Certain recent developments in labor law and labor relations have a significant effect on an employer’s ability to conduct business. While the specific cases deal with an employer’s attempt to classify employees as independent contractors, the impact on employers in my view is much broader.
Many state courts and related agencies, as well as now the 7th Federal Circuit Court of Appeals (Carlene M. Craig, et al. vs. FedEx Ground Package System, Inc.), found in favor of employees over employers in the issue of classifying employees as independent contractors. While there are numerous rationales for this determination, it seems that one of the fundamental reasons for the decision is that the independent contractor classification results in lower tax revenues for the government and an uneven playing field for employers over their workers. Many courts also assert that the misclassification of employees is used to cut costs and avoid compliance with labor laws.
In the 7th Circuit decision in the FedEx case, employees asserted that they were denied the protections of the FLSA, including minimum wage, overtime compensation, unemployment insurance, and worker’s compensation. Independent contractors are not covered by the FLSA. According to the Department of Labor, Congress intended that the FLSA should be interpreted broadly to classify workers as employees and courts have generally followed a liberal interpretation favoring employee classification.
Under federal law, there are generally six factors or questions in the determination of whether a worker is an employee or an independent contractor. These factors include:
1. Is the work an integral part of the employer’s business?
2. Does the worker’s managerial skill set affect the worker’s opportunity for profit or loss?
3. How does the worker’s relative investment compare to the employer’s investment?
4. Does the work performed require special skill and initiative?
5. Is the relationship between the worker and employer permanent or indefinite?
6. What is the nature and degree of the employer’s control?
While the tests above are very factually specific, the most determining factor is item 6: What is the nature and degree of the employer’s control? Over many decades, the Department of Labor, National Labor Relations Board and numerous courts and agencies have decided both ways. If one deeply analyzes the various decisions, the key is whether the worker is found to be economically dependent on the employer or truly an independent business person. More specifically, the central factor is whether the worker controls the meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business. The worker’s control over meaningful aspects of the work must be more than theoretical - the worker must actually exercise it.
What usually happens in these cases involving independent contractors is that the facts are often contested. Under such circumstances, the deciding authority, whether it be a court or an agency, must conclude the ultimate reality.
I believe there is more than a test of legal wills occurring. The main impetus behind the FedEx litigation is that either the employees or labor unions are behind an effort to achieve organization of the workers involved. This is also true in similar litigation involving Uber drivers and workers at Google.
While it is fair to say that the ultimate decision about independent contractors could go either way, and I have seen it occur this way in over 47 years in which I have been involved in representing employers, I believe employers may be facing a political headwind. For the last 7 years, the far left Obama administration has been appointing more liberal judges to the federal judiciary and numerous federal agencies involved with labor law. In my view, the FedEx case is just a portend of things to come. Where decisions are close, particularly in factual interpretation cases, employers will find increasingly that the federal courts, the NLRB and related agencies will find against them.
I caution employers to look at the 7th Circuit independent contractor case as a broader alert. More than ever before I urge employers to conduct a very close analysis of their business operations, particularly in the employee relations side of it, to determine how it might be scrutinized now under federal law. Proactive strategic planning is more important than ever. Even if the republicans obtain control of the White House in the 2016 elections, it will take years to reverse the anti-business perspective of the Obama administration. The time for employers to act is now.