Published in North of Boston Business Magazine (Summer 2019) and the Boston Business Journal (February 2020)
In an opinion letter dated April 29, 2019, the U.S. Department of Labor explains that some service providers working for a virtual marketplace company are independent contractors under the Fair Labor Standards Act.
This opinion letter identifies the test that DOL is expected to use when considering the classification of workers under federal law in this growing gig economy.
Service providers are also referred to as "gig," "on-demand," or "sharing-economy" workers. A gig economy is a marketplace where these workers take temporary positions for short-term engagements. Often using an app-based platform, the market involves these on-demand workers, the consumers who need a specific good or service, and the technology platform companies or VCMs that connect the workers to the consumers. Examples of some VCMs are Etsy, Airbnb, eBay and TaskRabbit.
The Fair Labor Standards Act applies to "employees." While the definition of employee - any individual whom an employer suffers, permits or otherwise employs to work - is very broad, not all workers are employees. Some workers may be independent contractors and therefore outside of any FLSA requirements. In other words, the legal protections of minimum wage and overtime pay are not afforded to independent contractors.
The recent growth in popularity of individuals entering into the gig economy has put center stage the question as to whether these new gig workers are employees or independent contractors. The Department of Labor addresses this question through its renewed opinion letter process.
In its opinion letter FLSA 2019-6, the agency redacted the identity of the technology platform company seeking the guidance. And the DOL was noticeably careful to point out that it was considering the facts specific to the situation at hand. What we do know is that the company here helps consumers connect with service providers through a software platform.
"The platform also allows its service providers to communicate with consumers, including through mobile-app messaging or masked telephone calls - to exchange details about the requested service, including adjustments to the scope, price or time." Opportunity for repeat business is also provided. There is no interview of service providers or required training by the technology platform company. Onboarding is online and service providers can provide work to consumers once the account is activated without any requirement for reviewing materials or physically reporting to any office. The technology platform company receives no services from the service providers.
In determining the classification of these particular workers, the Department of Labor uses its Economic-Realities Test. The six factors under that test include:
- The nature and degree of the potential employer's control;
- The permanency of the worker's relationship with the hiring business;
- The amount of the worker's investment in the 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; and
- The extent of integration of the worker's services into the potential employer's business.
The Department of Labor went through and analyzed each of the factors above. Prior to doing so, it noted that other factors may also be relevant to the analysis and that "appropriate weight" for the listed factors would depend on the circumstances. The key factor came down to how much "control" the technology platform company had over the service provider worker in doing the job. In the end, the DOL found that the service providers who use this technology platform company are independent contractors.
With a growing on-demand market of workers, getting some direction from the DOL as to the legal standard it will use in reviewing these classification issues is helpful. These opinion letters, however, are not precedent for courts, although courts may defer to the DOL's interpretation.
More important, this is limited to federal law. Many states have their own test for determining independent contractor status and, under those state tests, the same facts may lead to a different result.
For example, Massachusetts follows a more stringent test, making it difficult to classify workers other than as employees. In New Hampshire, the state DOL's test for classification changed in 2012 to a seven-part test. Employers wanting to engage workers as independent contractors should be careful of this classification minefield and seek legal assistance.