DOL Provides Guidance on Classification of Independent Contractors in Gig Economy

By: Jessica Jackler

On April 29, the U.S. Department of Labor (DOL) issued an opinion letter providing guidance for gig economy companies on when to properly classify workers as independent contractors versus employees. Independent contractors are not subject to minimum wage and overtime requirements imposed by the Fair Labor Standards Act (FLSA).    

The opinion letter responds to a question submitted by a virtual marketplace company (VMC) on whether its service providers are employees or independent contractors under the FLSA. According to the letter, a VMC is an online and/or smartphone-based referral service that connects service providers to end-market consumers to provide a wide variety of services. VMCs accomplish this through a software platform that uses objective criteria to match consumers to service providers. The virtual platform provides information on how the virtual marketplace works without any further training or direction. Once the account is activated, service providers can immediately provide work to consumers and are not required to report to a physical office.

The DOL applied the traditional six-factor economic reality test derived from Supreme Court precedent in determining the company’s service providers were independent contractors:

  1. The 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. Worker’s opportunities for profit or loss; and
  6. Extent of integration of the worker’s services into the potential employer’s business.

The DOL found that the service providers were independent contractors and were not working for the VMC, but rather for consumers through the virtual marketplace. The DOL concluded that the VMC did not exert control over the service providers because the providers had complete autonomy over their works hours, significant flexibility over their schedules and freedom to pursue external opportunities without repercussion.

The DOL also concluded that there was no permanent relationship because the service providers were free to stop providing services at any time. Further, the DOL found that the company did not invest in facilities, equipment or other materials necessary to perform the work, and the providers retained control over the opportunity for profit or loss because they could negotiate rates (despite the company setting the default price). Lastly, the service providers were not integrated into the company’s overall business, because they were merely providing services to consumers, while the business was providing the referral platform.

Practice Tip: DOL opinion letters may be relied upon as a good-faith defense to FLSA wage claims. Although the opinion letter is limited to facts and circumstances specific to particular gig economy workers, this guidance may shed light on future arguments that businesses will rely upon to defend against independent contractors’ FLSA claims. If you have any questions about the application of these opinions in your own practice, please contact us.

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