Can you be sued by your virtual employees?

If you’re treating your virtual workers like regular staff, but paying them as contractors, you might be setting yourself up for a lawsuit — even if you’re paying your employees in a virtual currency.

Donald Dowling

At least, that’s the opinion of Donald C. Dowling, Jr., partner in the international labor and employment law practice at White & Case.

It doesn’t matter if the work is fun or not, or if its in a game or not, or even if the worker is paid at all — what matters is the commercial benefit to the employer and the working conditions of the employee.

“The law is a very slow beast,” he told Hypergrid Business. “The legal concepts that exist are old-school, old-economy legal concepts. If a person was working, say, in Second Life, and got fired and brought a claim, the legal system would have to wrestle with this in the old ways they have.”

Is it work or is it play?

If a disgruntled employee sues you, the first line of defense you might have is that it was all a game. You were just playing at, say, running a shoe store and they were, say, just playing at working as a shoe sales clerk.

If you ever made money from that shoe store, that’s a big red flag.

“If Mr. Virtual Shoe Store was making money off their activity, then they were very likely working — even if they enjoyed it,” he said.

Say for example if someone volunteered to be a tour guide at Universal Studios, for free, because they loved hanging out there. Universal Studios wouldn’t be able to bring them on without paying them at least a minimum wage, he said.

“I would say that if you’re making money selling virtual shoes, and you’ve got someone on a headset basically marketing for you the way they would in a call center, but you’re not paying them much under the guise that its a game — then you have a legal issue,” said Dowling.

That applies even if you were paying them in a virtual currency, or even not paying them at all.

“You would have the same legal issues if you have unpaid interns,” he said. “Whether the person is enjoying it and doing it voluntarily is not a factor.”

A kid playing World of Warcraft as part of a guild is not an employee of his guild leader. But a worker in China working at a World of Warcraft gold farming operation is definitely an employee, and entited to Chinese minimum wages and benefits, Dowling said. Also, China minimum work age law likey applies, he added.

These two guys may be doing the same exact work – in fact, the Chinese gold farmer may continue to play World of Warcraft after he goes home — but the contexts are very different.

Employee or contractor?

If the courts determine that the shoe clerk was doing real work, then the second line of defense for the employer is to claim them as an independent contractor.

But this defense has been under attack in the US, and in countries around the world, Dowling said. In fact, it can even be tougher on companies that have overseas workers where the cost of fixing these problems can be much higher.

It’s a real risk, not a theoretical one, he added, with independent contractor agreements being attacked in Europe, Latin America, Philippines, Taiwan, and other countries.

In US, if a supposed contractor is ruled an employee, companies are liable for back tax withholdings, Social Security contributions, unemployment and workers compensation insurance, overtime, benefits, and interest and penalties.

Overseas, there are some extra liabilities as well — back vacations and holidays, mandatory benefits particular to the country, severance pay and liability for unfair dismissal, and steep fines.

And if doesn’t matter if a worker signs a contract affirming that they are working as an independent contractors — that holds very little weight with the courts, he said.

Instead, the courts look at the working conditions.

To determine whether a worker should be classified as an employee, courts around the world ask the following questions:

  • Is the worker supervised, or can they do their work as they see fit?
  • Can the worker set their own working hours?
  • Does the worker provide their own supplies?
  • Do they get paid only for the work that they do, or do they get paid vacations or holidays?
  • Does the worker have a business risk related to their work?
  • Does the worker have other paying clients? Or are they working exclusively or full-time just for you?

Say, for example, your virtual shoe clerk doesn’t show up the day they’re supposed to work.

“If they’re fired or punished… that is going to be a tough case to win,” Dowling said.

The courts are going to look to real-world parallels to decide how they’re going to rule.

Say, a company decided to tell their secretary that she was a contractor, and she agrees and signs the contract.

“We all know that’s not going to fly,” Dowling said. “You have to pay taxes and unemployment and workmans’ compensation.”

If that same company calls in a plumber, however, he’s clearly a contractor. He fixed the leak and he goes. If, say, he said he’s going to fix the leak for $20 and it takes him several hours, so that his final hourly rate winds up below minimum wage — that’s his problem, not yours.

The plumber’s business risk is clear, as well — he himself is responsible for finding customers, for making them happy, for marketing his services. The success or failure of his business is up to him.

Our virtual shoe sales clerk doesn’t fall into that category.

On the plus side, she’s responsible for all her own office supplies — she owns her own computer, and, probably, works from her home. But that one factor, by itself, isn’t enough to deem her an independent contractor, Dowling said.

