new nlrb decision: independent contractor...

New NLRB Decision:

Independent Contractor ClassificationEntrepreneurial Activity, Common Law Factors, Interaction With Federal, State and Local Laws

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WEDNESDAY, APRIL 10, 2019

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Alan I. Model, Shareholder, Littler Mendelson, Newark, N.J.

Teresa R. Tracy, Partner, Freeman Freeman & Smiley, Los Angeles

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Proprietary and Confidential

Presented by

ALAN I. MODEL

Shareholder, Littler, Newark

[email protected]

Cell 973.477.4002

Direct 973.848.4740

TERESA R. TRACY

Partner, Freeman Freeman & Smiley

[email protected]

Direct 310.255.6176

Fax 310.255.6276


Agenda

• Employer –Employee Relationship

• Independent Contractor Classification

• Discuss Recent Developments

• Identify “red flags” that may suggest independent contractor misclassification

• Steps to Minimize Risk

6

Proprietary and ConfidentialProprietary and Confidential

Today’s Workplace:Employees, Independent Contractors and

Joint Employers/ Employees

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• Worker is the full-time employee of the Company

• Worker is an employee of both the Company and a Third Party Client Company (joint employee/ joint employer) (PEO in agreed-to instances)

• Worker is an employee of the Company and a nonemployee or independent contractor of a Third Party Client Company (Franchisee / Franchisor)

• Worker is a nonemployee (or independent contractor) of the Company and an employee of the Third Party Client Company (temp agency, staff leasing co., etc.)

• Worker is a non employee (or independent contractor)of both the Company and a Third Party Client Company

Possible Arrangements in the Workplace Between Worker and Company

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Employer- Employee Relationship

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Most Workers Are Employees

• FLSA defines “employ” as “to suffer or permitto work”

• “Broadest definition of employment under the law because it covers work that the employer directs or allows to take place”

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Contrast with Independent Contractor Relationship

• Independent Contractors are economically independent,

– Self-employed

– Often business owners

– Freedom to come and go, perform job in any manner that accomplishes the desired result

• Frequently over-used classification

– Job titles not determinative; “economic realities” control

– Contracts designating people as independent contractors generally not effective

– Much litigation stems from classification of people who are really employees as independent contractors

• Largely considered as an abused and misused classification

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The “Shared Economy” or “Gig Economy”:

New Addition to the IC Picture

• Loosely defined as an economic model in which technology platforms allow individuals to borrow, rent, or use assets owned by someone else…

• A significant portion of the Gig Economy work as Independent Contractors

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Employees’ Rights, Generally

• Fair Labor Standards Act (FLSA)– Minimum Wage ($7.25 per hour worked) – Overtime Wages (1.5 times the “regular rate” for all hours

worked over 40, unless exempt)

• National Labor Relations Act (NLRA) – Right to Engage in “Concerted Activity”– Right to organize and collectively bargain over terms and

conditions of employment

• Discrimination Laws– Title VII (sex, gender, religion, race, national origin)– Americans with Disabilities Act (ADA)– Age Discrimination in Employment Act (ADEA)– Equal Pay Act (EPA)

• Worker Safety (OSHA, state worker’s compensation)• Security and Benefits (ACA, ERISA, state

unemployment insurance)

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The Allure and Risks of Treating Workers as Independent Contractors

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To 1099 or W-2?Independent Contractors vs. Employees

GENERAL DEFINITIONS

• EMPLOYEE = A person hired to perform services for another who has the right to control the performance by the worker.

• INDEPENDENT CONTRACTOR = A person who performs services for another who is interested only in the outcome, not the details of how the work gets done.

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What are the Benefits of Hiring ICs?

• Why do employers use ICs over employees?

• No matching payroll (FICA) taxes

• No unemployment taxes or state disability taxes

• No workers compensation insurance

• No extensive record keeping

• No benefits (insurance, vacation, sick, etc.)

• No FMLA or OSHA protection

• Increased flexibility in matching “head count” to work flow

• Termination limited only by terms of contract

• No union organizing

• Easier

• Only downside is lack of control… OR IS IT???

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Risks for Misclassifying Workers as ICs: Pressure From All Sides

• Federal agencies, state agencies, labor unions, and other advocates focused on stopping “wage theft” resulting from IC misclassification

• Studies estimate federal govt. loses between $2.7 and $4.3 billion annually

A Perfect Storm

IRS

DOLStates

Agencies

Unions

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Risks for Misclassifying Workers as ICs:Liability Goes Far Beyond Unpaid Overtime

Workers’ Comp

Taxes

Stock Options

Unemployment

Title VII/ADA/ADEA

Retirement

Affordable Care Act

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Risks for Misclassifying Workers as ICs:Agreements with State Agencies

• U.S. DOL has entered into Memoranda of Understanding with the IRS & 40 states (and the District of Columbia) concerning IC misclassification

• These partnerships provide for data sharing, referrals, and coordinated enforcement efforts between the DOL and these states

(https://www.dol.gov/whd/state/statecoordination.htm)

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The Varying Legal Frameworks for Evaluating IC Treatment &

Recent Developments

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Few problems in the law have given greater variety of application and conflict in results than the cases arising in the borderland between what is clearly an employer-employee relationship and what is clearly one of independent entrepreneurial dealing

NLRB v. Hearst Publications, Inc., 322 U.S. 111 (1944)

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• Key Term is “Independent”

• Contract language or the IC’s preference do not control the determination; the court will look at the actual relationship of the parties.

