The US Department of Labor has launched an investigation into Scale AI, a San Francisco-based data labeling startup valued at $13.8 billion, to determine its compliance with the Fair Labor Standards Act (FLSA). The investigation, which has been ongoing since at least August 2024, is examining whether the company has violated laws related to unpaid wages, misclassification of employees as contractors, and illegal retaliation against workers.

Scale AI relies heavily on a large workforce of contractors to perform essential AI work, such as labeling images for Big Tech and other organizations. While the company claims to provide "flexible work opportunities in AI" to hundreds of thousands of people, it has faced legal challenges from former workers who allege they were underpaid and misclassified as contractors instead of employees. Two lawsuits were filed against the startup in December 2024 and January 2025, with the plaintiffs claiming they were denied access to protections like overtime pay and sick days.

Scale AI has disputed the lawsuits, stating that it fully complies with the law and works to ensure its pay rates meet or surpass local living wage standards. However, the company's international labor practices have also been called into question, with a 2023 investigation by the Washington Post revealing that workers overseas were subjected to demanding work at low pay as contractors. Scale AI claimed at the time that pay rates were continually improving.

The US Department of Labor has the power to resolve cases administratively, but employers who violate the law may be subject to fines and potentially imprisonment. In addition, the DOL can force employers to reclassify their workers as employees. For example, hotel staffing startup Qwick settled a DOL case in February 2024 by paying $2.1 million and announcing that all California workers performing work using the Qwick app would be classified as employees.

Interestingly, Scale AI appears to have connections to the current presidential administration. The company's CEO and founder, Alexandr Wang, attended Donald Trump's inauguration in January, and Scale AI's former managing director, Michael Kratsios, is President Trump's nominee as the new director of the White House's Office of Science and Technology Policy. Kratsios previously served as the U.S.'s Chief Technology Officer during the first Trump administration and will advise Trump on science and technology matters if confirmed.

Despite the ongoing investigation, Scale AI spokesperson Joe Osborne stated that the company has worked extensively with the DOL to explain its business model and that conversations have been productive. Osborne emphasized that Scale AI brings more "flexible work opportunities in AI" to Americans than any other company and that feedback from its contributors is "overwhelmingly positive."

The outcome of the investigation remains to be seen, but it highlights the ongoing debate surrounding the classification of workers in the gig economy. As the labor landscape continues to evolve, companies like Scale AI will be under increasing scrutiny to ensure they are complying with labor laws and treating their workers fairly.