Few independent contractor agreements we have reviewed, even those of Fortune 500 companies, are relatively free from clauses that undermine the IC relationship because such agreements typically contain clauses that retain the company’s right to direct or control the manner and means of performing services. As discussed in our blog posts on the recent court decisions affecting FedEx and Uber, IC agreements that retain sufficient elements of direction and control can be used effectively by class action lawyers to demonstrate that an IC arrangement is nothing more than a misclassified employment relationship. Now, the National Labor Relations Board has followed suit. It just held in a watershed decision issued on August 27 that rights reserved by a company in an agreement with a third party supplier of labor services to set specific terms or conditions over workers who provide services can be sufficient control to establish a joint employer relationship with the third party labor supplier – and thereby expose the company to being swept into a union organizing campaign over the workers providing services – even if such rights are not exercised. Brown-Ferris Industries of California, Inc., d/b/a BFI Newby Island Recyclery, 362 NLRB No. 186 (2015).
As noted below in the “Takeaway” of this blog post, most businesses that use independent contractors to supplement their workforce or as an essential component of their business model can still protect themselves from IC misclassification liability as well as exposure to union organizing. How? By documenting their IC relationships in a state-of-the-art agreement that effectively enhances – rather than undermines – their compliance with federal and state IC laws.
Impact of the NLRB decision
The new NLRB decision is rather lengthy and includes a strong dissent by two of the five NLRB members. One of the key passages from the majority decision is that the NLRB “will no longer require that a joint employer not only possess the authority to control employees’ terms and conditions of employment, but . . . also exercise that authority, and do so directly, immediately, and not in a ‘limited and routine’ manner.” Rather, the NLRB stated, from this point on “[t]heright to control [alone], in the common-law sense, is [just as] probative of joint-employer status as is the actual exercise of control, whether direct or indirect.”
The facts in the NLRB’s new Brown-Ferris decision do not involve independent contractors, inasmuch as the third party provider of labor services, Leadpoint Business Services, retained the workers as W-2 employees. But the decision might well have been the same even if Leadpoint had retained the workers as 1099 contractors. In other words, while the Brown-Ferris decision is one step removed from independent contractor misclassification cases, its holding may well apply equally to cases where the issues are two-fold: (a) are the workers are ICs (who are not eligible for unionization under federal law) or employees (who are eligible for union representation), and (b) if employees, are they employed by only one entity or is there is another company who will be treated as a joint employer of the workers?
The NLRB’s most well-publicized recent decision involving independent contractor status is its September 30, 2014 decision in FedEx Ground, which was the subject of our blog post on October 6, 2014. In that decision, the NLRB held that FedEx Ground’s Home Delivery drivers in Connecticut were “employees” under the National Labor Relations Act and, therefore, could be represented by a Teamsters Union local that had petitioned to represent the drivers. 361 NLRB No. 55 (2014). In that decision by the NLRB, the agency’s opinion made multiple references to provisions in the independent contractor agreement, which the NLRB said “weigh heavily in favor of employee status.”
The appellate courts have been equally intolerant of the direction and control that FedEx retained in its standard IC agreements. As noted in one of our blog posts addressing the setbacks that FedEx Ground has recently experienced in the courts, one appellate court characterized the FedEx Ground independent contractor agreement as a “‘brilliantly drafted contract creating the constraints of an employment relationship with [the drivers] in the guise of an independent contractor model—because FedEx not only has the right to control, but has close to absolute actual control over [the drivers] based upon interpretation and obfuscation.’”
So, what does this new NLRB decision, which focuses not on the exercise of direction and control but rather on the right to exercise control, mean to those businesses that use independent contractors, including many tech start-up companies in the sharing, on-demand, or gig economy?
For companies that would like to continue their current workforce strategies using independent contractors, there is every incentive to re-document and re-implement their IC relationships in a way that does not retain contractual control over the performance of the services. This can be accomplished in most instances.
While some view the drafting of IC agreements as nothing more than dotting i’s and crossing t’s, FedEx Ground, Uber, and many other companies caught in the crosshairs of class action lawsuits can now relate to the fact that the IC laws are varied both at the federal and state levels and are often counter-intuitive. In other words, knowing where to find all of the i’s and t’s is not self-evident and has escaped in-house and outside counsel for many of the country’s largest corporations.
As we have stated previously, businesses that are concerned about the potential for misclassification liability often recognize that, at best, their independent contractors probably fall within a legal gray area, where some facts favor contractor status while others indicate employee status. Companies using IC Diagnostics™, a process that examines whether the position would likely pass the applicable independent contractor tests under governing state and federal laws, are able to examine a wide range of factors, duly weighted to reflect their relative importance in assessing compliance with applicable laws.
Regardless of whether an IC relationship needs to be substantially restructured, slightly restructured, or not restructured at all, the IC relationship must be documented in a manner as free from direction and control as feasible, consistent with the company’s business model and applicable IC laws.
While many independent contractors work without an agreement, it can sometimes be worse from the standpoint of IC compliance if ICs provide services under agreements that do not reflect the true relationship between the contractor and company. A contract that misstates the true relationship between the parties, such as one that states that a worker is not subject to the supervision of the company even though he or she is regularly supervised by a superior at the company or given regular evaluations, is generally of little or no benefit – and can be used to show that the IC agreement is little more than a sham.
Similarly, a contract that recites that a worker is an independent contractor offers no protection if the factors used by a court or government agency to determine the worker’s status demonstrate sufficient direction and control to create an employment relationship. Even agreements drafted for companies by otherwise talented lawyers include language that plaintiffs’ class action lawyers may use to support their arguments that the business has retained a right to direct and control the manner and means by which the workers perform the agreed-upon services. As noted above, that is exactly what the courts stated in the recent FedEx Ground appellate court decisions. IC Diagnostics™ takes into account those and hundreds of other court decisions as well as applicable state and federal statutes in the documentation process.
After the restructured relationship is memorialized in a written independent contractor agreement, the final step is implementing the restructured relationship. Companies must ensure that what is set forth in the contractor agreement will be implemented in the field and do not include empty recitals or misstatements of the relationship. Equally important, businesses must avoid exercising needless direction and control, which is often unintended yet has the potential to undermine an otherwise enhanced state of independent contractor compliance.
Other aspects of the re-implementation process may include reviewing and revising company operating manuals and procedures, documenting the implementation of certain provisions in the updated contractor agreement, and putting safeguards in place to ensure conformity with the independent contractor relationship.
There are no “quick and dirty” ways to enhance independent contractor compliance. The use of form or model independent contractor agreements, sometimes called templates, tends to cause businesses to overlook the need to restructure and to implement a sustainable independent contractor model that will withstand legal scrutiny and serve a company’s unique business model.
On the other hand, bona fide restructuring, re-documentation and re-implementation need not be a prohibitive undertaking and, once completed within a reasonably short period of time, can place a business in an enhanced and sustained state of compliance. That itself may substantially minimize the likelihood that a governmental agency or class action lawyer will seek to challenge a company’s compliance with independent contractor laws.
Many companies assume that if they experience an adverse legal determination, they have no choice but to reclassify the affected workers and make them employees. However, restructuring and re-documentation is also a valuable means for companies that are subject to legal challenge to revamp their independent contractor relationships in order to maximize compliance and minimize future misclassification liability.