Q: I recently read that the the U.S. Department of Labor has issued a ruling relaxing the laws on independent contractor classification.
I have been using independent contractors in my company, which does a lot of internet-based business, and have been concerned about an audit. Am I in the clear?
A. Some of the information you have is correct, but it’s more complicated than that. The Department of Labor (DOL) issued what is called an Opinion Letter on April 29 that gives an indication that the rules on independent contractor classification are being relaxed, at least on the federal level. Opinion Letters are issued at the request of individuals, businesses, or attorneys on behalf of clients. They are advisory and nonbinding, but they have some value in giving companies direction on how the DOL interprets wage and hour laws.
An unidentified online platform described as a “virtual marketplace company” that operates in the “sharing” or “on-demand” economy requested the Opinion Letter. The entity operates a referral service that connects service providers to consumers through a process software platform. These types of businesses are often described as the gig economy, and many, Uber the most well-known among them, utilize the services of independent contractors.
The opinion issued by the DOL’s wage and hour division concluded that the service providers “are independent contractors, not employees” based on the long-standing economic realities test. The test applies six factors to determine whether the workers are economically independent or dependent on the working relationship with the entity at issue. The 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 or loss.
• The extent of integration of the worker’s services into the potential employer’s business.
In applying the test, the DOL concluded that all six factors showed that the workers were economically independent and, in reality, worked for the end consumers rather than the company operating the online platform. Although this opinion is illustrative of how the DOL might view these types of relationships in other cases, you need to remember that the DOL was responding to a very specific hypothetical scenario.
Even more important, almost every state has its own set of rules about what defines an employee versus an independent contractor. New Hampshire and Massachusetts in particular, have standards that are very strict and hard to meet. The consequences of misclassification are significant, and it is critical to assess the relationship under all potentially relevant laws, including state laws, to avoid unnecessary entanglement with the numerous agencies which evaluate these relationships.
A clear written agreement is also an excellent way to mitigate against the risks of these relationships.