In an opinion letter issued April 29, 2019, the U.S. Department of Labor’s Wage and Hour Division concluded that a “virtual marketplace company” (“VMC”) that connects service providers with consumers is not the employer of the service providers.  The opinion should be a welcome one not only for VMCs and businesses in the “gig economy,” but for all businesses that work with independent contractors, consultants, and freelancers.

As defined by the DOL, a virtual marketplace company is “an online and/or smartphone-based referral service that [through a technology platform] 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.”

The VMC’s Relationship With Service Providers

The VMC that requested the opinion letter from the DOL did not interview or train their affiliated service providers.  It did, however, provide them with information on how the technology platform works, as well as tips on best practices and feedback from consumers.  The service providers were not provided with equipment, materials, or working space by the VMC—once the service providers were activated on the VMC’s platform, they could immediately begin working for consumers who were paired with them on the platform.

The platform provided the contractors with basic information about the customer’s service request (e.g., the kind of service needed, location, and date and time), and allowed the service providers to communicate directly with customers.  The customers—and not the VMC—paid the service providers for their work, but the VMC sets default prices based on the region and scope of the service provider’s work.  The service providers were at liberty to request different pricing from the customer.  The VMC issues IRS Forms 1099 to the service providers, reflecting their earnings through the platform.

Under their written agreements with the VMC, service providers could accept, reject, or ignore any service opportunity on the platform; select service opportunities by time and place; determine the tools, equipment, and materials needed to deliver the services; and hire assistants or personnel.  The VMC did not monitor, supervise, or control the particulars of how the service providers’ work was performed, or inspect or rate the quality of the service provider’s work, but customers on the platform had the ability to rate service providers’ performance.  Service providers were at liberty to provide services to customers outside the VMC’s platform, including on competing VMC platforms.  The VMC did not require service providers to accept a minimum number of service opportunities, but it did charge them a fee for late cancellation of an accepted service opportunity.  Service providers bear their own expenses.

General Principles

Citing Supreme Court precedent, the DOL noted that the definition of employee under Fair Labor Standards Act, while broad, is “obviously not intended to stamp all persons as employees.”  The agency reiterated its consistent position that “the touchstone of employee versus independent contractor status has long been “economic dependence.”  While the inability of an individual to work on his or her own terms often suggests dependence, the ability to simultaneously draw income through work for others, such as by working for a competitor, indicates “considerable independence.”

The DOL reiterated the six factors it considers—on a non-exclusive basis—when determining economic dependence, derived from Supreme Court precedent:

• The nature and degree of the potential employer’s control;
• The permanency of the worker’s relationship with the potential employer;
• The amount of the worker’s investment in 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.

On the “control” factor, the agency noted that “[a] business may have control where it, for example, requires a worker to work exclusively for the business; disavow working for or interacting with competitors during the working relationship; work against the interests of a competitor; work inflexible shifts, achieve large quotas, or work long hours, so that it is impracticable to work elsewhere; or otherwise face restrictions on or sanctions for external economic conduct, among others.”

On “permanence,” the DOL observed that it can arise where “a business … requires a worker to agree to a fixed term of work; disavow working for or interacting with competitors after the working relationship ends; or otherwise face restrictions on or sanctions for leaving the job in order to pursue external economic opportunities, among others.”

On the “extent of integration” factor, the agency noted that a worker’s services are integrated into a business if they form the “primary purpose” of that business.

Summarizing the legal considerations, the DOL concluded that “while the FLSA has a very broad scope of coverage, it is not so broad that all workers are caught within its reach—far from it.”  The agency cited favorably to the Supreme Court’s 2018 decision in Encino Motorcars, LLC v. Navarro, which rejected “the flawed premise that the FLSA pursues its remedial purpose at all costs.”

Applying the Factors to the Service Providers

The DOL concluded that the VMC is essentially a referral platform, and that the service providers at issue are independent contractors.  The VMC receives no services from the service providers; to the contrary, it “empowers” them to provide services to end-market consumers.  In the agency’s view,

The service providers are not working for [the VMC]; they are working for consumers through the virtual marketplace….  It is therefore inherently difficult to conceptualize the service providers’ “working relationship” with [the VMC], because as a matter of economic reality, they are working for the consumer, not [the VMC].

The DOL found no indication that the service providers are economically dependent on the VMC within the meaning of the FLSA, including for the following reasons:

• The VMC does not appear to exert control over its service providers. Rather, it gives the service providers significant flexibility, including the ability to pursue external economic opportunities and to choose if, when, where, how, and for whom they will work.  In this sense, the service providers have “complete autonomy.”
• The VMC allows the service providers to work for other clients, including for competitors.
• The VMC does not monitor, supervise, or control the particulars of the service providers’ work, inspect the work for quality, or rate the service providers’ performance.
• The ability of the VMC to disaffiliate with a service provider for frequent late cancellations, and the fact that the VMC requires background and identity checks of service providers prior to granting them access to the platform, are “less relevant given the general lack of control that [the VMC] exercises over when, where, how, and for whom the service providers work.”
• The VMC does not invest in facilities, equipment, or helpers on behalf of the service providers. Instead, it requires the service providers to purchase all necessary resources for their work, and does not reimburse those expenses.  While the service providers rely on the VMC’s platform to obtain jobs, “that reliance only marginally decreases [the service providers’] relative independence, because they can use similar software on competitor platforms.”
• While the VMC sets default prices, it allows service providers to choose different types of jobs with different prices, take as many jobs as they see fit, and negotiate the price of their jobs. Moreover, the service providers can further control their profit or loss by “toggling back and forth between different” competing VMC platforms.

Of particular note is the DOL’s rejection of the notion that the services providers are “integral” to the VMC’s business.  As the agency noted,

First, the service providers who use [the VMC’s] virtual platform do not develop, maintain, or otherwise operate that platform; rather, they use that platform to acquire service opportunities.  [The VMC] offers a finished product to its service providers; its business operations effectively terminate at the point of connecting service providers to consumers and do not extend to the service provider’s actual provision of services.  In other words, the service providers are not an integral part of [the VMC’s] referral service; they are consumers of that service….  [The VMC’s] “primary [business] purpose” is not to provide services to end-market consumers, but to provide a referral system that connects service providers with consumers.

Final Takeaways

The DOL’s opinion letter is a breath of fresh air for businesses in the on-demand marketplace.  It validates the fundamental notion that not every working relationship between an individual and a business is intended to confer employment status under the FLSA.  The agency’s position continues the trend of validating bona fide independent contractor relationships (see the Second Circuit’s 2017 decision in Saleem v. Corporate Transp Group, Ltd.), and provides businesses with safe harbors under two critical provisions of the FLSA—§ 259(a) (“[N]o employer shall be subject to any liability … for … minimum wages or overtime compensation … if [it] pleads and proves that the act or omission complained of was in good faith in conformity with and in reliance on any written administrative … interpretation … of the [DOL].”) and § 260 (“In any action … to recover unpaid minimum wages, unpaid overtime compensation, or liquidated damages …, if the employer shows to the satisfaction of the court that the act or omission giving rise to such action was in good faith and that [it] had reasonable grounds for believing that [its] act or omission was not a violation of the [FLSA], the court may, in its sound discretion, award no liquidated damages or award any amount [less than 100% of the underlying wages].”).