California Gig Economy Employers Should Approach the Department of Labor’s Recent Opinion Letter With Caution

UPDATE: On Feb. 19, 2021, the Department of Labor withdrew the Opinion Letter that was at issue in this alert. As of March 3, 2021, it is unclear what steps the Department of Labor, under a new administration, will take regarding independent contractors.   
Please contact your Payne & Fears attorney for current guidance on the subject matter of this article.

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Yesterday, the Department of Labor’s Wage-and-Hour Division (“WHD”) issued an employer-friendly Opinion Letter.  In this Opinion Letter, WHD considered whether service providers for a virtual marketplace company (“VMC”) are independent contractors or employees under the Fair Labor Standards Act (“FLSA”).  VMCs operate in the “gig,” “on demand,” or “sharing” economy.  They connect service providers with consumers in various markets, such as transportation (Uber), delivery (Postmates), and household services (TaskRabbit).

WHD concluded that the service providers addressed in the Opinion Letter are independent contractors.  The contracting VMC requires its service providers to, among other things, provide basic personal information, and sign an acknowledgment that there is no employment relationship between the service provider and VMC.  The VMC does not interview the service providers or require them to undergo training; paid the service providers on a per job basis; allow the service providers to accept or reject potential projects and does not require service providers to complete a minimum number of jobs.  Moreover, the VMC does not place requirements on how its service providers must perform their work, such as what transportation route to take, the order in which to clean an apartment, or the type of working materials they use.  The VMC terminates a relationship with a service provider only if the service provider commits a  material breach of their agreement.

In the Opinion Letter, WHD first laid out the governing standard.  Under the FLSA, an “employee” is any individual whom an employer suffers, permits, or otherwise employs to work. 29 U.S.C. §§ 203(e)(1),(g).  As broad as this definition is, it does not make all persons “employees.” The key to determining whether one is an employee or independent contractor is whether there is “economic dependence.”  In considering whether “economic dependence” exists, WHD considers 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. See Rutherford Food Corp. v. McComb, 331 U.S. 722, 730 (1947); United States v. Silk, 331 U.S. 704, 716 (1947).

Weighing these factors, WHD concluded that the service providers are independent contractors.  WHD noted that the VMC “provides a referral service,” and merely “empowers service providers” to serve consumers.  The service providers are working for the consumers—not the VMC.  Weighing the six factors discussed above, WHD concluded that the service providers were not economically dependent on the VMC under the FLSA.  The Opinion Letter follows a recent National Labor Relations Board decision finding shuttle drivers who had an opportunity for entrepreneurial opportunity for economic gain or loss to be independent contractors.

Although the Opinion Letter appears to give a wide amount of discretion to engage service providers outside traditional employment models, employers—especially those in California—must tread carefully.

First, the Opinion Letter is not binding on any court.  Rather, the Opinion Letter only provides guidance for employers regarding the Department of Labor’s enforcement policy.  Therefore, service providers may still sue employers for misclassification, even if it appears plainly precluded by the Opinion Letter.

Second, and perhaps more importantly, Californian employers still face liability under state law.  Last year, the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018) shifted the burden onto businesses to show service providers are independent contractors.  To show that service providers are independent contractors, employers must satisfy the “ABC” test.  That is, employers must show each of these three factors are met: “(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.”  Id. at 964.  Given that Dynamex has led to more litigation in California, employers still must take care before labeling service providers as independent contractors.

What Employers Should Know

Although initial reports have painted the Opinion Letter as a boon for companies, employers should take caution.  The Opinion Letter only provides guidance as to the Department of Labor’s prosecutorial decisions.  Workers may still sue employers under the FLSA for misclassification.  Moreover, because of Dynamex, California law still contains many pitfalls for employers misclassifying workers as independent contractors.  Compliance with the FLSA provides no defense to misclassification claims under California law.