International Newsletter

United States Labor Department Finds Gig Economy Service Providers Are Independent Contractors

May 29, 2019
United States

In a recent opinion letter, the U.S. Department of Labor (DOL) weighed in on the status of gig economy workers under the Fair Labor Standards Act (FLSA). In Opinion Letter FLSA2019-6, issued on April 29, 2019, the DOL’s Wage and Hour Division considered whether service providers using a “virtual marketplace company” platform to offer services to consumers are employees or independent contractors.

The DOL concluded that the primary purpose of the business is “to provide a referral system that connects service providers with consumers.” According to the DOL, “as a matter of economic reality, they are working for the consumer,” not the company providing the platform.

Economic Realities Test

Whether a worker is an independent contractor or an employee depends on the test applied in a given context.

In this opinion letter, the DOL reviewed the workers’ status under the federal FLSA, applying the “economic realities test.”  The DOL applied the economic realities test to conclude that all of the factors that it considered weighed in favor of an independent contractor relationship. For example:

  • Control: The company gave the service providers flexibility to choose if, when, where, how, and for whom they will work. Moreover, the company does not supervise the work and permits service providers to work for competitors and “multi-app” (i.e., compare the company’s deal to competitors’ deals and take a competitor’s deal over the company’s without being penalized).
  • Permanency: The DOL found that the service providers had “a high degree of freedom to exit the working relationship.” The DOL weighed this factor strongly in favor of independent contractor status.
  • Investment: Service providers purchase all necessary resources, and the company did not reimburse them for these purchases. According to the DOL, the company’s investment in the platform is not an investment in the work the service providers perform.
  • Skill, initiative, judgment, and foresight: The service providers choose between different opportunities and exercise discretion in order to maximize their profits. The company does not require that service providers undergo mandatory training–thereby increasing their economic independence.
  • Opportunity for profit and loss: The company sets default prices, but service providers can maximize their profits by, among other things, negotiating the price of the jobs. In addition, the DOL noted that service providers can control their profits or losses by “toggling back and forth between different” competing virtual marketplace platforms.
  • Integrality: The service providers do not develop, maintain, or operate the platform; rather, they use the platform to acquire service opportunities. According to the DOL, the company offers a finished product to the service providers, and its business operations effectively terminate at the point of connecting service providers to consumers.

After applying this test to the numerous detailed facts submitted by the employer, the DOL concluded that the service providers were independent contractors under the FLSA and thus not entitled to the FLSA’s wage and hour protections such as the minimum wage.

Comment

The DOL’s analysis provides a useful framework for companies that connect service providers with end users through a platform to argue that the service providers are independent contractors, not employees. Although the opinion letter is not binding on courts, courts may defer to an agency’s interpretation of the law. In addition, if circumstances are similar enough, employers can sometimes rely upon opinion letters such as this one (which is signed by the acting administrator) as a good faith defense to claims arising under the FLSA, unless the letter is later withdrawn. Thus, this opinion letter may have a wide effect in jurisdictions that apply the FLSA in making determinations regarding independent contractor classifications and could portend a trend in some areas to extend independent contractor classifications.

However, employers may want to use caution in relying on this letter in states (such as California) that apply their own state laws when making independent contractor determinations.

In particular, the DOL’s opinion letter is not expected to apply in jurisdictions where a different test, such as the ABC test, applies to determine whether someone is an independent contractor under various state laws. California, Massachusetts, Connecticut, Illinois, Vermont, Nevada, New Hampshire, and New Jersey are among those states that apply a version of an ABC test in at least one context. Under the more stringent ABC test, a factfinder will consider some of the same issues that the DOL weighted (such as the right to control), but the factfinder must also consider whether the worker performs work that differs from the hiring entity’s business and whether the worker is customarily engaged in that work. Under an ABC test, the same worker evaluated by the DOL could still be deemed an employee of the same company for different purposes in another jurisdiction.

Written by Cara F. Barrick, Greg Guidry, and Thomas M. McInerney of Ogletree Deakins

© 2019 Ogletree, Deakins, Nash, Smoak and Stewart, P.C.