There are also other issues that individual countries look at. These include whether the worker has your company’s name on their business card, and is listed on your company’s website or organization chart. If the working relationship lasts for more than a few months, this is a red flag in many countries. If the worker gets company-paid training, bonuses, or other benefits, or has to sign a non-compete agreement, that’s another red flag.

An unattended store eliminates the dangers of hiring virtual employees.

Contractor agreements

To be safe, companies must draft contractor agreements that specifically treat them as free agents, Dowling said. That means that they set their own hours, organize their work the way they see fit, and work for other clients. B

And then you have to abide by that agreement in practice. You can’t have your workers sign a contractor agreement — and then turn around and tell them to ignore it and go back to acting like employees again.

“The ultimate analysis looks to the actual relationship,” Dowling said. “Even a perfectly-drafted contract offers no guarantees.”

Another alternative, especially if the contractor falls into a gray area, is to hire them as an employee, either directly or through an agency, and take the hit in extra overhead costs.

After all, even a perfectly happy contract employee can turn vindictive when the contract ends, of if they feel they were treated unfairly, or if they think their employer has been getting rich at their expense.

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Maria Korolov

Maria Korolov is editor and publisher of Hypergrid Business. She has been a journalist for more than twenty years and has worked for the Chicago Tribune, Reuters, and Computerworld and has reported from over a dozen countries, including Russia and China. Follow me on Twitter @MariaKorolov.

10 Responses

  1. @iliveisl says:

    ugh, i read this on my Android phone and now read it on my PC and i still don't understand! i kind of get it but also don't come away able to explain it to anyone (a big issue of the legal system – it's hard to understand and a distinction needs to be made about living in a law-driven society versus a justice-driven society – we currently live in the former)

    so am i an employee of subQuark? some of this sounds like i am (even though i am family and am paid in burritos – that barter system is pretty old)

    i wish i could understand this better =(

    (/me a big fan of Gerry Spence)

  2. Ener —

    Some Mom-and-Pop businesses do hire family members as employees — that way, they can pay them a salary, deduct them from the business expenses, and still keep the money in the family.

    Typically, though, that's when the company is incorporated.

    More frequently, the Mom and Pop are partners in the business, and simply share revenues — or, if they file a single tax return, they don't even have to have a partnership drawn up and simply keep it as a single proprietorship. In the U.S., at least.

    Laws in other countries vary.

    One thing the lawyer told me — which I didn't put in the story — was that there's another consequence of hiring contractors in foreign countries: the government over there might decide that the fact that you have staff there means that you are doing business there — and you need to get a business license and pay taxes!

    And the rules on having a presence in the country and the rules on whether someone is a contractor or an employee are different. Some countries might decide that you're doing business there even if you don't have employees, and just have contractors.

    All it takes is a single disgruntled worker or whistleblower to report you to the local authorities, and they might decide you're a rich American (or Canadian) company taking advantage of their poor workers — and take you to the cleaners!

    The lesson is — if you're making a lot of money, set up an LLC or some other corporate structure to protect your personal assets from these kind of liabilities. And if you're hiring folks from a foreign countries, check with someone about the employment laws over there. What you don't know can bite you in the butt.

  3.' Sarge Misfit says:

    It gets even more twisted when you add locations to the mix. I'm Canadian, had a club in SL, which is US and had European 'employees'. Whose labour laws would apply? There's various arguments for and against each jurisdiction applying.

  4. You could only be sued for virtual currency in a virtual world. LL's disclaimers state that Linden Dollars have no real world value. With that clause, a SecondLife in-world employer can get a in-world employee's compliant thrown out of real court, as there's not a case. You can;t sue a person because your virtual self (not the real you) did something for virtual money (which has no real value). Such a case/complaint would need to be settled within the virtual world, but that takes up money, time, and resources of the virtual world's provider.

  5. Sakkano —

    As the attorney pointed out, even if the currency is play money and the courts decide that the employee wasn't paid AT ALL — that just means they were working for free, and still in violation of the laws.

    In the US, it's illegal to hire people (like interns) to do work that regular employees could do such answering customer questions (online, by Skype, or in-world — they're still answering customer questions), or designing products, etc…

    Anything that you might hire someone to do in Second Life, there's a company or individual out there doing it for pay for real money. Event planning? Check. Building and scripting? Check.

    By hiring an unpaid (or virtually paid) person to do this, you're taking work away from someone who would do it for real, more-than-minimum-wage, money.

