The US Department of Labor (DOL) has delivered some good news for employers. In response to a request on behalf of a virtual marketplace company (VMC) regarding the classification of certain workers under the Fair Labor Standards Act (FLSA), the DOL issued an opinion letter on April 29 concluding that the workers are independent contractors, not employees.

The opinion letter is not binding authority and can only be used by the company who requested it. However, it does provide a comprehensive understanding of how the DOL analyzes this misclassification issue and offers insight on what approach it will use in enforcement actions moving forward.

At bottom, the opinion letter takes a narrower view of what constitutes an "employer" under the FLSA and offers VMCs (aka gig employers) a persuasive tool in defending classification determinations.

Background

The opinion letter does not identify the company – which is customary for privacy reasons – but it does contain a detailed explanation of the business and its operations. The business is described as "a virtual marketplace company that operates in the so-called 'on-demand' or 'sharing' economy." VMC is defined as "an online and/or smartphone-based referral service that connects service providers to end-market consumers." According to the opinion letter, VMCs provide a broad range of services "such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services" – a very widely cast net. VMCs use a software platform called "an analytic hierarchy process" to efficiently connect consumers with service providers.

Specifically, the business at issue does not interview service providers or require them to undergo training. It does, however, require service providers to supply certain basic information, such as the service provider's name, contact information, and social security number. Service providers must also self-certify their experience and qualifications, undergo a background check through a third party, and complete an identity check though an outside vendor. Service providers are also required to acknowledge and accept a terms of use agreement and a service agreement (which disclaims any employment relationship). The entire onboarding process is conducted online, and service providers are immediately allowed to begin providing work for end users once their account is activated. Service providers are not required to report to any physical office.

While not required to accept any particular job, service providers are required to complete a minimum amount of work and are paid on a per-job basis. They design their own schedules and determine when, where, and how much work to accept. Service providers determine how they perform their work and purchase all of their own supplies and equipment.

If a service provider cancels a job without sufficient notice, a cancellation fee is charged on behalf of the end-user. The relationship with the service provider can be terminated only if a service provider commits a material breach of the service agreement (eg, inappropriate behavior toward a consumer, fraud, repeated cancellations).

Relatedly, end users are permitted to rate each service provider's performance, and consistently low ratings may be grounds for termination of the relationship. Importantly, service providers are allowed to "multi-app," which means simultaneously acquire work on a competitor VMC platform at any time.

The DOL's analysis

Not surprisingly, the DOL applied the long-standing six-factor balancing test (based on Supreme Court precedent) to determine if the service providers constitute employees under the FLSA. The purpose of the test is to determine whether the service providers have economic dependence on the VMC in question.

The following chart contains a brief summary of the DOL's six-factor analysis under the above-described circumstances.

 


FACTOR


EXAMPLES/EXPLANATION


DOL'S ANALYSIS

Control

 

A look at the nature and degree of the potential employer's control

Examples of control include: (i) requiring exclusive services; (ii) disavowing work for a competitor; (iii) inflexible shifts; (iv) large quotas; and (v) long hours.

Not met. There is no indication of strict shifts, large quotas, or long hours. Instead, service providers have flexibility to choose if, when, where, how and for whom they will work. Service providers have freedom and autonomy to pursue other jobs outside the VMC platform.

Permanency of relationship

 

An assessment of the permanency of the worker's relationship with the potential employer

Permanence can be demonstrated by, inter alia: (i) requiring a worker to perform services for a fixed period of time; (ii) disavowing work for a competitor; or (iii) imposing restrictions or sanctions on a worker for leaving the job.

 

Not met. There is no indication of a permanent working relationship. Rather, service providers appear to maintain a high degree of freedom to exit the working relationship. Most importantly, service providers are permitted to interact with competitors at any time.

 

Investment in facilities, equipment, or helpers

 

A determination of the amount of the worker's investment in facilities, equipment, or helpers

If a business makes these investments, it signals worker reliance on the business to perform his or her services. Such reliance could make it more difficult for the worker to pursue other economic opportunities and could signal economic dependence on the business.

 

Not met. Service providers purchase all necessary resources for their work. They are not reimbursed for any expenses.

Skill, initiative, judgment, and foresight required

 

An evaluation of the amount of skill, initiative, judgment, and foresight required for the worker's services

This factor focuses on the worker's exercise of managerial discretion to maximize personal profits and looks for "considerable independence" from the business. How the worker acquired the skills necessary to perform the job is relevant. If the business provides all workers with the skills necessary to perform the job, it is suggestive of an employment relationship.

 

Unclear. The letter does not specifically identify what types of services are offered in the virtual marketplace. However, regardless of the specific services performed, service providers choose between different opportunities and competing virtual platforms (while exercising managerial discretion) to maximize their own personal profits. This demonstrates "considerable independence." Also, no mandatory training exists for service providers.

 

 

Opportunity for profit and loss

 

An estimation of the worker's opportunities for profit or loss

 

These opportunities typically exist where the worker does not receive a predetermined amount but controls the major determinants of profits or losses.

Not met. Service providers do not receive a predetermined amount of compensation for their work. Instead, they control the major determinants of profits and losses. Default pricing by the business is permitted so long as the service providers are allowed to choose different types of jobs with different prices. Service providers' ability to "toggl[e] back and forth" between different VMC platforms allows for increased ability to control their level of compensation.

 

Integration

 

Integration is established by the worker's duties being tied directly to the primary purpose of the business.

Not met. Service providers are not integrated into the VMC's referral business. They do not use the virtual platform to develop, maintain or otherwise operate the platform. Rather, they use the platform to acquire service opportunities.

 

 

Takeaways

Key factors of the independent contractor determination in the opinion letter include:

  1. the workers' independence, flexibility, and autonomy
  2. the workers' ability to perform services for a competitor, at any time
  3. the workers' control over their level of compensation and
  4. the fact that the company was not engaged in the businesses performed by the service provider.

Again, the opinion letter is not binding authority, and therefore, it does not provide a bulletproof defense to classification decisions under the FLSA, nor does it affect state law on this issue.

Nevertheless, the opinion letter serves as a persuasive tool for gig employers to rely upon when determining the classification of workers and provides a useful framework outlining the DOL's current position on such classification issues.

Please contact the author or another attorney in DLA Piper’s Employment group with any questions regarding proper independent contractor classifications under federal or state law.

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