Technology plays a huge role in the burgeoning on-demand economy, which is generally characterized by the use of technology to deliver goods and services to users “on demand.” That demand is satisfied using websites and apps that connect users with transportation, accommodations, food and retail delivery, housecleaning and lawn care services, and more. Workers who deliver the goods and services are often independent contractors who can accept or reject work opportunities (also called “gigs”) based on their own schedule and availability.
Recently, those contractors (and regulatory agencies such as the US Department of Labor) have argued that they should instead be classified as employees under state and federal law. Several high-profile cases involving well known on-demand companies such as Uber and Lyft have put a spotlight on the classification issue.
Liability for misclassifying employees as independent contractors may include:
- Back wages and overtime pay.
- Liquidated damages of two or three times the back pay due.
- Federal and state income, Social Security and unemployment taxes.
- Workers’ compensation costs and penalties.
- Employee benefits, including retirement benefits.
- Reimbursement of the contractor’s business expenses.
- Attorneys’ fees.
Tests for independent contractor classification can vary depending on both the jurisdiction (federal or state law, for example) and the purpose of the classification (such as for overtime pay, income taxes and unemployment benefits).
The federal Fair Labor Standards Act (FLSA) test involves six factors, one or more of which often appear in similar tests under other federal statutes and state law:
- The company’s control over the contractor’s performance.
- The contractor’s managerial skill and its impact on his profit or loss.
- Each party’s respective investment in equipment, materials and labor.
- Whether the work requires a special skill.
- Whether the working relationship is permanent or indefinite.
- Whether the work is an integral part of the company’s business.
The tests for independent contractor status, which can be difficult to apply even in traditional work arrangements, are especially difficult to apply to on-demand work relationships. For example, workers in this economy may have significant autonomy, but the associated technology can provide a high level of indirect and automated oversight of worker locations and performance.
Companies in this space should understand the various independent contractor tests applicable where they do business. Written contracts with independent contractors and the parties’ actual practices should satisfy those tests.