Many employers classify a portion of their workforce as “1099s/independent contractors.” The designation can make a big difference because such workers do not fall within the ambit of most labor and employment laws, which typically only apply to “employees.” Employers have thus historically been able to rely on the independent contractor classification to avoid payment of unemployment and workers’ compensation premiums, minimum wage and overtime pay, and liability under most antidiscrimination, union, immigration and employee benefits laws.
However, as Venable has noted in previous E-lerts here and here, courts have increasingly begun to scrutinize this practice. Particularly in situations where the employer exercises control over the purported independent contractors, many courts have found that the workers are actually “employees” who are entitled to all the protections and benefits of state and federal labor and employment laws.
Below, we summarize two recent federal appellate court decisions that shed further light on this trend. We conclude by offering guidance to employers regarding the practical implications of these decisions.
I. Court Concludes That Physician with Staff Privileges at a Hospital Might Be an “Employee” for Purposes of Sexual Harassment Suit.
In this case, the court ruled that a physician with staff privileges at a New York hospital could bring a sexual harassment suit against the hospital under the theory that she was an “employee” of the hospital for purposes of state and federal antidiscrimination statutes.
The hospital had argued that the suit could not go forward because the physician was merely an “independent contractor” who did not fall within the ambit of the antidiscrimination statutes. In support, the hospital alleged that it merely provided her with access to the hospital’s facilities, but that the physician retained control over the “manner and means” in which she treated her patients.
The court was not persuaded. Among other things, the court noted that the hospital retained substantial control over the physician through its quality assurance program, which included a peer review process. As a result, the court concluded that the question of the physician’s status as an employee or an independent contractor should be left to a jury to decide, and the physician’s suit could go forward to trial.
II. Court Finds That Taxi Drivers Are “Employees” Who Have a Right to Seek Union Representation.
In this case, the court ruled that taxi drivers working for a California company were “employees” of the company and thus had a right to seek union representation under federal labor law.
The company had argued that its drivers were “independent contractors,” not “employees,” and that they therefore had no right to organize under the National Labor Relations Act. The court disagreed, however, noting that the company restricted the drivers from pursuing other job opportunities, regulated numerous details of how they operated their taxicabs, and imposed discipline for delays or refusals to respond to dispatches.
Because the company exercised so much control over the drivers, the court concluded that the drivers were not sufficiently independent to justify their purported status as independent contractors. As a result, they had a right to unionize.
III. What These Decisions Mean for Employers.
Concerned employers can draw at least two lessons from these decisions. First, merely classifying certain workers as 1099s/independent contractors is not sufficient to avoid the reach of most federal and state employment laws. As these decisions make clear, the single most important factor in determining the status of a worker is the degree to which the employer controls the worker. The more control the employer exercises, the more likely a court will find the worker to be an employee.
Second, employers should consider entering into written agreements with their contractors or, if they have already done so, reviewing the agreements in order to ensure that their contractors have been given sufficient independence. Such agreements will help provide the parties with a framework for defining the relationship in a manner that meets the requirements of applicable law.