Guidance: Shift Toward Classifying Workers as Independent Contractors

The Legal Intelligencer

(by Carla Voigt and Molly Meacham)

Recent guidance from two federal agencies indicates a push by the current administration toward classifying gig economy workers as independent contractors under federal workplace laws. Last month, the Department of Labor’s Wage and Hour Division (WHD) and the National Labor Relations Board (NLRB) each authored guidance declaring certain workers in the gig economy independent contractors, rather than employees.

In an opinion letter issued on April 29, the WHD analyzed whether workers for an unnamed “virtual marketplace company” (VMC) are employees or independent contractors under the Fair Labor Standards Act (FLSA). In refining the definition of independent contractor, the WHD focused on the economic reality test, which considers the totality of the circumstances to determine the degree of economic dependence the worker has on his employer. The WHD opinion letter describes workers’ “economic dependence” on businesses as “the touchstone of employee versus independent contractor status” and evaluated the nature of the relationship using the existing six-factor test previously developed by the U.S. Supreme Court in Rutherford Food v. McComb, 331 U.S. 722, 729 (1947).

Shortly after the WHD issued its opinion letter, in May the NLRB published its own advice memorandum dated April 16, in which it declared a group of Uber drivers to be independent contractors under the National Labor Relations Act (NLRA). Applying the board’s SuperShuttle classification test, the NLRB determined that the drivers have “significant opportunities for economic gain and, ultimately, entrepreneurial independence.” Accordingly, the NLRB opined that the drivers were properly classified as independent contractors and therefore not eligible to unionize under the NLRA. These publications indicate a significant trend by the current administration in favor of classifying workers as independent contractors.

Guiding Federal Law Principles

The FLSA defines an employee for the purposes of minimum wage and overtime pay as any individual employed by an employer, meaning anyone an employer suffers or permits to work, see  29 U.S.C. Section 203(e)(1), (g). Independent contractors are not employees. As recognized by Rutherford Food, workers may be independent contractors when their work does not “in essence … follow the usual path of an employee.”

The determination as to whether a worker qualifies as an employee under the FLSA turns on a weighing of six factors derived from Rutherford Food. These factors include: the nature and degree of the employer’s control over the worker; the permanency of the worker’s relationship with the 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 employer’s business. These factors are weighed “in order to answer the ultimate inquiry of whether the worker is ‘engaged in business for himself or herself,’ or ‘is dependent upon the business to which he or she renders service.’” Misclassification by an employer can result in substantial liability under the FLSA in the form of unpaid overtime, minimum wage violations and exposure for benefits that should have been provided to workers.

On the other hand, the NLRB’s recent analysis focused on workers’ ability to organize, which rests on a similar threshold determination of whether the workers are properly classified as employees or independent contractors. The NLRA empowers employees to unionize but does not extend this power to independent contractors. Section 2(3) of the NLRA explicitly excludes “any individual having the status of an independent contractor” from its definition of employees entitled to the act’s protection, see 29 U.S.C. Section 152(3). In evaluating whether workers are employees or independent contractors, the NLRB employs a qualitative application of the 10 nonexhaustive common-law factors enumerated in the Restatement (Second) of Agency, as adopted in the board’s recent SuperShuttle opinion. The inquiry in this context centers on a worker’s “entrepreneurial opportunity;” workers who have significant control over their profits and losses are likely independent contractors.

Federal Agency Guidance

Both the WHD and NLRB have made clear that the factors of their respective tests are to be applied qualitatively, not quantitatively. “The determination of employee status does not depend on such isolated factors but rather upon the circumstances of the whole activity.” As the WHD explained, the analysis of “whether a worker is economically dependent on a potential employer is a fact-specific inquiry that is individualized to each worker.”

Guidance as to the respective weight of the six factors in the economic reality test has varied from one administration to the next. In 2015, the former head of the WHD issued a guidance letter, administrator’s interpretation No. 2015-1 (2015 AI), which took an aggressive position regarding the classification of employees and suggested that most workers should be classified as employees under the FLSA. In applying the economic reality test, the interpretation letter de-emphasized the control factor in favor of a more expansive view of the employer-employee relationship. In 2017, the current administration reversed course, withdrawing the 2015 AI and signaling a move by the current administration toward a narrower view of employee classification. However, until the most recent opinion letter from the WHD, the administration offered little practical guidance as to what this change of course might mean for companies and their workers.

Now, nearly two years later in its April 29, opinion letter, the WHD has reiterated that the appropriate test for employee analysis is the six-factor economic realities test and, at least in the context of an unnamed virtual marketplace company in the gig industry, provided essentially a checklist of characteristics that weigh in favor of independent contractor status.

More specifically, the WHD letter responded to a question submitted by an unnamed VMC described as an “online or smartphone-based referral service that connects 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.” Applying the six-factor Rutherford Food test, the WHD characterized the VMC as a “referral service” that “empowers service providers to provide services to end-market consumers” through the virtual marketplace, rather than receiving services itself. In this context, the company’s primary purpose was to “provide a referral system,” and its “operations effectively terminate at the point of connecting service providers to consumers.” The WHD determined that the providers had “complete autonomy” over their hours and type of work, and “significant flexibility” to pursue external economic opportunities, even with the company’s competition. The WHD further found that there was no permanent working relationship between the company and its service providers that would be indicative of an employer-employee relationship because the service providers maintain a high degree of freedom to exit the relationship at any time. Ultimately, the WHD opined that all six of the factors weighed in favor of independent contractor status.

In a similar vein, the NLRB stated in its recent advice memorandum that it will apply the test it set out in SuperShuttle when evaluating worker classification under the NLRA. This test weighs 10 nonexhaustive factors and, as with the economic dependence test applied by the WHD, “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.” In the shared-ride and taxicab context, the NLRB explained that the board will give significant weight to two of these ten factors—the level of company control and the relationship between the company’s compensation and the amount of fares collected. To that end, the NLRB concluded that the group of Uber drivers “had significant entrepreneurial opportunity by virtue of their near complete control of their cars and work schedules, together with freedom to choose log-in locations and to work for competitors of Uber.” For the NLRB, the “important animating principle” is “whether the position presents the opportunities and risks inherent in entrepreneurialism.” Ultimately, workers who have significant control over their profits and losses are more likely to be classified as independent contractors under this test.

Virtual Marketplace and Ride Share Companies

The WHD’s opinion letter and the NLRB’s advice memorandum are two apparent signals that this administration intends to find that the fast-growing virtual marketplace business model is staffed by independent contractors, not employees. Under both the “economic dependence” test and the SuperShuttle test, workers for at least two companies with gig business models were easily classified as independent contractors under the relevant tests that include a number of subjective factors.

This indication is not absolute, as the guidance to date is limited to the specific workers and circumstances presented to the agencies. While the WHD opinion letter and NLRB advice memorandum may be used by employers to support their decisions, it remains unclear what level of deference such guidance might receive by the courts. While persuasive and instructive, these publications do not bind any court or state agency and are susceptible to alteration by future administrations. Moreover, the analysis only applies to the two federal laws at issue—the FLSA and NLRA. Thus, it remains to be seen how these publications will influence future classifications of workers, particularly given the overlapping state and federal laws applicable to the workplace.

Conclusion

This administration’s recent guidance for gig economy workers provides a temporary road map for companies to consider when determining whether their workers are properly classified as independent contractors or employees. However, any business relying upon these publications in their decision-making should weigh the impact of future administration change on their strategic choices as to whether the gig economy workers they rely upon are properly classified as employees or independent contractors.

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