Kentucky employers must be careful when classifying each member of its workforce as either an employee or an independent contractor. Hiring an employee, in many cases, subjects to the employer to a wide range of responsibilities under state and federal wage-and-hour laws, such as the Kentucky Wages and Hours Act and the federal Fair Labor Standards Act, which impose minimum requirements for minimum wages, overtime wages, and meal and rest breaks.
WHD Opinion Letter
The Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) is the main federal government agency responsible for enforcing federal wage-and-hour laws. On April 29, WHD issued a news release about its new opinion letter on the issue of whether service providers that use a virtual marketplace for matching with customers are employees or independent contractors of the company that hosts the virtual marketplace platform.
While opinion letters are responses to individual inquiries, the name of the inquirer is kept confidential and the letter provides guidance to others.
Six-factor balancing test
The WHD applied its balancing test that weighs six factors to determine whether the service providers are employees or contractors. The factors help to determine whether the provider is economically dependent on the employer, a characteristic of employment. The WHD looks at each factor and assigns appropriate weight based on the “circumstances of the whole activity.”
The WHD considered the factors:
- Control: The marketplace company does not control the service providers that utilize the marketplace platform to find customers. The company requires no duties and gives flexibility and freedom to the providers to choose how much and what work to take on through the marketplace. The providers also may get customers through other sources. The marketplace company does not supervise or monitor the services rendered by the providers.
- Permanency of relation: The relationship is not permanent or exclusive and the service providers have freedom to stop using the platform any time.
- Investment in facilities, equipment or helpers: The marketplace company provides none of these tools to the service providers in their completion of jobs.
- Required skill, judgment, initiative or foresight: The marketplace provides no training and gives providers complete “managerial discretion.”
- Profit and loss opportunity: Even though the platform provider sets default service prices, providers are free to negotiate pricing with customers. Providers’ productivity and “managerial skill” impact profits directly.
- Integrality: The service providers’ work with customers found through the marketplace is independent from the business of the marketplace provider; they are not integrated businesses.
WHD concluded that the service providers are independent contractors under the FLSA because each of factor leaned toward a finding of economic independence on the part of the service providers from the virtual marketplace company.
While the WHD’s conclusion in this inquiry was rather straightforward, many relationships aren’t so cut and dry, as there are some factors that lean in favor of an employment relationship while other factors lean in favor of a contractor relationship. An experienced employment attorney can walk an employer through this analysis at the outset, saving time, money, and a lot of headaches down the road.