With the rise of the “gig economy,” the Department of Labor (DOL) has been under pressure to further clarify the difference between independent contractors and employees. In new guidelines just released, the DOL makes it very clear that, by default,  it views most workers as employees. Klinedinst attorney Thomas Daugherty takes a look at the guidelines, the rise of the freelance movement, and the steps each and every employer should take immediately to ensure compliance.

By Thomas E. Daugherty, Esq.

With the growth of the “gig economy,” and in response to the growing trend of complaints of employee misclassification, the US Department of Labor (DOL) has just issued new guidelines for classifying employees and independent contractors. The new guidelines interpret “employee” very broadly. The Fair Labor Standards Act (FLSA) defines “employ” as “to suffer or permit to work.” The DOL contends that the “suffer or permit to work” standard was intended to create as broad of a scope of statutory coverage as possible.

In June, 2015, the California Labor Commissioner ruled that an Uber driver (a gig worker, if ever there was one) was an employee, not an independent contractor as Uber had argued. Uber is appealing the ruling, and has succeeded in keeping its drivers classified as independent contractors in other states. Nonetheless, this continues in the theme of past Fed Ex and UPS “driver” cases in which employers misclassified their drivers as independent contractors, and the courts found them to be employees. Many other rising companies, like Lyft (a drive-sharing competitor to Uber) and Instacart (a grocery delivery service) have faced questions and lawsuits as to whether their workers are indeed employees.

The gig economy has provided  individuals with more flexible workplace arrangements, which can benefit both companies and workers. While using independent contractors may benefit a company’s bottom line, the misclassification of employees as independent contractors can deprive those workers of statutory protections, such as minimum wage, overtime pay, unemployment insurance, workers’ compensation and reimbursement for business expenses. Critics also argue the practice can result in lowered tax revenues for governments, while creating an uneven playing field for employers who properly classify their workers.

To determine whether a worker is an employee or and independent contractor under the FLSA, courts use the “economics realities” test. According to the DOL, this test must be used to determine “whether the worker is economically dependent on the employer (and thus is an employee) or is really in business for him or herself (and thus its independent contractor).” The economic realities test considers multiple factors, with no single factor as determinative. The factors generally considered are:

1. the extent to which the work performed is an integral part of the employer’s business;
2. the worker’s opportunity for profit or loss depending on his or her managerial skill;
3. the extent of the relative investments of the employer and the worker;
4. whether the work performed requires special skills and initiative;
5. the permanency of the relationship; and
6. the degree of control exercised or retained by the employer.

The DOL cites the FLSA’s directive that the scope of the employment relationship is very broad, and advises that the “control” factor should not be given undue emphasis.

Under this test, independent contractors are workers with economic independence who are operating a business of their own. In contrast, workers that are economically dependent on the employer are employees covered by the FLSA. Therefore, the economic realities of the relationship, and not the labels given by employers, determine the classification.

The DOL is quite blunt in its assessment, concluding that under the FLSA, most workers are employees. With this in mind, employers should take a hard look at all independent contractors that they utilize. Misclassification of employees can result in multiple individual lawsuits and wage claims, as well as large representative and class actions with potentially devastating penalties. Given the recent rulings of the California Labor Board, state and federal courts and the new guidelines promulgated by the DOL, employers that use independent contractors should consult with employment counsel to determine whether their workers are employees or independent contractors under the law.