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Hiring Entity:  When are gig workers employees?

Four Government Agencies & Courts:  It depends!

Trying to track the employment status of gig workers will make your head spin. Contractors? Employees? Super heroes?

In the last few weeks, four federal and California state agencies and courts — the US Department of Labor, the National Labor Relations Board, the Ninth Circuit Court of Appeals and the California Labor Commissioner — have all weighed in on the debate. And, the answer is — it depends.

Follow our script below to help make sense of the patchy legal landscape.

From the DOL & the NLRB: Look at the facts (particularly who controls the P&L) and you might have independent contractors.

In April, both the NLRB and the DOL issued guidance offering some sense of relief to companies engaging independent contractors:

  • In an April 16, 2019 Advice Memorandum, the NLRB General Counsel’s Office issued an advice memo concluding that drivers for a ride-sharing company are independent contractors not employees based, in part, on the drivers’ control over their earnings.
  • Similarly, in its April 29, 2019 Opinion Letter, the DOL took the position that gig workers (service providers) at a virtual marketplace company are independent contractors (not employees), in part because they had control over the “major determinants of profit or loss.”

Although the DOL and the NLRB came to the same conclusion, the specific facts of each case, and the agencies’ approach to the facts are so different that the results engender uncertainty for employers, rather than clarity. Let’s take a closer look:

DOL: Gig workers are independent contractors if they pass the Wage and Hour Division’s six-factor test.

To reach its conclusion that the service providers for a virtual marketplace company are independent contractors, the DOL applied a six-factor test, focusing on three factors in particular: (1) company control, (2) the extent of integration of the worker’s services in into the potential employer’s business and (3) the worker’s opportunity for profit and loss. Under the facts before it, all of these factors weighed in favor of independent contractor status.

  1. The Nature and Degree of the Potential Employer’s Control

The control a company exerts — or rather, doesn’t exert, over its gig workers is key. Here, the company did not set a work quota or a firm schedule for the service providers; it did not dictate how the work was to be performed; and it allowed the workers the freedom to take jobs offered by competitors. The Opinion Letter noted that while the service providers can work full-time for the virtual marketplace, most choose not to, perhaps indicating they are pursuing other jobs.

  1. Integration with the Engaging Entity’s Business

Is the work performed by the contractors the “primary purpose” of the company? Here, the DOL notably characterized the virtual marketplace company as a “referral business” whose primary purpose is in creating service opportunities, and the service providers are themselves consumers of those opportunities. Once a client and provider connect, the company’s operations “effectively terminate.”

  1. The Provider’s Opportunity for Profit and Loss

Can the service provider receive additional compensation based on their initiative, judgment or foresight? Do they have flexibility to renegotiate compensation? Here, the DOL found that the providers had entrepreneurial-like control over their compensation. The engaging entity not only allowed them to work for competitors at any time and pursue their own clients at any time, it also allowed them to continually negotiate better rates throughout the business relationship.

NLRB: Gig workers are independent contractors if they pass OUR test.

The General Counsel’s Office concluded that certain ride-share drivers are independent contractors rather than employees with rights under the National Labor Relations Act (NLRA). Only workers meeting the legal definition of “employee” may be entitled to minimum wages and overtime pay under federal law — the same is not true for independent contractors.

Analyzing the Common Law Factors Through The “Prism of Entrepreneurialism”

The Board applied the ten-factor common-law agency test recently outlined in SuperShuttle (read more here) to determine employment status. In the context of the share-ride and taxicab industries, the Board explained that it gives particular weight to two of the ten factors: (1) the extent to which the company can control how the work is performed and (2) the relationship between the company’s compensation and the amount of fares collected.

Beyond these two significant factors, the Board also emphasized entrepreneurial opportunity:

[A]an important animating principle by which to evaluate those [ten] factors … is whether the position presents the opportunities and risks inherent in entrepreneurialism…[W]here the common-law factors, considered together, demonstrate that the workers in question are afforded significant entrepreneurial opportunity, [the Board] will likely find independent-contractor status.

In its analysis, the Board highlighted these facts:

RE Company Control

  • Drivers had “unfettered freedom” to set their own schedules;
  • Drivers controlled their work locations by choosing where to log into the App;
  • Drivers could, and often did, work for competitors.

RE Compensation

  • The company “amplified entrepreneurial opportunity” through variable fare pricing and promotions;
  • Drivers had “unlimited freedom” to look elsewhere for better earnings;
  • With these facts, “the absence of a flat fee” actually increased entrepreneurial opportunity, since this made it easier for drivers to take advantage of the unlimited freedom they had to work for competitors or pursue other ventures.

In total, the Board concluded that while several factors pointed toward employee status (e.g. drivers did not have a special skill or experience), “the strength of the evidence supporting independent-contractor status overwhelms those factors.”

Share Drivers in the Gig Economy Can’t Unionize

By determining that the drivers are not employees covered under the NLRA, the General Counsel’s memorandum strikes a blow to union organizing efforts in the ride share industry. Some commentators are suggesting that the Advice Memorandum may not have long-term value as a precedent since it could be reversed by a future general counsel. However, for now, it indicates how the NLRB’s regional director will apply federal law.

California: Gig workers just might be employees in the Golden State.

Unlike the DOL and the NLRB, the Golden State is taking a more protective view of gig workers by adopting a legal test creating a high bar to independent contractor status. To read more about last year’s landmark Dynamex decision, click here.

Tldr: Under Dynamex‘s ABC test, the burden is on the hiring entity to prove workers are independent contractors. To meet this burden, the hiring entity must establish ALL of the following: (A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work; (B) the worker performs work outside the usual course of the hiring entity’s business; and (C) the worker is engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The Ninth Circuit Finds Dynamex Applies Retroactively

On May 2, the Ninth Circuit ruled Dynamex’s ABC test applies retroactively (read more here). The difficulty with this ruling is that now companies can be liable for misclassification under the ABC test going back 4 years (meaning companies can be held responsible for conduct that occurred before the ABC test even existed!).

Labor Commissioner Expands Application of the ABC Test

On May 3, the California Labor Commissioner issued an Opinion Letter expanding the application of the ABC test to other contexts. Thus, according to the Division of Labor Standards Enforcement (DLSE), California’s wage and hour enforcement agency, the challenging test now applies not only to application of the IWC wage orders, but also to any Labor Code claims (e.g. reimbursement claims under section 2802 and waiting time penalties under section 203).

You: So, what is a company engaging service providers to do??

Us:   Well . . . stayed tuned and up to date with the changing script, and consider adding arbitration provisions to your contracts with service providers.

Given the current legal landscape, companies engaging independent contractors and other non-employee workers should take advantage of the employer-friendly arbitration landscape and make sure they have in place best practices arbitration agreements with class action waivers.

Class action waivers can significantly limit the company’s potential exposure and make the company an undesirable target for plaintiff’s attorneys. Contact your Baker McKenzie employment lawyer for help implementing litigation mitigation strategies.