Mobile On-Demand Technology Platforms are under increasing scrutiny by State and Federal employment agencies to reclassify the independent contractors that use the technology as employees of the technology or service providers. Drivers have filed suit against Uber in California to seeking employment status, and the National Labor Relations Board has been on a hot streak of opinions in favor of employment status over traditional independent contractor treatment. Even the US Department of Labor in July of this year issued a Wage and Hour Division Administrator’s Interpretation providing for a broad definition of “employee” under the Fair Labor Standards Act that indicates an increased expectation of employee over independent contractor classification.

Tension between Independent Contractor and Employee Status is Not New

Real estate agencies, insurance brokers, direct sales organizations and multi-level marketing programs, as well as traditional enterprises looking to fill temporary or variable human resource requirements, have long fought the battle to preserve opportunity for independent contractors and avoid the overwhelming costs associated with employing for such services. The Internal Revenue Service for federal tax purposes, the Department of Labor under the Fair Labor Standards Act, the National Labor Relations Board under the National Labor Relations Act and the corresponding state agencies in most every State, as well as courts under the common law, employ some form of balancing test to distinguish between employees and independent contractors. While the details may vary, each test generally looks at such circumstances as whether there is an independent contractor agreement and whether the individual presented themselves as an independent contractor, were they issued a 1099 or W-2, were they obligated to work certain times or could they choose when to work or not, was their compensation time-based or results or success-based, how much control was exerted by the principal or company, and where they restricted from working outside of the company.

Self-Employment is a Growing Trend

In part due to the lifestyle choices of younger generations, in part due to the state of the economy in general and in part due to the availability of technology solutions to enable entrepreneurship and flexible, self-directed work opportunities, the number of independent contractors and consultants is growing. Self-employment, and specifically the opportunity to set one’s own schedule and reap as much reward as one is willing to work for, is a goal for many people and, for many, is the embodiment of the American Dream. Technologies and services like Uber and other mobile on-demand services have made it possible for individuals to realize this goal. But, at what cost?

Businesses and Service-Technology Providers Beware

From a policy standpoint, governments are concerned that this independent service provider model will lead to great macro-economic cost in the long run, because self-employed individuals are not adequately providing for healthcare, injury and disability and retirement savings, things that traditional employers provide for directly or indirectly through benefits or withholding. Businesses and service-technology providers that take the path of the independent contractor model may find themselves subject to extraordinary cost and distraction, if the employee advocate groups and government agencies are successful in reclassifying independent contractors, including retroactive withholdings, back taxes and obligations to provide and pay-for benefits going forward.

Things for Businesses to keep in mind

1. Do you have employees and independent contractors performing the same tasks?

2. Do your independent contractors provide their own equipment and set their own schedule, or do you?

3. Are you requiring and paying for time-based services or results or success-based services?

4. Do you allow your independent contractors to work for other businesses, including competitors, or are they expected to be loyal to you?

Things for Service-Technology Providers to keep in mind

1. Are you really an independent technology solution used as a tool, or is your technology set-up to, in fact, “be the business?”

2. Do your terms of use or license agreements impose requirements or conditions on performance or loyalty that may constitute “control” over how a licensee or user performs his or her job?

3. Is there more to providing the service than simply using your software?

4. Does your solution cover the entire service transaction, including the pricing and payment process?

If you answered “yes” to any of these questions, in either case, there may be more for you think about. Even if you are “just a tech company,” be sure that you have someone knowledgeable about employment law and independent contractor qualification and classification reviewing your license agreements, terms of use and privacy policies.

About the Firm:

Klemchuk LLP is a litigation, intellectual property, transactional, and international business law firm dedicated to protecting innovation. The firm provides tailored legal solutions to industries including software, technology, retail, real estate, consumer goods, ecommerce, telecommunications, restaurant, energy, media, and professional services. The firm focuses on serving mid-market companies seeking long-term, value-added relationships with a law firm. Learn more about experiencing law practiced differently and our local counsel practice.

The firm publishes Intellectual Property Trends (latest developments in IP law), Conversations with Innovators (interviews with thought leaders), Leaders in Law (insights from law leaders), Culture Counts (thoughts on law firm culture and business), and Legal Insights (in-depth analysis of IP, litigation, and transactional law).