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.