APPLICATION OF EMPLOYEE VERSUS INDEPENDENT CONTRACTOR CONCEPTS TO THE GIG ECONOMY. by Neil H. Dishman 1

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1 APPLICATION OF EMPLOYEE VERSUS INDEPENDENT CONTRACTOR CONCEPTS TO THE GIG ECONOMY by Neil H. Dishman 1 I. Introduction The proper classification of workers as employees or independent contractors under federal and state labor laws has important ramifications, as misclassification can expose employers to penalties by the Internal Revenue Service (IRS), the U.S. Department of Labor (DOL), and state agencies that enforce state wage laws and administer unemployment benefits, including liability for unpaid wages and overtime pay. With the emergence of the gig economy, also known as the on-demand or sharing economy, the distinction between an employee and independent contractor has become harder to determine. The gig economy is generally characterized by the use of technology to deliver goods and services to users on demand. Typically, workers in the gig economy enter into formal agreements with on-demand companies to provide services to the company s clients. 2 Prospective clients request services through an Internet-based platform or a smartphone application and the workers then provide the requested services and are compensated for the jobs. 3 Workers in the gig economy are typically classified as independent contractors who can accept or reject job opportunities based on their own schedule and availability. Although the freedom to determine a worker s own schedule is generally indicative of being an independent 1 Neil H. Dishman is a Principal in the Chicago office of Jackson Lewis P.C., a national law firm representing management exclusively in workplace law and related litigation. Mr. Dishman s practice is focused on helping employers prevent and resolve disputes with their employees. He serves as the head of the Chicago office s wagehour practice. Mr. Dishman thanks Kevin R. Gallardo, an associate in the Chicago office of Jackson Lewis P.C., for his assistance in researching and writing this paper. 2 Sarah A. Donovan, David H. Bradley, and Jon O. Shimabukuro, Congressional Research Service, What Does the Gig Economy Mean for Workers?, at 1-2, February 5, Id.

2 contractor, classifying workers in the gig economy is not that simple. Workers in the gig economy may fall into a gray area because, while having the freedom to determine when to work and what assignment to work on, the worker may be subject to significant control by the employer over things such as pay rate, how to interact with customers, or how to perform the job. 4 The DOL has recently issued guidance on classifying workers as employees or independent contractors under the Fair Labor Standards Act (FLSA) the federal statute that regulates minimum wages and overtime pay but has not specifically addressed the gig economy. Further, while litigation has recently arisen over whether workers in the gig economy are employees or independent contractors, most notably involving ride-sharing providers Uber and Lyft, 5 this is an evolving area of the law, as state administrative agencies that have addressed the issue have arrived at opposite conclusions and court cases have left the question open. II. U.S. Department of Labor Regulations In July 2015, the DOL issued an Administrator s Interpretation on the application of the FLSA to determine whether workers are employees or independent contractors. 6 In the Interpretation, the DOL notes that the six-factor economic realities test should be applied to determine if a worker is an employee or an independent contractor under the FLSA and, although no one factor is determinative, the ultimate goal is to determine whether the worker is 4 Kellen Myers and Patricia Nemeth, LegalNews.com Detroit Legal News, On-demand work force: Time for a new worker classification?, November 27, 2015, 5 Sena v. Uber Techs., Inc., No. 2: (D. Ariz.); O Connor, et al. v. Uber Techs., Inc., No. 3: (N.D. Cal.); Cotter, et al. v. Lyft, Inc., No. 3: (N.D. Cal.); Varon v. Uber Techs., Inc., No. 1: (D. Md.); Ogunmokun, et al., v. Uber Techs., Inc., No. 1: (E.D. N.Y.); Dinofa v. Uber Techs., Inc., 2: (E.D. Pa.); Micheletti v. Uber Techs., Inc., No. 5: (W.D. Tex.); Fisher v. Uber Techs., Inc., No. 2: (W.D. Wa.); Yucesoy v. Uber Techs., Inc., No (N.D. Cal.); Frederic, et al. v. Lyft Inc., 8: (M.D. Fla.). 6 U.S. Department of Labor, Administrator s Interpretation No (July 15, 2015) (hereafter DOL Interpretation ). 2

3 economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor). 7 Although the DOL has not issued any regulations or interpretations specific to workers in the gig economy, [r]egardless of the employment context, [the DOL] uses the same analysis to determine whether a worker is an employee or an independent contractor. 8 The economic-realities test looks at six factors. The first factor focuses on the extent to which the service rendered is an integral part of the employer s business. According to the DOL, [i]f the work performed by a worker is integral to the employer s business, it is more likely that the worker is economically dependent on the employer. 9 The focus is whether, considering the nature of the employer s business, the worker performs work that is an essential part of that business. The second factor is the worker s opportunity for profit or loss depending upon his managerial skill. 10 Factors considered include whether the worker is able to make the decision to hire and fire others, purchase materials and equipment, advertise, rent space, and manage time tables and rates of pay, or control his or her overhead costs. 11 However, a worker s ability to work more hours and the amount of work available from the employer do not indicate that the worker is using managerial skills that affect his or her profit or loss. 12 The third factor is the worker s investment in equipment or materials required for his task and focuses on the relative investments of the employer compared to the worker. The more 7 Id. at 2. 8 Sec. Tom Perez, Secretary Perez Answers Your Questions on Employee Misclassification, U.S. Dept. of Labor, July 28, 2015, 9 DOL Interpretation at Id. at Id. at Id. at 7. 3

