2019-6, issued on April 29, 2019, the DOL’s Wage and Hour Division considered whether service providers using a “virtual marketplace company” platform to offer services to consumers are the company’s employees or independent contractors. The letter does not identify the specific company or type of service.
The DOL concluded that the company “empowers service providers to provide services to end-market consumers” and merely provides a referral service. According to the DOL, “as a matter of economic reality, they are working for the consumer,” not the company providing the platform.
The DOL found that the primary purpose of the business is “to provide a referral system that connects service providers with consumers”—language expected to be frequently quoted by platform providers in future legal disputes.
Whether a worker is an independent contractor or an employee depends on the test applied in a given context. Different tests apply under various federal laws and state laws to determine when someone is an independent contractor. Therefore, different tests may apply when determining rights and obligations for purposes of unemployment insurance, state wage laws, overtime, expense reimbursements, federal and state income taxes, or workers’ compensation, for example.
In this opinion letter, the DOL reviewed the workers’ status under the federal FLSA, applying the “economic realities test.” After applying this test to the numerous detailed facts submitted by the employer, the DOL concluded that the service providers were independent contractors under the FLSA, meaning that the worker would not be entitled to the FLSA’s wage and hour protections such as the minimum wage.
In applying the economic realities test, the DOL found that all of the factors that it considered weighed in favor of an independent contractor relationship. For example:
- Control: The company gave the service providers flexibility to choose if, when, where, how, and for whom they will work. The company does not supervise the work. Service providers could work for competitors of the company. Service providers worked on a project-by-project basis and were allowed to “multi-app,” meaning that that they could compare the company’s deal to competitors’ deals and take a competitor’s deal over the company’s without being penalized.
- Permanency: The service providers were found to have “a high degree of freedom to exit the working relationship.” Even if the service providers maintained a lengthy relationship, they did so only on a project-by-project basis, and the DOL weighed this factor strongly in favor of independent contractor status.
- Investment: Service providers purchase all necessary resources and are not reimbursed by the company. The company’s investment in the platform does not equate to an investment in the work the service providers perform. The service providers’ reliance on the platform “only marginally decreases their relative independence, because they can use similar software on competitor platforms.”
- Skill, initiative, judgment, and foresight: The service providers choose between different service opportunities and exercise managerial discretion in order to maximize their profits. Also, the company does not provide mandatory training to the service providers, which increases their economic independence.
- Opportunity for profit and loss: The company sets default prices, but service providers can maximize their profits by, among other things, negotiating the price of the jobs. The DOL also noted, quoting a Second Circuit Court of Appeals case, that service providers can control their profits or losses by “toggling back and forth between different” competing virtual marketplace platforms.
- Integrality: The service providers are not integrated into the company’s referral business. The service providers do not develop, maintain, or operate the platform. Rather, they use the platform to acquire service opportunities. The company offers a finished product to the service providers, and its business operations effectively terminate at the point of connecting service providers to consumers.
The DOL’s analysis provides a useful framework for companies that connect service providers with end users through a platform to argue that the service providers are independent contractors, not employees.
Although the opinion letter is not binding on courts, courts may defer to an agency’s interpretation of the law. In addition, if circumstances are similar enough, employers can sometimes rely upon opinion letters such as this one (which is signed by the acting administrator) as a good faith defense to claims arising under the FLSA, unless the letter is later withdrawn.
However, as we pointed out above, the DOL’s opinion letter is limited to the FLSA and is not expected to apply in jurisdictions where a different test, such as the ABC test, applies to determine whether someone is an independent contractor under various state laws. California, Massachusetts, Connecticut, Illinois, Vermont, Nevada, New Hampshire, and New Jersey are among those states that apply a version of an ABC test in at least one context. Under the more stringent ABC test, a factfinder will consider some of the same issues that the DOL weighted (such as the right to control), but the factfinder must also consider whether the worker performs work that differs from the hiring entity’s business and whether the worker is customarily engaged in that work. Under an ABC test, the same worker evaluated by the DOL could still be deemed an employee of the same company for different purposes in another jurisdiction.
More to Come From This Administration?
This letter may be a prelude to other positive actions relating to gig economy businesses and their models for independent contractor classification. According to media reports, there may have been other requests for opinions on gig economy independent contractor classifications sent during 2018. In addition, Secretary of Labor Alexander Acosta, in a September 2018 interview September 2018, indicated that the DOL would be looking at the classification issue after it issued its recommendation on changing the standard on joint-employer status. According to Acosta, “We need to start looking at our rules and recognize that what fit 20 or 30 years ago is not going to fit for the modern workplace.” The DOL issued a notice of proposed rulemaking (NPRM) on joint employment on April 1, 2019, so a guidance on independent contractor classification could be issued in the future. Stay tuned.