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A recent opinion letter from the U.S. Department of Labor (DOL) stated that, under certain circumstances, workers who use online or smartphone-based referral services to connect with consumers are considered independent contractors – and not employees – of the companies providing these referral services. While the DOL letter does not identify the company that requested the letter, the guidance relates to “virtual marketplace companies” (VMCs) that operate in the “on-demand” or “sharing” economy, such as drivers who use Uber or housekeepers who use Handy.
A worker’s classification by the DOL as an independent contractor versus as an employee is important because the Fair Labor Standards Act (“FLSA”) only applies to employees. A worker classified as an independent contractor is not covered by the FLSA’s minimum wage and overtime pay requirements, and the employer is not bound by certain recordkeeping requirements.
When determining whether a worker is an employee versus an independent contractor under the FLSA, the DOL focuses on the degree that the worker is “economically dependent” on the business to which she provides service, a determination primarily made using a six-factor test.1 No one factor is determinative and the analysis is based on the circumstances of the whole activity.
Applying this test to the anonymous VMC that requested the opinion letter, the DOL determined that the VMC’s workers are not economically dependent on the VMC and are independent contractors based on the following six factors:
- The VMC does not exert control over these workers because the VMC allows workers significant flexibility to choose if, when, where, how and for whom they will work, and allows workers to simultaneously pursue external work opportunities, including through competitors.
- The VMC does not have a permanent working relationship with these workers because the workers work on a “project-by-project basis,” are free to interact with competitors both during and after the relationship ends, and maintain a high degree of freedom to exit the working relationship at any time.
- The VMC does not invest in facilities, equipment or helpers on behalf of these workers because the VMC requires these workers to purchase all resources necessary for their work and does not reimburse workers for these purchases. Rather, the VMC primarily invests in its virtual referral platform, which allows workers to rely on the VMC’s software to obtain jobs, but workers can use similar software on competitor platforms.
- The workers’ services require a significant amount of skill, initiative, judgment, and foresight because workers choose between different job opportunities (often on competing platforms) and exercise managerial discretion to maximize their profits. Further, there is no mandatory training of workers by the VMC.
- The workers have significant opportunity for profit or loss because workers can choose how to perform their jobs, can choose different types of jobs with different prices, can take as many or as few jobs as they see fit, and can negotiate the prices of their jobs (notwithstanding that the VMC sets default prices for the jobs).
- The workers are not integrated into the VMC’s business because the DOL contends that the primary purpose of the VMC’s business is to provide a referral system that connects workers with consumers, and the workers who use the VMC’s virtual platform do not develop, maintain or otherwise operate that platform.
While the DOL made clear that its opinion is specific to the VMC in question, this letter nonetheless provides useful guidance to other VMCs operating in the “on-demand” or “sharing” economy as to the types of facts that might be considered when determining the classification of their workers under the FLSA.
- This test is similar to the IRS’s test for classifying employees and independent contractors, which measures the degree of a worker’s control and independence by looking at: (1) the extent that the company controls the worker’s behavior; (2) the extent that the company controls the business aspects of the worker’s job; and (3) the type of relationship between the company and the worker. Companies need to withhold income, Social Security and Medicare taxes from wages paid to employees but do not need to do so for independent contractors.↵