On April 29, 2019, the U.S. Department of Labor (“DOL”) issued an opinion letter finding that “on-demand” service providers working for a virtual marketplace company are independent contractors under the Fair Labor Standards Act.

The opinion letter comes almost two years after the DOL withdrew informal guidance on independent contractors issued under the Obama administration, in which the DOL concluded that “most workers are employees under the FLSA.” The new opinion letter signals an approach more friendly to “gig economy” virtual marketplace companies (or “VMCs”), online and/or smartphone-based referral services that connect consumers with service providers providing a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services.

To determine whether a worker is an independent contractor or employee under the FLSA, courts analyze the “economic dependence” of the worker on the alleged employer. See Bartels v. Birmingham, 332 U.S. 126, 130 (1947). Whether a worker is economically dependent on a potential employer is a fact-specific inquiry that is individualized to each worker. See Barrantine v. Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 739 (1981).

In conducting its analysis in the opinion letter, the DOL’s Wage and Hour Division (“WHD”) analyzed six factors applied by courts:

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 these factors, the WHD concluded that the service providers working for the unnamed VMC that requested the DOL’s opinion were independent contractors, not employees.  The WHD found that the VMC provided “a referral service,” and that “as a matter of economic reality,” the service providers were working for the consumer, not the VMC providing the referral.

The WHD discussed each of the six factors in explaining why it concluded that the service providers at issue were not economically dependent on the VMC under the FLSA.

1. The nature and degree of the potential employer’s control

The WHD found that the VCM did not appear to exert control over its service providers; rather, they are afforded autonomy to choose the hours of work that are most beneficial to them, can simultaneously work for competitors of the VCM without repercussions, and are subject to minimal, if any, supervision by the VCM.

2. The permanency of the worker’s relationship with the potential employer

The WHD noted that the VCM does not have a permanent working relationship with its service providers that would indicate an employer-employee relationship. Service providers only maintain a relationship with the VCM on a project-by-project basis, and service providers maintain a high degree of freedom to stop using the VCM platform.

3. The amount of the worker’s investment in facilities, equipment, or helpers

The WHD noted that the VCM does not invest in facilities, equipment, or helpers on behalf of its service providers. Rather, the service providers are required to purchase all necessary resources for their work and are not reimbursed by the VCM for them. Though the VCM invests in its own platform, the WHD found that those investments do not, alone, establish an employment relationship with service providers who use the platform because those are not investments in the work the service providers perform.

4. The amount of skill, initiative, judgment or foresight required for the worker’s services

The WHD reasoned that service providers demonstrate independence from the VCM by choosing between different service opportunities and competing virtual platforms and exercising managerial discretion in order to maximize their profits.

5. The worker’s opportunities for profit or loss

While the VCM sets default prices, the WHD noted that the VCM allows service providers to choose different types of jobs with different prices, take as many jobs as they see fit, and negotiate the price of their jobs. Additionally, the VCM charges a fee for cancelled services, and thus the service providers risk losing money if they do not complete a job they accepted. The Department reasoned that these opportunities for profit or loss give the service providers a substantial amount of control over their compensation and thus independence from the VCM.

6. The extent of integration of the worker’s services into the potential employer’s business

Finally, the Department found that the service providers are not integrated into the VCM’s referral business; rather, the service providers are consumers of the VCM’s referral business and can negotiate with the VCM over the terms and conditions of using the referral business. The WHD also noted that the VMC’s “primary purpose” was not providing services to end-market consumers, but providing a referral system to connect service providers and consumers.

Takeaways for Businesses

The WHD’s opinion letter provides a template that “gig economy” companies and other businesses may wish to consider in structuring their relationships with workers they intend to be independent contractors under the FLSA.  State laws may provide other tests for determining whether workers are independent contractors, and companies may wish to consult with employment counsel in evaluating their compliance with applicable laws.