• The more control exerted by the principle, the more likely the worker is an employee.

• The default status is an employment relationship.

Refresher: Who Is An Independent Contractor?

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• Federal law alone has multiple different tests for determining IC status

• Layered on top of these, states may have up to six different tests under different laws

Over 100 Different Legal Tests in the US

IRS 20-Factor

Test

FLSA Economic Reality

Test

Common Law Test

Over 100 State Law

Tests

NLRBTest

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The IC Tests Under Federal Law

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NLRB Test

By reverting to the common-law test, the NLRB in

SuperShuttle DFW, Inc., 367 NLRB No. 75 (2019) noted:

entrepreneurial opportunity is not an independent common-law factor, let alone a “superfactor” . . . . Nor is it an

“overriding consideration,” a “shorthand formula,” or a “trump card” in the independent-contractor analysis. Rather .

. . 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. Indeed, employer control and

entrepreneurial opportunity are opposite sides of the same coin: in general, the more control, the less scope for

entrepreneurial initiative, and vice versa.

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The NLRB Weighs in . . . Again!

• Trump NLRB clarifies its position on the independent contractor issue in SuperShuttle DFW, Inc. - January 2019

Concerned SuperShuttle franchisees, who drive customers to and from Dallas-area airports

⎻ Board returned to the common-law independent contractor test in effect prior to 2014

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

2. Whether or not the one employed is engaged in a distinct occupation or business

3. The kind of occupation, referencing whether the work is usually done under the direction of the employer or by a specialist without supervision

4. The skill required

5. Whether the employer or the worker supplies the tools and place of work for the person doing the work

6. The length of time the worker is employed

7. The method of payment, whether by time or by job

8. Whether or not the work is part of the regular business of the employer

9. Whether or not the parties believe they are creating a master-servant relationship

10. Whether the principal is or is not in business

Criticized the prior Board for merging the common-law test into an economic realities test that diminished the entrepreneurial opportunity analysis and overemphasized the right to control test

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Impact of SuperShuttle on Other Laws

• NLRB is a federal agency of limited jurisdiction

• Whole groups of businesses are excluded

• Scope of power limited to employees’ rights to organize and

bargain collectively

• Admittedly swayed by political appointees and their agendas

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• SuperShuttle does not change the standard or analysis of independent contractor/employee status under other federal, state, and local laws

• Employers face confusing, overlapping and differing standards in a wide variety of areas

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• Fair Labor Standards Act (FLSA)

• not directly impacted by SuperShuttle

• uses “economic realities” test which has multiple factors

• the guidance on even this test changes from time to time

• unclear whether arguments based on SuperShuttle will be

successful

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• Title VII


• uses what can be described as hybrid economic realities/common

law test which has multiple factors


successful

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• FMLA

• uses same definition of “employee” as FLSA

• split in Circuit Court approaches


successful

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• ADA and ADEA


• uses common law test with many different factors

• mix of economic realities/common law control test


successful

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IRS “20 Factors” Test

11. No required reports

12. Payment for the result

13. Business expenses

14. Own tools

15. Significant investment

16. Possible profit or loss

17. Working for multiple firms

18. Services available to the

general public

19. Limited right to discharge

20. Liability for non-completion

1. No instructions

2. No training

3. No integration

4. Services do not have to

be rendered personally

5. Control over assistants

6. No continuing relationship

7. Work hours

8. Time to pursue other work

9. Job location

10. No requirements on the

order or sequence of work

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• State and Local Laws

• State and local laws have fewer “ties” to federal laws

• Even individual states have internally overlapping and differing

tests for “employee” status

• Limited federal preemption

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• State and Local Laws – California

• Labor Code (minimum wage, overtime, breaks, expenses, etc.)

• Wage Orders (cover many but not all aspects of Labor Code)

• Workers’ Compensation

• Unemployment Insurance Benefits

35




Dynamex decision in 2018

• Wage Orders have three alternative tests:

a) to exercise control over the wages, hours or working conditions, or

b) to suffer or permit to work, or

c) to engage, thereby creating a common law employment relationship.

