Earlier today, the U.S. Department of Labor issued an Opinion Letter on the issue of independent contractor status of an on-demand virtual marketplace company (VMC) that refers end-market consumers to service providers who offer delivery, transportation, shopping, moving, cleaning, plumbing, painting, and household services. The Labor Department examined six factors pertinent to independent contractor (IC) status under the federal Fair Labor Standards Act (FLSA) and concluded that all six favored IC status. The opinion is not the least bit surprising; one can hardly envision a more solid IC relationship than the one described in the Opinion Letter. Even the Labor Department during the Obama Administration would have probably concluded that the service providers in this instance are ICs under the FLSA – although it is likely that that Administration’s Labor Department would have found at least one or two of the six factors to have favored employee status.
In June 2017, the Labor Department under the Trump Administration first took a stance on the issue of IC classification when it rescinded a July 2015 Administrator’s Interpretation that had been issued by the Wage Hour Administrator in the Obama Administration. That Interpretation on IC status under the FLSA cited the same U.S. Supreme Court cases and set forth the same six factors that are cited in the new Opinion Letter. But the new Opinion Letter interprets those factors in a dramatically different way – a manner that strongly favors IC status and seeks to lend support to those businesses based on an IC business model in the on-demand economy.
The Limited Impact of the Opinion Letter
Although many commentators have cited the issuance of today’s Opinion Letter as rather momentous, the U.S. Labor Department does not determine the law under the FLSA; only the courts do. And the new Opinion Letter is not binding on the courts. So, for the most part, it is little more than a reflection of the Labor Department’s enforcement policy toward this type of VMC.
The limited nature of today’s Opinion Letter is also a function of the fact that most IC misclassification cases, especially those brought against on-demand businesses, are commenced under state laws, not the FLSA – and most state law tests for IC status differ sharply from the FLSA’s test.
A Brief Analysis of the Six Factors Under the Opinion Letter
According to the new Opinion Letter, the six factors indicative of IC status are all “derived from [U.S.] Supreme Court precedent.”
The first factor is the nature and extent of the potential employer’s control. Unlike the focus of the Obama Administration on whether the business controls the manner and means by which the worker performs services, the new Opinion Letter focuses on whether the company controls the right of a worker to provide his or her services to competitors of the company or his or her own clients.
The second factor is the permanency of the relationship with the potential employer. Whereas the Obama Administration treated a service provider’s continuous relationship with a company as a factor indicating employee status, even if the worker had the right to provide services to its own clients or to a competitor, the Opinion Letter cites favorably to a court decision finding no permanency where the length of the working relationship “was the product of a mutually satisfactory arrangement.”
The third factor relates to the worker’s investment in facilities, equipment, or helpers. The Obama Administration compared the monetary investments of the company and the individual worker – a comparison that would almost always support employee status. The new Opinion Letter, in contrast, focuses instead on whether the business provides the facilities and equipment to the worker instead of the worker purchasing his or her own tools and equipment.
The fourth factor involves the skill and initiative required for the worker’s services and the fifth factor involves the opportunity for profit and loss. The differences between the Obama Administration position and the position of the Trump Administration are less divergent on these two factors than the others.
The sixth and last factor is the extent of the integration of the worker’s services into the potential employer’s business. The Obama Administration generally found this factor favored employee status on nearly every occasion. The new Opinion Letter looks at this factor quite differently. It concludes that the on-demand service providers classified as ICs are not integrated into the company’s referral business because they “do not develop, maintain, or otherwise operate that [on-demand] platform; rather, they use that platform to acquire service opportunities.” The Opinion Letter then refers to the service providers as “consumers” of that on-demand platform. This type of argument seeks to tilt the scales in favor of IC status under the FLSA, but only if the courts concur with the Labor Department’s view of this factor. For those on-demand companies with operations in California that operate an IC business model, this argument may have some additional value.
A year ago, the California Supreme Court issued its now-infamous Dynamex decision, which requires a business to establish all three prongs of a so-called ABC test if the company wishes to establish IC status when defending against certain types of IC misclassification claims. One of those prongs, Prong B – the one companies in California are finding the most challenging to prove – mandates that a business must show that the workers perform services that are “outside the usual course of the company’s business.” This is close to the wording of the sixth factor used to test IC status under the FLSA – “the extent of integration of the workers’ services into the potential employer’s business.” As noted above, the new Opinion Letter equates the workers with “consumers” of the on-demand platform. It is anticipated that this argument may be used by on-demand and other types of businesses to try to meet Prong B of the Dynamex IC test.
- Don’t assume the Labor Department is not serious about enforcing the FLSA
Although the Opinion Letter strongly favors the use of ICs by on-demand businesses, the public should not presume that the Labor Department is unwilling to enforce the FLSA when it comes to ICs. As we reported in our blog post of March 11, 2019, Secretary Acosta recently won an appeal to the U.S. Court of Appeals for the Sixth Circuit, which found in his favor that off-duty sworn police officers retained as security guards had been misclassified as ICs. And as noted in our blog post of November 12, 2018, Secretary Acosta has aggressively prosecuted an independent contractor misclassification claim against a franchisor in the cleaning contracting industry, winning an appeal last Fall that allowed him to proceed with his IC misclassification claim against the cleaning franchisor.
- Don’t confine your IC analysis to six factors under the FLSA
The new Opinion Letter only examined six factors, but there are dozens of additional factors that are pertinent to the issue of whether a worker is an IC or an employee under the FLSA. As the Opinion Letter states: “Other factors [beside these six] may also be relevant, and the appropriate weight to give to each factor depends on the facts.” The Letter continues, “the determination of [employee status] does not depend on [these six factors] but rather upon the circumstances of the whole activity.”
- Don’t think that IC misclassification claims will diminish
The new Opinion Letter will not deter plaintiffs’ class action lawyers and state workforce agencies from pursuing IC misclassification claims against companies using ICs. These types of class and collective actions remain in the cross-hairs of the plaintiffs’ bar. Likewise, state workforce agencies will continue to focus on companies that they believe are out of compliance with state IC laws.
- Take steps to enhance your company’s IC compliance
Those companies which have elevated their level of compliance with IC laws are less likely to be sued in class action lawsuits alleging IC misclassification or subjected to regulatory audits or administrative proceedings regarding the classification of their 1099ers. Many savvy companies have sought to maximize their IC compliance by use of a process such as IC Diagnostics.™ That type of process examines dozens of factors to determine the level of IC compliance and then uses that diagnostic information to restructure the IC relationship, if necessary, and re-document it in a state-of-the-art manner to minimize exposure to IC misclassification liability. The process should also re-implement the IC relationship in a manner that carries out in practice the structure and documentation of the IC relationship. A process such as IC Diagnostics can also be used by companies to better defend lawsuits and administrative proceedings alleging IC misclassification.
- Add an arbitration clause with class action waiver to your IC agreement or update your arbitration clause to take advantage of new case law developments
The courts are increasingly receptive to arbitration clauses with few exceptions, most notably the interstate transportation industry – but there are usually workarounds even for companies in that type of industry. An arbitration clause with class action waiver can minimize the likelihood that an IC misclassification lawsuit will be litigated in a class action in court, if drafted effectively, anticipating arguments by plaintiffs’ class action lawyers that such clauses are unenforceable.
Written by Richard Reibstein