Companies in the sharing economy continue to encounter legal challenges to their business models and employment practices. Just last month, Uber Technologies Inc. settled two closely watched worker classification class actions for as much as $100 million. This Law360 Expert Analysis series explores how the sharing economy could work better, from the points of view of a former chief economist for the U.S. Department of Commerce, the general counsel of a New York City taxicab advocacy organization, an employment lawyer and an employment law professor.
No one can seem to agree on the proper label for the economic model associated with companies like Uber Technologies Inc., Handy Inc. and Lyft Inc. that connect consumers with services through a smartphone app — is it the “sharing economy,” the “gig economy,” the “exploitation economy” or something else? Remarkably though, these companies have coalesced around a label for the workers who provide their services to the public — independent contractors. Superficially, this classification sounds justifiable. The ads for these jobs promise “no office, no boss,” and the freedom to work “when you want.” All you need is a car and a dream to fund.
The reality, of course, is much more complicated. Letting workers work when they want can create problems when there are no workers available for a job or a customer is left out in the cold waiting for a pick up that never arrives. Customers expect certain standards of service and courtesy that may be hard to ensure when there is no boss and no rules governing how workers perform their services.
Recognizing this, some companies have switched from an independent contractor to an employee model. The CEO of Instacart, a company that does your grocery shopping for you, “found ... that our shoppers require training and supervision, which is how you improve the quality of the picking. You can’t do that when they are independent contractors.” Shyp, a delivery service, also transitioned its couriers to W2 employees. Its CEO emphasized that the company decided to reclassify “based on our interest in owning the entire, end-to-end Shyp experience[.]”
Unfortunately, many companies have tried to have it both ways — benefiting from the tax and other cost savings of calling workers independent contractors while at the same time treating them as employees in most other respects. This has resulted in a growing number of lawsuits on behalf of workers claiming that these companies “misclassified” them as independent contractors instead of employees and deprived them of protections under the federal Fair Labor Standards Act and various state wage laws, such as the right to overtime, minimum wage, customer tips and reimbursement of work-related expenses.
The test used to determine whether a worker is an “employee” under the FLSA or an independent contractor outside of its coverage is old and well settled. Because the FLSA’s coverage is so broad, most workers are employees. Courts look beyond the label attached to the worker to the “economic reality” of the relationship to answer this ultimate question: Is the worker in business for herself or dependent on the employer to provide the service? The answer has significant implications for workers and their entitlement not just to overtime and minimum wages, but other important benefits like unemployment insurance, Social Security, workers’ compensation, health care, safe working conditions, and anti-discrimination protections.
Applying the Test — Employee or Independent Contractor?
Last July, the U.S. Department of Labor issued guidance to help employers properly determine whether workers are employees or independent contractors. While the guidance does not break new ground, it affirmed that a true independent contractor is someone who operates a business of her own. The DOL endorsed the set of factors that courts around the country use to answer the ultimate employment question. Although the guidance does not specifically address “gig economy” companies, courts and administrative agencies have begun to apply the factors to these companies. Some have concluded that the workers are employees, not independent contractors, while others have found triable issues that juries, not judges, must decide. Practitioners advising clients (and evaluating potential cases) must consider the following questions to properly assess whether workers are employees or independent contractors.
1. Do the workers provide the service that the company exists to provide?
Practitioners must consider whether the work is integral to a company’s business. For example, there can really be no doubt that drivers are integral to a company in business to provide transportation services and cleaners are integral to a company in business to provide housekeeping services. The Department of Labor’s guidance offers a useful counterexample involving a construction company that frames residential homes. A software developer who contracts with the company to develop software to track bids, schedule the project and crew, and track material orders performs work ancillary to — but not integral to — the company’s business. In contrast, a carpenter is integral to the company’s business because the company cannot frame homes without someone to do the framing. This factor weighs in favor of employment status for many sharing economy workers.
2. Can the worker profit or lose money based upon her managerial skills?
The second key question is whether the worker has the possibility not only to profit from her association with the company, but also to experience loss. This factor is not satisfied simply because a worker can choose to work more hours. What is relevant is whether the worker can use her managerial skill to increase her profit and diminish her risk of loss. If the only way a worker can earn more money is to work more hours in a prescribed way, then the worker is more like an employee than an independent contractor. For example, Uber’s business model prevents drivers from exercising managerial skills on the job in several ways. Drivers can only provide services to riders that Uber refers to them, and cannot obtain or develop their own clientele. Uber prohibits drivers from booking future rides outside of its app and soliciting rides from customers except through its app. Drivers also have no input into the fare that Uber charges customers, and the only way that drivers can earn additional income is by providing more rides through the app. In short, Uber drivers cannot exercise managerial skills, cannot lose money and can only earn additional money by working more hours. The profit and loss factor indicates that Uber drivers — and workers laboring under similar conditions — should be classified as employees.
