Labor dept. says workers at a gig company are contractors

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The Labor Department weighed in Monday on a question whose answer could be worth billions of dollars to gig-economy companies, deciding that one company’s workers were contractors, not employees.

As a result, the unidentified company — whose workers, it appears, clean residences — will not have to offer the federal minimum wage or overtime, or pay a share of Social Security taxes. And while the decision officially applies only to that company, legal experts said it was likely to affect a much larger portion of the industry.

The move signals the Trump administration’s approach to the way gig companies, a growing share of the economy, must treat their work force. As companies like Uber and Lyft begin to sell shares to the public, industry officials estimate that requiring them to classify their workers as employees would raise their labor costs by 20 to 30 percent.

“Today, the U.S. Department of Labor offers further insight into the nexus of current labor law and innovations in the job market,” Keith Sonderling, an official in the division that oversees such issues, said in a statement. It is a longstanding policy for the department not to disclose the names of companies receiving such letters.

Under the Obama administration, the Labor Department issued guidance suggesting that gig workers like drivers for Uber and Lyft were likely to be employees, a stand the department rescinded several months after President Trump took office.

“There are few more contentious issues currently than the status of workers operating on platform-type business models,” said David Weil, the administrator who issued the guidance under President Barack Obama and is now dean of the Heller School at Brandeis University.

Unlike the broad guidance the Obama administration issued, the action announced Monday took the form of an “opinion letter” applying only to the company that sought it. But other businesses in the industry tend to parse such letters closely for insight into the department’s approach.

And the letters have more practical legal force than departmental guidance for the company in question. They are often referred to as “get-out-of-jail free cards” because they mean that the Labor Department won’t initiate enforcement proceedings against a company with a favorable letter.

The letter can also provide a powerful defense to the company if workers sue it or initiate arbitration proceedings to resolve allegations of improper classification.

“It is outrageous for the Department of Labor to set policy in such an important area through the device of an opinion letter,” Mr. Weil said. “The Obama administration discontinued opinion letters precisely because they are a capricious tool for settling complicated regulatory questions.”

Kathleen M. Anderson, a partner at the law firm Barnes & Thornburg, who represents employers in misclassification cases, agreed that the department appeared to have broader policy ambitions in devising its letter.

“This doesn’t read like a normal opinion letter,” Ms. Anderson said. “You go back historically to most opinion letters and they are short, defined, with multiple disclaimers. This is expansive — it’s back to the basics, applicable to numerous situations.”

Based on the description in the opinion letter, the company that sought it is evidently not Lyft, which went public in March, or Uber, which plans to go public in the coming weeks.

But the letter could nonetheless have important implications for these companies. Uber, in its filing for a public offering, told prospective investors that having to classify drivers as employees would cause it to “incur significant additional expenses” and “require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition.”

Lyft has made similar statements.

In recent years, both companies and a variety of other gig-economy operations have been aggressive in seeking legislation and regulatory rulings to ensure that their workers are classified as contractors.

There are no precise figures for the number of workers in the nation’s online gig economy, but an estimate based on the methodology of two former Obama administration officials suggests there are one million to five million at any time. Other researchers have produced similar estimates.

In its letter, the department wrote 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 the type of materials they must use. The description suggested that it was referring to a company, like Handy or TaskRabbit, whose platform allows customers to hire cleaners.

Sharon Block, a top official in the Obama Labor Department who is executive director of the Labor and Worklife Program at Harvard Law School, said it was hard to tell from the facts in the Labor Department’s letter whether the workers using the platform in question were truly independent contractors. But she said there seemed to be a stronger case to make for contractor status in that case than for Uber.

Still, she speculated that the finding could be procedurally useful for the department if it later sought to deem Uber drivers to be independent contractors.

“This as a strategy makes sense,” Ms. Block said. “They set the standard in a way that makes it really clear this company gets past it, and in a way that’s going to help them in the harder cases.”

The department could subsequently argue, in effect, that Uber’s business model largely overlaps with the business model of the company in question, and conclude that its workers are contractors as well.

Uber declined to comment, and Lyft said it had no immediate comment. Those companies could ask the department for a similar letter, which could help ease the anxieties of investors about profitability were the department to provide a favorable opinion.

Decisions about employment status typically hinge on several factors, including the extent to which the prospective employer controls how the worker does his or her job, and how central the job the worker performs is to the company’s business.

In explaining its conclusion about the company in question, the department cited the fact that workers had the freedom to choose when, where and how long they worked; the fact that they provided their own equipment; and the fact that the company did not have a mandatory training program.

The department also said the workers were not an integral part of the company’s business because they “do not develop, maintain or otherwise operate” the platform that connects them with customers.

All of these factors would apply to Uber and Lyft drivers as well, though some worker advocates questioned the department’s reasoning in applying them in this case. Catherine Ruckelshaus, general counsel of the National Employment Law Project, said it defied common sense to assert that people who found work through a gig company that dispatched cleaners to customers’ homes weren’t central to its business.

“It’s a narrow parsing of the business of this company,” Ms. Ruckelshaus said. “It’s a huge red flag.”

The department did cite a handful of ways in which the business in question appears to differ somewhat from Lyft or Uber. For example, workers on the platform have some room for negotiating pay, although the company provides default prices, and are permitted to schedule future jobs with the same customer without using the platform.

Ms. Anderson, the management-side lawyer, said that the workers were clearly contractors based on all the factors that the department considered, and that the case of workers on a platform like Uber might be less clear.

But Ms. Ruckelshaus questioned whether the differences between the company and Uber were meaningful in practice. A customer shown a price for a service may be unwilling to pay more if a worker tries to bargain, she said, leaving the cleaner without much more control over pay than an Uber driver.