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Gig economy firms get guidance on employee vs. contractor status

Gig economy

(This story included an incorrect citation to an appellate court decision. The name of the case is Gerardo Vazquez, Gloria Roman, and Juan Aquilar v. Jan-Pro Franchising International Inc.)


A U.S. Department of Labor opinion letter outlining when a worker should be considered an independent contractor or an employee provides some clarity to employers potentially liable to provide benefits and a minimum wage to workers categorized as contractors, say experts.

Observers say, however, that while the department’s letter will guide employers in avoiding potential liability under the 1938 federal Fair Labor Standards Act, employers must still contend with laws in states such as California, Massachusetts, Connecticut and New Jersey that are more restrictive.

The issue of whether workers are employees or independent contractors has been contentious. Last week, Uber Technologies Inc. agreed to pay $20 million to settle a lawsuit brought by drivers nearly six years ago alleging they should be treated as employees.

The 10-page April 29 letter by acting Department of Labor administrator Keith E. Sonderling to an unidentified “virtual marketplace” company described six factors it said was derived from Supreme Court precedent that should be used in determine whether an employee should be considered an independent contractor:

  • The nature and degree of the potential employers’ control, such as whether the firm requires a worker to work exclusively for the business.
  • The permanency of the worker’s relationship with the potential employer, including cases where the worker must disavow working for competitors after the working relationship ends.
  • The amount of the worker’s investment in facilities, equipment or helpers, as in cases where the worker comes to rely on the business to supply those investments to perform his or her services.
  • The amount of skill, initiative, judgment or foresight required for the workers’ services, and whether the company provided the workers with the skills to perform the job.
  • The opportunities for profit or loss. A worker’s opportunity to generate either can indicate independent contractor status, according to the letter.
  • The extent of integration of the workers’ services into the potential employer’s business.

“Based on the facts you provide in your letter, it appears that the services providers who use your client’s virtual marketplace are independent contractors,” the letter advises.

Roger Royse, founder of Royse Law Firm P.C. in Menlo Park, California, said “The standard there is not surprising.” With the DOL’s six-factor balancing test, “We’ve got something we can work around and apply,” he said.

The letter probably has an effect beyond the employer addressed in the letter, said Michael J. Puma, a partner with Morgan Lewis & Bockius LLP in Philadelphia.

The department’s letter articulates “there are limits as to the concept of who is an employee, whereas prior guidance under the Obama administration had much more broadly interpreted what it means for somebody to be an employee,” Mr. Puma said.

The Trump administration not only has withdrawn the Obama administration’s guidance in this area, but in the letter “provides a fair amount of flexibility for these kinds of nontraditional relationships,” Mr. Puma said.

Under the Trump administration, the issue of employee misclassification has become less of a priority, he said. While the financial exposure has not changed, the likelihood that some employer/employee relationships would be challenged is lower, he said.

But the issuance of the letter may have a limited effect, said Katherine S. Catlos, a partner with Kaufman, Dolowich & Voluck LLP in San Francisco.

“This particular opinion is not binding on anyone. It’s an advisory opinion” supposedly submitted in response to a query from an anonymous company engaged in virtual marketing, she said.

Mr. Puma said also there is a significant amount of private litigation in this area, and the letter does not bind the courts. “It’s not even entitled to the same deference as a regulation necessarily, but I think it will be persuasive with at least some courts,” Mr. Puma said.

Kelly T. Kindig, a member of law firm Cozen O’Connor P.C. in Philadelphia, said with the Department of Labor guidance, “presumably there should be less liability for employers going forward as to certain categories of workers.”

Employers must still make sure they conduct the six-factor test, said Carrie Hoffman, a partner with Foley & Lardner LLP in Dallas. “It isn’t a free ride. You still have to follow the six factors,” she said.

Employers must also contend with some state laws. With the Department of Labor under the Trump administration “backing away from a lot of that Obama-era regulation, we probably are already seeing the states filling the gap,” said Ms. Kindig.

In a decision earlier this month in Vazquez v. Jan-Pro Franchising Intl., a three-judge panel of the 9th U.S. Circuit Court of Appeals in San Francisco held employers that hire independent contractors must retroactively apply a test to gauge whether the worker is an employee or a contractor.

Employers must carefully evaluate the laws of the states in which they operate to be sure they are not more restrictive than the federal law, said Ms. Hoffman. This “makes the landscape tough for a nationwide employer,” she said.

Disputes over this issue “are not going to go away,” said Cheryl A. Sabnis, a partner with King & Spalding in San Francisco. “I think that what we're likely to see is legislatures stepping in to bless the concept and provide some protection for individuals, and I think that is probably the best solution for all concerned.”





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