Tag Archives: independent contractor

Gig Workers: An Evolving Trend or a Class Action Waiting to Happen?

Contributed by Rebecca Dobbs Bush, June 4, 2019

The workplace is changing: Millennials, Generation Z-ers, and Baby Boomers looking to supplement their retirement income. These individuals are more interested in autonomy and avoiding bad managers, office politics and lengthy, non-productive staff meetings. Plus, the tax-savvy individual knows the economic advantage of having access to traditional business deductions through a Schedule C, rather than being limited to the standard deduction or itemizing as a W-2 employee would be.

Business concept. Isolated on white

More and more businesses also seem to be interested in the advantages of a gig workforce, also called freelancers, subcontractors, contingent workforce, and more. After all, it allows a business to gain access to skills and talent without having to commit to hiring an individual as a full-time employee. According to Deloitte’s 2018 Global Human Capital Trends study, more than 40% of workers in the U.S. are employed in “alternative work arrangements.” These arrangements include contingent, part-time, or gig work.

So, is it a win-win for all involved? The problem is that current employment laws are simply not evolving at the pace required to keep up with this modern-day independent contractor. With this, a minefield is created for the unwary business. 

Under the Obama administration, the DOL had issued broad guidance suggesting that gig workers were likely to be considered “employees.” That guidance was rescinded with the change in administration. Then, on April 29, 2019, the DOL issued an atypical, 10-page opinion letter on the subject. The opinion letter lays out a detailed analysis of all the relevant factors for independent contractor status and then comes to the conclusion that the gig workers at issue are not employees.

For now, if your business is participating in the trend of the gig worker, you want to make sure the relevant factors are met. Those factors and the analysis change depending on which law the issue is being examined under. Some of the more common factors are: control, permanency of the relationship, integrality to business operations, ability to sustain a profit or loss, accountability for operating expenses, etc. In other words, is the individual truly operating as a stand-alone business? 

If you choose to engage gig workers, make sure to avoid these common mistakes:

  • Do not treat the individuals as employees. Do not even use the word “hire.” Instead, you are “engaging” their services, or “contracting” with them. And, commit to the arrangement in writing.
  • Do not be tempted to offer them benefits. Putting them in your health plan or letting them participate in a 401(k) will jeopardize any argument that they are not otherwise an employee. If it walks like a duck, quacks like a duck….
  • Do not make them sign a non-compete agreement. A critical factor in most cases is whether the individual is free to take on work from others or whether they are completely dependent on your business for work. If the individual is subject to a non-compete agreement and effectively being prevented from working for others, you will not win on this factor.

Because of the amount of exposure involved with a misclassification lawsuit, it is worthwhile to have competent employment counsel review your situation and any independent contractor agreement or contracts that you are using to help you make sure it’s being handled in the best possible manner to strengthen the individual’s status as an independent contractor.

UPDATE: Supreme Court Rules For Workers On FAA “Transportation” Exemption

Contributed by Brian Wacker, January 15, 2019 

Last month, this blog discussed New Prime, Inc. v. Oliveira, a then-pending case before the Supreme Court that presented the question of whether arbitration agreements between trucking companies and independent contractor drivers fall within the “transportation” exemption to the Federal Arbitration Act (“FAA”).   

This morning, the Court unanimously ruled in favor of Mr. Oliveira, affirming the First Circuit and holding that his independent contractor agreement with New Prime is a “contract of employment” under the FAA.  The Court disregarded the characterization of his relationship with New Prime as an independent contractor (as opposed to an “employee”) and found that the FAA’s exemption for “contracts of employment” refers to any “agreements to perform work.” Therefore, Mr. Oliveira’s agreement fell within the FAA’s exemption and his claims were not properly subject to compelled arbitration.  

This is a significant victory for workers, especially considering the unanimity of the Court’s decision, authored by one of its more conservative jurists, Justice Gorsuch. Employers with independent contractors in the transportation field should take note: existing arbitration provisions in independent contractor agreements can no longer be used to shield businesses from the risks, expenses and uncertainty of litigation in court.

