Memo of the Month - Brief Article

MEMORANDUM

Privileged and Confidential Not to Be Distributed Outside of Task Force

To: Remote Staff Task Force

From: John D. Gardiner Date: September 11, 1995

Subject: Summary of Legal Issues and Options Related to Remote Staff

1. Introduction

The key legal issue America Online, Inc. ("AOL") is confronted with in connection with the so-called "remote staff" is whether the remote staff are independent contractors or employees. AOL has classified and attempted to structure the remote staff as independent contractors as have other major online network service companies. An independent contractor relationship precludes the application of IRS regulations and federal and state laws relevant to employers, such as minimum wage and overtime requirements and tax withholding and filings. Notwithstanding AOL's classification and structure, there are elements of an employer/employee relationship between AOL and the remote staff to warrant internal review of the relationship and appropriate action by AOL based on the conclusions of such review.

2. Legal Determination of Status

There is no single legal rule or test for determining whether an individual is an independent contractor or employee. Generally, courts and the IRS have applied the common law "right to control" test to determine whether an employer/employee relationship exists and the "economic realities" standard to determine if a worker is covered by the various federal employment laws.

The "right to control" test focuses on a factual determination of whether the employer controls the principal aspects of the individual's work efforts. Such determination is difficult, but the IRS has identified twenty factors which are indicative of the presence of sufficient control to establish an employer/employee relationship. The factors include:

1) Amount of Instruction/Direction

2) Amount of Training

3) Amount of Integration/Impact of Services

4) Requirement of Personal Service

5) Ability to Hire Assistants

6) Existence of Continuing Relationship

7) Set Hours of Work

8) Full Time Requirement

9) Work Performed on Premises

10) Order of Work Set Potential

11) Oral or Written Reports Required

12) Paid by Hour, Week or Month

13) Paid Travel/Business Expense

14) Furnish Equipment

15) Significant Investment by Worker

16) Worker Profit/Loss

17) Sole Client

18) Services Available to Public

19) Right to Discharge

20) Worker Right to Terminate

The "economic realities" standard focuses primarily on the degree to which the individual is economically dependent on a company, involving a balancing of factors related to each situation in determining the status of a particular relationship. Under this analysis, some courts have focused on the degree of economic dependence of the individual to the company. However, most of the federal courts use a hybrid of the "economic realities" standard that incorporates many of the aspects of the "right of control" test discussed above. For certain federal laws, courts generally have applied the following five-factor test: (1) the degree of control by employer; (2) the extent of relative investment by worker and employer; (3) the degree to which workers opportunity for profit or loss is determined by employer; (4) the skill and initiative in performing job; and (5) the permanency of the relationship.

3. AOL Options

Although AOL has classified and attempted to structure its relationship with remote staff to treat remote staff as independent contractors, in light of the foregoing, the existing structure contains elements an employer/employee relationship, primarily in the area of AOL's role in the control of the remote staff"program". This is not a conclusion that an employer/employee relationship exists. AOL can make a reasonable argument that the remote staff are independent contractors. Nevertheless, it is unclear what a court might conclude and this is not an issue that AOL should let a court determine. In order to control the outcome of the issue and avert potential liability, AOL has three options to choose from:

(1) Restructure its relationship with the remote staff, using the above test elements for guidance, to create a structure more consistent with that of an independent contractor relationship. AOL actually has been heading in this direction in recent years, but the control elements may still persist. The restructuring would cause AOL to lose elements of control that may be necessary to coordinate monitoring of the AOL service.

(2) Outsource the remote staff services to a third party that would either "hire" the remote staff of use its own staff. In this case, AOL could require services and service levels from the third party and control the services accordingly. The third party would have to deal with hiring, managing and operating its business and its employees. The outsourcing must be to a third party because outsourcing it to a "shell" subsidiary would probably not change AOL's potential liability. AOL could consider joining other online network service companies to establish a joint venture that would service the most if not the entire industry.