Independent Contractors

Do Sharing Economy Cases Show that the FLSA is Outdated? Yes!

Over at the Workplace Prof Blog, Professor Sachin Pandya (Connecticut) asks whether sharing economy cases show that employment laws–in particular the FLSA–are outdated.  Without commenting on any one case or situation, the answer to me is obvious: Yes!  Recent cases involving high profile “sharing economy” pioneers are good reminders about how difficult it is to apply laws drafted in the mid-20th century to the new 21st century business models that have sprung from the advance of technology. As one judge wrote, many of the factors used in the Fair Labor Standards Act’s (FLSA) employee/contractor test “appear outmoded” in the sharing economy context.

Unsurprisingly, sharing economy employees who find job assignments via apps resemble contractors in some ways because, for example, they can choose their work hours and their jobs. In other ways, these workers resemble employees because of the manner and degree of control the companies exercise over them.  To properly categorize and protect these workers, the FLSA must recognize a third status: “dependent contractor.

Department of Labor Wage and Hour Division (WHD) Administrator Dr. David Weil’s 15-page Administrator’s Interpretation from earlier this summer (announced in a DOL blog post that contains its own interesting information) stressed the DOL’s view that the FLSA must be viewed expansively to make most workers qualify as employees under the FLSA. The DOL does clearly outline its position that:

most workers are employees under the FLSA’s broad definitions . . .  The very broad definition of employment under the FLSA as ‘to suffer or permit to work’ and the act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor.

The Administrator’s Interpretation shifts away from “economic realities” to something different: economic dependence.  Indeed, the WHD used the phrase “economically dependent” 21 separate times in the Interpretation. The document repeatedly steers stakeholders and courts away from the “mechanical application” of economic realities factors and toward this focus on the economic dependence of the worker. Dr. Weil’s blog post drives that point home:

Ultimately, the goal is not simply to tally which factors are met, but to determine 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).

The employee/independent contractor dichotomy impacts more than just those people you traditionally think of as contractors and extends into the “sharing” part of the sharing economy.  To use the example that I discussed at a labor and employment law conference earlier this month, the WHD’s expansive definition picks up the casual sharing economy user and even users of co-op apps where no for-profit entity or economic activity exists outside of the WHD’s application of a definition.

This all-or-nothing dichotomy is a glaring weakness in the FLSA when compared to similar laws in other countries, which is why I have argued that we need a third category: dependent contractors.

Creating a dependent contractor classification, as in many European countries, is the best of limited available options.  Under the current regulatory dichotomy that strongly favors employee classification, only some of the for-profit parts of the sharing economy would likely survive, albeit with a dramatically different cost structure, killing off most of the benefits of the sharing-driven model in the first place.  The other probable alternative, a Lochner-style substantive due process challenge by contractors and members of sharing cooperatives who object to being forced into employment, is no improvement.  Using economic dependence to label a worker an employee against his or her will does arguably violate substantive due process, at least as applied to contractors who present credible evidence that they have made a voluntary decision to contract.  However, the laissez-faire Lochner regime lacks any limiting principle that would prevent the abuses prevalent during its reign in the early 20th century. Whether because of market failures or the allocation of resources, and whether termed “inequality” or “bargaining power,” in a “free” market Lochner environment, most workers would have to live with terms and conditions of work that society finds unacceptable.

Consequently, the most balanced approach creates a dependent contractor classification, a point I’ll address in more detail next week.

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