Guidance on Independent Contractor Status

The so-called “gig economy” challenges conventional practices between companies and the people who perform the work. A key question is: Are these workers an independent contractor or employee?

The U.S. Department of Labor (DOL) recently published a new wage and hour opinion letter, spelling out its position with respect to a specific virtual marketplace company (VMC). Though the letter is directly applicable only to the specific employer that sought the opinion, it still offers insight on how the DOL might rule in similar cases.

Just the Facts

The DOL letter indicates that VMC workers can legitimately be classified as independent contractors, and thus aren’t subject to the Fair Labor Standards Act (FLSA). The DOL defines 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.” Examples of services include:

• Transportation (for example, Uber and Lyft),
• Delivery,
• Personal shopping,
• Moving,
• Plumbing,
• Painting,
• Home repair, and
• Cleaning.

To determine the appropriate classification for workers, the DOL letter identified the following relevant facts about workers at the company in question:

• They were paid per task performed.
• They could request pay rates that deviated from the VMC’s “default” local rate, based on their level of experience.
• They could accept or reject work requests they received through the company’s platform.
• They used their own supplies and equipment.
• They could hire assistants to help them perform agreed-upon services.
• They could use competing platforms to get tasks to perform. (This is similar to some Uber drivers who concurrently use the Lyft platform to solicit work and vice versa.)
• They could turn down service requests without immediately being booted off the platform, and, if they were suspended due to inactivity, workers could reactivate their status.
• They weren’t directly supervised by the company; rather, performance was judged by customer feedback.

The DOL letter distinguishes an employee from a person who’s engaged in business for himself or herself. An employee, “as a matter of economic reality, follows the usual path of an employee and is dependent upon the business to which he or she renders service.”

Economic Reality

The “economic reality” standard must be applied to the workers’ activities as a whole, based on the following six factors:

1. Nature and degree of the potential employer’s control,

2. Permanency of the worker’s relationship with the potential employer,

3. Amount of the worker’s investment in facilities, equipment or helpers,

4. Amount of skill, initiative, judgment or foresight required for the worker’s services,

5. The worker’s opportunities for profit and loss, and

6. Extent of integration of the worker’s services into the potential employer’s business.

Applying those assessment criteria to the VMC in question, the DOL noted the “significant flexibility” the company’s workers have to pursue external economic opportunities. The DOL found no hint of “permanency” in the VMC’s relationship to the people who obtain work on its platform. Examining the third factor, the DOL observed that workers are required to use their own equipment.

Regarding skills, the DOL focused on the fact that the company assumes workers already have the requisite skills when they join the platform because it provides no training. And their initiative, the DOL inferred, is evident from the fact that workers chose for themselves which work opportunities to take. That power also touches on the fifth criterion, opportunities for profit and loss.

Finally, the VMC’s workers aren’t operationally integrated into its platform in the sense of developing, operating or maintaining it. Rather, they’re “consumers” of the service and, as independent people, “negotiate over the terms and conditions of using that service.”

Market Dynamics

Not everyone agrees with the DOL’s assessment, however. Maya Pinto, a senior researcher at the National Employment Law Project (a labor policy research not-for-profit organization) disagrees with the ruling. She recently advocated on behalf of gig workers, saying, “We believe in most cases, if not all cases, the workers are under control of the company and are in fact employees.”

Likewise, Uber drivers made a vocal pitch for employee status. Many drivers participated in a strike the day before the ride-hailing company’s recent IPO. Seeking to settle the nerves of potential investors, Uber agreed to increase pay rates, but it didn’t cave on the drivers’ independent contractor classification.

The lesson seems to be that the cost of labor, whether it comes from employees or independent contractors, is governed by market forces. The fact that striking Uber drivers extracted some concessions from the company on the eve of its IPO shows market forces at work.

How Does the DOL Letter Affect Your Situation?

An opinion letter is an official, written opinion by the DOL’s Wage and Hour Division on how a particular law applies in specific circumstances presented by the individual person or entity that requested the letter. However, the letter does provide insight into how the DOL regards the VMC business model.

So, regardless of whether your company operates as a VMC or uses a more traditional business model, the same basic principles of independent contractor vs. employee status apply under the FLSA. It’s also important for companies to consider state law, which may, in some cases, be more restrictive than the FLSA when analyzing independent contractor status.

Even when workers’ classification status seems straightforward, based on the standards laid out in the DOL ruling, that doesn’t guarantee protection. And the price of misclassifying workers can include paying back wages and payroll taxes, as well as fines and additional penalties if the IRS believes your misclassification was based on fraudulent intent. An employer also may be liable for employee benefits that should have been provided but weren’t.

It is important to employees are classified correctly. Are your workers an independent contractor or employee? Learn more at https://www.dol.gov/ or Kirsch CPA Group can help you make the proper classifications and avoid problems with the DOL, contact us  at 513.858.6040.