UBERIZATION OF THE WORKPLACE, PART 3: UBERIZATION OF EMPLOYER/EMPLOYEE/INDEPENDENT CONTRACTOR RELATIONSHIPS – VIEW FROM THE DOL

This blog post is part three of a six part series on the impact the Uber business model is having on employment laws across the nation.

It’s probably plain by now that we may be on the precipice of a new era when it comes to workplace relationships.  One in which a new type of worker is recognized.  Or perhaps one in which (*gasp*) arcane methodologies are replaced with workable standards.  Technology is allowing people to better their lives and those of their families in ways we never imagined even twenty years ago.  These advances come with growing pains, as Uber has learned.  Are its drivers employees or independent contractors?  That’s the question that will be decided in the near future, possibly as early as this June in the California litigation.  The Wage and Hour Division of the U.S. Department of Labor (“WHD”) has weighed in on this question both by issuing a new Administrator’s Interpretation on July 15, 2015, and by entering into Memoranda of Understanding with the IRS and various states to combat employee misclassification through coordinated enforcement efforts.

The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.

As the WHD points out in this Interpretation, the FLSA’s definition of employ as “to suffer or permit to work” is extremely broad in an effort to cover as many workers as possible under the FLSA.  The WHD summarized the legal inquiry as follows:

The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself.  If the worker is economically dependent on the employer, then the worker is an employee.  If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.

While I am not sure I can identify anyone who is economically independent from someone they do work for, the WHD has provided further guidance on the application of factors to consider in making this determination.  The test is fact-specific and considers the totality of the circumstances.  Simply labeling the relationship as independent contractor is not enough, and it never has been.  But, sometimes a duck is actually a duck even if someone else wants to call it a chicken.  Independent contractors do exist despite what the WHD says.  Let’s take a look at the economic realities factors which should guide this determination, and consider how they might apply to Uber and other companies using a similar business model.

Is the work an integral part of the employer’s business?

“If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer.”  The focus of this factor is on the employer’s primary business and how the worker fits into the overall picture.  Is Uber a transportation company or a technology company acting like a middleman connecting supply to demand?  Uber allows me to forego looking up cab companies on my phone or in a phone book when I’m in need of one, calling them for a ride, having to carry extra cash to pay for the trip, and relieving me of the burden of doing math to determine an appropriate tip.  Is it providing me with transportation or with a cyber administrative assistant?  Let’s look at the next factor to see if it helps provide more clarity.

Does the worker’s managerial skill affect the worker’s opportunities for profit or loss?

According to the WHD, simply having the ability to work more hours and the amount of work available have nothing to do with managerial skill, so they generally are not helpful to the independent contractor status inquiry.  Under this simplification of the standard, the fact that Uber drivers can work whatever hours they choose because work is available would lead to a conclusion that they are employees.  However, there’s more to consider in looking at this factor.  The worker’s managerial skill, in addition to subjecting him to possible profit or loss, will also impact the availability of future work if he is an independent contractor.  The worker’s decisions to purchase equipment, hire others, advertise, rent space, manage time tables, and attempt to reduce costs also reflect managerial skill associated with an independent contractor.  A reduction in earnings is not the same as a loss under the WHD’s interpretation of the test.

I would posit that this factor is also difficult to apply with precision.  In Uber’s case, some drivers have employees and a fleet (however large or small) of vehicles while others just have their personal vehicle.  But even those driving their own cars have to meet certain standards with regard to those vehicles, and that may require investment.  Some drivers attempt to make the experience more pleasant for the rider by offering water or satellite radio.  These investments may lead to better marks when the ride is scored at its conclusion, and this leads to the ability for future business.  These drivers may also work to reduce costs, for instance, by doing their own vehicle maintenance rather than going to a shop.

That’s not all.  While these drivers like the flexibility of setting their own hours and having work available to them, that does not mean they are not exercising independent judgment.  For one example, a driver can decide to maximize his earning potential by locating his vehicle in a busy part of town during peak hours.  As another example, a driver can expel or refuse to drive someone who is on drugs, is drunk, or appears to be unsafe for him or her to transport.  A driver even can decide whether to accept a rider when the destination is so far out of the way that it will cost the driver more to take the fare than to refuse it.  On the other hand, the drivers (for the most part) are not advertising their services, are not able to solicit additional work, and have their work funneled to them through Uber.  So, the test continues.

How does the worker’s relative investment compare to the employer’s investment?

