Employment Law Update
November 6, 2014
Whether an individual is classified as an independent contractor or an employee has significant legal implications, because most federal and state employment laws do not apply to independent contractors. Independent contractors often afford companies greater flexibility with their workforce, administrative benefits, and cost savings. However, for a variety of government agencies, misclassification of an employee as an independent contractor can result in billions in lost revenue by virtue of lost opportunities for payroll withholdings, among other things. For example, several years ago, the Internal Revenue Service initiated a project of random audits to identify employees misclassified as independent contractors because of the significant annual costs to the federal government. [See “IRS and Department of Labor Plan Crackdown on Independent Contractor Misclassification: Act Now to Minimize Your Risk.”]
Employee classification continues to be a focus for the current presidential administration and various federal agencies, most recently the National Labor Relations Board (NLRB). On Sept. 30, 2014, the NLRB issued a decision in which it “refined” the test for determining whether individuals performing services for an employer are employees, who are covered by the National Labor Relations Act (NLRA), or independent contractors, who are not. FedEx Home Delivery, 361 NLRB No. 55 (2014). The NLRB’s decision departs from federal courts’ focus on alleged independent contractors’ “entrepreneurial opportunity for gain or loss,” turning instead on whether those individuals are, “in fact, rendering services as part of an independent business.”
FedEx Drivers’ Previous Legal Challenges to Independent Contractor Status
The NLRB has traditionally employed a multifactor test in evaluating whether particular individuals are true independent contractors or are misclassified employees. These factors include, among others:
- The extent of the company’s control over the individual’s work;
- Whether the individual is engaged in a distinct occupation or business;
- Whether the individual’s work is typically performed at the direction of the employer or by a specialist without supervision;
- Whether the individual supplies the work tools and place of work; and
- Whether the work is part of the employer’s regular business.
These factors are not exclusive, and decisions are made on a case-by-case basis, with no one factor being determinative.
In recent years, FedEx drivers filed a wave of federal lawsuits and related legal challenges throughout the country, in which they alleged that the company had misclassified them as independent contractors. In a previous case involving FedEx drivers in Massachusetts, the NLRB took the position that FedEx drivers were employees entitled to collective bargaining rights, based on FedEx’s exercise of control over the drivers’ routes and conduct.
However, in 2009, the U.S. Court of Appeals for the D.C. Circuit reversed the NLRB on that issue and changed the test, finding that the focus of the independent contractor determination should not be FedEx’s right to “control” its drivers, but whether its drivers experienced the “entrepreneurial opportunity for gain or loss” inherent in independent contractor relationships. Finding that Massachusetts FedEx drivers satisfied that standard, the D.C. Circuit held that the drivers were properly classified as independent contractors and were not entitled to collective bargaining rights under the NLRA.
The FedExHomeDelivery Case Rejects Focus on “Entrepreneurial Opportunity”
In 2014, the NLRB again examined the independent contractor status of FedEx drivers, this time from FedEx facilities in Connecticut. The primary issues in this FedEx Home Delivery case were twofold: 1) whether FedEx drivers had the “entrepreneurial opportunity for gain or loss” indicative of an independent contractor relationship; and 2) how much weight “entrepreneurial opportunity” should be given, vis-a-vis the NLRB’s traditional factor test focusing on the right to control.
The NLRB rejected the D.C. Circuit’s exclusive focus on the “entrepreneurial opportunity” standard and found FedEx drivers to be employees, not independent contractors, thus requiring FedEx to bargain with the union certified as the drivers’ representative. The NLRB emphasized that “entrepreneurial opportunity” is just one of many factors to be addressed when assessing whether an individual is an independent contractor or employee. Moreover, the NLRB found that “entrepreneurial opportunity” is not indicative of independent contractor status when those opportunities are more theoretical than real.
The NLRB agreed that FedEx drivers’ contractual right to hire and supervise supplemental drivers was indicative of independent contractor status. However, departing from the D.C. Circuit, the NLRB gave little weight to the drivers’ right to sell, assign, or transfer their routes. The NLRB noted FedEx’s tight control over drivers’ routes and found that only two route sales had ever taken place at the terminal at issue. Similarly, although drivers were theoretically permitted to use their vehicles for other purposes, no driver had ever done so.
Regardless of whether the drivers were provided “entrepreneurial opportunity” by contract, the NLRB concluded that the “lack of pursuit of outside business activity appears to be less a reflection of entrepreneurial choice …and more a matter of the obstacles created by (the drivers’) relationship” with FedEx. In doing so, the NLRB rejected “entrepreneurial opportunity” as the proper standard in evaluating independent contractors, instead adding a new factor to its traditional factor test which evaluates “whether the evidence tends to show that the individual is, in fact, rendering services as an independent business.”
Considerations for Employers
While the NLRB characterized the FedEx Home Delivery decision as “restating and refining” the test for determining whether an individual is an employee or an independent contractor, it essentially eliminated “entrepreneurial opportunity for gain or loss” as a determinative factor, focusing less on “opportunities” and more on the realities of the parties’ business relationship. Ultimately, this could result in an increased reach of the NLRA to cover many service providers that are currently classified as independent contractors based on contractual relationships, but who do not, in reality, render services as a business independent of the alleged employer.
Although many employers experience benefits from relationships with independent contractors, the federal government’s continued focus on independent contractor misclassification issues, coupled with the NLRB’s expanding reach to cover additional service providers, emphasizes the need for employers to ensure that independent contractors are correctly classified.
The Employment Law Alert is published as a service to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation.