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August 03, 2020

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DOL Issues Opinion Letter Clarifying Employment Status in Gig Economy

On April 29, 2019, the Department of Labor issued an opinion letter FLSA2019-6. In fall 2018, several employer groups sought clarification from the DOL on worker classification as employees versus independent contractors. In announcing the opinion letter, the Acting Administrator of the Wage and Hour Division stated that the letter is to offer “further insight into the nexus of current labor law and innovations in the job market.”

The company at issue in the letter was part of the so-called ‘on-demand’ or ‘sharing economy’ but, as per DOL policy, the company remained unnamed. In describing the company’s business, the DOL labeled it a virtual marketplace company that provides online or smartphone-based referrals to service providers for various services – from transportation, delivery shopping, moving, cleaning, plumbing, etc. The service providers certified their own experience and qualifications, completed a background check and signed a service agreement, and accepted terms of use including an employment disclaimer.

In the letter, the DOL ultimately determined that the workers at issue were contractors and not employees. Specifically, the DOL looked at the same six factors in determining status as found in decades-old Supreme Court precedent:

  1. The nature and degree of the potential employer’s control;
  2. The permanency of the worker’s relationship with the potential employer;
  3. The amount of the worker’s investment in facilities, equipment or helpers;
  4. The amount of skill, initiative, judgment or foresight required for the worker’s services;
  5. The worker’s opportunity for profit or loss; and
  6. The extent of integration of the worker’s services into the potential employer’s business.

Rutherfood Food Corp. v. McComb, 331 U.S. 722, 729 (1947).

In making its determination, the DOL weighed the six factors as a whole to determine whether the worker is an independent business operator or dependent upon the company for which he provides services. The DOL found that these workers were free to accept or reject work based on reasons of their own choosing and without retribution, allowed to perform services through the method of their own choosing, and were not providing any service to the platform company itself but instead to the ultimate consumer of the service. While the company assessed a fee against the worker for canceling a service outside the accept notice period, the DOL found that this was to protect the company’s integrity. Finally, the company did not oversee or evaluate the worker’s performance. In evaluating these facts against the six factors, the DOL determined that these workers were independent contractors.

This opinion letter contradicts the Obama DOL’s Administrator Interpretation 2015-1 that these types of workers would be employees.

Related IRS Reporting Obligations.

It is important to note that Internal Revenue Code Section 6041 and related regulations may impose an information reporting obligation (i.e., 1099-MISC) on the virtual marketplace company (“VMC”) to the extent the VMC makes a “payment” (generally $600 or more) in the course of its business on behalf of another person (e.g., the end-market consumers). This reporting obligation arises to the extent that the VMC performs any management or oversight functions in connection with the payment (i.e., as opposed to performing mere administrative or ministerial functions such as writing checks at another’s direction).

A failure to properly report the tax-related information in accordance with IRS requirements can trigger penalties. The penalties imposed by the IRS range from $50 for each required 1099-MISC report not properly filed with the IRS up to thirty (30) days late after the January 31 deadline, $100 if not filed by August 1, and $260 if filed after August 1.

A 1099-MISC is not needed with respect to any payment made to an actual corporation (i.e., C or S corporation).

Backup Withholding Obligations.

In addition to 1099-MISC reporting, backup federal income tax withholding in connection with required reporting generally would not be required with respect to any payments made by the VMC to a so-called U.S. persons (i.e., even when the VMC is making the payments for its end-market consumers); provided that a properly completed IRS Form W-9 has been received by the VMC from the payment recipient (“payee”). The VMC still could however have federal income tax backup withholding requirements in the following situations:

  • The U.S. person has not provided its taxpayer identification number in the manner required (i.e., no W-9 has been received),
  • The IRS notifies the VMC that the TIN furnished by the payee is incorrect,
  • There has been a notified payee under-reporting, or
  • There has been a so-called payee certification failure.

Certain states will have their own backup withholding and reporting requirements.

A failure to implement backup withholding when required could result in the IRS seeking to obtain the required withholding amount from the VMC.

© 2020 Foley & Lardner LLPNational Law Review, Volume IX, Number 120

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About this Author

Michael Abbott employment lawyer Foley Lardner
Partner

Employee benefits and tax lawyer Michael Abbott is a leading advisor to companies, executives and fiduciaries with sophisticated employee benefits and executive compensation needs, particularly in the tech, energy and private equity sectors. In addition, he has a significant employee benefits presence representing clients in the live entertainment, credit/debit card, chemical, school bus, transit and transportation industries. His nationwide practice focuses on ERISA and related tax compliance matters involving various aspects of employee benefits including, cross-border tax issues, tax-...

713.276.5571
Carrie Hoffmann, Foley Lardner Law Firm, Dallas, Labor and Employment, Litigation Law Attorney
Partner

Carrie Hoffman represents and counsels major employers nationwide in all areas of labor and employment law across a wide range of industries, including retail. Carrie is highly regarded for her experience with wage and hour issues, as well as employment discrimination and retaliation claims. She regularly reviews and drafts employment agreements – such as covenants not to compete – and advises clients on a wide variety of labor and employment issues, such as:

  • Workplace safety

  • Workplace harassment

  • Union avoidance and election campaigns

  • Leaves of absence

  • Hiring, termination and severance policies and procedures

  • Litigation avoidance

Carrie has defended clients throughout the United States in major employment litigation, at both the federal and state court level, including class and collective actions. She also represents employers in investigations and audits by agencies such as the Equal Employment Opportunity Commission, Texas Workforce Commission, the National Labor Relations Board and the Department of Labor.

Clients have a high regard for Carrie’s knowledge of wage and hour laws, as well as her practical approach to problem solving and direct manner.

214-999-4262