Experienced Strategists Dedicated to Achieving Clients’ Goals

US Labor Department Issues Guidance Supporting Gig Economy Model

On Behalf of | May 8, 2019 | Employment Issues For Employers |

Companies like Lyft, Uber and the like have been using a new model for delivering their services to customers. Instead of hiring employees, they rely on contract workers — even for their core business. This is often called the “gig economy” model.

Since contractors aren’t entitled to many job-based benefits, this model is much less expensive than the traditional employment model. Not only are contractors not eligible for work-based health insurance and retirement accounts, but they are also ineligible for a variety of important safety-net benefits that many people may assume everyone receives:

  • The minimum wage and overtime pay
  • Workers’ compensation insurance
  • Unemployment insurance
  • Employer’s share of Social Security taxes
  • Reimbursement for business expenses
  • Tax withholding

How much are gig economy companies saving by not providing these benefits? According to a recent article in the New York Times, having to classify their workers as employees would increase the labor costs of these companies by 20-30%.

Labor Department issues opinion letter approving one gig model

The Obama administration’s Labor Department issued guidance indicating that many gig economy workers are actually employees — but the Trump administration’s DOL rescinded that guidance shortly after the president took office.

Now, the Labor Department has issued an opinion letter on the subject. These traditionally anonymize the company involved, so it’s not clear which company the letter directly applies to, although it is a cleaning company. Other companies in the gig economy can use the letter to argue that their workers are properly classified as contractors, if their case is similar enough to the letter.

Although there is a multi-part test used to determine whether a particular worker is legally an employee or a contractor, the main part of the test has traditionally centered around the question of control. If the employer exercises significant control over the details of the work, the worker is more likely to be an employee. If the worker exercises more control over the work details, he or she is more likely to be considered a contractor.

In the case of this unnamed cleaning company, the Labor Department focused on the degree of control. It found that the company “does not impose requirements on how its service providers must perform their work, such as what transportation route to take, the order in which to clean an apartment” or other factors, such as products used. Therefore, it determined that the cleaners were properly classified as contractors.

Now, other companies wishing to hire contract labor will need to consider whether their business models are similar enough to those described in the opinion letter that they can confidently rely on it. Discuss the situation with your employment law attorney.