NLRB Issues Franchise-Friendly, Pro-Independent Contractor Ruling; New Test for IC Status Raises Bar for Unions Alleging IC Misclassification

Earlier today, the National Labor Relations Board issued a decision overturning a union-friendly test for independent contractor status that had been adopted by the Board during the Obama Administration. In its decision in SuperShuttle DFW Inc., the NLRB, which is now controlled by a majority of Board members appointed by President Trump, has reverted to the common law test for IC status that was articulated by the U.S. Supreme Court 50 years ago.  According to the Board majority, those common law factors must be examined “through the prism of entrepreneurial opportunity.”  What does this mean?  Unions that seek to organize and represent drivers and other workers who provide services as independent contractors or franchisees will have a far more challenging time obtaining a ruling from the current NLRB that the workers have been misclassified as ICs – and are therefore eligible to be unionized as employees under the National Labor Relations Act.

This decision, while perhaps noteworthy politically, has limited application.  It only applies to the classification of workers as independent contractors or employees under federal labor laws.  It has no application under any other laws including federal and state wage and hour laws, state wage payment laws, unemployment insurance and workers’ compensation laws, or the federal law governing retirement and employee welfare benefits.

Analysis of the SuperShuttle Decision

This case involved a decision by an NLRB Regional Office finding that shuttle drivers who owned and operated franchises of SuperShuttle DFW, Inc. were independent contractors and not employees eligible to be represented by a union under the National Labor Relations Act. In reaching its decision, the NLRB Regional Office had applied the Board’s traditional common law agency test. That decision was reviewed at the behest of the union.  But instead of simply affirming the decision, the NLRB (in a 3-1 decision, with Member McFerran dissenting) used the occasion to overrule an earlier NLRB decision issued during the Obama Administration that was union-friendly.

As a practical matter, though, and as explained in an earlier blog post, the NLRB’s prior test was of limited value to unions anyway because it had been rejected by the United States Court of Appeal for the District of Columbia in a case involving FedEx Ground.  When the NLRB later disregarded the D.C. Circuit’s decision in a second FedEx Ground case, the D.C. Circuit reversed the NLRB once again, stating: “It is as clear as clear can be that ‘the same issue presented in a later case in the same court should lead to the same result.”  The appeals court then stated emphatically: “Doubly so when the parties are the same.” After observing that the NLRB was simply seeking to “nullify this court’s [prior FedEx] decision,” the court remarked: “This case is the poster child for our law-of-the-circuit doctrine, which ensures stability, consistency, and evenhandedness in circuit law.”

Both the majority and dissenting opinions in the SuperShuttle DFW case  – the majority in a 14-page decision and Member McFerran in a 15-page dissent – spent a great deal of time rebutting the other’s arguments .  But the actual holding of the case is rather straightforward:  based on the Supreme Court’s decision in 1968 in NLRB v. United Insurance Co. of America, which adopted the test for independent contractor status set forth in the 1958 edition of the Restatement (Second) of Agency, the Board will henceforth apply a “non-exhaustive” list of common law factors (described below). The Board majority cautioned, though, that those factors are not a “shorthand formula” for determining IC status; rather, “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.”  Those factors will then be examined in view of the “total factual context” of the business and industry, and evaluated “through the prism of entrepreneurial opportunity.”

Those last two words were at the crux of extensive counterpunching between the majority and dissent.  The majority opinion stated that entrepreneurial opportunity is not a separate common law factor or a “super-factor,” as it says the dissent claims, and the dissent claimed that the majority opinion essentially makes entrepreneurial opportunity a “trump card” in the independent contractor analysis.

But far more important than this exchange over “entrepreneurial opportunity” is the majority and dissenting opinions’ views of the facts and whether such facts support IC or employee status.

The factors considered by the NLRB majority and its conclusion

The NLRB reviewed eight factors, finding that five favored IC status, two favored employee status, and one factor was neutral.

The first factor was the “extent of control by the [business]” over the “manner and means by which drivers conduct business.”  In assessing this element, the Board majority focused on SuperShuttle’s business context and concluded that, as part of the shared ride industry, it and its drivers are highly regulated, just as are drivers in the taxicab industry. The Board majority made clear that governmental regulation is not to be regarded as a form of control by a business over the manner and means by which drivers perform their services.

The Board majority then found the factor of whether the SuperShuttle franchisees are “free from control in most significant respects in the day-to-day performance of their work.”  They set their own schedule, decide if they want to accept a trip opportunity as offered on their Nextel devices, take breaks and stop working at any time, are free to choose where they work in the Dallas-Fort Worth area, and have no set routes. The Board majority determined that this item weighs heavily in favor of IC status.

The second factor examined was the method of payment. The franchisees pay a flat fee to SuperShuttle and are entitled to all fares they collect from riders, without having to share with SuperShuttle. The majority found this factor also favored IC status.

The third factor examined the instrumentalities of work, the workers’ tools, and their place of work.  The Board majority noted that the franchisees own or lease their own vans, pay a fee for the use of their Nextel devices, incur their own driving expenses (gas, tolls, repairs, etc.), and may work wherever they choose in the Dallas-Fort Worth area. This factor favors IC status as well, according to the Board majority.

