Earlier today, the U.S. Department of Labor re-issued an Opinion Letter on the issue of independent contractor (IC) status of an on-demand virtual marketplace company (VMC) that refers end-market consumers to service providers who offer delivery, transportation, shopping, moving, cleaning, plumbing, painting, and household services. This Opinion Letter had been issued under the first Trump Administration, but was rescinded by the Biden Administration, and is now restored under the second Trump Administration. Under the Opinion Letter, the Labor Department examined six factors pertinent to IC status under the federal Fair Labor Standards Act (FLSA) and concluded that all six favored IC status. The opinion is not the least bit surprising; one can hardly envision a more solid IC relationship than the one described in the Opinion Letter. Even the Labor Department during the Biden and Obama Administrations would have probably concluded that the service providers in this instance are ICs under the FLSA — although it is likely that those Administrations’ Labor Departments would have found at least one or two of the six factors to have favored employee status. But as noted below, the Opinion Letter has a very limited impact, and does not supplant state IC laws that have different and often stricter tests for IC status than the FLSA. For this reason, the takeaway for most businesses using ICs is that the only prudent course of conduct is to elevate IC status by using a process such as IC Diagnostics (TM) to minimize IC misclassification liability in a sustained and customized manner consistent with the company’s business model.

The Limited Impact of the Opinion Letter

Although many commentators are likely to cite the issuance of today’s Opinion Letter as rather momentous, the U.S. Labor Department does not determine the law under the FLSA; only the courts do. And the new Opinion Letter is not binding on the courts. So, for the most part, it is little more than a reflection of the enforcement policy of the current Trump Administration Labor Department toward this particular type of VMC.

The limited nature of today’s Opinion Letter is also a function of the fact that most IC misclassification cases brought against on-demand businesses have been commenced under state laws, not the FLSA — and as noted above, many state law tests for IC status differ sharply from the FLSA’s test.

A Brief Analysis of the Six Factors Under the Opinion Letter

According to the new Opinion Letter, the six factors indicative of IC status are all “derived from [U.S.] Supreme Court precedent.”

The first factor is the nature and extent of the potential employer’s control. Unlike the focus of the Obama Administration on whether the business controls the manner and means by which the worker performs services, the Opinion Letter focuses on whether the company controls the right of a worker to provide his or her services to competitors of the company or his or her own clients.

The second factor is the permanency of the relationship with the potential employer. Whereas the Biden and Obama Administrations treated a service provider’s continuous relationship with a company as a factor indicating employee status, even if the worker had the right to provide services to its own clients or to a competitor, the Opinion Letter cites favorably to a court decision finding no permanency where the length of the working relationship “was the product of a mutually satisfactory arrangement.”

The third factor relates to the worker’s investment in facilities, equipment, or helpers. The Obama and Biden Administrations compared the monetary investments of the company and the individual worker — a comparison that would almost always support employee status. This Opinion Letter, in contrast, focuses instead on whether the business provides the facilities and equipment to the worker instead of the worker purchasing his or her own tools and equipment.

The fourth factor involves the skill and initiative required for the worker’s services and the fifth factor involves the opportunity for profit and loss. The differences between the prior Democratic Administrations’ position and the position of the first and second Trump Administration are less divergent on these two factors than the others.

The sixth and last factor is the extent of the integration of the worker’s services into the potential employer’s business. The Obama and Biden Administrations generally found this factor favored employee status on nearly every occasion. The re-issued Opinion Letter looks at this factor quite differently. It concludes that the on-demand service providers classified as ICs are not integrated into the company’s referral business because they “do not develop, maintain, or otherwise operate that [on-demand] platform; rather, they use that platform to acquire service opportunities.” The Opinion Letter then refers to the service providers as “consumers” of that on-demand platform. This type of argument seeks to tilt the scales in favor of IC status under the FLSA, but only if the courts concur with the Labor Department’s view of this factor. For those on-demand companies with operations in California that operate an IC business model, this argument may have some additional value.

Takeaways

1. Don’t assume the Labor Department is not serious about enforcing the FLSA.

Although the Opinion Letter strongly favors the use of ICs by on-demand businesses, the public should not presume that the current Labor Department is unwilling to enforce the FLSA when it comes to ICs. The current Labor Department is still enforcing the FLSA, even if not as vigorously as the Biden Administration’s Labor Department had done in the prior four years.

2. Don’t confine your IC analysis to six factors under the FLSA.

The re-issued Opinion Letter only examined six factors, but there are dozens of additional factors that are pertinent to the issue of whether a worker is an IC or an employee under the FLSA. As the Opinion Letter states: “Other factors [beside these six] may also be relevant, and the appropriate weight to give to each factor depends on the facts.” The Letter continues, “the determination of [employee status] does not depend on [these six factors] but rather upon the circumstances of the whole activity.”

3. Don’t think that IC misclassification claims will diminish.

The new Opinion Letter will not deter plaintiffs’ class action lawyers and state workforce agencies from pursuing IC misclassification claims against companies using ICs. These types of class and collective actions remain in the cross-hairs of the plaintiffs’ bar. Likewise, state workforce agencies will continue to focus on companies that they believe are out of compliance with state IC laws.

4. Take steps to enhance your company’s IC compliance.

Those companies which have elevated their level of compliance with IC laws are less likely to be sued in class action lawsuits alleging IC misclassification or subjected to regulatory audits or administrative proceedings regarding the classification of their 1099ers. Many savvy companies have sought to maximize their IC compliance by use of a process such as IC Diagnostics (TM).

That type of process examines dozens of factors to determine the level of IC compliance and then uses that diagnostic information to restructure the IC relationship, if necessary, and re-document it in a state-of-the-art manner to minimize exposure to IC misclassification liability. The process should also re-implement the IC relationship in a manner that carries out in practice the structure and documentation of the IC relationship. A process such as IC Diagnostics can also be used by companies to better defend lawsuits and administrative proceedings alleging IC misclassification.

5. Add an arbitration clause with class action waiver to your IC agreement or update your arbitration clause to take advantage of new case law developments.

The courts are increasingly receptive to arbitration clauses with one notable exception — workers engaged in interstate transportation services — but there are usually workarounds, even for companies with those types of workers. An arbitration clause with class action waiver can minimize the likelihood that an IC misclassification lawsuit will be litigated in a class action in court, if drafted effectively, anticipating arguments by plaintiffs’ class action lawyers that such clauses are unenforceable.