To evaluate whether the worker can experience profit or loss, ask:
• Can the worker lose money by working through the company?
• Does the worker control more than just how much she works?
• Can the worker market herself, and distinguish herself from other workers contracted through the site? Or does the site present its workers as homogenous?
3. How much has the worker invested relative to the employer?
A worker’s relative investment in the enterprise can indicate whether she is in business for herself or is employed by the service provider. For example, Uber drivers can only engage in commercial transportation using Uber’s licenses and insurance. Only Uber — not its drivers — possesses a business license to provide transportation services to customers. As a result, drivers cannot legally drive their own clientele and depend on Uber’s business investments. Uber also invests significant amounts in its app, marketing, and other necessary business operations. Each driver’s contribution pales in comparison to Uber’s multibillion-dollar infrastructure. As such, the relative investment factor indicates that Uber drivers are not independent contractors.
To evaluate how much the worker has invested relative to the company, ask:
• What equipment does the worker provide? What infrastructure and support network does the company provide?
• Does the business require a particular license? If so, who has this license — the company or the employee?
• Who insures the worker?
• Does the worker market herself to consumers?
• Does the worker provide any of the finance and accounting systems necessary to provide the service?
4. Does the work require special skills and initiative?
This factor focuses on whether the worker uses business skill, judgment or initiative to perform the work. A worker’s technical skills, education or specialization does not affect the independent contractor analysis because many employees have specialized skills but this does not mean they have their own businesses. Most sharing economy workers have little, if any, opportunity to use business judgment in performing their duties. For example, drivers who are fed customers through an app do not require independent initiative. Because they cannot legally have their own customers, these drivers depend on Uber’s initiative in marketing its product and pricing it competitively.
To evaluate whether work requires business skills, judgment, or initiative, ask:
• What business skills does the worker use on the job?
• What kinds of decisions does the worker make on the job?
• Does the company take affirmative steps to prevent the worker from exercising discretion?
5. Is the relationship between the company and the worker temporary or indefinite?
A permanent or indefinite relationship with a company indicates that the worker is an employee. However, the lack of permanence does not automatically mean that a worker is an independent contractor. A worker is more likely to be a true independent contractor when her impermanent status is the result of her own independent business initiative. For example, a contractor in business for herself may negotiate with the company to perform a project for a specific amount of time. In contrast, a short-term worker is still an employee even if she joins the company for a few weeks and then quits, or the company decides to terminate her after a probationary period. Most sharing economy workers can work indefinitely for a company and do not work on a project or contract basis; and most can be discharged at will — a strong indicator of the company’s right to control the work.
To evaluate whether the worker’s relationship with the company is temporary or permanent, ask:
• Does the worker contract to perform services with the company for a set amount of time, or for a specific project?
• Is the worker’s relationship with the company indefinite?
• Who determines the length of time that the worker stays with the company?
• Can the company terminate the worker? Under what circumstances?
6. How much control does the company retain over the worker?
The amount of control that a company retains or exercises is a significant factor under many state laws, but is less important under the FLSA because of the FLSA’s focus on economic reality. Nevertheless, the degree of control that a company exercises over its workers can be highly persuasive in determining whether a worker is an independent contractor or an employee. The fact that a worker can control the hours that she works is less meaningful than the control that the company has the right to exercise when she is on the job. For example, where the company controls who the customers are, how the work is performed, and the amount charged for the work, and can penalize workers for non-compliance, this is strong evidence of an employment relationship.
To evaluate how much control the company has over the worker, ask:
• What does the worker control about her job?
• Does the company tell the worker how to do the job?
• What happens when the worker doesn’t do the job the way that the company tells him to?
• Does the worker have to do a certain number of jobs in a set amount of time?
• Who determines how much the worker gets paid?
• Does the company monitor the worker’s performance? If so, how and how often?
• Does the company instruct the worker about his appearance?
• Does the company require that the worker dress a certain way, or wear a certain T-shirt?
• Does the company set minimum qualifications for workers?
• Does the worker directly transact with customers?
• How does the company select workers?
• Does the company train workers? If so, what kind of training does the company offer and how long does training last?
