September 17, 2019

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U.S. Department of Labor Says “Gig Economy” Workers Are Independent Contractors, Not Employees (US)

On Monday, April 29, 2019, the United States Department of Labor (“DOL”) Wage and Hour Division issued an opinion letter in response to an inquiry from an anonymous “virtual marketplace company” (“VMC”) concerning whether individuals who provide services through the VMC (“service providers”) are employees or are independent contractors for purposes of federal wage and hour laws.  As defined by the DOL, a virtual marketplace company is “an online and/or smartphone-based referral service that [through a technology platform] connects service providers to end-market consumers to provide a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services.”  VMCs are part of the expanding “gig economy,” and include familiar companies such as Uber, Lyft, Postmates, Fiverr, and others. 

The DOL’s analysis cited “economic dependence” as the key criterion in evaluating whether an individual is an employee or an independent contractor.  The opinion letter identified six factors the DOL considers when analyzing whether a worker is economically dependent on a potential employer, noting, however, that no one factor is determinative, and that, instead, the analysis is holistic, based on the totality of the circumstances.  These six factors are:

  • 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 and loss; and
  • the extent of integration of the worker’s services in to the potential employer’s business.

Through a detailed analysis of each of these factors, the DOL opined that in the case of the VMC requesting its opinion, its service providers are properly characterized as independent contractors rather than employees.  The DOL’s conclusion was based on several key facts relating to the arrangement between the VMC and its service providers, including that:

  • service providers set their own schedules; they determine when and how much work they provide, and are not required to accept a minimum amount of service opportunities (service providers may become “inactive” if they do not accept jobs within a certain time period, but may be reactivated upon request);
  • by determining their own schedules and which job opportunities they accept, service providers are directly responsible for their own profit and loss;
  • service providers may work outside of the VMC’s platform, including for competing VMCs (the VMC even allows service providers to “multi-app,” or simultaneously run the VMC’s app and a competitor’s app and choose the best service opportunities on a job-by-job basis);
  • service providers can decline, reject, or cancel accepted jobs; only cancellations within a certain window of the job start time generate a penalty to the service provider (to maintain the integrity of the VMC’s platform);
  • the VMC does not train service providers, and it is not present for, and does not inspect nor rate the service provider’s work; only consumers can rate their experience through the service platform;
  • service providers provide all of their own equipment and other items necessary to perform the job;
  • service providers are paid directly by the consumer (through the VMC’s platform), and the VMC does not provide any additional compensation; the VMC reports service provider earnings through IRS Form 1099s, which are used for nonwage compensation, not Form W-2 wage reports; and
  • the VMC’s primary purpose is to provide the referral platform, not to provide the end-market service; only service providers provide the consumer with the sought-after service.

(If you think, based on these facts, you know which VMC requested the opinion, you’re probably right.)

The DOL’s opinion letter is seen as a boon for “gig economy” companies, which typically classify workers using their platforms as independent contractors.  Indeed, the flexibility and independence for workers – which are the benefits typically associated with independent contractor relationships – appear to be the hallmark features of this growing sector of the workforce.

Although the DOL’s opinion letter illustrates a shift in policy from the previous presidential administration, it is not clear that state courts and state wage and hour enforcement agencies will follow suit.  For example, as we reported to you previously, the California Supreme Court recently adopted the “ABC” test in Dynamex Operations West, Inc. v. Superior Court.  Under this test, workers are presumed to be employees unless they meet all three elements of this test, in which case they may be properly classified as independent contractors.  Other jurisdictions have also defined standards that tend to classify more workers as employees than independent contractors.

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Daniel B. Pasternak, Squire Patton Boggs, Phoenix, Labor Litigation Layer
Partner

Dan Pasternak focuses his practice on litigating labor and employment claims, representing management in traditional labor relations matters, and working with employers to develop and enforce business-sensible policies and practices to effectively manage their human resources.

Dan represents employers before federal and state courts and administrative agencies, and in arbitration and mediation proceedings, in employment matters arising under the array of federal and state employment laws, including discrimination, harassment, retaliation,...

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