New DOL Guidance on Employee Status: News for Uber or Lyft?

Published July 15th, 2015 -  - 07.15.1514

The U.S. Department of Labor has issued a new Interpretation of the Fair Labor Standards Act’s definition of “employ.” The Interpretation will be broadly relevant to disputes over whether workers are correctly classified as employees or independent contractors for purposes of the FLSA (and other statutes, including the Family and Medical Leave Act). Given the intense focus on the “employment” question in the on-demand sector, here is a quick analysis of how the Interpretation may figure in those particular debates.

At the most general level, the Interpretation – issued by the Administrator of the DOL’s Wage and Hour Division – emphasizes what the DOL views as the sweeping breadth of the FLSA’s definition. Thus, the Interpretation states that the FLSA “was specifically designed to ensure as broad of a scope of statutory coverage as possible.”  Now, that can’t quite be true: the FLSA could have covered “everyone who performs work for another,” a definition that would have been substantially broader and would have eliminated the independent contractor category.  The statute doesn’t do that.  But, clearly, “suffer or permit” provides broad coverage, and – more to the point – it’s the Administrator’s intent in this document to stress breadth of coverage.  This comes across clearly in the introductory section, for example, where the Interpretation states flatly, “most workers are employees under the FLSA.”

The Interpretation also cautions that the common law “control” test is too narrow for FLSA purposes, and it reiterates what numerous courts have long held: that employee status under the FLSA is to be determined according to an “economic realities” test.  With respect to the economic realities test, moreover, the Interpretation emphasizes that the test turns on a determination of whether the worker is “economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).”  [NB: The notion of “economic dependence” can be confusing and distracting, for reasons that Judge Easterbrook (among others) has pointed out.  But that discussion is a bit beside the point here.]

The heart of the guidance comes with the discussion of the six factors meant to flesh out whether a worker is dependent or “really in business for him or herself,” and it is here that there may be some news for Uber, Lyft and other on-demand firms. The six factors are well known and long-established; it is the focus and emphases contained in the Interpretation’s discussion of the factors that matter.

“What is the Nature and Degree of the Employer’s Control”  Control is the last factor in the six-prong test, and it’s the last one the Interpretation discusses, but it may be the most relevant for Uber and Lyft.  Why? Because the Interpretation takes up, and then dispenses with, two of the most common views about why on-demand workers ought to be considered independent contractors. First, the Interpretation states that the lack of direct supervision over how work is carried out is “largely insignificant” when workers work offsite. And, second, the Interpretation states that workers’ ability to determine when they work is also “not indicative of independent contractor status.”  Citing the Third Circuit’s DialAmerica Marketing decision, the Interpretation thus concludes that “the fact that the workers could control the hours during which they worked and that they were subject to little direct supervision was unsurprising given that such facts are typical of homeworkers and thus largely insignificant in determining their status.”  In other words, you can be an employee even if you set your own hours and are never directly supervised.  This is a conclusion with unmistakable relevance to the on-demand debate.

“Is the Work an Integral Part of the Employer’s Business?”  Here, the Interpretation states that if the work is “integral” to the putative employer’s business, it is more likely that the worker is economically dependent on the employer and thus more likely that the worker is an employee.  The Interpretation also highlights the fact that courts have held the “integral” factor to be controlling, and that work can be integral within the meaning of the test even if it is performed by “hundreds of thousands of [] workers.”  Are drivers “integral” to Uber and Lyft’s business?  If you accept, as for example Judge Chen did, that Uber and Lyft are transportation companies and not technology companies, then there can be no question on this prong: driving is integral to transporting people in cars.

“Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?”  The Administrator’s emphasis in this section is on distinguishing between a worker’s ability to increase her income by working more hours and a workers’ ability to increase profits through managerial skill. Employees can earn more by working more; independent contractors earn profits (or suffer losses) as a result of managerial skill. The Interpretation then defines managerial skill, by way of example, to include “a worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables.”  These are not the kinds of things that Uber and Lyft drivers seem to do, and so this is factor – under the DOL’s analysis – also points toward employment status for the drivers.

“How Does the Worker’s Relative Investment Compare to the Employer’s Investment?”  The Interpretation’s discussion of this factor is important because of the emphasis it places on distinguishing between absolute levels of investment and comparative levels.  For example, the Administrator highlights a Tenth Circuit decision in which the court found that rig welders’ investment of $40,000 in their trucks did not imply independent contractor status.  Why?  Although the investment is clearly significant in absolute terms, it was small when compared to the employer’s investment of “hundreds of thousands of dollars of equipment at each work site.”  As we know, some Uber and Lyft drivers are investing in new cars. This is clearly a significant investment in absolute terms.  But relative to the investments that Uber and Lyft have made in their businesses, the drivers’ investments will pale.

“Does the Work Performed Require Special Skill and Initiative?”  The first sentence of this section captures it’s relevance: “A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent.” Similar to the managerial skill inquiry, the Interpretation here distinguishes between ordinary skills and those specific to “business initiative.”  There’s not much specificity as to what kind of skills reflect “business initiative,” though the Example in this section makes reference to a carpenter who “markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.”  So, it’s hard to say much about this prong, though there’s not much evidence yet that driving for Uber or Lyft requires marketing, purchasing, or the kind of discretion that defines business initiative.

“Is the Relationship between the Worker and the Employer Permanent or Indefinite?”  Here, the point is that when a work relationship is either permanent or indefinite it is likely to be an employment relationship, whereas independent contracting is typically done on a project basis.  The relationship between Uber and Lyft and its drivers is indefinite.

Of course, this Interpretation does not bind courts.  But an Interpretation like this one can guide courts when they are construing the meaning of “employee,” “employer,” and “employ” in the Fair Labor Standards Act.  The Interpretation also will likely be highly relevant to future enforcement actions the DOL itself takes.  And to the extent that this Interpretation shapes the law governing employment in the on-demand sector, it is likely to increase the momentum toward a determination that companies like Uber and Lyft employ their workers.

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