Use Independent Contractors? DOL Says Almost Everyone Is An Employee Under the FLSA

Contributed by Steven Jados

On July 15, 2015, the U.S. Department of Labor (DOL) issued an Administrator’s Interpretation addressing the distinction between employees and independent contractors in the Fair Labor Standards Act (FLSA).

The DOL has aggressively pursued potential misclassifications of employees as independent contractors in recent years. Indicative of that aggressive approach, the interpretation states that most workers are employees under the FLSA. While that statement is walked-back somewhat in other parts of the interpretation, businesses that rely heavily on independent contractors should take this message to heart and reassess whether their independent contractor relationships will truly survive scrutiny by the DOL and other government agencies. The consequences of independent contractor misclassification may be severe and include liability for unpaid taxes, wages, and other damages and costs.

Much of the interpretation covers old ground, but nevertheless there are several interesting insights. Among them is the interpretation’s discussion on workers who are able to choose how many hours they work in a day or week, or when and where they perform their work. In short, the interpretation states that such freedom should not weigh heavily in favor of an independent contractor relationship if the workers are not exercising managerial skills in a way that affects the workers’ opportunities to realize profits or losses. However, if a worker negotiates the rate at which customers paid for the worker’s services, then that would indicate independent contractor status.Independent contract

The interpretation reiterates that an independent contractor relationship cannot be established by a contract between a business and worker declaring the worker an independent contractor. Instead, the DOL uses a six-factor “economic realities” test in conjunction with the FLSA’s “suffer or permit” standard (which is intended to make the FLSA’s coverage as broad as possible) to analyze whether a worker is an employee or independent contractor. The interpretation phrases those six factors as:

(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.

In the end, the question of whether a worker is an employee or independent contractor will generally boil down to whether a worker is truly “in business for him or herself”—and therefore an independent contractor—or whether the worker is “economically dependent on the employer” and an employee. That said, if your business treats workers who are economically dependent on your business as independent contractors, we strongly recommend seeing advice of counsel to determine if changes can be made to ensure a strong defense against litigation or other enforcement actions by the DOL or the independent contractors themselves.

The ABCs of Independent Contractors and Unemployment Insurance

Contributed by Noah A. Frank

Good news: Unlike employees, an independent contractor (“IC”) is not eligible for unemployment benefits when the work relationship terminates.

Bad news: When a former IC files an unemployment claim (and they sometimes do) or the government disagrees with the IC status (either in approving a claim or performing an audit), whether the IC will be denied benefits often depends on whether the IC:

A. Is free from control and direction; and

B. Performs services outside the usual course of business for the enterprise for which such service was performed; and

C. Is engaged in an independently established trade, occupation, profession, or business.

This “ABC Test” exists in most states, though the elements/sub-elements may vary slightly. Typically, the party seeking IC status has the burden to prove that all three of these elements are satisfied.  Neither an IC agreement nor designation controls.

Worse news:  Administrative agencies (e.g., unemployment agencies, workers’ compensation/industrial commissions, and departments of labor and tax/revenue) may share information with each other regarding independent contractor misclassification.  This may increase the risk of an audit by one agency triggering an audit by others.

Recent Example:

An appellate court applied the ABC Test to IC window washers under a three year unpaid contributions audit, and found them to be employees, affirming an administrative finding of $64,051 in unpaid unemployment contributions plus $35,773 in unpaid interest. L.A. McMahon Bldg. Maint., Inc. v. Dept. Employment Sec., 2015 IL App (1st) 133227 (May 7, 2015).

The court found unpersuasive that the workers: were not exclusive or required to wear a uniform; used their own vehicles and supplies, for which they were not reimbursed; received no training or direction in their work process; advertised their own services; and hired their own helpers and employees.

Instead, the court found that the window washers were employees because their services were central to the business which could not exist without them (e.g., Element B). The company’s “place of business” extended to each location where the workers represented the company’s interests (customer’s homes), especially since the workers carried the company’s price card and invoiced under the company’s name.

