Important information on the classification of independent contractors vs. employees

Department of Labor opinion letter :

Issued April 29, the opinion letter https://www.dol.gov/whd/opinion/FLSA/2019/2019_04_29_06_FLSA.pdf addresses whether a service provider for a virtual marketplace company is an employee of the company or an independent contractor under the FLSA. It concludes that the workers who provide services to consumers through this company’s virtual platform are independent contractors, not employees of the company. To make this determination, the Department’s Wage and Hour Division

applied its longstanding and unchanged six-factor balancing test, derived from Supreme Court precedent:

• The nature and degree of the potential employer’s control
• The permanency of the worker’s relationship with the potential employer
• The amount of the worker’s investment in facilities, equipment, or helpers
• The amount of skill, initiative, judgment, or foresight required for the worker’s services
• The worker’s opportunities for profit or loss and
• The extent of integration of the worker’s services into the potential employer’s business

Other factors also may be considered. The DOL “does not determine employee status by simply counting factors but by weighing these factors in order to answer the ultimate inquiry of whether the worker is ‘engaged in business for himself or herself’ or ‘is dependent upon the business to which he or she renders service,’” stated the letter.

While the opinion deals with a specific company, wages, and fair labor standards and is not legally binding, legal experts suggest it has an effect beyond the employer addressed in the letter. Under the Trump administration there is more flexibility in defining independent contractors and the likelihood that some employer/employee relationships would be challenged is lower.

The key issue is control. When classified as independent contractors, workers should be able to control their own schedules, work in other jobs or businesses, choose whether to accept a project, and not receive extensive training.

Cautionary note: The opinion letter is based on the facts presented by the company and these facts may not be true of other gig economy workers. It does confirm employers must conduct the six-factor test when confronted with a classification question. Further, employers still must abide by laws in states such as California, Massachusetts, Connecticut and New Jersey that are more restrictive.

National Labor Relations Board memorandum

            The National Labor Relations Board (NLRB), handed an important victory to Uber when it determined that the company’s drivers are contractors, not employees. In the first major policy action concerning the gig economy, the NLRB’s move relates primarily to unionization and other collective activities.

The decision was outlined by the board’s general counsel in a memorandum (.pdf) dated April 16, but made public in mid-May. In effect, the action tells gig economy workers not to report labor abuses to the Board because they are outside its jurisdiction. This judgment and the opinion letter cited above reverse the stance of the Obama administration that people who found work through apps could be considered employees. While the memo can be reversed by future general counsels, it carries considerable weight in how the Bard enforces the law.

California: Independent contractor classification dealt another blow – ABC test must be applied retroactively

            About a year ago, the California Supreme Court issued a groundbreaking decision when it adopted a new legal standard known as the “ABC Test,” making it much more difficult for businesses to classify workers as independent contractors in Dynamax vs The Superior Court of Los Angeles County. In a subsequent case, Garcia v. Border Transportation Group. a Court of Appeals held that the new test is limited to claims arising under the California Wage Orders. A May 3 letter from the California DLSE confirmed that the Dynamex decision extends to obligations imposed by the Industrial Welfare Commission wage order, making employers who misclassify workers responsible for California Labor Code obligations such as overtime, minimum wage, reporting time pay, record-keeping, business expense reimbursement, and meal and rest periods.

Moreover, the case was remanded, and pending legislation (AB5) would extend the reach of Dynamex’s ABC independent contractor assessment to unemployment and disability insurance and workers compensation.

Recently, the U.S. Court of Appeals for the Ninth Circuit held that the “ABC” test, used in the employee-versus-independent contractor analysis in cases involving IWC Wage Orders, must be applied retroactively. The ruling in Vazquez v. Jan-Pro Franchising Int’l Inc. means that the “ABC” test not only will be applied to cases going forward, but also to disputes dating back to before the new test was enacted. Based on California’s statute of limitations, employers could be liable for misclassifying workers as contractors going back four years before the 2018 decision.

The decision has significant implications for businesses using a franchise model or independent contractor model, including gig economy companies, since employees have more rights and benefits than independent contractors. The court essentially held that the “ABC” test applies to both a franchisee and the parent franchisor when deciding whether a group of workers are formal employees, pointing to increased exposure to liability for franchisors.

The unanimous federal appeals court ruling vacated an earlier dismissal of the complaint, and remanded the issue back to the lower district court, with instructions to follow the test issued in the Dynamex ruling.  California employers who routinely enter into independent contractor arrangements with individuals should promptly and carefully review the status of those workers.

Note: AB5 advanced May 29 with the state Assembly passing the legislation 59-15