The issue of independent contractors and employment status continues to vex employers and present substantial liability risks. The employment laws generally cover only employees, not independent contractors. Properly classified independent contractors cannot have viable claims under the discrimination laws, wage and hour laws, leave laws, workers’ compensation laws, etc., because they are not covered by these laws.
Misclassification of an independent contractor, however, can result in liability under many laws for the unwary employer. Independent contractor status can be a high risk/high reward proposition, and employers should ensure that they feel comfortable that those individuals they treat as independent contractors are properly classified under the relevant employment and tax laws.
The FLSA is a ripe source of potential risk for employers who utilize the services of independent contractors, consultants, and other service providers who are not treated as employees. The vast majority of independent contractors do not receive overtime compensation in compliance with the requirements of the FLSA. If the independent contractor is misclassified and actually qualifies as a covered employee under the FLSA, liability for unpaid overtime may exist if the individual has worked more than 40 hours in any work week.
On April 29, 2019, the U.S. Department of Labor issued an opinion letter on whether service providers for a “virtual marketplace company” (VMC) qualify as employees or independent contractors under the Fair Labor Standards Act.
The DOL defined a VMC as “an online and/or smartphone-based referral service that 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.”
To analyze the issue, the DOL applied the same six-factor test created by the U.S. Supreme Court in the 1940s to determine employment status under the FLSA:
- 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 opportunity for profit or loss; and
- The extent of integration of the worker’s services into the potential employer’s business.
Applying these six factors, the DOL concluded that the workers at issue were independent contractors and not covered employees of the VMC under the FLSA. The DOL essentially determined that the VMC was a referral platform, and not an employer of the service providers it paired with customers.
The VMC at issue did not interview or train the affiliated service providers or oversee or evaluate their work. Nor did the VMC provide the service providers with equipment, materials, or working space. The VMC’s platform provided the contractors with basic information about the customer’s service request (e.g., the kind of service needed, location, and date and time) and permitted the service providers to communicate directly with customers. The VMC established default prices for the work based on the region and scope, but the customers, and not the VMC, paid the service providers, and service providers could negotiate the price of their jobs.
The DOL also noted that the workers were free to accept or reject work at their discretion, could work simultaneously for competitors of the VMC, performed work on a project-by-project basis without permanency, and provided services not to the platform company itself but instead to the consumer of the service.
The DOL’s opinion letter is helpful for businesses operating in the on-demand marketplace, a relatively new phenomenon in the so-called gig economy. Beyond that, the opinion letter reaffirms that the decidedly 20th century six-factor test remains the applicable standard when determining employment status under the FLSA in the 21st century.
Like any non-exhaustive multi-factor test, there usually will exist ambiguity and gray areas when determining the independent contractor vs. employee question under the FLSA. However, the DOL’s recent opinion letter is a welcome one for employers and demonstrates the agency’s current willingness to look closely at gig economy arrangements and not reflexively label any such arrangement covered employment under the FLSA.