On April 29, 2019, the Department of Labor’s Wage and Hour Division (WHD) issued an opinion letter covering the standard to determine whether a worker is an FLSA-covered employee or an independent contractor. Economic dependence, as evidenced by the following six considerations, is the touchstone of WHD’s analysis.
WHD’s opinion letter responds to an inquiry from an unidentified “virtual marketplace company that operates in the so-called ‘on-demand’ or ‘sharing’ economy.” Generally, such companies are online- and/or smartphone-based referral services that connect service providers to end-market consumers to provide a broad array of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services.
- Does the business control the worker?
The first factor is the nature and degree of the potential employer’s control. Control may exist where, for example, a business requires an individual to: work for it exclusively; disavow working for or interacting with competitors during the working relationship; work against a competitor’s interests; work inflexible sifts, achieve large quotas, or work long hours, which precludes the individual from working elsewhere; or otherwise face restrictions on or sanctions for extracurricular economic conduct.
- Are the business and the worker in a permanent relationship?
The second factor is the permanency of the worker’s relationship with the potential employer. Permanence, according to the WHD, arises when a business, for example, requires a worker to agree to a fixed term of work; disavow working for or interacting with competitors after the working relationship ends; or otherwise face restrictions on or sanctions for leaving the job to pursue other business relationships. Likewise, a long-term working relationship may indirectly indicate permanence.
- Has the worker invested in facilities, equipment, or helpers?
The third factor is the amount of the worker’s investment in facilities, equipment, or helpers. Such investments, according the WHD, weigh against a conclusion that the individual is dependent upon the business that retained him or her. In contrast, if the business invests in facilities, equipment, or helpers and provides them to the worker, he or she may come to rely on the business, making it more difficult for the worker to pursue other economic opportunities.
How the worker acquired his or her skills also is relevant. For example, if the business trains workers to perform their job, that suggests employee status.
- How much skill, initiative, judgment, and foresight do the worker’s services require?
The fourth factor is the amount of skill, initiative, judgment, and foresight required for the worker’s services. In explaining this factor, WHD pointed to a Supreme Court case from the late forties — Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947). There, the business profited from the alleged independent contractor’s work. Those profits, however, were not tied to the workers’ initiative, judgment, or foresight, as would be expected from a typical independent contractor. Instead, they resulted from work akin to employee piecework. This factor also may look to, for example, whether the worker has the skills necessary to locate and manage discrete work projects – typical of independent contractors – as opposed to task-specific, specialized skills that are part of a larger business operation, typical of employees.
- Does the worker have opportunities for realize profit and loss?
The fifth factor is the worker’s opportunities for profit or loss. Profit and loss opportunities typically exist, according to WHD, if the worker receives additional compensation based, not on greater efficiency, but on his or her initiative, judgment, or foresight (e.g., commissions); can renegotiate compensation throughout the working relationship, or has risked capital in the job. Opportunities for profit and loss can indicate independent contractor status, even if they aren’t solely within the worker’s control.
- Are the worker’s services integrated into the business?
The sixth factor is the extent of the integration of the worker’s services into the potential employer’s business. A worker’s services are integrated into the business, says WHD, if they are part of the business’s primary purpose. To illustrate, WHD cited a recent Sixth Circuit case – Werner v. Bell Family Med. Ctr., Inc., 529 F. App’x 541 (6th Cir. 2013), in which the Court held that an ultrasound technician’s services were not integrated into a medical center’s business because ultrasounds were not the heart of its business.
The letter does not bind courts. And, legally, it applies only to the business to whom it is addressed. However, the letter contains useful guidance to virtual marketplace companies and others that use independent contractors or may wish to do so.