The Department of Labor’s guidance suggests that many sharing economy companies have misclassified their workers as independent contractors. That these workers set their own hours and work remotely far from an office have little bearing on whether they are true businesspeople under the FLSA and state wage laws. Despite what some commentators have said, these issues are not really new — early U.S. Supreme Court cases interpreting the FLSA held that “home workers” who worked on a piece-rate basis making garments in their homes were employees of the “cooperative” of which they were members. While there are certainly some gray areas, companies that “contract” with large numbers of workers who actually provide the service the company offers to the public should be wary of provoking Department of Labor investigators or litigation. Courts have rejected the argument advanced by some gig economy companies that they are merely technology companies — a neutral platform — that link service providers to customers. Although classifying workers as independent contractors may save some money in the short term, there are long-term benefits of adopting an employee model that are even more important, including building a trained, dedicated workforce, meeting customers’ expectations, and avoiding time-consuming, expensive and risky litigation.
Rachel Bien is a partner in Outten & Golden's New York office and co-chairs the firm's class and collective action practice group. Cara Chomski is an associate in the firm's New York office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 Sign up to Drive with Uber, available at https://get.uber.com/drive/ (last visited Apr. 12, 2016).
 Become a Driver—Lyft, available at https://www.lyft.com/drivers (last visited Apr. 12, 2016).
 Brad Stone, Instacart Reclassifies Part of Its Workforce Amid Regulatory Pressure on Uber, Bloomberg Technology (June 22, 2015), available at http://www.bloomberg.com/news/articles/2015-06-22/instacart-reclassifie… (last visited Apr. 12, 2016).
 A Note from Shyp’s CEO
 See, e.g., Zenelaj v. Handybook, 82 F. Supp. 3d 968 (N.D. Cal. 2015); Otey v. CrowdFlower, Inc., No. 12 Civ. 5524, 2016 WL 304747 (N.D. Cal. Jan. 26, 2016); Loewen v. Lyft, Inc., No. 15 Civ. 1159, 2015 WL 5440729 (N.D. Cal. Sept. 15, 2015); Iglesias v. Homejoy, No. 15 Civ. 1286, 2015 WL 5698741 (N.D. Cal. Sept. 29, 2015); Cobarruviaz v. Maplebear, No. 15 Civ. 697, 2015 WL 6694112 (N.D. Cal. filed Feb. 13, 2015); Singer v. Postmates, No. 4:15-cv-01284 (N.D. Cal. filed Mar. 19, 2015); Levin v. Caviar, No. 3:15-cv-01285 (N.D. Cal. filed Mar. 19, 2015); Taranto v. Washio, No. CGC 15-546584 (Cal. Super. Ct. filed Jun. 29, 2016).
 See Regarding The Employment Status of Uber Drivers, Advisory Opinion of the Commissioner of the Bureau of Labor and Industries of the State of Oregon, at 1 (Oct. 14, 2015), available at http://uberlawsuit.com/Oregon.pdf (last visited Apr. 12, 2016) (“Oregon Advisory Opinion”).
 Administrator’s Interpretation No. 2015-1, U.S. Department of Labor, at 2 (July 15, 2015)
 See Oregon Advisory Opinion; Cal. Unemployment Ins. Appeals Bd., Case No. 5371509 (June 1, 2015) (DeSilvestore, ALJ), available at http://uberlawsuit.com/Uber%20Case%20No.%205371509.pdf (last accessed 4/5/2016) (finding that an Uber driver is an employee eligible to receive unemployment compensation) (“California Unemployment Decision”).
 See, e.g., O’Connor v. Uber Techs., Inc., 82 F. Supp. 3d 1133 (N.D. Cal. 2015); Cotter v. Lyft, Inc., 60 F. Supp. 3d 1067 (N.D. Cal. 2015).
 Oregon Advisory Opinion § 6; California Unemployment Decision at 9; see also Berwick v. Uber Techs., Inc., No. 11-46739, at 8 (Cal. Lab. Comm’n June 3, 2015) (“Defendants are in business to provide transportation services to passengers. Plaintiff did the actual transporting of those passengers. Without drivers such as Plaintiff, Defendants’ business would not exist”), available at http://uberlawsuit.com/Decision.pdf (last visited Apr. 12, 2016).
 AI at 7.
 California Unemployment Appeals Decision at 9.
 Oregon Advisory Opinion §3; California Unemployment Decision at 9.
 California Unemployment Decision at 9.
 Oregon Advisory Opinion § 2; California Unemployment Decision at 9.
 AI at 10.
 Oregon Advisory Opinion § 4; California Unemployment Decision at 9.
 AI at 11-12.
 Id. at 12.
 Oregon Advisory Opinion § 5; California Unemployment Decision at 10.
 AI at 14.
 AI at 14; California Unemployment Decision at 9-10.
 AI at 13.
 See California Unemployment Appeals Decision at 9-10.
 See Goldberg v. Whitaker House Co-op., Inc., 366 U.S. 28 (1961).
 See O’Connor, 82 F. Supp. 3d at 1141-45; Cotter, 60 F. Supp. 3d at 1078.