4 significant the employer s investment compared to the worker s, the more likely there is an employer-employee relationship. 13 Investing in tools and equipment does not necessarily indicate that the worker is an independent contractor, especially if necessary to perform the specific work for the employer. Rather, the worker s investment must be significant in nature and magnitude compared to the employer s investment in its overall business to indicate that the worker is an independent contractor. 14 The fourth factor is whether the service rendered requires a special skill. Specialized skills may indicate that the worker is an independent contractor. 15 However, if the skills required to do the job are developed on the job, this is less probative. 16 The fifth factor is the degree of permanency and duration of the working relationship, whether written work agreements are renewable, and whether the worker must work exclusively for the employer. 17 Permanency or indefiniteness in the worker s relationship with the employer suggests that the worker is an employee. 18 On the other hand, if the worker works on one project for an employer and does not necessarily work continuously or repeatedly for the employer, this may indicate that the worker is an independent contractor. Nonetheless, the lack of permanence or indefiniteness does not automatically mean that the worker is an independent contractor if this is due to the operational characteristics intrinsic to the industry (for example, 13 Id. at Id. 15 Id. at Sec. of Labor v. Lauritzen, 835 F.2d 1529, 1537 (7th Cir. 1987); Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, (11th Cir. 2013). 17 Eberline v. Media Net, L.L.C., No , 2016 U.S. App. LEXIS 1030, at *10-11 (5th Cir. Jan. 21, 2016); Lauritzen, 835 F.2d at 1537; DOL Interpretation at DOL Interpretation at 11. 4

5 seasonal workers) or the worker s own business initiative. 19 Finally, the sixth factor is the nature and degree of the alleged employer s control as to the manner in which the work is performed; this factor focuses on whether the employer can control the manner and direction of work, payment arrangements, supervision and oversight, flexibility of the work schedule, and whether the worker is able to provide services to other entities while working for the employer. 20 The DOL here appears to acknowledge the gig economy, providing that [t]echnological advances and enhanced monitoring mechanisms may encourage companies to engage workers not as employees yet maintain stringent control over aspects of the workers jobs, from their schedules, to the way that they dress, to the tasks that they carry out. 21 Some employers assert that the control that they exercise over workers is due to the nature of their business, regulatory requirements, or the desire to ensure that their customers are satisfied. However, control exercised over a worker, even for any or all of those reasons, still indicates that the worker is an employee. 22 The DOL s interpretation of the economic-realities test is broad; in its view, most workers are employees under the FLSA s broad definitions. 23 III. Litigation Involving Classification of Gig Workers A. Administrative Opinions State administrative agencies have recently addressed the issue of whether workers for Uber and Lyft are employees or independent contractors, but have arrived at different 19 Id. at Id. at 4, 6-5, Id. at Id. at Id. at 15. 5

6 conclusions. In Berwick v. Uber Techs., Inc., et al., the California Labor Commissioner concluded that a former Uber driver was an employee for purposes of the state s worker protection laws, based on the company s control over its drivers. 24 Similarly, the Commissioner of the Oregon Bureau of Labor and Industries issued an Advisory Opinion regarding the employment status of Uber drivers, concluding that the drivers were employees based on the economic-realities test. 25 In contrast, the Florida Department of Economic Opportunity ( DEO ) issued an order finding that two former Uber drivers were independent contractors, based on the agreement that the parties entered into (classifying the drivers as independent contractors) and the actual course of dealing between the parties, as drivers have significant control over the details of their work, including when to work, where to work, which customers to serve, the details of the customer experience, and may decide to work for competing companies when not using Uber s application. 26 Accordingly, the Florida DEO concluded that Uber was just a middleman and the drivers were not its employees. B. Court Opinions Several lawsuits have been filed against Uber and Lyft regarding alleged 24 Case No EK. In particular, the Commissioner believed that the following facts supported employee status: the plaintiff s work was integral to Uber s business; Uber vetted its drivers, required them to undergo background and DMV checks, controlled how they maintained their cars, retained the right to terminate a driver s access to its application if the driver received bad customer ratings, only approved drivers allowed to use its app, and had a non-negotiable service fee; and the plaintiff s only assets were her car and labor. Id. at The case is currently being appealed. Uber Techs. v. Berwick, No. CGC (Cal. Sup. Ct.). 25 Oregon Bureau of Labor and Industries, Advisory Opinion Regarding the Employment Status of Uber Drivers, October 14, 2015, available at: The Commissioner relied on most of the facts that were stated in the Berwick finding. 26 Florida Dept. of Economic Opportunity, Final Order, Docket Nos Ewers, McGillis, Hutton (PP), available at 15.pdf, at 1-2. One of the drivers appealed the decision. McGillis v. Dept. of Economic Opportunity, Case No. 3D (Fla. Ct. of Appeal-Third Dist.). 6