Doing it Right:

Properly engaging independent contractors extends beyond an actual contract between the parties (helpful – if you ensure that the IC upholds its end of the bargain).  When using ICs to perform work central to your business (e.g., workers to pick-and-pack in your warehouse, or provide regular services to customers):

  1. Be sure that you have either engaged a separate company providing contract/temporary labor; or
  2. That all three elements of the ABC Test (or relevant statutory test) are fully and completely satisfied; or
  3. Ensure that the IC is a bona fide corporation or limited liability company.

Outside counsel should audit the relationship now to ensure that it is actually “independent” before a worker files a claim with any federal, state, or local administrative agency (triggering anti-retaliation protections!) and/or an agency initiates its own audit.

FedEx Drivers’ Case Delivers Lesson For All Businesses

Contributed by Suzanne S. Newcomb

Last week a federal appeals court ruled FedEx drivers are not independent contractors, but rather employees. The decision prompted many to ask, FedEx drivers are classified as independent contractors? In fact they are. According to the decision, Alexander v. FedEx, drivers provide their own vehicles (which must meet detailed specifications), pay their own operating expenses, determine their own routes, (provided they deliver the assigned packages on time) and sign an operating agreement accepting the independent contractor arrangement.

The FedEx case arose because a group of drivers challenged the independent contractor designation. However, various governmental agencies can and regularly do launch investigations on this issue even when the parties involved are happy with the independent contractor arrangement. The employee verses independent contractor distinction has potentially huge implications for payroll taxes, unemployment, social security, wage rates, overtime, benefits, exposure to liability, and applicability of various employment laws – worker’s compensation, Title VII, ADEA, ADA, FLSA, FMLA, and more.

The IRS, state taxing authorities, unemployment agencies, state and federal departments of labor, and the EEOC and its state and local counterparts all have a stake in whether an individual is an employee or an independent contractor. To complicate matters further, each agency has its own criteria for differentiating between the two, and one agency’s determination is not binding on another. There are no hard-and-fast rules; the IRS alone considers 20 factors.

Though each agency has its own means to determine when an independent contractor is actually an employee, it generally boils down to how much control you retain over the performance of the job. Referencing California law, the Alexander court stated: “The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” In other words, do you oversee the process or simply dictate the end result?

FedEx drivers must wear company uniforms, use company scanners, abide by the company’s appearance, service and safety standards, drive company-approved trucks, and deliver their assigned packages within a specified time window. This, the court concluded, amounts to sufficient control over the manner and means of their work to render them employees despite their written acceptance of independent contractor status.

So, what can you do to protect your business?

  1. Realize the distinction is determined by law, not choice. The parties’ agreement that an individual is an independent contractor – even if in the form of a written contract — does not make it so.
  2. If the individual performs work for your organization exclusively and/or for an extended period, it will likely be difficult to justify an independent contractor relationship.
  3. If the individual is regularly engaged in performing a service for hire and performs that service for others, independent contractor status may be appropriate. If he has formed his own business entity, your chances are likely better.
  4. Involve competent counsel at the on-set; don’t wait until problems arise. It is far more cost effective to address these issues up front than it is to defend an audit or a lawsuit and sort out back taxes, back wages, penalties and fines.

The ‘Big Mac’ is Under Attack: Radical NLRB Labeling the Franchisor as “Joint Employer” of Franchisee Employees

Contributed by Caryl Flannery and Jeffrey Risch

Franchisors across the U.S. may be surprised to learn that the general counsel for the National Labor Relations Board has taken the position that they are likely joint employers with their franchisees under the National Labor Relations Act (NLRA).  The announcement came in the context of finding joint liability for alleged unfair labor practices, but the true impact and purpose is to open the door to unionization of all employees of local franchises as a single bargaining unit of the corporate franchisor.

