Last week, this blog reported on the guidance from the Department of Labor (DOL) regarding the classification of independent contractors under the FLSA. The 15-page Administrator’s Interpretation (AI) seeks to restrict the use of independent contractors by reading the FLSA’s definition of “employ” as broadly as possible and by tightening the requirements of the “economic realities” test used to evaluate worker classification.
While applicable to all businesses, the AI seems to specifically target the “on-demand” business model.
For instance, despite the fact that no one factor is supposed to be controlling, the DOL now finds “compelling” the first factor of the economic realities test: “the extent to which the work performed is integral to the employer’s business.” This may be problematic for many on-demand companies, as the service provided by their contractors may be deemed to be at the heart of the enterprise. This is the argument pursued in many pending legal challenges, including those against ride services and home cleaning businesses.
On-demand companies have argued that their core business is technology and that they simply connect customers with service providers through an app or website. Plaintiffs’ lawyers have disagreed, and the AI appears to side with the latter view by elevating the importance of this factor.
The AI also stresses that a “worker’s investment must be significant in nature and magnitude relevant to the employer’s investment … to indicate that the worker is an independent businessperson.” The AI does not include an acceptable ratio, and says only that a worker’s investment should not be “relatively minor.” It cites one case where a worker’s investment of $35,000 to $40,000—roughly the amount required to purchase and maintain an automobile—was dismissed as an inconsequential amount. This may be the DOL’s subtle way of taking aim at any on-demand company that utilizes drivers to provide transportation or delivery services, where the worker’s investment may be limited to an automobile.
Finally, given the spike in independent contractor lawsuits, many on-demand companies have chosen to decrease the amount of control they exercise over independent contractors as a preventative measure to avoid being sued (or better defend themselves if they are sued). However, the AI goes out of its way to minimize the importance of the “nature and degree of control” factor—seemingly in an effort to downplay the importance of the factor that on-demand businesses have worked to solidify.
Ultimately, the DOL’s intent to more aggressively police the classification of independent contractors will only heighten the scrutiny placed on the on-demand business model. We’ve already seen one major casualty: Homejoy, an on-demand cleaning service, recently announced that it was shutting down, saying that the “deciding factor” behind this decision was the four pending independent contractor lawsuits filed against the company.
The extent to which courts will defer to the AI, if at all, is likely to be the subject of much debate and litigation. But we anticipate that the plaintiffs’ bar will soon try to use the guidance as a binding precedent, especially in New York and California federal courts, where many on-demand tech companies are based. Company attorneys will likely argue that the DOL cherry-picked cases to support its argument, cite more reasonable interpretations of the FLSA and economic realities test, and ultimately argue that the AI should receive minimal deference. We will keep readers apprised as the courts have their say.