Startups, Independent Contractors, and the Risk of Litigation

These days, many startups (Uber probably being the most famous example) make
extensive use of independent contractors in order to provide services “on demand.”
However, when these cutting edge businesses collide with established laws, the
risks can be great.

Both parties can benefit from an independent contractor
arrangement. Workers gain a degree of freedom and flexibility. Businesses can
rapidly adjust the size of their workforces to meet changing demand, and often
find that they save money.

However, misclassifying a worker as an independent
contractor when they really should be considered a traditional employee can
expose your company to litigation. Aside from the expense, litigation can cause
harmful publicity, and make it more difficult to attract investors. Recently,
several startups, including Uber and Lyft, using have been sued for allegedly
misclassifying their workers as independent contractors. One such startup,
Homejoy, which provided on-demand household cleaning services, announced that
it is closing its doors after being sued for misclassification.

The moral of the story? Simply calling your workers
independent contractors does not make them so. A court will look beyond the
title, and examine the nature of the work performed and the relationship
between the worker and the employer. In particular, the degree of control
exerted by the employer has been very persuasive.

The Department of Labor recently weighed in on this issue on
a July 15 memo, emphasizing the need to look at the “big picture.” Critically,
the memo expresses the view that most workers still fall under the traditional
employee classification:

In sum, most workers are employees under the FLSA’s broad
definitions. The very broad definition of employment under the FLSA as “to
suffer or permit to work” and the Act’s intended expansive coverage for workers
must be considered when applying the economic realities factors to determine
whether a worker is an employee or an independent contractor. The factors
should not be analyzed mechanically or in a vacuum, and no single factor,
including control, should be over-emphasized. Instead, each factor should be
considered in light of the ultimate determination of whether the worker is
really in business for him or herself (and thus is an independent contractor)
or is economically dependent on the employer (and thus is its employee). The
factors should be used as guides to answer that ultimate question of economic
dependence. The correct classification of workers as employees or independent
contractors has critical implications for the legal protections that workers
receive, particularly when misclassification occurs in industries employing low
wage workers.

There are still real advantages to using independent
contractors, but make sure you seek qualified legal counsel.  If you have any questions, please contact the business law and employment attorneys at The Vethan Law Firm, P.C. Fixing your problem is our business.