United States: Which Are They? Independent Contractors Or Employees? Navigating The Conflicts Between State And Federal Law

Last Updated: July 5 2019
Article by Keahn N. Morris and John S. Bolesta

UberX and UberBLACK Drivers Are Not Employees for Purposes of the NLRA

According to the NLRB General Counsel's Division of Advice (GC), Uber's UberX and UberBLACK drivers are independent contractors exempt from the rights and protections of the National Labor Relations Act (NLRA), including the right to form and join unions. Advice Memo, dated April 16 2019, Uber Technologies, Inc., Case Nos. 13-CA-163062, 14-CA-158833 and 29-CA-177483. Applying the National Labor Relations Board's (Board or NLRB) traditional multi-factored common law agency test used to determine whether workers are employees or independent contractors and after considering all of the common law factors through the "prism of entrepreneurial opportunity" as mandated by the Board's recent decision in Supershuttle DFW, Inc., 367 NLRB No. 75 (January 25, 2019), the GC has found that the drivers were independent contractors and not employees within the meaning of the NLRA.

The GC also considered and then discounted certain factors often relied upon to establish a worker's employee status, finding them not dispositive indicators of employee status. For instance, in the GC's view, the fact that Uber received a percentage of a driver's fare instead of charging a driver a flat fee for their use of the Company's ride sharing platform did not support a finding of employee status because the fundamental features of the Uber system including Uber's reliance on customer reviews to maintain quality and insure repeat business without the need for company control overcame any inference of employer control or the diminution of a driver's entrepreneurial opportunity. Likewise, the fact that no special skills or experience were required to qualify a driver to use the Uber platform and that the driver's work was integral to Uber's business did not mandate a finding of employee status, citing prior Board decisions in which individuals were held to be independent contractors, even though their services were integral to the business of the company that engaged them, given the entrepreneurial opportunity afforded them.

Company's Gig Workers Are Not Employees for Purposes of the FLSA

Likewise, in a recent opinion letter, dated April 29, 2019, the Acting Administrator of the U.S. Department of Labor's Wage and Hour Division (WHD) has concluded that service providers referred by a virtual marketplace company (VMC) to end-market consumers to provide a wide variety of services (including transportation, delivery, shopping, moving, cleaning, plumbing, painting and household services) were also independent contractors not covered by the Fair Labor Standards Act (FLSA). According to this opinion letter, the touchstone of employee versus independent contractor status has long been a worker's "economic dependence" on their putative employer. Further, whether a worker is economically dependent on a potential employer is a fact-specific inquiry that is individualized to each worker applying six factors derived from Supreme Court precedent including 1) the nature/degree of the potential employer's control; 2) the permanency of the worker's relationship with the potential employer; 3) the amount of the worker's investment in facilities, equipment and helpers; 4) the amount of skill, initiative, judgment or foresight required for the worker's services; 5) the worker's opportunities for profit or loss; and 6) the extent of integration of the worker's services into the potential employer's business. Applying the facts relating to the VMC and the service providers to these six factors, the WHD concluded that the facts demonstrated economic independence in the relationship between the VMC and the service providers and that the service providers were, therefore, independent contractors and not employees within the meaning and coverage of the FLSA.

Apparent Conflict Between Federal and State Law

In seemingly direct conflict with these federal pronouncements are state cases like Dynamex v. Superior Court, 4 Cal. 5th 903 (2018) where California's Supreme Court recently abandoned the state's traditional reliance on a common law agency test not unlike the one currently used by the NLRB, see, Borello v. State Department Of Industrial Relations, 48 Cal 3d 341 (1989), and devised a new employee-independent contractor test based upon giving a state law its widest possible effect consistent with its statutory purpose. In Dynamex, the workers who served as delivery drivers making pickups from and deliveries to the customers of a large nationwide package and document delivery company claimed to be employees covered and protected by the state's Industrial Welfare Commission (IWC) Order No. 9 applicable to the transportation industry. Dynamex, their putative employer, denied their employee status and claimed the drivers to be independent contractors who fell outside the IWC's Orders. Accordingly, at issue was the standard to be applied when determining the employee/independent contractor status under the state's IWC Orders

