One of the big questions that companies need to answer is whether a worker is an employee or independent contractor. The answer is complicated when the worker works remotely rather than on company premises. This issue is important because of the growth in the sharing or on-demand economy, with such companies as Uber and Lyft, Task Rabbit, Fivrr, and many others. Fortunately, there is some guidance on this from the DOL.
The Department of Labor’s Wage and Hour Division has authority to enforce the Fair Labor Standards Act (FLSA). This law imposes minimum wage and overtime rules, but it only applies to employees. Payments to independent contractors are not governed by the FLSA.
Back in 2015, the DOL issued Administrator’s Interpretation No. 2015-1 on independent contractors. It used an “economic realities” test to determine whether a worker is “economically dependent” on the company or in reality is in business for him/herself. The economic realities test used various factors, including whether the worker’s job responsibilities were an integral part of the company’s business.
On June 7, 2017, the DOL Secretary withdrew the former guidance. My observation: Under the 2015 economic realities test, every worker for every online platform would have been classified as an employee because the job responsibilities would be an integral part of the company’s business. In my opinion, this does not really reflect the economic realities of the sharing/on-demand economy.
DOL’s 6-factor test
The DOL now bases a determination of whether a worker is an employee or independent contractor on whether the worker has economic dependence. It uses 6 factors (derived from court cases):
- 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
Recently, the DOL applied these factors to a company with a virtual marketplace where its service providers worked for consumers through this virtual marketplace. The company involved was an online and/or smartphone-based referral service that connected 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. Here the workers were viewed as independent contractors because:
- The company didn’t impose any duties on the service providers (e.g., strict shifts, quotas)
- There was no permanent working relationship and service providers are free to work anywhere else (including for competitors)
- The service providers did not buy facilities or equipment on behalf of the company
- No special skills were required by the company; no training was involved
- The service providers didn’t receive flat compensation; what they earned depended on whether they chose jobs with different prices, took as many jobs as they saw fit, and negotiated the price of their jobs.
- The service providers did not develop or maintain a platform; the company did
The DOL has its test; the IRS has its own. The IRS applies common law rules to assess the degree of control or independence of workers. Factors used by the IRS fall into 3 categories:
- Type of relationship
Other government agencies
The DOL and IRS aren’t the only government agencies looking at the question of worker classification.
- NLRB determines whether workers are employees with union-related rights
- State unemployment and workers’ compensation boards decides whether workers are entitled to these benefits
If you want your workers to be independent contractors, use extreme care. Merely having them sign an agreement acknowledging this status won’t control the classification if other factors weigh against you.
Talk with an employment law attorney about the arrangement you want to see whether it passes muster. And even if you successfully classify workers as independent contractors, review local laws to see whether you are required to provide certain payments or benefits to independent contractors. For example, NYC’s Freelance Isn’t Free Act requires all contracts worth $800 or more to be in writing and the hiring party must make pay the contractor within 30 days after the work has been completed.