DOL Opinion Letter That Some Gig Workers Are Contractors Has Little Significance In California Given Dynamex

On April 29, 2019, the U.S. Department of Labor’s Wage and Hour Division (“DOL”) issued an Opinion Letter in response to an inquiry by a single, unnamed company that sought the Department’s guidance on whether its workers could properly be considered contractors under the Fair Labor Standards Act (“FLSA”), which mandates minimum wages and overtime pay for employees, but not for independent contractors.

To determine whether an individual is an employee or independent contractor, the DOL looks at six factors that demonstrate “economic dependence.” (See United States v. Silk, 331 U.S. 704, 716 (1947).) The analysis focuses on the “economic reality” of the relationship between the service provider (worker) and the company with whom the service provider performs work. Relevant factors include the nature and degree of the employer’s control, the integration of the worker’s services into the employer’s business, and the permanency of the relationship.

The subject of the Opinion Letter was a virtual marketplace company (“VMC”) that operates in the “gig economy” as a virtual “referral service,” connecting consumers with a variety of household and personal service providers through its proprietary software platform.

The DOL applied its six-factor test to conclude that the service providers were properly characterized as independent contractors. The service providers were not economically dependent on the VMC, which only provided a “referral service” through which the providers ended up working for consumers rather than for VMC. The service providers also worked on a project-by-project basis, had to rely on their own skills and managerial decisions, and could end the relationship with the VMC at any time. The VMC did not mandate how its service providers performed their work, i.e. the VMC did not specify the kinds of working materials to use, the route to take to and from clients, nor require attendance at specific trainings. The ability of the service providers to offer their services independent of VMC (which suggested minimal “economic dependence”) appears to have been particularly significant to the DOL.

Although the Opinion Letter is based on the VMC business model, its language is broad and traditional businesses that use independent contractors will be tempted to embrace its characterization of non-employee workers under the FLSA. However, a few caveats are in order.

First, the Opinion Letter only provides guidance for employers regarding the Department of Labor’s enforcement policy. The Opinion Letter does not have the force of law and does not bind any court.

Second, an employer’s compliance with the FLSA as outlined by the Opinion Letter will not provide a defense to misclassification claims under California law, which can result in substantial liability for overtime, minimum wage violations and exposure for benefits that should have been provided but were not. In 2018, the California Supreme Court issued Dynamex Operations West v. Superior Court, which adopted a stricter worker classification test than the six factors used by the DOL to evaluate “economic dependence.” In order to properly classify workers as independent contractors under Dynamex, an employer must satisfy all three elements of the “ABC” test by demonstrating:

“(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, (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.”

(For more information on the ABC test and Dynamex, see http://svelf.com/new-abc-test-california-employees-and-its-potential-impact-on-gig-economy-and-otherwise/)

The first element of the test is not new. However, the second element — that the worker performs tasks that are outside of the usual course of the hiring entity’s business — may be difficult for many employers to satisfy. For example, ride-hailing services like Uber will have to demonstrate that the driving services performed by their drivers is outside the usual course of a business whose principal purpose is to provide rides to consumers.

Thus, workers may still sue California employers for misclassification for failure to satisfy the ABC test, even if these same claims would not be supported by the Opinion Letter. Therefore, it is important that, despite the encouraging guidance provided for employers by the Opinion Letter, California employers comply with Dynamex.

We have substantial experience in these issues, including classification issues that arise with gig economy employers. If you would like to discuss these issues further, or have any questions about this blog, please contact us.