National Labor Relations Board reverts to previous independent contractor standard

An independent business entity maintained a license agreement with a corporation for the right to use the corporation’s trademark and transportation system in a particular airport. Before 2005, the independent business entity designated its drivers as employees. At that time, the independent business entity assigned drivers to regularly scheduled shifts in company-owned vans. The drivers were paid hourly wages.

In 2005, a franchise model was put in place. Under that model, the drivers were required to sign a 1-year Unit Franchise Agreement that classified the drivers as nonemployee franchisees who operate independent businesses. The franchisee-drivers were required to supply their own vans and to pay the independent business entity an initial franchise fee and a flat weekly fee for the right to utilize the brand as well as the dispatch and reservation systems. The franchisees have no set schedules or hours of work requirements and instead work when and how much they choose. The franchisees may also hire their own employees called “relief drivers” to operate their vans.

A Union sought to represent a unit of drivers including those who operated as franchisees and relief drivers. To that end, the Union filed a representation petition with the NLRB and sought to have the franchisees and relief drivers classified as employees under the NLRA.

Applicable Law

To determine whether a worker is an independent contractor, the NLRB has traditionally applied the common-law agency test. This test includes the following factors:

(a) The extent of control which, by the agreement, the master may exercise over the details of the work.

(b) Whether or not the one employed is engaged in a distinct occupation or business.

(c) The kind of occupation, with references to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision.

(d) The skill required in the particular occupation.

(e) Whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work.

(f) The length of time for which the person is employed.

(g) The method of payment, whether by the time or by the job.

(h) Whether or not the work is part of the regular business of the employer.

(i) Whether or not the parties believe they are creating the relation of master and servant.

(j) Whether the principal is or is not in business.

In addition, the NLRB has used “an important animating principle by which to evaluate [these common law] factors in cases where some factors cut one way and some the other.” That principle is whether the job at issue “presents the opportunities and risks inherent in entrepreneurialism.”

In 2014, the NLRB changed its independent-contractor analysis. While the NLRB claimed it was merely endeavoring “to more clearly define the analytical significance of a putative independent contractor’s entrepreneurial opportunity for gain or loss,” the changes made by the NLRB had a much more profound impact. As stated by the NLRB here, the changes made in 2014 “fundamentally shifted the independent contractor analysis, for implicit policy-based reasons, to one of economic realities, i.e., a test that greatly diminishes the significance of entrepreneurial opportunity and selectively overemphasizes the significance of ‘right to control’ factors relevant to perceived economic dependency.”

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Decision of Acting Regional Director

The Acting Regional Director considered the case and concluded that the franchisees were independent contractors and not employees. The Acting Regional Director looked to prior decisions involving the taxicab industry and noted that the key considerations there were “the lack of any relationship between the company’s compensation and the amount of fares collected,” and “the company’s lack of control over the manner and means by which the drivers conduct business after leaving the [company’s] garage.” The Acting Regional Director found that in this case the franchisees do not share fares with the independent business entity and operate their vehicles with little control exercised by the business entity. The Acting Regional Director also thought it was significant that the franchisees owned their vehicles and had “opportunities for loss or gain.”

NLRB’s Decision

The Union requested a review of the Acting Regional Director’s decision. The Union argued that the NLRB should find that the franchisees are employees because the independent business entity exercised substantial control over the drivers’ daily performance.

The NLRB began by overruling the “purported ‘refinement’” made by the Obama-Era NLRB in 2014. Accordingly, the NLRB reinstituted the traditional common-law factors to be utilized when conducting the independent-contractor analysis. The NLRB also clarified that, “properly understood, entrepreneurial opportunity is not an independent common-law factor, let alone a ‘super-factor.’” Instead, the NLRB stated, “entrepreneurial opportunity, like employer control, is a principle by which to evaluate the overall effect of the common-law factors on a putative contractor’s independence to pursue economic gain.”

The NLRB then applied the traditional common-law factor test to the facts of the case before it and concluded the franchisees were independent contractors. Key considerations for the NLRB here were: (1) the franchisees invest in their businesses by buying or leasing the vans that they drive; (2) the franchisees make the same weekly flat fee payment to the independent business entity regardless of the fares earned; and (3) the franchisees choose when and where to drive.

Takeaway

This NLRB decision represents a welcome change in the NLRB’s position to what it had long been before the Obama Administration-backed changes. Employers should use this decision as a framework to study how their arrangements with independent contractors are structured. While this decision is currently the controlling NLRB precedent, the decision itself shows how the NLRB’s position on issues can change from one Presidential Administration to another. Moreover, it is important to remember that this decision represents only the NLRB’s present position on the test for independent contractor status. Other federal agencies and different state agencies can and do apply other tests in making the independent contractor determination. This patchwork of different laws and different independent contractor tests that are applied continue to make the independent contractor classification and determination a winding and sometimes difficult road.  

UPDATE: On March 7, 2019, the Department of Labor (DOL) issued its much-anticipated “Notice of Proposed Rulemaking” regarding overtime payment requirements. This new rule raises the salary threshold to qualify as exempt from overtime under the white-collar exemption rules. Currently, employees with a salary below $455 per week ($23,660 per year) must be paid overtime if they work in excess of 40 hours per week. Under the new rule, the standard salary level would be increased from $455 to $679 per week ($35,308 per year). The new rule also increases the total annual compensation requirement for “highly compensated employees” from $100,000 to $147,414 per year. In addition, the new rule allows employers to use bonuses that are nondiscretionary as well as incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level. Note that this new rule is not yet in effect. The public has 60 days to comment on the new rule and the DOL then will consider all the timely submitted comments in developing the final rule.

R. Eddie Wayland is a partner with the law firm of King & Ballow.  You may reach Mr. Wayland at (615) 726-5430 or at rew@kingballow.com.  The foregoing materials, discussion and comments have been abridged from laws, court decisions, and administrative rulings and should not be construed as legal advice on specific situations or subjects.