Who is a contractor? Who is an employee? The Department of Labor answers.

The U.S. Department of Labor (DOL) issued an opinion letter (FLSA 2019-6) on April 29, 2019, setting forth its position on when service providers obtaining work from a virtual marketplace company (VMC) are independent contractors for purposes of the Fair Labor Standards Act (FLSA). The FLSA establishes overtime and minimum wage requirements for employees but does not apply to independent contractors. Independent contractors are compensated solely based on the terms of their contract.

There have been numerous challenges by service providers in the virtual marketplace, often referred to as the "gig economy," to their classification by a VMC as independent contractors rather than employees. The stakes can be quite high for VMCs.

Misclassification can result in substantial liability for overtime, minimum wage violations and exposure for benefits that should have been provided but weren't. In the context of the FLSA, the proper classification determination is a function of the economic reality of the relationship between the service provider and the VMC through which the service provider obtains work, with the focus ultimately being on the worker's economic dependence on his or her relationship with the VMC to earn a living.

Key Factors:

The DOL's April 29 opinion letter provides much needed clarity on when service providers in the gig economy are employees or contractors.

The DOL issued the opinion letter in response to an inquiry from a VMC that functioned as a virtual "referral service" to allow those seeking to provide certain services to ply their trade to those consumers seeking to purchase those services.

The DOL concluded that "as a matter of economic reality," the service providers worked for the consumer, not the VMC, and therefore were not employees of the VMC.

The DOL reasoned that the service providers did not "fit into any 'traditional employment paradigm covered by the [FLSA]" and there was no indication of economic dependence between the service providers and the VMC.

In reaching its findings, the DOL considered the following factors:

The service providers had significant flexibility in pursuing work outside of any one VMC; that is, the service providers could seek work through competitors of the VMC or through their own contacts.

The service providers retained the ability to choose if, when, where, how and for whom they would work.

The service providers worked on a project-by-project basis at their choosing.

The service providers could end the relationship with the VMC at any time.

There was no expectation of a permanent or long-term working relationship between the VMC and the service providers.

The service providers had to purchase all necessary resources for their services without reimbursement from the VMC. The DOL did not find it material to the analysis that the service providers relied on the VMC's software (the virtual marketplace) to obtain work.

The service providers had to rely on their own skills and managerial decisions in terms of which jobs or projects to accept, what price to charge and how best to perform the job or project in an efficient manner to ensure they made a profit.

The VMC was not in the business of performing the work performed by the service providers. Rather, the VMC's business was to develop and maintain the virtual marketplace platform. No employees of the VMC performed the work performed by the service providers.

Conclusion and Considerations

The DOL's analysis is case specific and will depend on numerous factors. Although no one factor controls the outcome of the analysis, the ability of the service providers to offer their services through numerous outlets at the same time appears to be of particular significance to the DOL. Under those circumstances, the service provider has the opportunity to exercise significant control over his or her ability to earn a living and is not likely going to be deemed to be economically dependent on any particular VMC.

For more information on how this guidance could apply to you or your organization, the authors or other attorneys in Holland & Knight's Labor, Employment and Benefits Group or Employee Benefits and Executive Compensation Group are available to advise on this issue.

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