  6. One other thing to mention, as of August 30, 1996, court awards are considered taxable income EXCEPT if there was physical harm and/or sickness. If such cases were to go before a real world court, the Lab's statement that "Lindens have no value" coupled up with the fact the award is taxed makes for another problem.

    Personally, I think that it's best to cut your losses rather than sue. And if someone was stupid to continue working for someone after they stopped getting pay or assurances of pay, it's kind of their own fault for wasting their own time.

  7. Sakkano — Or you could avoid getting sued by not telling your underpaid virtual employees who you really are. Which is just douchy, if you're making real money off them.

    In the US right now I believe the only way to pay someone a pittance for their work is to make them a business partner. If you're both sharing the risks — and the potential rewards — of starting a new company, you are expected to work long, unpaid hours for months — or even years — as your business gets off the ground.

    So if you're using virtual employees, to, say, create the next million-dollar breedables craze, do the right thing and make them partners in the venture. It wouldn't be right if you wound up pulling in a million-dollar payday (in real money) while the slaved away for less than minimum wage helping you get there.

    • Actually, there's this thing from Amazon called mTURK that pays pittances to people to do tasks that computers cannot do.

      But I need tocorrect myself. Your article highlights legal issues if a "business" draws Lindens out and has them exchanged for cash. I missed that part, and I feel silly for having missed it. I was under the impression it was a Lindens only thing. That was where I was having a misunderstanding.

      But there would be additionally issues if that were the case, first, as I understood, businesses generally need to be registered as a business, mostly for tax purposes. Otherwise it wouldn't be a hobby. And if that's the case, then the whole "minimum wage" idea wouldn't need to be paid if the money making entity is not a true business. Also, there are even more laws that say that employees that only hire so many people don't need to pay minimum wage, or if said employees work for tips, they don't need to be paid minimum wage either. And what about health insurance since that needs to be offered to employees?

      I'm not saying that establishments should rip off their workers, but I am saying that current laws don't take such things into consideration, and any suit would be shaky. I think people should do the right thing, but there's little ground for a suit to stand on. And it is my thought that Dowling is really only trying to make a quick buck. He seems more unethical if he's not pushing for legislation that the government force businesses in SL to register, that they need to abide my employment laws, and all the wonderful stuff that some with.

  8. Sakkano — I'm not sure what your point about taxes is. If I work for you as an unpaid or underpaid intern, then get mad at you because I wasn't offered a real job at the end, or because the work I did helped the company make a lot of money and I didn't get any of it, and I go to court, and sue, and win, and get a big chunk of change, I'll be happy to pay the taxes on it.

    Well, not super happy — but I'll be happy that I have money to pay taxes on.

    And you can't just unilaterally decide what the value of something is. If I paint a painting, and my ex wants it his share of it in the divorce, I can't just say "it has no value" — especially if other paintings I did brought in bucketfuls of cash. It has to be appraised, or put up for auction. Linden Dollars are regularly traded by third-party exchanges for real money, so someone out there thinks that they're worth something.

    (I personally think it's a bad strategy to invest in a virtual currency — any virtual currency — but that's another story.)

  9. Sakkano just submitted a comment (which isn't showing up for some reason, though it's been moderated) to the effect that there are a bunch of exceptions to the whole minimum wage thing — waitresses, Amazon mTurk, etc… and that a business has to be registered to be a business.

    First of all, you don't have to be registered as a business to do business in the US — you just need to file your Schedule C at the end of the year. That's it. You can open a bank account and file a DBA if you want to be fancy, but the good o' USA makes it super easy to go into business.

    Second, you don't have to be a business to have to comply with hiring laws – as any politician who's hired an illegal nanny has found out.

    If you have a full-time nanny, and you boss her around, you'd better be paying taxes and benefits. If you have an occasional babysitter — who also works for other people — then the babysitter is a contractor and can charge whatever he or she wants. Just like a plumber.

    The various online freelance boards work on an independent contractor system. As attorney Dowling explained, there are a bunch of times when a worker is a contractor, and not an employee, and minimum wage laws don't apply.

    The issue is that employers (whether businesses or individuals, but most of his clients are probably businesses) need to be careful about how they classify their workers and don't accidentally call someone a contractor when they're really an employee.

    Meanwhile, if you're simultaneously trying to argue that Linden Dollars aren't real money — but that your virtual employee is a waitress who gets tips and so minimum wage laws don't apply — I don't think that's going to fly! If you're telling her when and where to work, and you're making money off of her efforts, and you treat her as an employee in many other ways as well, then you've got an employee and you should be forking over all the salary and benefits she's entitled to in your jurisdiction.