Are Your Digital Workers Violating Labor Laws?

Does your business have people working remotely?

Do you classify these workers as employees or independent contractors?

If you consider them to be independent contractors, recent guidance from the Department of Labor suggests that you are violating Federal labor laws.

The digital revolution has created new opportunities for businesses and workers.  Individuals no longer have to be physically present in an office building in order to provide services.  He/she can work remotely, sending e-mails, Skyping with colleagues, and sharing documents via Dropbox all from the comfort of his/her home.

As a result of this new working arrangement, many businesses have classified these individuals, for labor and employment purposes, as independent contractors.  Some of the factors that businesses consider when making this determination include the fact that the individual chooses what time to work, uses his/her personal computer or smartphone to work, and decides how much time to work.  Classifying individuals as independent contractors can be a benefit to a business because it allows the business to avoid paying the Federal minimum wage and overtime requirements, which are mandated by the Fair Labor Standards Act, as well as other costs such as health insurance and payroll taxes.

However, last month the Department of Labor (“DOL”) issued guidance that has forced businesses to reconsider how they classify these digital workers.  The DOL guidance explained that companies should apply the new “economic realities” test to determine whether a worker is an employee or independent.  Under this test, the key inquiry is whether a worker is economically dependent on the employer.  The following factors should be considered when making this determination:

  1. The extent to which the work performed is an integral part of the employer’s business;
  2. The worker’s opportunity for profit or loss depending on his or her managerial skill;
  3. The extent of the relative investments of the employer and the worker;
  4. Whether the work performed requires special skills and initiative;
  5. The permanency of the relationship; and
  6. The degree of control exercised or retained by the employer.

No one factor is determinative, but the DOL has said that, under this new test, most workers are employees and not independent contractors.

Several companies, particularly those involved in the “sharing economy,” have encountered legal issues arising out of how they have classified their workers.  Homejoy, an on-demand cleaning start-up that had raised $40 million in investments, shut-down at the end of July as a result of four lawsuits that challenged Homejoy’s classification of its approximately 1,000 workers as contractors and not employees.  Uber, the ride-sharing app with approximately 200,000 drivers working as independent contractors, is dealing with Federal lawsuits filed by drivers, who claim that they are employees.  In June, California’s labor commissioner found that Uber drivers are employees and, as a result, qualify for minimum wage, overtime, and workers’ compensation protections.  Classifying workers as employees could drive up labor costs an estimated 20% to 40%.  This does not necessarily include the penalties that companies may incur for misclassifying individuals as independent contractors.

If you have questions about whether your digital workers are employees or independent contracts, please contact our office at 814-870-7600 or complete this form on our website.