On April 29, 2019, the U.S. Department of Labor (“DOL”) issued an opinion letter concluding that workers providing services to customers referred to them through an unidentified virtual marketplace are properly classified as independent contractors under the Fair Labor Standards Act (“FLSA”).

Although the opinion letter is not “binding” authority, the DOL’s guidance should provide support to gig economy businesses defending against claims of independent contractor misclassification under the FLSA. The opinion letter may also be of value to businesses facing other kinds of claims from gig economy workers that are predicated on employee status, such as organizing for collective bargaining purposes.

Overview

An unidentified “virtual marketplace company” – defined by the DOL to include an “online and/or smartphone-based referral service that connects service providers to end-market consumers to provide a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services” – requested an opinion on whether service providers who utilize the company’s platform to connect with customers are employees or independent contractors under the FLSA.

To answer this question, the DOL analyzed whether, and to what extent, the service providers are “economically dependent” upon the company. Applying what is commonly referred to as the “economic realities test,” the DOL considered the following six factors:

1. the nature and degree of the putative employer’s control;

2. the permanency of the relationship;

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

4. the amount of skill, initiative, judgment, or foresight needed;

5. the worker’s opportunity for profit and loss; and

6. the extent to which the worker’s services are integrated into the putative employer’s business.

The DOL noted that because status determinations depend upon the “circumstances of the whole activity,” it could not “simply count[] factors” when evaluating the service providers’ independent contractor status. Instead, it needed to weigh the relevant factors to determine whether the service providers are in business for themselves, or economically dependent on the company.

The DOL’s Analysis

The DOL began its analysis by explaining that because the service providers work for customers – and not the virtual marketplace, or the company that maintains it – it was “inherently difficult to conceptualize the service providers’ ‘working relationship’” with the company. The DOL then applied the factors listed above, finding that each weighed in favor of independent contractor status.

• Control. The DOL determined that the “control” factor weighed heavily in favor of independent contractor status.  In reaching this conclusion, the DOL noted that the service providers – who have the right to accept, reject, or ignore any opportunity offered to them through the platform – control “if, when, where, how, and for whom they will work,” and are not required to complete a minimum number of jobs in order to maintain access to the platform. The DOL also pointed to the service providers’ freedom to work for competitors, and to simultaneously use competing platforms when looking for work.  Finally, the DOL found that the service providers are subject to minimal, if any, supervision.  Although customers have the ability to rate the service providers’ performance, the company does not inspect the service providers’ work or rate their performance, or otherwise monitor, supervise, or control the details of their work.

• Permanence. The DOL found that the lack of permanence in the parties’ relationship weighed strongly in favor of independent contractor status because: (i) the service providers have a “high degree of freedom to exit” the relationship; (ii) the service providers are not restricted from “interacting with competitors” during the course of the parties’ relationship (or after the relationship ends); and (iii) even if the service providers maintain a “lengthy working relationship” with the company, they do so only on a “project-by-project” basis.

• Investment. The DOL next concluded that the level of investment favored independent contractor status, reasoning that although the company invests in its platform, it does not invest in facilities, equipment, or helpers on behalf of the service providers, who are responsible for all costs associated with the “necessary resources for their work.”

• Skill and Initiative. Although the company did not disclose the specific types of services available to customers through the platform, the DOL concluded that the level of skill and initiative needed to perform the work supported independent contractor status. Regardless of the specific types of work they perform, the service providers “choose between different service opportunities and competing virtual platforms,” “exercise managerial discretion in order to maximize their profits,” and do not receive training from the company.

• Opportunity for Profit and Loss. The DOL found that although the company sets default prices, the service providers control the major determinants of profit and loss because they are able to select among different jobs with different prices, accept as many jobs as they see fit, and negotiate with customers over pricing.  The DOL also found that the service providers can “further control their profit or loss” by “toggling back and forth between” competing platforms, and determining whether to cancel an accepted job (and incur a cancellation fee) if they find a more lucrative opportunity.

• Integration. The DOL concluded that the service providers are not integrated into the company’s business operations because: (i) the service providers do not develop, maintain, or operate the company’s platform; (ii) the company’s business operations effectively terminate at the point of connecting service providers to consumers; and (iii) the company’s “primary purpose” is to provide a referral system to connect service providers with consumers in need of services – not to provide any of those services itself.

The DOL found that these facts “demonstrate economic dependence, rather than economic dependence,” and concluded that the service providers are independent contractors under the FLSA.

Takeaways

As noted by the DOL, determining “[w]hether a worker is economically dependent on a potential employer is a fact-specific inquiry that is individualized to each worker.” In addition, the tests for determining independent contractor status vary by statute, and by jurisdiction. Accordingly, agencies in some jurisdictions, including in states that apply the “ABC test” to determine independent contractor status in certain contexts, such as California and New Jersey, may disregard the opinion letter. Indeed, the New Jersey Labor Commissioner recently issued a statement indicating that the opinion letter “has zero effect on how the New Jersey Department of Labor enforces state laws … [because] the statutory three-part test for independent contractor status [in New Jersey] … is distinct from and much more rigorous than the standard referenced in the opinion letter.” Nevertheless, the opinion letter should provide support to gig economy businesses defending against claims of independent contractor misclassification under the FLSA, and in jurisdictions that apply tests that overlap with the FLSA’s economic realities test.

The opinion letter may also be of value to businesses facing other kinds of claims from gig economy workers that are predicated on employee status, such as organizing for collective bargaining purposes. Earlier this year, the National Labor Relations Board (“NLRB” or “Board”) adopted a new test to be used in distinguishing between “employees,” who have rights under the National Labor Relations Act (“NLRA” or “Act”) and independent contractors who do not. In its January 25, 2019 decision in SuperShuttle DFW, Inc., 367 NLRB No.75 (2019) the Board rejected the test adopted in 2014 in FedEx Home Delivery, 361 NLRB 610 (2014) and returned to the common-law test, finding that the test adopted in FedEx minimized the significance of a worker’s entrepreneurial opportunity.

SuperShuttle involved a union petition for an election among a group of franchisees operating SuperShuttle airport vans at Dallas-Fort Worth Airport. In response to the petition, SuperShuttle, the franchisor, argued that the franchisees who were seeking representation were not employees but rather independent contractors and as such were not entitled to vote in an NLRB election or to exercise the rights granted to employees, but not independent contractors, under the Act. The Board found that the franchisees’ leasing or ownership of their work vans, their method of compensation, and their nearly unfettered control over their daily work schedules and working conditions provided the franchisees with significant entrepreneurial opportunity for economic gain. These factors, along with the absence of supervision and the parties’ understanding that the franchisees are independent contractors, resulted in the Board’s finding that the franchisees are not employees under the Act. While the tests for determining independent contractor status under the NLRA and FLSA differ, both the Board’s decision in SuperShuttle and the DOL’s opinion letter emphasize similar themes, including the significance of a worker’s economic opportunity and discretion.