Since 2012, the NLRB has received 181 complaints from employees of individual McDonald’s franchises claiming that their rights were violated when they were disciplined or fired for participating in union-organized employee protests. On July 29, 2014, the general counsel released a statement saying that his office is prepared to move against the individual franchisees along with franchisor McDonald’s, USA, LLC, as joint employer respondents on 43 charges unless settlements can be reached.  In other words, the NLRB is going to try and muscle McDonald’s into submission.  Time will tell how it all plays out, but it is anticipated that the courts will ultimately have to intervene.

Since the early 1980s, a finding of “joint employer” status requires both entities to exercise direct and immediate control over the employees and the terms and conditions of their employment. Determinative factors include having the power to hire and fire, setting work schedules, determining rates of pay, and keeping employment records.  These factors rarely exist in traditional franchise arrangements.

In June, the NLRB accepted amicus briefs in an active matter involving the joint employer/franchisor issue.  While numerous manufacturing, hospitality, and business associations strongly advocated for retaining the current test, the general counsel’s brief argued that the direction and control test fails to take into account shifts in the U.S. workforce such as increasing use of contingent employees, outsourcing, and franchising.  The result, the GC argued, is to frustrate the purpose of the NLRA by limiting opportunities for collective bargaining.   The general counsel went even further, suggesting (without citing actual specific factual evidence) that corporations have moved to the franchise model for the specific purpose of limiting collective bargaining. The general counsel proposed an “industrial realities” test; arguing that a franchisor’s control over matters such as pricing, inventory, branding, and supply, effectively dictate the terms and conditions of employment that franchise owners could offer their employees.

It is no secret that the current NLRB is all about providing opportunities for collective bargaining and with an estimated 3-5 million fast food workers in the U.S., many of whom are paid at the lower-end of the wage scale, it’s not surprising that unions have focused their efforts on that industry.  The expense and effort of organizing and negotiating with thousands of individual franchise units makes industry-wide unionization difficult. The ability to organize all 700,000+ McDonald’s employees through a single election and secure employment terms for (and dues from) those employees in a single collective bargaining agreement, however, would be a significant game-changer.

Bottom Line for Employers:  The general counsel’s statement does not have the effect of binding law and it could be years before a board decision applying a new joint employer standard works its way through the courts to become law, but franchisors and franchisees should be aware of the writing on the wall and be sure that the franchise documents, policies and practices clearly vest all employee-related decisions and duties in the franchisee.  Additionally, employers should note that the underlying issue involved here goes well beyond the franchisor/franchisee relationship.  The real issue in play here is the larger INDEPENDENT CONTRACTOR or SUBCONTRACTOR relationship.  From temporary staffing relationships (see https://laborandemploymentlawupdate.com/2014/07/09/nlrb-expanding-joint-employer-standard) to the 1099-worker, the NLRB is attempting to do everything and anything in its power to broaden the employer/employee relationship.  In effect, the NLRB very much wants to allow labor unions to target “dual employers” and consequently organize employees in unprecedented numbers.  Yes, the ‘Big Mac’ is under attack, and all employers who are part of a franchise agreement, supply or use temporary staffing and/or rely on independent contractors should take serious note — and continue to work with competent legal counsel on diminishing “joint employer” liabilities.

Contractors Beware: Strict Amendments to the Illinois Employee Classification Act

Contributed by Jonathon Hoag

House Bills 923 and 2649 were signed into law amending the Illinois Employee Classification Act (IECA), effective January 1, 2014.  The IECA sets forth strict requirements in order to lawfully classify individuals as independent contractors within the construction industry (defined very broadly by the act).  The IECA has been amended to give the Illinois Department of Labor more oversight and authority to enforce this act.  The recent amendments mandate that (1) contractors follow annual reporting requirements when contracting with an individual, sole proprietor, or partnership to perform construction services; (2) add individual liability; and (3) change the department’s method for enforcing the act (i.e. easing enforcement).

Beginning January 1, 2014, contractors that make payments to an individual, sole proprietor, or partnership for construction services must report contact and payment information to the Illinois Department of Labor by January 31 following the taxable year in which payment was made.  The department intends to closely monitor the use of (non-employee) sole proprietors and partnerships in the construction industry.  Contractors that fail to submit required reports are subject to penalties and debarment.

