From JDSupra, Richard Reibstein discusses the United States Department of Labor’s Opinion Letter which said that workers engaged through an online platform were independent contractors. Richard writes:
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 focuses instead on whether the business provides the facilities and equipment to the worker instead of purchasing his or her own tools and equipment.
The fourth factor involves the skill and initiative required for the workers’ 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 different 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 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 when not on duty 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.” …