Startup companies (particularly those in technology or e-commerce) typically rely on independent contractors to fill key roles in the early stages of development, design, and implementation. But not a few startups we advise also rely on short term, part-time, “gig” workers to make their business model go. These workers are typically paid by the end-customer through the startup’s platform, which facilitates the transaction (usually for a cut). So, are such companies required to pay or guarantee a certain minimum wage to such workers?
Minimum Wage and Arizona Law
NOTE: I am only licensed to practice here in Arizona and, as such, this post deals strictly with the law of Arizona. You should research the law of your own state or consult a qualified lawyer in the state where you are located or conducting business regarding your company’s specific facts and circumstances.
Arizona’s minimum wage statute, A.R.S. 23-363, tells us flat out:
Employers shall pay employees no less than the minimum wage…
First of all, it’s important to note that this statute makes no distinction between full-time, part-time, or temporary employees (your typical “gig” worker, in other words).
Second, you may be thinking to yourself, the statute says “employees”. My guys are not employees! End of story, case closed, right? Well, as with so many things in the law, it is not as clear cut as you might think.
“Employee” under Arizona’s minimum wage law
Under the definitions contained in A.R.S. §23-362, an “employee” means any person who is or was employed by an employer but does not include “any person who is employed by a parent or a sibling, or who is employed performing babysitting services in the employer’s home on a casual basis.”
If you think this sounds like a pretty broad definition, you’d be correct. Maybe the definition of “employer” might help our “gig” startup…
“Employer” under Arizona’s minimum wage law
Under subpart B., “Employer” includes any corporation, proprietorship, partnership, joint venture, limited liability company, trust, association, political subdivision of the state, individual or other entity acting directly or indirectly in the interest of an employer in relation to an employee, but does not include the state of Arizona, the United States, or a small business.
The “Small Business” exception to Arizona’s minimum wage law
How about that “small business” qualifier. That’s got to be the carve-out that will except your “gig” workers, no?
Let’s take a look at how the statute defines it. “Small business” means any corporation, proprietorship, partnership, joint venture, limited liability company, trust, or association that has less than five hundred thousand dollars in gross annual revenue and “that is exempt from having to pay a minimum wage under section 206(a) of title 29 of the United States Code.”
So, at first blush, it seems that the $500,000 gross annual revenue test should include a lot of new businesses. The problem is that last part. It refers to the Section 206(a) of Title 29 of the United States Code, a subsection of the federal Fair Labor Standards Act (FLSA) that requires employers engaged in “commerce” to pay their employees a minimum wage.
This is further reinforced by the definition of “employ” under A.R.S. §23-362 as “to suffer or permit to work”, further adding that whether a person is an independent contractor or an employee “shall be determined according to the standards of the federal fair labor standards act”, but the burden of proof shall be upon the party for whom the work is performed to show independent contractor status by clear and convincing evidence.
Thus, while the revenue threshold seems like it would include many startup (and more than a few established) companies, examination of both the definition of “small business” as well as “employ” under the statute tells us that few Arizona businesses would qualify as exempt from having to pay minimum wage simply by virtue of the revenue amount.
In fact, businesses like barbers and janitors are some of the examples of small businesses that the Industrial Commission of Arizona Labor Department has determined may meet the exemption.
Make sure your startup’s independent contractors are, well, independent contractors
If your startup or e-commerce business’ model revolves around matching potential “gig” workers with end customers, who in turn set or establish the compensation to such workers, we recommend you have solid terms and conditions in place with the gig worker utilizing your platform.
Your agreement with them should clarifying that they, in fact, are independent contractors, responsible for their own hours, payment of taxes, the manner of accomplishing the tasks, can have other clients they service, will be using their own tools or equipment, etc., etc.
Moreover, it is not a bad idea to copy such provisions into your general website or app Terms of Service or -Use, notably in the section dealing with the gig worker as a user or service provider under your platform. However, you should take care to review your agreements carefully to make sure that such provisions are consistent across both.
Finally, here in Arizona at least, have the gig worker complete and sign a “Declaration of Independent Business Status” or “DIBS” with your startup. We’ve discussed the importance of the DIBS for Arizona businesses in an earlier post, but the DIBS language (if done correctly) can offer your company a safe harbor of sorts for your use of independent contractors, helping your businesses prove the existence of the independent contractor relationship if the nature of the relationship is ever called into question.
Sure, that full stack developer or UI consultant you’ve brought in on a contract basis to handle a project for your startup will almost certainly be working for more than minimum wage. But, if your startup’s minimum viable product relies on gig workers then there are some basic steps you should take to help your chances of not being considered an “employer” that is employing a worker subject to Arizona’s minimum wage requirement.
You should understand that the part-time nature of that “gig” worker does not automatically insulate your company from possibly having to pay them minimum wage.
However, as Arizona’s minimum wage laws apply only to the payment of wages to employees, provided your “gig” workers are truly independent contractors, then your startup company will likely fall under the exemption afforded under Arizona law.
Image courtesy of Peter Fazekas via Pexels
Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a startup, technology, and e-commerce law practice advising founders and management teams on company startup, corporate and technology transactions, e-commerce, as well as Internet privacy concerns. The firm serves corporate and individual clients throughout Arizona, the United States, and internationally. Our offices are conveniently located along the Camelback corridor in Phoenix’s financial district. For more information about our Company Startup practice, feel free to reach out using the contact form on the right or call us at (602) 222-5542 to schedule a meeting. Connect with Ben on LinkedIn or Avvo.