In addition, officers and agents of contractors who knowingly permit the contractor to violate the IECA, or are otherwise considered an employer under the act, are subject to individual liability.  This provision does not apply to contractors primarily engaged in the sale of tangible personal property or doing work for a business primarily engaged in the sale of tangible personal property.

Lastly, the enforcement procedure was drastically amended so that now alleged violations will be prosecuted by the Illinois Department of Labor through an administrative hearing, subject to administrative review in the courts.  Currently, the Illinois Department of Labor’s administrative findings have no significant weight and violations must be proved by the Attorney General in the circuit court.  This change to the enforcement procedure will give the Illinois Department of Labor substantial control and power in how this act is enforced. 

Interestingly, contractors in compliance with the responsible bidder requirements set forth in the Illinois Procurement Code are exempt from these statutory amendments.  There are a number of requirements under the responsible bidder provision of the Illinois Procurement Code, but the one of most significance is the requirement that contractors have an apprenticeship program approved by the U.S. Department of Labor to cover each craft of work performed on the job.  There has been a concerted effort to broaden the application of the responsible bidder requirements to contractors throughout Illinois, and it appears the strategy will be to give contractors who satisfy the responsible bidder requirements special treatment under other Illinois laws.

Exotic Female Dancers Should Be Classified As “Employees” As They Are Integral To The Business of A Strip Club

Contributed by Allison Chaplick

The misclassification of employees as independent contractors has been a very hot issue in the legal and employment communities for quite some time. The misclassification of an individual can result in costly litigation and even costlier damages for violating the Fair Labor Standard Act’s (FLSA) mandate on paying minimum wage and overtime.  The following example case shows that businesses must carefully evaluate how they classify and pay individuals who perform work for them; i.e., “employees” or “independent contractors.”

The plaintiff’s in this example case were nude, female exotic dancers who entertained gentlemen at the defendants’ nightclub.  The sole issue at question was whether the dancers should have been classified and treated as employees rather than independent contractors.

The definitions of “employee” and “employer” under the FLSA are indirect in nature, so just like other federal courts, the court in this example looked instead to the definition of “employ.” Under the act, “employ” means “to suffer or permit to work.”  Since the term “to suffer or permit to work” is not defined anywhere in the FLSA, this court used the six-factor “economic realities test” to determine if an employer/employee relationship existed between the dancers and the nightclub. 

The nature of the position and degree of control the club exerted on the dancers’ work weighed in favor of finding an employer/employee relationship and not an independent contractor relationship. For example, the club maintained an employee manual, given to each dancer, which required overweight dancers to diet and enforced club rules as to the cost of dances, scheduling, tipping the disc jockey, and paying a fee to the club. 

It was also noted that the opportunity for profit or loss was greater for the nightclub than for the dancers because the evidence showed that the nightclub was primarily responsible for attracting customers through marketing and promotion decisions, nightclub maintenance, aesthetics and atmosphere, and cost and availability of food and alcohol. 

Additionally, it was determined that the relative investment in employing the dancers created an employer/employee relationship because the club spent approximately $900,000 annually on the cost of equipment, fixtures, advertising, insurance, rent, alcohol, licenses and music; whereas each dancer spent significantly less annually on the cost of hairstyles, costumes, props, shoes, makeup, and nails. As no “special skills” were required to perform as an entertainer/dancer in the club and because the dancers were absolutely integral to the club’s business, the employer/employee relationship was finally determined.

Worth noting is that there was one factor which was found to be in favor of an “independent contractor” relationship. It was noted that the club’s dancers tended to be transient or itinerant, and thus, lacked the “permanency of working relationship” to satisfy an employer/employee relationship because many of the dancers named in the case were employed at the club for less than one year.  However, this one factor was not strong enough to outweigh all the others.

Clincy, at al v. Galardi South Enterprises, Inc., d/b/a The Onyx, et al., (N.D. Ga. 2011)