Tech Companies Targeted for On-demand Independent Contractors

By Robert Whitman

Apr. 30, 2015

The on demand economy is growing — fast.

This type of commerce, largely driven by tech startups, allows consumers to quickly and easily buy goods and services with their computers, tablets and smartphones. Dinner can be ordered online; a car ride is available through an app; house cleaners can be hired in minutes; and groceries can be ordered without leaving the couch. Snoop Dogg is even getting into the action as an investor in a delivery app for medical marijuana.

The speed of delivery is possible because a fleet — literally or figuratively — of contract workers is available to provide these goods and services 24/7. These workers have the flexibility to accept many jobs per day as a primary source of income, or just a few per week as a secondary source. This model creates a fluid but deep pool of workers who are classified under the law as independent contractors. These workers may freely pick and choose when and where they perform work for these online or app-based companies.

Employers have long faced difficulties classifying workers as independent contractors in more traditional industries. Lawsuits challenging the classification under the Fair Labor Standards Act and state law are common, with plaintiffs seeking significant back wages and liquidated damages.

More recently, there has been a rash of litigation involving unpaid interns, another nontraditional job arrangement that shares many similarities with the independent contractor analysis. Interest groups for independent workers and freelancers are growing in strength and visibility, and these organizations may embolden workers to challenge their classification status. Compounding the risk are the increased efforts of the U.S. Labor Department, Internal Revenue Service, and state agencies to crack downon worker misclassification.Labor 

The first wave of on demand lawsuits has already arrived, with lawsuits filed in California and New York against online or app-based firms that provide car rides, house cleaning and home repair, and personal assistant services.

In short, the on-demand economy appears to be the newest front of wage and hour lawsuits targeting nontraditional and independent employment arrangements.

So how is a business supposed to know if a worker can be designated as an independent contractor? The Supreme Court has never created a bright-line test. Rather, the court supports a totality of the circumstances approach that evaluates the entirety of the economic relationship between the business and the worker. The Labor Department summarizesthose key factors as follows, noting that no single one is controlling:

  1. The extent to which the work performed an integral part of the employer’s business.
  2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss.
  3. The relative investments in facilities and equipment by the worker and the employer.
  4. The worker’s skill and initiative.
  5. The permanency of the worker’s relationship with the employer.
  6. The nature and degree of control by the employer.

The challenge of evaluating independent contractor status in “on demand” companies can be even more difficult. In two recent cases against Uber and Lyft, the companies sought summary judgment on the drivers’ independent contractor status. The judge in the Lyft case evaluated the relevant factors and pointedly noted, “Lyft drivers don’t seem much like employees … [b]ut Lyft drivers don’t seem much like independent contractors either.”

Although the judge in that case did not decide the ultimate issue, his balancing test highlighted the application of these legal standards to “on-demand” jobs. Facts in favor of employee status were: the company retained a good deal of control over drivers’ conduct once they accepted a job; it published guides and FAQs that governed drivers’ behavior and their decision to choose rides, and reserved the right to penalize drivers who did not follow its guidelines; the company could terminate a driver at any time, without cause; and the work performed by the drivers was “wholly integrated” into Lyft’s business.

Facts supporting independent contractor status were: the drivers’ flexibility in deciding when and how often they work, the parties’ mutual belief that they were entering into an independent contractor relationship, and the drivers’ use of their own cars.

These factors led the judge to conclude that only a jury could make the factual determination whether the drivers were properly classified. Barring a pre-trial settlement, these cases are not likely to be resolved for several years.

Given the millions of dollars being invested in on-demand companies and the growth in commercial activity via smartphones and online, the on-demand economy is not just a passing fad. Startups seeking to become the next high-profile player in the on-demand economy need to carefully consider the important legal issues posed by their workforce model.

Rather than follow the lead of the established names in this space and assume that independent contractor status is appropriate, they must evaluate the tasks workers are performing, the permanency of the relationships, and the level of control the business will have over these individuals, among other factors.

Legal departments or counsel of established corporations should similarly evaluate such employment arrangements before rolling out any on-demand services. Failure to do so could be the recipe for a lawsuit, and with litigation comes potential liability for minimum wage, overtime and a myriad of other legal obligations.

Robert S. Whitman is a partner in the Labor & Employment department of Seyfarth Shaw in New York. He can be reached at Adam J. Smiley is an associate in the Labor & Employment department of Seyfarth Shaw in New York. He can be reached at Comment below or email Follow Workforce on Twitter at @workforcenews.

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