Independent Contractor Misclassification and Compliance News June 2023

By Nathan Gibson | June 30, 2023

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Key Points

The NLRB re-adopts a 2014 standard for determining whether workers are employees or independent contractors.

The NLRB issued a memo saying non-compete agreements violate the National Labor Relations Act.

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web.

1. National Labor Relations Board (NLRB) Re-adopts Standard for Determining if Workers are Employees or Independent Contractors

In June, the NLRB reverted to an approach for determining if workers are employees or independent contractors that was adopted in a 2014 decision, and rejected an approach that was adopted in a 2019 decision. The NLRB members are appointed by the President and with a change in administration, the focus and opinion of the NLRB changes as well.

As a starting point, it should be noted that the NLRB has jurisdiction over employees but does not have any jurisdiction over independent contractors, so the decision whether a worker is an employee or independent contractor determines if the NLRB has any authority or not. This jurisdiction is so significant that there has been a debate about whether deliberately misclassifying workers as independent contractors (to avoid the jurisdiction of the NLRB) would constitute an unfair labor practice under the National Labor Relations Act (NLRA). Last year, the NLRB issued a complaint alleging that misclassifying workers was a violation of the NLRA.

In this most recent change, the NLRB adopted an approach that did not provide any emphasis on whether the worker had significant entrepreneurial opportunity. There has been a long history on whether entrepreneurial opportunity should be emphasized or not, which is briefly summarized (and overly simplified) as follows:

  • 1968: United States Supreme Court says common law agency test should be used to determine employee/independent contractor status under the NLRA.
  • 2007: NLRB says FedEx drivers are employees in decision that did not allow FedEx to, “introduce system-wide evidence concerning the number of route sales and the amount of profit,” as the information would be relevant to the determination of the drivers’ “entrepreneurial interest in their position.”
  • 2009: United States Court of Appeals for the D.C. Circuit said that while the common law agency test was still the appropriate standard, the NLRB had shifted the emphasis to whether a worker has significant entrepreneurial opportunity for gain or loss. This approach was to make it easier to draw the line, although all the factors could be considered.
  • 2014: NLRB decision says entrepreneurial opportunity should not be emphasized. FedEx Home Delivery, 361 NLRB 610 (2014).
  • 2017: United States Court of Appeals for the D.C. Circuit overrules 2014 NLRB decision saying entrepreneurial opportunity should be emphasized saying that it already decided this issue.
  • 2019: NLRB decision says entrepreneurial opportunity should be emphasized.
  • 2023: NLRB decision says entrepreneurial opportunity should not be emphasized.

Throughout the back and forth, the question has been whether to emphasize the extent to which a worker has an entrepreneurial opportunity as a way to apply the common law agency test. The common law agency test is summarized in section 220 of the Restatement of Agency which says:

In determining whether one acting for another is a servant [employee] or an independent contractor, the following matters of fact, among others, are considered:

  1. the extent of control which, by the agreement, the master [employer] may exercise over the details of the work;
  2. whether or not the one employed is engaged in a distinct occupation or business;
  3. the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
  4. the skill required in the particular occupation;
  5. whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
  6. the length of time for which the person is employed;
  7. the method of payment, whether by the time or by the job;
  8. whether or not the work is a part of the regular business of the employer;
  9. whether or not the parties believe they are creating the relation of master and servant; and
  10. whether the principal is or is not in business.

A question several commentators have asked is: Does it really make a difference? In the most recent case, for example, all the NRLB board members reached the same result—that the workers were employees—even though not all of the board members agreed to return to standard in the 2014 decision and/or the importance of the entrepreneurial opportunities. This result has led several commentators to question in how many cases would the issue of entrepreneur opportunity really make a difference.

At least 4 of the 10 factors in the Restatement appear to correspond closely with the concept of entrepreneurial opportunity:

  1. Whether or not the one employed is engaged in a distinct occupation or business—it is hard to imagine an entrepreneurial opportunity if the worker is not in business.
  2. Whether or not the work is a part of the regular business of the employer. Most employers are not going to provide an entrepreneurial opportunity for a worker in the same business as the regular business of the employer.
  3. Whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work. Supplying the instrumentalities, tools and place of business seem to be necessary for entrepreneurial opportunities.
  4. The skill required in the particular occupation—lower skilled workers (dishwashers, manual laborers) are unlikely to have an entrepreneurial opportunity.

It is not likely that this most recent decision will be appealed because most of the NLRB members found that the workers were employees, and so an appeal on the standard may not yield a different outcome. But it is also not likely that this issue is settled. Another case, under a different NLRB appointed by a different president, may lead to a different outcome.

2. NLRB says Non-compete Agreements Violate the National Labor Relations Act

The NLRB General Counsel Jennifer Abruzzo recently issued a memo with the view that many non-compete provisions in employment contracts and severance agreements violate the National Labor Relations Act (NLRA).

The General Counsel memo said that non-compete agreements are unlawful because they prevent employees from exercising their rights under Section 7 of the National Labor Relations Act. Section 7 protects employees with the, “right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”

The last part of the section, “to engage in other concerted activities for the purpose of … other mutual aid or protection” appears to be the basis for most of the opinion.

The memo says that non-compete agreements interfere with employees’ ability to:

  1. Concertedly threaten to resign to secure better working conditions,
  2. carry out concerted threats to resign or otherwise concertedly resign to secure improved working conditions,
  3. concertedly seek or accept employment with a local competitor to obtain better working conditions,
  4. solicit their co-workers to go work for a local competitor as part of a broader course of protected concerted activity, and
  5. seek employment, at least in part, to specifically engage in protected activity, including union organizing, with other workers at an employer’s workplace.

Non-compete agreements do not violate the NLRA if the provisions clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships. The memo’s allowance for true independent contractor relationships is another reason the determination of who is an independent contractor or employee under the National Labor Relations Act (NLRA) is so important. In addition, narrowly tailored non-compete agreement’s infringement on employee rights may be justified by special circumstances.

Last year, the NLRB announced partnerships with the United States Department of Labor and United States Justice Department to work together to protect employees’ rights. This position that non-compete agreements are unlawful under the NLRA is another step by the NLRB to protect employees’ rights.

For more information, check out our resources page on misclassification and compliance. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help. 

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