01 May 2019

Federal Department of Labor Decides Workers in “Gig Economy” are Independent Contractors, Not Employees

On Monday, the U.S. Department of Labor (“DOL”) announced its reversal of an Obama-era policy regarding “gig” workers, signaling that the DOL may be returning to a more permissive stance regarding the classification of workers as independent contractors.

Under the Obama administration, the DOL issued guidance stating that most workers who were treated as independent contractors were actually employees. The DOL thought that this misclassification was particularly problematic in the “gig economy,” and made cracking down on such misclassifications an enforcement priority for the Obama administration. The Trump DOL officially withdrew the Obama guidance in 2017, indicating a possible shift in course that was confirmed Monday when the DOL issued an opinion letter making it clear that it no longer considers classifying gig workers as “independent contractors” a “problematic trend.”

In Monday’s opinion letter, the question was whether service providers working for a virtual marketplace company (“VMC”) were employees or independent contractors. A VMC is an online referral service that connects service providers to end-market consumers who are willing to pay for a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, and painting. The DOL continued to apply the traditional “economic dependency” test to determine independent contractor status, which takes into account the following six factors:

  1. The nature and degree of the potential employer’s control;
  2. The permanency of the worker’s relationship with the potential employer;
  3. The amount of the worker’s investment in facilities, equipment, or helpers;
  4. The amount of skill, initiative, judgment, or foresight required for the worker’s services;
  5. The worker’s opportunities for profit or loss; and
  6. The extent of integration of the worker’s services into the potential employer’s business.

Applying that test, the DOL found that VMC service providers were independent contractors – not employees – because:

  • The VMC did not exert control over its service providers. The VMC did not impose any particular duties, set schedules, or mandate certain quotas. The VMC did not supervise service providers, inspect their work, or control how work was performed.
  • The VMC did not have a permanent working relationship with its service providers that would be indicative of an employer-employee relationship. Moreover, the VMC did not prohibit service providers from working for competitors.
  • The VMC did not invest in facilities, equipment, or helpers on behalf of the service providers. The VMC merely invested in its web-based referral platform, which DOL concluded was insufficient to establish an employment relationship.
  • The VMC did not require its workers to possess any particular amount of skill, initiative, judgment, or even training. Instead, service providers were able to choose between different service opportunities and exercise their own discretion in order to maximize their profits, thereby demonstrating considerable independence from the VMC.
  • The amount of profit or loss was determined almost entirely by the service provider, who was permitted to choose different jobs with different prices, to take as many jobs as they saw fit, to negotiate the price of their jobs, and to work for competing VMC’s in order to make more money.
  • The service providers were not integrated into the VMC’s referral business. The VMC did not develop, maintain, or otherwise operate the web-based platform. Rather, they simply used the furnished platform to acquire business. Thus, the service providers were actually consumers of the VMC’s product.

After weighing these circumstances in the context of the six-factor test, the DOL concluded that the service providers were independent contractors. The DOL did point out, however, that the determination of independent contractor status “does not depend on … isolated factors but rather upon the circumstances of the whole activity.” Thus, DOL does not determine employee status by simply counting the six factors, but by weighing all of the factors together 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.”

The DOL’s opinion letter is important to employers who use independent contractors because, even though the DOL has continued to use the same six-factor test, the way that DOL applied those factors is much more employer-friendly. That said, employers should still be careful to pay attention to whether they have properly classified some workers as independent contractors, always asking themselves whether the independent contractor is economically dependent on the employer for their livelihood.

Michigan Increases Enforcement of Independent Contractor Misclassification. At the same time, employers need to keep in mind that state governments may take a different position than the federal government. In fact, just last week, the Michigan Attorney General announced that she will establish a Payroll Fraud Enforcement Unit to investigate and crack down on employer misclassification of workers as independent contractors. The Michigan Attorney General has already set up a dedicated web page to assist workers who want to report possible misclassification.

Thus, employers should not take the DOL’s new opinion letter as permission to classify workers as independent contractors without proper justification. Employers should still carefully consider the individual facts and circumstances in light of the DOL’s economic dependency test and the relevant state law analysis prior to reaching a conclusion.

If you have any questions about this alert, or need help properly classifying your workers, please contact the authors of this alert or any of the attorneys in Miller Johnson’s Wage and Hour Practice Group.