For some time, Dynamex classified its California drivers as employees and compensated them pursuant to the state's wage and hour laws. However, in 2004, Dynamex converted all of its drivers to independent contractors after management concluded that such a conversion would generate economic savings for the company. Like Uber's drivers, under this new arrangement, all Dynamex drivers were required to provide their own vehicles and to pay all of their transportation expenses as well as all taxes and workers' compensation insurance. Additionally, drivers were free to set their own work schedules, to reject deliveries assigned to them and to choose the sequence in which they would make deliveries as well as the routes that they would take. Drivers were also permitted to hire other persons to make deliveries assigned by Dynamex and, when not making pickups or deliveries for Dynamex, drivers were permitted to make deliveries for other delivery companies as well as to conduct their own personal delivery business. Those drivers assigned to a "dedicated" fleet or a scheduled company route were paid a flat fee or an amount based on a percentage of the delivery fee Dynamex received from the customer, while drivers doing "on demand" deliveries, were paid either a percentage of the delivery fee paid by the customer on a per delivery basis or a flat fee basis per item delivered.

For the purpose of giving the IWC order its widest possible effect and the drivers' the greatest protection, the Dynamex court opted to use a simpler, less fact intensive standard that presumes a worker to be an employee unless and until their putative employer proves them to be an independent contractor under a standard known as the "ABC" test. Utilized in other jurisdictions and in varying contexts to distinguish employees from independent contractors, under the ABC test, a worker will be considered an employee unless a "hiring entity establishes: (A) that the worker is free from control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that that worker performs work that is outside the usual course of the hiring entity's business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity."

This patch quilt of varying standards is likely to lead to anomalous results and create serious compliance challenges where a worker is found to be an independent contractor for some purposes, while for other purposes and in differing contexts, that same worker is likely to be found an employee. For example, in the case of the Uber drivers, they were found to be independent contractors for NLRA purposes, even though their driving was considered to be integral to Uber's regular business. However, because they may not perform work outside the usual course of Uber's business as required by prong B of Dynamex and/or because a person driving an app-based car may not be engaged in an independently established trade, occupation or business under prong C of Dynamex, plaintiffs may argue that Uber drivers are employees for state wage and hour law purposes even though by contract and in fact, the Uber driver is free from Uber's control and direction in connection with the performance of their work.

Risk of Antitrust Compliance

But looking beyond the immediate confusion caused by a less than unified definition of independent contractor, uncertainty as to a worker's status is sure to trigger larger controversies outside the employment arena. Take, for example, the effect that such uncertainty and ambiguity is likely to have in the area of antitrust compliance where workers band together and act collectively to improve their wages and working conditions. If the workers qualify as employees for NLRA purposes, then that conduct is protected by law and probably immune to the constraints of federal and state antitrust laws. However, if they are deemed independent contractors, then their collective action may constitute a conspiracy to restrain trade in violation of the Sherman Antitrust Act, "which prohibits every contract, combination in the form of trust or otherwise, or conspiracy, in the restraint of trade or commerce."

Moreover, insofar as state and local governments pass legislation in an attempt to treat independent contractors as if they are employees within the meaning of the NLRA and to accord them NLRA-like rights, that too may raise significant issues of antitrust compliance. For example, the Ninth Circuit recently reversed a dismissal of a challenge under federal antitrust law by the U.S. Chamber of Commerce to Seattle Ordinance 124968. In Chamber of Commerce v. City of Seattle, Case No. 17-35640 (9th Cir. May 11, 2018), Seattle enacted an ordinance that created a collective bargaining process between ridesharing companies and drivers in order to negotiate the rate of pay and amount withheld by the companies. In opposition to the ordinance, the U.S. Chamber of Commerce argued it was preempted by multiple federal laws, including the Sherman Antitrust Act. After the district court dismissed the claims, the Ninth Circuit reversed, in part, holding that the ordinance did not meet the requirements for state-action immunity from federal antitrust law and without reaching the merits of the question, that the ordinance authorizes a per se antitrust violation. Accordingly, it is still an open question in the Ninth Circuit and other circuits whether cities and states may lawfully enact ordinances allowing app-based, ride-hailing drivers to bargain collectively over wages, hours and other working conditions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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