In an opinion letter released on April 29, 2019 the Department of Labor Wage and Hour Division (WHD) provided guidance on the standards for establishing an employment relationship in today’s modern gig economy. In doing so, the WHD took a narrow view, and found that digital platforms that connect individual service providers to customers are better characterized as “referral services,” than employers.
The letter addressed a question posed by an unnamed internet/smartphone gig economy platform, which, by the description, calls to mind companies like Uber, TaskRabbit and Care.com. The question the WHD sought to answer was whether the service providers who work for such “virtual market companies” are “employees” or “independent contractors” under the Fair Labor Standards Act (FLSA). The FLSA requires employers to pay its employees, but not independent contractors, at least the federal minimum wage of $7.25/hour and overtime at the rate of 1½ times the employee’s regular hourly rate for all hours in excess of 40 worked in a 7-day work week.
The WHD determined that these service providers are independent contractors rather than employees, and therefore, are not entitled to the protections and benefits under the FLSA. In reaching this conclusion, the WHD applied the well-established “economic realities” test, which considers (1) the degree of the employer’s control; (2) the permanency of the relationship; (3) the worker’s investment in equipment; (4) the skill and judgment required by the work; (5) the opportunities for profit or loss; and (6) the integration between the worker’s services into the potential employer’s business.
The WHD found that all six factors weighed in favor of finding an independent contractor relationship. Concerning control, the WHD found it significant that workers in these companies set their own hours, and enjoy significant autonomy free from supervision. Moreover, the workers’ ability to freely disengage from the company and that they worked only on a project-by-project basis, supported the conclusion that these workers are independent contractors.
The WHD’s determination is significant, but it does not close the door on the issue. Courts may defer to the WHD’s interpretation of the law, but they are not bound by it. Moreover, the WHD’s authority only applies to the FLSA. Other federal laws and states use different tests when balancing whether a worker is an independent contractor or an employee. Notably, in a statement issued by the New Jersey Department of Labor and Workforce Development Commissioner Robert Asaro-Angelo, and reported by Bloomberg Law Daily Labor Report (May 1, 2019), the WHD’s Opinion Letter will have “zero effect” on New Jersey’s rigid standards in determining whether workers are “employees” or “independent contractors” under that state’s employment laws. New Jersey and other states apply the much more rigorous “ABC” test than the factors and analysis set forth in the WHD’s opinion.
Therefore, a determination on whether to treat workers as employees or independent contractors is a significant inquiry requiring careful consideration. In making such classification decisions, it is critical that employers understand and fully appreciate the applicable standards under the different federal laws and applied by each state where they engage workers.