Despite DOL 'Gig Economy' Opinion Letter, State Wage and Hour Laws That Provide Greater Protections for Workers Still Trump Fair Labor Standards Act

As we reported recently, on April 29, 2019, the U.S. Department of Labor (DOL) issued an opinion letter clarifying its stance on the classification of workers in the gig economy. The letter provided good news to those who contract with workers in the “gig economy,” concluding, based on the facts provided, that with respect to the specific company that solicited the letter, its workers would be properly classified as “independent contractors” and not as “employees” under the Fair Labor Standards Act (FLSA).

For those who read the DOL’s opinion letter as a doomsday scenario for workers and a boon for companies, the reality is that the DOL’s position on gig economy classification may not matter all that much for many in the gig economy. That is because in states that utilize stricter worker classification tests for their wage and hour laws, gig economy workers may still be classified as “employees” under state law without regard to the FLSA.

In those states, employers will have to comply with state wage and hour laws regardless of the DOL’s perspective on worker classifications, which means they will be subject to minimum wages, maximum hours, and overtime requirements.

Of particular importance is the state of California. Not only is California’s large population reason to take note, but a year ago the state upended its judicial test for worker classification and moved to the less-forgiving “ABC” test. In the case at issue, Dynamex Operations West v. Superior Court, the California Supreme Court adopted a test that requires “hiring entities” to establish: “(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, (B) that the worker performs work that is outside the usual course of the hiring entity’s business, and (C) that the worker is customarily engaged in an independently established trade, occupation, or business.” Only when all three elements of the ABC test are met may a company properly classify its workers as independent contractors.

It appears that the ABC test is here to stay in California – just last week the state’s Department of Industrial Relations issued an opinion taking the view that the test applies to claims arising under California wage orders.

The ABC test differs markedly from the approach previously used in California—an approach mirrored in the DOL opinion letter and used in a number of other states. Under the prior approach, California courts looked at the following factors in determining the totality of the circumstances:

• Control of the details of work;
• The extent to which the workers are a regular and integrated part of the business operation;
• The permanence of the work;
• Whether the workers engage in a distinct trade or calling;
• Whether the workers hold themselves out as in business;
• Whether the workers perform typical labor for hire;
• Whether the workers invest more than personal service and hand tools;
• Whether the workers incur an opportunity for profit or loss; and
• Whether the workers have an opportunity to insure themselves against loss of income.

The DOL’s opinion letter similarly focuses on six factors:

1. The nature and degree of the potential employer’s control;
2. The permanency of the worker’s relationship with the potential employer;
3. The amount of the worker’s investment in facilities, equipment, or helpers;
4. The amount of skill, initiative, judgment, or foresight required for the worker’s services;
5. The worker’s opportunities for profit or loss; and
6. The extent of integration of the worker’s services into the potential employer’s business.

Many states apply a similar or identical test to the one applied by the DOL.

However, other states, including New Jersey, Connecticut, and Massachusetts, alongside California, have all adopted the ABC test for determining who is an employee under state wage and hour laws. In those states, workers who otherwise might be classified as independent contractors under the DOL’s interpretation of the FLSA can and, likely will at times, be classified as employees. For businesses, this means taking the time to evaluate classification decisions and the risk of differing interpretations under state and federal law in order to avoid misclassification.