The US Department of Labor (DOL) has delivered some good news for employers. In response to a request on behalf of a virtual marketplace company (VMC) regarding the classification of certain workers under the Fair Labor Standards Act (FLSA), the DOL issued an opinion letter on April 29 concluding that the workers are independent contractors, not employees.

The opinion letter is not binding authority and can only be used by the company who requested it. However, it does provide a comprehensive understanding of how the DOL analyzes this misclassification issue and offers insight on what approach it will use in enforcement actions moving forward.

At bottom, the opinion letter takes a narrower view of what constitutes an "employer" under the FLSA and offers VMCs (aka gig employers) a persuasive tool in defending classification determinations.

Background

The opinion letter does not identify the company – which is customary for privacy reasons – but it does contain a detailed explanation of the business and its operations. The business is described as "a virtual marketplace company that operates in the so-called 'on-demand' or 'sharing' economy." VMC is defined as "an online and/or smartphone-based referral service that connects service providers to end-market consumers." According to the opinion letter, VMCs provide a broad range of services "such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services" – a very widely cast net. VMCs use a software platform called "an analytic hierarchy process" to efficiently connect consumers with service providers.

Specifically, the business at issue does not interview service providers or require them to undergo training. It does, however, require service providers to supply certain basic information, such as the service provider's name, contact information, and social security number. Service providers must also self-certify their experience and qualifications, undergo a background check through a third party, and complete an identity check though an outside vendor. Service providers are also required to acknowledge and accept a terms of use agreement and a service agreement (which disclaims any employment relationship). The entire onboarding process is conducted online, and service providers are immediately allowed to begin providing work for end users once their account is activated. Service providers are not required to report to any physical office.

While not required to accept any particular job, service providers are required to complete a minimum amount of work and are paid on a per-job basis. They design their own schedules and determine when, where, and how much work to accept. Service providers determine how they perform their work and purchase all of their own supplies and equipment.

If a service provider cancels a job without sufficient notice, a cancellation fee is charged on behalf of the end-user. The relationship with the service provider can be terminated only if a service provider commits a material breach of the service agreement (eg, inappropriate behavior toward a consumer, fraud, repeated cancellations).

Relatedly, end users are permitted to rate each service provider's performance, and consistently low ratings may be grounds for termination of the relationship. Importantly, service providers are allowed to "multi-app," which means simultaneously acquire work on a competitor VMC platform at any time.

The DOL's analysis

Not surprisingly, the DOL applied the long-standing six-factor balancing test (based on Supreme Court precedent) to determine if the service providers constitute employees under the FLSA. The purpose of the test is to determine whether the service providers have economic dependence on the VMC in question.

The following chart contains a brief summary of the DOL's six-factor analysis under the above-described circumstances.

 

Takeaways

Key factors of the independent contractor determination in the opinion letter include:

  1. the workers' independence, flexibility, and autonomy
  2. the workers' ability to perform services for a competitor, at any time
  3. the workers' control over their level of compensation and
  4. the fact that the company was not engaged in the businesses performed by the service provider.

Again, the opinion letter is not binding authority, and therefore, it does not provide a bulletproof defense to classification decisions under the FLSA, nor does it affect state law on this issue.

Nevertheless, the opinion letter serves as a persuasive tool for gig employers to rely upon when determining the classification of workers and provides a useful framework outlining the DOL's current position on such classification issues.