The fourth factor reviewed was supervision.  The Board majority noted that the only daily communication between franchisees and SuperShuttle is via the Nextel dispatch system and that drivers may accept or reject a trip. While drivers are subject to a $50 fine for accepting a trip and then later declining it, the $50 is given to the franchisee that picks up the declined trip. In the assessment of the Board majority, the few minor and isolated fines do not diminish the drivers’ “near-absolute” autonomy, which the Board majority found to support IC status.

The fifth factor involves the relationship the parties believe they created. The Board majority relied on the franchise agreement, which states that the franchisee is not an employee of SuperShuttle and is an independent owner of its own business, and noted that SuperShuttle does not withhold taxes and provides no fringe benefits to the franchisees.  These facts, in the view of the Board majority, also favor IC status.

The sixth factor involves the issues of whether the franchisees work in a distinct business and whether they are part of the employer’s regular business. The Board majority found that driving is “not considered a distinct occupation,” SuperShuttle is involved in the business of transporting customers, and it is part of the employer’s regular business inasmuch as revenues for SuperShuttle are derived from the franchisees’ monthly payment for providing this service. The Board majority found that this set of factors favors employee status.

The seventh factor is length of employment. Although the franchise agreement is a one-year contract, which the Board concluded favored IC status, most franchisees renew their agreements yearly, so the Board determined this factor was neutral.

The eighth and last factor considered was skills required.  The Board majority determined that the franchisees do not have any particular skill set or require any special training; it held this factor favored employee status.

In assessing these eight factors, the Board majority stated that three factors – ownership and control of their vans, nearly complete control of their daily work schedules, and the method of payment where they pay a monthly fee and keep all of their fares collected – strongly favor IC status.  Those three factors, according to the Board majority, provide franchisees with “significant entrepreneurial opportunity.” The Board majority also discounted the importance of the two factors favoring employee status, finding them to be “relatively less significant” than the others favoring IC status.

The dissenting opinion

Member McFerran took issue with almost all of the conclusions of the Board majority, starting with her view that the Board overlooked the fact that, under the franchise agreement, franchisees are prohibited from working for other transportation companies and must obtain approval for any substitute drivers, and are also “subject to a uniform agreement imposed by the company on each of them” – all factors that weigh in favor of employee status.

She also disagreed with the majority’s view of factors involving the length of employment.  Opposed to the majority, which regarded this factor as neutral, Member McFerran found that it favored employee status because most franchisees renew their agreements.

The dissenting opinion then examined the language in the franchise agreement where drivers may “not . . . deviate from the standards, specifications and operating procedures as specified in this Agreement,” rhetorically concluding that “[i]f this is not control ‘by the agreement . . . over the details of the work . . . , then it is hard to grasp what control could be . . . .”

Member McFerran also took issue with the majority’s conclusions regarding the “instrumentalities, tools, and place of work” (viewing that that factor as neutral), the parties’ belief that they had created an IC relationship (stating that the non-negotiable agreement should be disregarded), the method of payment factor (suggesting that factor  should be given little weight), and the supervision factor (concluding this factor strongly favors employee status).

Takeaways

The majority and dissenting opinions are diametrically different; as such, they afford little guidance to new ventures that are contemplating whether to create a business model on an independent contractor or franchise model, on the one hand, or an employee model, on the other hand.  Both opinions examine the same facts yet reach almost opposite conclusions. It is fair to assume that if the majority of the NLRB’s members is nominated in the future by a future Democrat, Member McFerran’s views may once again reflect the majority.

Many businesses currently based on an independent contractor or franchise model will undoubtedly view this NLRB decision as confirmation that they are in compliance with the law.  But, decisions involving IC status are very fact-dependent. Not all companies deploying an IC or franchise business model will prevail, even before the current Board majority, and under a different set of facts, Member McFerran may well  find some workers to be independent contractors.

In addition, the decision by the NLRB only addresses the test for IC status under the National Labor Relations Act. It has no application whatsoever to the test for IC status under the federal Fair Labor Standards Act (FLSA), governing minimum wage and overtime; the federal non-discrimination laws (such as Title VII, the Americans with Disabilities Act, and the Age Discrimination in Employment Act), and the federal law governing pensions and employee benefits (ERISA) – each of which have their own tests for IC status.  Likewise, this decision by the NLRB has no application to any state laws, including those involving minimum wage and overtime, wage payments, unemployment, and workers’ compensation.

Perhaps the most compelling takeaway is that businesses using an IC or franchise business model that wish to avoid a union drive, a regulatory proceeding initiated by a federal or state workforce or tax agency, or a class action under a federal or state law should enhance their level of compliance with the IC tests under all of those laws – and not just the new test under the National Labor Relations Act. Many businesses have chosen to use a process such as IC Diagnostics™, which is designed to minimize IC misclassification exposure by restructuring, re-documenting, and re-implementing IC relationships under applicable IC tests in a customized and sustainable manner. Utilizing this type of process will maximize the likelihood a business will be able to avoid an IC misclassification challenge – and prevail in one if brought.

Written by Richard Reibstein

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