NLRB Changes Definition of ‘Independent Contractor’

By Allen Smith, J.D.
January 29, 2019 - SHRM

​By broadening the standard for who is considered an independent contractor under the National Labor Relations Act (NLRA), the National Labor Relations Board (NLRB) has reduced the number of individuals who may unionize or bring unfair labor practice charges. Unlike employees, independent contractors are not protected by the act.

In the Jan. 25 SuperShuttle DFW Inc. decision, the board overturned a 2014 NLRB decision that made classification as an independent contractor harder to achieve. The overturned decision didn't rely solely on a host of common-law factors but focused on economic realities, such as whether a worker is economically dependent on a company, in determining whether someone is an independent contractor. Under the 2014 test, if the worker was economically dependent, that worker likely would have been found to be an employee rather than an independent contractor, explained David Pryzbylski, an attorney with Barnes & Thornburg in Indianapolis.

Now the board has returned to the common-law test it used for years before the 2014 decision. This test takes into account a variety of factors, including the relationship the company and individual think they are creating and how much control the company has over the person's work.

Common-Law Test Applied

SuperShuttle DFW franchisees transported passengers to and from Dallas-Fort Worth and Love Field airports and petitioned to unionize. SuperShuttle argued they couldn't because they were independent contractors.

Before 2005, SuperShuttle DFW designated drivers as employees. In 2005, SuperShuttle switched to a franchise model, requiring drivers to sign a one-year franchise agreement that characterizes them as nonemployee franchisees who operate independent businesses.

The franchisees:

• Supply their own shuttle vans.
  
• Pay SuperShuttle DFW an initial franchise fee and a flat weekly fee for the right to use the SuperShuttle brand and its dispatch and reservation equipment.
  
• Are entitled to all fares they collect from customers.
  
• Work no set schedule or number of hours or days per week.
  
• Are not supervised by SuperShuttle. The only daily communication between SuperShuttle and the franchisees occurs through the dispatch system, and franchisees have the right to accept or decline any bid.
  

These factors indicate an independent contractor status, according to the board in the 2019 ruling, which relied on the application of the following common-law factors:

• The type of relationship the parties believe they are creating.
  
• The length of time the person is employed.
  
• If the employer or the worker supplies the tools and place of work.
  
• The method of payment, whether by the time worked or by the job.
  
• The extent of control which, by an agreement, the company may exercise over the details of the work.
  
• Whether the work is usually done under the direction of the employer or by a specialist without supervision.
  

Extra Consideration Eliminated

The 2014 decision considered those common-law principles but also evaluated whether the worker rendered services as part of an independent business.

Under this standard, the board looked not only at whether the individual had a significant entrepreneurial opportunity, but also at whether he or she had:

• A realistic ability to work for other companies.
  
• A proprietary or ownership interest in his or her work.
  
• Control over important business decisions, such as the scheduling of work, the hiring and assigning of employees, the purchasing of equipment and the commitment of capital.
  

In rejecting the 2014 standard, the NLRB stated in SuperShuttle DFW Inc. that the 2014 test "did far more than merely refine the common-law independent contractor test—it fundamentally shifted the independent contractor analysis."

The board instead ruled that employers should use common-law factors alone to determine who is an independent contractor. In addition to the factors mentioned above, these include whether the one employed is engaged in a distinct occupation and if the work is part of the employer's regular business.

The board noted, "There is no shorthand formula." Instead, "all the incidents of the relationship must be assessed and weighed with no one factor being decisive."

Other Laws

HR professionals need to keep in mind that there are other tests for independent contractor status under other laws that may produce different results, cautioned Michael Lotito, an attorney with Littler in San Francisco.

For example, in Dynamex Operations West v. Superior Court, the California Supreme Court last year adopted a three-factor test to determine whether workers are employees or independent contractors under California's wage orders. The prior test was a multifactor analysis that primarily focused on who exerted control over the work. California's new test is much narrower.

All three of the following factors must be met for a worker to be properly classified as an independent contractor under Dynamex:

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  
• The individual performs tasks that are outside the usual course of the hiring entity's business.
  
• The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.
  

Whether an individual is properly classified as an employee versus as an independent contractor is of significance under tax, workers' compensation, discrimination, leave and unemployment laws.

"For example, employers have an obligation to withhold payroll taxes for employees but not for independent contractors," noted Jon Klinghoffer, an attorney with Goldberg Kohn in Chicago. "Employees are protected by discrimination and leave laws, but independent contractors generally are not."

He said that the SuperShuttle DFW Inc. decision should "place the proper characterization of an individual as an employee or independent contractor back on the forefront of HR professionals' minds. This is one area of the law where so many companies just get things wrong."