Why it matters

The National Labor Relations Board’s (NLRB) Division of Advice published an Advice Memorandum binding on regional offices that permitted an action based on an employer’s alleged misclassification of an employee as an independent contractor. Written in December 2015 but previously unpublished, the Memorandum recognizes that the Board has never found misclassification a per se violation of the National Labor Relations Act (NLRA). However, “there are several lines of Board decisions that support such a finding,” according to the Memorandum. In the case of the Pacific 9 Transportation, Inc., the employer continued to categorize its workers as independent contractors despite an earlier ruling from a regional office that its drivers were employees and conveyed to workers that unionization would be futile, actions the NLRB said worked as “a preemptive strike,” chilling workers from exercising their rights under the Act. The Division of Advice therefore recommended that the regional office issue a complaint based on a Section 8(a)(1) violation for the sole reason that the employer misclassified its workers as independent contractors. While the Memorandum only authorizes a complaint and is not a finding of liability, it serves as a warning to employers that the Board considers misclassification a potential per se violation of the NLRA.

Detailed discussion

Pacific 9 Transportation operates a drayage company servicing the ports of Los Angeles and Long Beach. A fleet of approximately 160 trucks and 180 drivers transport containers to and from the ports, rail locations and customer warehouses.

Each driver was required to execute an agreement stating they are an independent contractor. Other provisions state that drivers must acquire and maintain insurance for their trucks, will be compensated by the load (not the hour), are not required to rent or purchase trucks from the employer and may accept or decline shipments at their choosing.

According to the NLRB, however, day-to-day operations were much different, with Pacific exercising “extensive control” over drivers’ schedules, 90 percent of workers renting their vehicles from the company, insurance held by Pacific on all its vehicles and memos routinely issued to drivers about various expectations.

A union began an organizing campaign among the drivers, part of which was to file individual wage and hour claims with the state Labor Commissioner alleging misclassification as independent contractors. The union also filed a charge with the NLRB. After an investigation, the region determined the drivers were statutory employees and that the company violated Section 8(a)(1), notifying Pacific of its intent to file a complaint.

Instead, the company entered into an informal settlement. A few weeks later, however, Pacific distributed a memorandum to its drivers stating that the company only worked with independent contractors, did not have any employee drivers, and the charge the union filed with the NLRB was “completely false and without fact.”

When the region requested Pacific retract the memo, the company refused and the region revoked the settlement agreement. It then turned to the Board’s Division of Advice, asking whether the misclassification of employees as independent contractors by itself violates Section 8(a)(1) of the NLRA.

In a newly published Advice Memorandum, Associate General Counsel Barry J. Kearney answered in the affirmative: “We conclude that the Region should issue a Section 8(a)(1) complaint alleging that the Employer’s misclassification of its employees as independent contractors interfered with and restrained employees in the exercise of their Section 7 rights.”

Pacific’s drivers are statutory employees and not independent contractors, the Board said, as the company “exerts extensive control over its drivers on a day-to-day basis,” effectively supervises the performance of work through standards in a handbook and establishes and controls the drivers’ rates of compensation, and the work performed by the drivers is “literally the entirety” of Pacific’s business.

“Section 8(a)(1) makes it unlawful for an employer ‘to interfere with, restrain, or coerce employees in the exercise of’ employees’ Section 7 rights,” the memo stated. “Although the Board has never held that an employer’s misclassification of statutory employees as independent contractors in itself violates Section 8(a)(1), there are several lines of Board decisions that support such a finding.”

The Board has found Section 8 violations when an employer’s actions “operate to chill or curtail” future Section 7 activity of statutory employees, where employers make a statement to employees that engaging in Section 7 activity would be futile, and are based on a misstatement of law that insinuates adverse consequences for workers engaging in Section 7 activity.

“In the instant case, [Pacific’s] misclassification of its statutory employees as independent contractors operates as a restraint on and interference with its drivers’ exercise of their Section 7 rights,” Kearney wrote. Pacific’s “conduct—treating the drivers as employees on a daily basis while continuing to insist that they are independent contractors—is without any legitimate business purpose other than to deny the drivers the protections that inure to them as statutory employees, and operates to chill its drivers’ exercise of their Section 7 rights. [Pacific’s] misclassification suppresses future Section 7 activity by imparting to its employees that they do not possess Section 7 rights in the first place. [Pacific’s] misclassification works as a preemptive strike, to chill its employees from exercising their rights under the Act during a period of critical importance to its employees—the Union’s organizing campaign.”

Pacific also conveyed the message in its memo that unionization would be futile and its continued insistence that drivers are independent contractors “is akin to a misstatement of law that reasonably insinuates adverse consequences for employees’ continued Section 7 activity,” the Board added. “Because independent contractors may lawfully be terminated for engaging in Section 7 activity, [Pacific’s] continued insistence to its employees during a union organizing campaign that they are independent contractors is tantamount to [Pacific] telling its employees that they engage in Section 7 activity at the risk of losing their jobs.”

Accordingly, the Advice Memorandum recommended the region office should issue a Section 8(a)(1) complaint alleging Pacific’s misclassification of its drivers as independent contractors violated the NLRA.

As a remedy, the region should seek an order requiring Pacific “cease and desist from interfering with, restraining, or otherwise coercing its employees in the exercise of their Section 7 rights by communicating to drivers that they are independent contractors and not employees within the meaning of the Act.” In addition, the order should mandate Pacific take affirmative action to rescind agreements with drivers that classify them as independent contractors and post appropriate notice.

To read the Advice Memorandum in Pacific 9 Transportation, Inc., click here.