BU 217 Unit 4 employment law scenario example

Twenty-Two Cleaners Called Contractors: A Worker Classification Scenario Under Federal Law and California's ABC Test, Then Judged Ethically

Student Name

Business, Herzing University

BU 217: Business Ethics and the Legal Environment

Instructor Name

February 5, 2026

Twenty-Two Cleaners Called Contractors: A Worker Classification Scenario Under Federal Law and California's ABC Test, Then Judged Ethically

The Facts and the Working Relationship

Sparrow Clean is a composite home-cleaning startup in San Diego, California. It books cleanings through its app, sets the price customers pay, assigns jobs to cleaners, supplies cleaning products and branded shirts, sets the checklist each cleaning must follow, collects customer ratings, and removes cleaners from the app if their ratings fall below 4.5. Its 22 cleaners choose which days they are available and may decline a job, but a cleaner who declines three jobs in a week is shown fewer jobs the following week. Sparrow classifies all 22 as independent contractors under a signed contractor agreement, pays them a set amount per cleaning, and does not withhold taxes, pay overtime, or provide workers' compensation or unemployment insurance coverage. No handbook applies, because Sparrow treats the cleaners as outside its workforce. The question is whether they are employees.

Legal Analysis: Federal Law

Rule and source. Under the federal Fair Labor Standards Act, whether a worker is an employee depends on the economic reality of the relationship: whether the worker is economically dependent on the business or is in business for themselves. The Department of Labor's 2024 regulation sets out six factors: opportunity for profit or loss depending on managerial skill; investments by the worker and the business; permanence of the relationship; the nature and degree of control; whether the work is integral to the business; and skill and initiative (29 C.F.R. § 795.110). In May 2025 the department told its investigators to stop applying the 2024 regulation in its own enforcement and to use its earlier guidance, which relies on similar economic reality factors, while the regulation remains available in private lawsuits (U.S. Department of Labor, Wage and Hour Division [WHD], 2025).

Facts tested against each factor. Profit or loss: cleaners cannot raise prices, choose customers or grow a business; they earn only by working more jobs. Investment: Sparrow supplies products, the app and marketing; the cleaners invest little beyond transportation. Permanence: most cleaners work for Sparrow week after week. Control: Sparrow sets prices, assigns work, dictates the checklist and uniform, and removes cleaners by rating. Integral: cleaning homes is Sparrow's business. Skill and initiative: the work requires skill, but not the business initiative of an independent operator.

Conclusion on federal law: every factor points toward employee status. Under either the 2024 regulation or the older guidance, the cleaners are very likely employees under federal law.

Legal Analysis: California Adds a Stricter Test

California law sets a higher bar for treating workers as contractors. A worker is presumed to be an employee unless the hiring business shows all three parts of the ABC test: (A) the worker is free from the business's control and direction in performing the work; (B) the work is outside the usual course of the business; and (C) the worker is customarily engaged in an independently established trade or business of the same kind. The test is codified at Cal. Lab. Code § 2775. The test was adopted by the California Supreme Court (Dynamex Operations West, Inc. v. Superior Court, 2018) and then written into statute.

Facts tested: Part A fails because Sparrow controls prices, assignments, methods and removal. Part B fails most clearly: a cleaning company's cleaners do exactly what the company is in business to do. Part C is doubtful at best; few of the cleaners have their own cleaning businesses. Conclusion: under California law, the cleaners are employees. Failing any one part is enough.

Conclusion on Legality

Sparrow's classification is very likely unlawful under federal law and almost certainly unlawful under California law. Sparrow is exposed to back pay for any minimum wage and overtime shortfalls, to unpaid payroll taxes, and to claims for workers' compensation and unemployment coverage it did not provide.

Ethical Analysis

The legal answer settles what Sparrow must do. The ethical question is whether the practice was defensible even before a court reached it, and what the company owes the cleaners now.

Fairness. Classifying the cleaners as contractors moved costs and risks from Sparrow to the cleaners: payroll taxes, the risk of injury without workers' compensation, and the loss of income without unemployment insurance. The cleaners did not bargain for that shift; they accepted an agreement drafted by a company that controlled their work as an employer would. A rule of "control workers like employees but pay them like contractors" is not one the cleaners would accept if they had equal bargaining power, which is the test fairness asks of it.

Honesty. The contractor agreement describes a relationship that does not exist. Calling someone independent while controlling their prices, methods and removal is a label chosen for its cost advantage, not its accuracy. Ethical business practice requires describing relationships truthfully, especially to people with less power to question the description (Crane et al., 2019).

Conclusion on ethics: the practice was unfair and misleading independent of its legality. Sparrow should reclassify the cleaners as employees and, beyond what the law strictly requires, work with them to correct past shortfalls rather than waiting for claims.

What Reclassification Would Involve

The practical path matters, because the ethical conclusion is only useful if the company can act on it. Reclassifying 22 cleaners means registering them for payroll withholding, obtaining workers' compensation coverage, contributing to state unemployment insurance and disability insurance, and tracking hours so that overtime is paid for any week over 40 hours or, under California rules, any day over eight. It also means reviewing the past: Sparrow should estimate what each cleaner would have earned as an employee, including any overtime and the employer's share of payroll taxes the cleaners paid themselves as self-employed workers, and consider paying the difference. The costs are real. At an average of 30 hours a week, employer payroll taxes and insurance could add roughly 15% to 20% to labor costs. But the company's prices were set on the assumption that it would not bear those costs, and that assumption was the problem. A business model that works only if its workers carry the employer's legal obligations is not a sound model, legally or ethically, and it would face the same exposure the day any one cleaner filed a claim.

References

Cal. Lab. Code § 2775 (2025).

Crane, A., Matten, D., Glozer, S., & Spence, L. J. (2019). Business ethics: Managing corporate citizenship and sustainability in the age of globalization (5th ed.). Oxford University Press.

Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018).

Economic reality test to determine economic dependence, 29 C.F.R. § 795.110 (2025).

U.S. Department of Labor, Wage and Hour Division. (2025). Field Assistance Bulletin No. 2025-1: Enforcement policy for determining employee or independent contractor status under the FLSA. https://www.dol.gov/sites/dolgov/files/WHD/fab/fab2025-1.pdf