The WHD begins this section of its Interpretation by stating, “Courts also consider the nature and extent of the relative investments of the employer and the worker in determining whether the worker is an independent contractor in business for him or herself.”  There are a few points to consider with regard to this factor:  (1) a minor investment by the worker suggests an employment relationship; (2) investments that further a business’s capacity to expand, reduce costs, or extend market reach indicate an independent contractor relationship; and, (3) the relative investment by the employer and the worker is considered.

Uber does not own a single car.  At its core, its investment was creating technology and networking to meet a need.  Instead, the Uber driver supplies the vehicle and the time investment, so the monetization of the investments is difficult to compare.  I know nothing about what it takes to create this technology, get it out to the world, and make it work, but I have seen the server for a multi-million dollar technology company sitting on paint cans and duct-taped together.  I also know that vehicles are expensive to buy and maintain.  In their model, both Uber and the driver contribute to the insurance coverage associated with the ride.  After that, each driver’s investment can be different, depending upon the service he or she wishes to provide.  If this is a draw, the balance tips to independent contractor, but the analysis doesn’t end here.

Does the work performed require special skill and initiative?

“A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent.”  In its Interpretation, the WHD provides an example worth reviewing.  It compares two highly skilled carpenters working under two different scenarios.  One carpenter works on a construction site and is told what work to perform where.  He does not get to determine the sequence of work; he does not have to consider from where the next job will come; and he does not have to order materials for his work.  The other carpenter works for various construction companies.  He has to market his skills, order his own materials, and determine which jobs to take.  The first carpenter is an employee, while the latter is most likely an independent contractor.

Many Uber drivers also drive for Lyft, Sidecar, and for taxi companies.  They simply switch the application, or sometimes the phone they are using, when they are deciding which fare to take.  So, while Uber can tell the driver what work is available and where, it cannot require a driver to perform the service.  Thus, the driver may sequence his own work to accommodate his schedule, his desire to earn, and his ability to meet the needs of the rider(s).  Uber does require drivers to maintain certain levels of performance, both in quantity and quality, but that would be true of any business that allows its brand to be used by others.  Let’s look at the next factor.

Is the relationship between the worker and the employer permanent or indefinite?

While this does not appear to be a yes or no question, it really is.  According to the WHD, if the answer to this question is yes, then the worker is most likely an employee.  Let me try to clarify what this factor means.  The typical independent contractor works on a project basis and not necessarily repeatedly for the same employer.  Thus, he does not have a permanent relationship.  Meanwhile, most employees, generally speaking – including ones at-will – begin work based on the premise that what they are doing could last permanently or indefinitely if the parties like each other and what they bring to the relationship.  Drivers do work within some defined parameters for Uber, but they also tend to work for others as well.  Now, they also do work for Uber repeatedly and without established end dates.  The quest for clarity continues.

What is the nature and degree of the employer’s control?

Control has traditionally been recognized as the most important factor in the independent contractor status analysis.  No more, however, as the WHD has shifted emphasis back to the question of economic dependence.  This may be the biggest shot across the bow in the WHD’s Interpretation.  Under the control factor, the worker must control meaningful aspects of the work being performed, and exercise that control, to be considered an independent contractor.  However, the employer’s control must be examined as well.  Here is where the WHD takes its best shot at Uber and its kind:

Technological advances and enhanced monitoring mechanisms may encourage companies to engage workers not as employees yet maintain stringent control over aspects of the workers’ jobs, from their schedules, to the way that they dress, to the tasks that they carry out.  Some employers assert that the control they exercise over workers is due to the nature of their business, regulatory requirements, or the desire to ensure that their customers are satisfied.  However, control exercised over a worker, even for any or all of those reasons, still indicates that the worker is an employee.

The WHD believes that the majority of workers in these scenarios are employees and should be treated as such.  In reality, a jury will weigh these factors and attempt to make this determination.  Of course, that is no straightforward task, but we may see it played out in California this June assuming Uber goes to trial as scheduled.  In my next installment, I will take a more detailed look at that litigation in California.

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Vanessa Towarnicky's primary focus is in the area of labor and employment law. She has been involved in representing clients in various employment cases, including sexual harassment; deliberate intent; age, race, and disability discrimination; wrongful discharge; and various other employment-related torts. She is admitted to various state and federal courts as well as the Third Circuit Court of Appeals and Fourth Circuit Court of Appeals.
 
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