The legal issues surrounding the independent contractor business model
The on demand economy, which consists primarily of tech startups, allows consumers to conveniently purchase goods and services via an app on their computers, tablets, and smartphones. In addition to being one of the fastest growing types of commerce, delivery speeds are lightning fast due to a large pool of contract workers who are available to provide goods and services around the clock. These workers are flexible enough to numerous jobs per day as a primary source of income, or a few per week as a secondary source. They are classified under most state laws as independent contractors rather than employees, and are able to decide when and where they perform work for these online or app-based companies.
Lawsuits challenging the classification under the Fair Labor Standards Act (FLSA) and state law are common, with plaintiffs seeking significant back wages and liquidated damages. Interest groups for independent workers are growing, and may inspire workers to challenge their current classification status. Just this week, after a recent driver dispute, the California Court of Appeals ruled that an Uber driver is now considered an employee. California is now following the steps Florida took earlier this Spring, stating that these drivers are employees of Uber. The increased efforts of the Department of Labor, IRS, and state agencies to crack down on worker misclassification are also motivating workers.
The Supreme Court supports a totality of the circumstances approach that evaluates the entirety of the economic relationship between the business and the worker. The Department of Labor summarizes those key factors below. Note that no single one is regarded as controlling:
- The extent to which the work performed is an integral part of the employer’s business
- More often than not, a worker is economically dependent on the employer if his or her job is crucial to the employer’s business, and unlikely that worker is in business for himself or herself.
- Whether the worker’s managerial skillsaffect his or her opportunity for profit and loss
- Managerial skill may be characterized by the hiring and supervision of workers, or by investment in equipment. Does the worker implement managerial skills? If so, do those skills affect that worker’s opportunity for both profit and loss?
- The relative investments in facilities and equipment by the worker and the employer
- In order to determine if a person is an independent contractor in business for himself or herself, the worker must make a business investment compared to the employer’s investment (and bear some risk for a loss). If a worker’s investment compares well enough to the employer’s that they appear to share a risk of loss, this indicates that the worker may be an independent contractor. However, a worker’s investment in tools and equipment does not necessarily indicate independent contractor status if they are simply required to perform the job for the employer.
- The worker’s skill and initiative
- Employees and independent contractors can be skilled workers. To indicate possible independent contractor status, the worker’s skills should demonstrate that he or she exercises independent business judgment. In addition, a worker being in open market competition with others would suggest independent contractor status.
The following two factors especially emphasize the difference between an employee and an independent contractor:
- The permanency of the worker’s relationship with the employer
- Permanency in the worker’s relationship with the employer suggests that he or she is an employee, rather than an independent contractor. However, the lack of a permanent relationship with the employer does not necessarily suggest independent contractor status. An impermanent relationship may be due to industry-specific factors, or the fact that an employer regularly uses staffing agencies.
- The nature and degree of control by the employer
- This includes who sets pay amounts and work hours, who determines how the work is performed, and whether the worker is free to work for others and hire help. An independent contractor usually works free from control by the employer or anyone else. This complex factor warrants careful analysis because both employees and independent contractors can have work situations that include minimal control by the employer.
Start-ups that want to grow and prosper need to carefully consider these legal issues. Instead of following the lead of established companies in this market, they need to assess a number of factors, including but not limited to the tasks of their workers, the permanency of the relationships, and the level of control the business will have over these individuals. Failure to do so could result in a lawsuit. After seeing what is happening in California this month, it is becoming apparent that more lawsuits are on the way and there may be a bigger push for the on-demand marketplace to take on employees rather than independent contractors.
Both WGA’s Property and Casualty and Employee Benefits Groups have extensive knowledge on this issue, and can assist companies with navigating the complexities that accompany these laws. Contact WGA for more information on workers compensation programs and to learn more.
About the Author
Ann Mizner McKay is the General Counsel and Senior Vice President at WGA. She manages the legal affairs of the company, and also serves as the Claims Practice Leader for the firm. Ms. McKay has extensive experience and knowledge in various types of risks including technology, healthcare, business service, environmental, energy, life sciences, financial institutions, and other business risks.