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Dynamex decision in 2018

• Under the second (suffer or permit to work) test, the hiring entity must prove that an independent contractor:

a) is free from the 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) performs work that is outside the usual course of the hiring entity’s business; and

c) is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

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• State and Local Laws – Indiana

• Unemployment benefits – ABC test with different factors than

Dynamex

• Workers’ compensation – IRS rules

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• State and Local Laws – New Jersey

• Wage Laws require hiring entity to prove that independent contractor:

a) has been and will continue to be free from control or direction over the performance of such services, both contractually and factually;

b) provides services either outside the usual course of the hiring entity’s business for which services are provided, or performs services outside of all the places of business of the hiring entity; and

c) is customarily engaged in an independently established trade, occupation, profession or business.

39


Best Practices

1. Avoid language commonly used in employment relationship

2. Avoid contractual terms and factual evidence of relationships common to employment relationship

3. Identify highest risk jurisdiction and law and comply with it

4. Maximize compliance

5. Update and maintain comprehensive and realistic agreements

6. Strong and enforceable arbitration provision

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• Employ/Employee/Employment

• Full time

• Part time

•Wages

• Payroll

• Supervise

•Direct

•Discipline

•Apply/Interview

Terms that Don’t Apply to Independent Contractors

41


• Independent Contractors Can:• Work when they want

• Accept the jobs they want

• Wear what they want

• Take the route they want

• Employ others to perform the work

• Use the equipment they want

• Contract with competitors

• Contract with customers

• Promote their own business

Signs of Independent Contractor Status

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BUT: Watch for IC Red Flags

There is a problem if:

• IC performs same work as employees

• IC is paid by the hour, not by the project

• Company provides training to IC

• Company controls hours worked by IC

• Company provides tools or equipment to IC

• IC cannot refuse or negotiate work

• Work is performed by IC on a “full-time” basis and relationships are long-term and continuous

• IC Agreement includes a restrictive covenant

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Risky Practices• Utilizing Employees and ICs for the same

job

• Having ICs “report” to local supervisors

• Providing guidance on “how to” do the work

• Allowing long, protracted relationships.

Best Practices

Best Practices

• Work with ICs who are incorporated and serve other businesses (even competitors)

• Present projects as outcome-oriented.

• Limit duration of engagement.

• Allow for negotiation of contract terms and prices, when possible.

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$$$ Misclassification Liability $$$

• Failure to recognize coverage and benefits for not only misclassified individual but other acknowledged employees where there is “employee numerosity” threshold

• Failure to provide mandatory compensation and benefits

• Failure to comply with mandatory requirements (e.g., minimum wage, overtime)

• Penalties (e.g., liquidated damages under FLSA, break and last paycheck penalties in California)

• Attorneys’ fees

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Misclassification Issues With Benefit Plans

• Failure to offer coverage for medical plans

• Failure to follow terms of retirement plans

• Multiple employer welfare arrangements

• Employer reporting for ACA

• Record retention for hours of service for benefit plans

• Liabilities (penalties and past due taxes of FICA/FUTA, Medicare, and state and local income taxes)

These issues apply equally to liability for IC Misclassification

and Joint Employment.

GOAL: Make sure workers receive proper pay and benefits46


Taxes

• Employer is the party “in control of the payment of wages”

⎻ That may be the common law employer, or it may be an entity that would be a joint or co-employer under employment laws

• Deciding the correct employer can have significant tax implications because of the withholding, reporting, and remitting obligations

KEY: Someone needs to pay the taxes (social security and unemployment taxes, etc.)

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How Can Company Be Sure They Get This Right?

48


Evaluate

• Determine whether the benefits of arrangement (use of staffing firm, leasing, outsourcing of entire functions, etc.) are worth potential risks

• Recognize that agreements and approaches must be tailored to the particular arrangement and context

• Trust but Verify…audit practices

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Understanding Key Risk Areas: More Important Than Ever

• Lack of due diligence with respect to potential business partners

• Lack of training and auditing of “on the ground” practices and supervision

• Nature of work performed and interaction with “regular” employees

• Management overlap/shared services/procedures

• Written agreements that reserve more control than necessary with respect toterms and conditions of employment

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Due Diligence

• Essential to contract with a reputable company with good service, financial wherewithal and record of positive employee relations

• Investigate (independently)

• Obtain reps and warranties regarding legal compliance

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Check Your Agreements

• Explicitly provide that staffing agency is solely responsible for hiring, firing, promoting, disciplining, and compensating employees

• Improve indemnification clause to explicitly cover employment-related claims

• Strengthen independent contractor provision by explicitly acknowledging that employer utilizing contingent workers employed by staffing agency is not a joint employer

• Consider mandating employment practices liability insurance

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Sample Indemnification ClauseYou agree to indemnify us against any claims related to your noncompliance or alleged noncompliance with any law, ordinance, rule or regulation, including any allegation that we are a joint employer or otherwise responsible for your acts or omissions relating to your employees

Check Your Agreements

53


Other Language That Can Help…

• Distinguish between requirements and recommendations

• Focus on results rather than process

• Make sure documentation distinguishes between employees and contingent workers

• Explicitly include IC and/or joint employment-related disclaimers

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new nlrb decision: independent contractor...

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