7 misclassification of drivers as independent contractors. 27 Most of these cases are in early stages and involve the issue of whether the drivers have been misclassified under state law. Only the United States District Court for the Northern District of California appears to have directly addressed the issue of whether workers in the gig economy are employees or independent contractors, in two cases Cotter v. Lyft, Inc. and O Conner v. Uber Technologies, Inc. 28 Although both cases involve questions of whether workers were employees under California law (which involves a different test than the FLSA s economic-realities test), the factors that each case evaluates are essentially the same factors as the economic-realities test. However, neither case has definitively resolved the issue. In Cotter, the plaintiffs were former drivers who claimed that Lyft owed them reimbursement for expenses and minimum wage, as they should have been classified as employees rather than independent contractors. 29 Both sides filed cross-motions for summary judgment, with plaintiffs asking the court to find them to be employees, while Lyft asked the court to declare the plaintiffs as independent contractors. The court noted that under California law, if a person performs a service for a company, the person performing the service is generally presumed to be an employee. 30 Once that presumption is met, it is the company s burden to show that the person is not an employee. 31 Under California law, the primary question is whether the company to whom the service is rendered has the right to control the manner and 27 Supra, note Id. 29 3: , March 11, 2015 Order Denying Cross-Motions for Summary Judgment, Docket Entry 94, at Id. at Id. 7

8 details of how the work is performed. 32 In particular, the court determined that several facts supported that the drivers were employees: although drivers enjoyed flexibility regarding when and how often to work, Lyft retained a good deal of control over how its drivers perform their work; Lyft provided Rules of the Road which prohibited drivers from engaging in certain conduct (such as talking on the phone with a passenger present, picking up non-lyft passengers, having other people in the car, and requesting tips); Lyft also reserved the right to penalize or even terminate drivers who did not follow its rules and could bar drivers from its platform for any or no reason. 33 Accordingly, Lyft reserved the right to control. 34 Further, while the parties believed that they were entering into an independent-contractor relationship, the drivers were still an integral part of Lyft s business (as it could not exist without drivers), no special skills were required, providing a car was not a significant investment, and the rates of pay were nonnegotiable. 35 By contrast, several facts supported independent contractor status: drivers had flexibility in when and how often to work, chose what areas in which to accept ride requests, were never required to adhere to any personal appearance standards, had minimal contact with Lyft management, and did not rely on Lyft as their primary source of income. 36 Because the facts could go either way, the court denied both sides motions and determined that the matter 32 Id. at 10. California courts also look to secondary indicia of the nature of a service relationship, which is similar to the economic-realities test and includes: (1) whether the person performing services is engaged in a distinct occupation or business; (2) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (3) the skill required in the particular occupation; (4) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (5) the length of time for which the services are to be performed; (6) the method of payment, whether by the time or by the job; (7) whether or not the work is part of the principal s regular business; and (8) whether or not the parties believe they are creating an employer-employee relationship. Id. at Id. at Id. at Id. 36 Id. at 18. 8

9 had to be resolved by a jury. 37 The case subsequently settled. 38 Similarly, in O Connor, the plaintiffs filed a putative class action on behalf of themselves and other similarly-situated individuals who drove for Uber and claimed that they were Uber s employees under California law. 39 Uber filed a motion for summary judgment arguing that the plaintiffs were independent contractors. The court determined that the drivers were presumptive employees since they provided a service to Uber. 40 The court further determined that there was a dispute over whether Uber had the right to significantly control the manner and means of the plaintiffs transportation services. 41 Uber retained the right to terminate its drivers at will, required its drivers to conduct themselves in a certain way during rides (including rules on how to pick up passengers, how to dress professionally, and what type of music to play in the car), and used customer ratings and feedback to monitor and, if necessary, terminate or discipline its drivers if they received unsatisfactory reviews that caused them to fall below a minimum rating threshold. 42 Further, although the drivers had the freedom to choose their own work schedule, evidence indicated that Uber controlled its drivers while they were on duty for it. No specialized skills were required and the drivers performed a regular and integral part of Uber s business. These factors supported that the drivers could be employees. 43 The court also noted that the drivers provided their own vehicles, which indicated investment of significant capital, but this 37 Id. at Robert Burnson, Eric Newcomer, and Joel Rosenblatt, Lyft Will Pay $12M to Settle California Drivers Claims, Bloomberg BNA, Labor & Employment Law Resource Center, January 27, : , Order Denying Defendant Uber Technologies, Inc. s Motion for Summary Judgment, Docket Entry 251, at Id. at Id. at Id. at Id. at

10 factor was not dispositive. Given that there were disputed factors regarding Uber s level of control over the manner and means of plaintiffs performance, the court denied the motion and determined that the matter must be set for trial. 44 IV. Conclusion As the sparse case law indicates, the classification of gig workers is an evolving area of the law that is still unclear. This area will continue to develop as other lawsuits proceed to dispositive motions or trial. Although the DOL has provided that the same economic-realities test should be applied to the gig economy, many questions remain unanswered about how this will play out in practice. It is important for employers to remain updated on this changing area of the law to avoid any pitfalls of misclassification. 44 Id. at