Service providers working for a virtual marketplace company (VMC) operating in the “on-demand,” “sharing” or “gig” economy are independent contractors, not employees, according to an opinion letter issued by the Wage and Hour Division of the U.S. Department of Labor (DOL) on April 29, 2019. The distinction between employee and independent contractor is important because independent contractors are not entitled to minimum wages and overtime pay under the Fair Labor Standards Act.

More business-friendly than similar opinions from the Obama-era administration, this opinion is helpful to any employer engaged in the gig economy and/or engaged in web-based operations (Lyft, Uber, TaskRabbit, DoorDash and many others). While written in response to a gig economy employer, its language is broad enough to be applicable to employers in the more traditional employment setting as well. In fact, any employer that uses independent contractors will find this guidance helpful in ensuring that their contracts and work arrangements truly reflect an independent contractor relationship.

The DOL issued the opinion in response to an employer’s request for guidance on whether its service providers were employees or independent contractors under federal law. As is customary, the letter does not name the employer involved.

Historically, an employee classification will rest on whether the worker is economically dependent on the employer. Here, the DOL applied a six-factor test derived from U.S. Supreme Court precedent to determine economic dependence. The DOL weighted each factor before determining employee status:

1. Employer control
2. Permanency of relationship
3. Investment in facilities, equipment or helpers
4. Skill, initiative, judgment and foresight required
5. Opportunity for profit and loss
6. Extent of integration with employer’s business.

Applying the six factors, the DOL concluded that the company did not exert control over the workers but rather afforded them significant flexibility, including the ability to work for others. The DOL also considered that the company did not provide its service providers with any equipment or other resources needed to perform the work, nor did it provide them with mandatory training. Finally, the DOL determined that the workers had an opportunity for profit or loss and had substantial control over their level of compensation by working for different platforms, choosing how to perform the job, choosing different jobs with different prices or choosing to cancel a job.

The analysis applied by the DOL is one where all six factors are weighed. However, the ultimate inquiry is whether the worker is “engaged in business for himself or herself” or “is dependent upon the business to which he or she renders service.” The DOL considered each factor carefully and provided examples under each.

Companies should keep the letter handy as it could be used as a legal defense in dealing with issues of misclassification of employees or as a guide in establishing business relationships with independent contractors.