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. 2019 was a fascinating year for independent contractor compliance. Here’s a look at five of the top stories.
1. AB 5 is Signed Into Law
On September 18, 2019, California Governor Gavin Newsom signed AB 5 into law, a comprehensive law that adopts the ABC standard for classifying workers as independent contractors. The California Supreme Court initially adopted the ABC test in a decision last year: Dynamex Operations West Inc. v. The Superior Court of Los Angeles County, Charles Lee et al, Case No. S222732 (commonly referred to as “Dynamex”).
AB 5 says that workers in California are employees unless the business hiring them can demonstrate:
- (A) The person 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
- (B) The person performs work that is outside the usual course of the hiring entity’s business.
- (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Under the ABC test, many freelancers, gig workers, and independent workers are classified as employees. Most independent contractors are able to satisfy the first prong—being free from control of the hirer—and the third prong—being customarily engaged in an independently established business—but many are unable to satisfy the requirement that the services they provide are outside the usual course of a company’s business. Part of the issue is that “outside the usual course of the hiring entity’s business” is a vague and undefined term that leaves companies at risk if they interpret it differently from a court.
AB 5 makes the ABC test the standard for most, but not all, independent contractors working in California. It also creates important exceptions to the ABC test that enable independent workers to continue to work in California if they meet AB 5’s exceptions’ specific requirements. AB 5 provides four broad categories of exceptions: exempt occupations, professional services, referral agencies, and bona fide business to business relationships. AB 5 sets forth specific requirements and limitations for each of these exceptions.
AB 5 has made it more challenging, but not impossible, for professionals to operate as independent contractors in California. The language in AB 5 is not always clear and may need to be interpreted by courts. In the meantime, MBO continues to work with independent professionals in California to qualify for one of the exceptions or to meet the ABC test.
2. The NLRB and DOL Released Documents Saying Gig Platform Workers Are Independent Contractors
In May, the National Labor Relations Board (NLRB) and the Department of Labor (DOL) released documents saying that gig platform workers were independent contractors, although these opinions may not affect state courts and state wage and hour enforcement agencies.
The NLRB released an Advice Memorandum
The NLRB released an Advice Memorandum prepared by the Office of the General Counsel that concluded that Uber drivers were independent contractors. The NLRB is responsible for enforcing labor laws including laws protecting workers rights to organize, form a union, and bargain with their employers. The General Counsel’s Advice Memorandum was the result of three charges that Uber violated various labor laws. The memo reviewed Uber’s operations and policies and determined that the drivers were independent contractors because they had significant entrepreneurial opportunity.
The memo relied heavily on three key aspects of the relationship:
- Drivers had unfettered freedom to set their own work schedules
- Drivers controlled their work locations
- Drivers could and did work for competitors
The memo said that these factors outweighed the countervailing facts supporting employee status.
The NLRB is a five-person board that is appointed by the President and confirmed by the Senate. The Board is typically split with a majority of the members belonging to the President’s party and the minority of member belonging to the other party. As a result, the decisions of the Board reflect the President’s party’s political philosophy. This opinion by the NLRB is beneficial to gig platform companies like Uber but may be limited or changed when the next President is able to appoint new members to the Board.
The DOL Issued an Opinion Letter
The DOL issued an opinion letter stating that workers for a virtual marketplace company (VMC) are independent contractors under the Fair Labor Standards Act (FLSA).
The DOL reviewed six factors:
- The nature and degree of the potential employer’s control;
- The permanency of the worker’s relationship with the potential employer;
- The amount of the worker’s investment in facilities, equipment, or helpers;
- The amount of skill, initiative, judgment, or foresight required for the worker’s services;
- The worker’s opportunities for profit or loss; and
- The extent of integration of the worker’s services into the potential employer’s business.
The DOL reviewed these factors and found that the workers were independent contractors. The DOL said:
- The VMC did not control the workers—the workers are able to choose if, when, where, how, and for whom they provide services and could work for competitors.
- The VMC did not have a permanent relationship with the workers.
- The VMC did not invest in equipment necessary to the workers to provide services to customers, the VMC invested in the referral platform that connected workers to the customers.
- The VMC did not provide training and the workers were able to choose among virtual platforms to maximize their profits which shows initiative and discretion
- The workers have an opportunity for profit and loss by choosing the types of jobs, the number of jobs, and negotiating the price for the jobs.
- The workers were not integrated into the referral business because they did not develop or maintain the platform; they use the platform to connect with consumers.
The DOL opinion letter may provide insight into how the DOL will approach cases involving virtual marketplace platforms or how the DOL will enforce the FLSA, but it does not change the law or the legal standard for classifying workers. The opinion letter is not binding on courts although a court may refer to it and rely on it for guidance. Most misclassification cases are brought under state laws with more stringent standards for determining if a worker is an employee or independent contractor.
3. The NLRB Says Misclassifying Workers is Not an Unfair Labor Practice
The NLRB said that employers who misclassify employees as independent contractors have not committed an unfair labor practice. The NLRB is responsible for enforcing the National Labor Relations Act which protects employees’ rights and prohibits employers from unfair labor practices. The NLRA protects employees but does not cover independent contractors. A courier/driver for the logistics company Velox Express alleged that Velox had committed an unfair labor practice by misclassifying its workers as independent contractors.
In reviewing the case, the NLRB ruled that misclassification alone does not constitute an unfair labor practice. An employer has to do more, such as make a threat of reprisal, for there to be an unfair labor practice. This ruling lessens the potential liability of companies that engage independent contractors.
4. More States Adopt the 20-Factor Test
While California adopted the ABC test for determining if a worker is an employee or independent contractor, several states have moved away from the ABC test, choosing instead to adopt the “20 factor” test that is found in Internal Revenue Service 87-41.
The ABC test makes it hard for companies to classify workers as independent contractors. In contrast, the IRS 20-factor standard makes it comparatively easy to classify workers as independent contractors. The 20 factors in Revenue Ruling 87-41 indicate that workers who set their own hours, are free from direction and control over their work, and who do not require training for their services performed to be independent contractors, among other factors. You can find all 20 factors here.
Unlike the ABC test where a company has to demonstrate all three elements, the 20-factor test requires a balancing of all factors to determine if a worker is an independent contractor. In 2019, Arkansas, Oklahoma, and Tennessee passed laws that adopted the 20-factor test and eliminated the ABC test. While the ABC test is being considered by Illinois and New York, other states are moving away from it.
5. National Labor Relations Board Finds Arbitration Agreement Unlawful
This year, the National Labor Relations Board (NLRB) found that an arbitration agreement was unlawful when it was reasonably interpreted to interfere with an employee’s right to file charges with the NLRB. In 2018, the Supreme Court said enforcing arbitration agreements under the Federal Arbitration Act (FAA) did not violate the National Labor Relations Act (NLRA) by requiring employees to arbitrate their claims and waive their rights to class action lawsuits.
The NLRA protects workers’ rights to organize and engage in collective bargaining. The issue in this case is slightly different than when the NLRB considered whether the arbitration agreement could be reasonably interpreted to restrict an employee’s right to file charges with the NLRB. The NLRB said that Supreme Court and the FAA did not address arbitration agreements that restrict employees’ access to the NLRB. The NLRB reviewed the language in the arbitration agreement and determined that the arbitration agreement said that it was the exclusive forum for resolving claims and that when reasonably interpreted this restricted an employee’s rights to file charges with the NLRB.
The NLRB did leave open the possibility that a disclaimer or “savings clause” that explicitly allows employees to file claims would be found lawful. Well-drafted arbitration agreements are the best defense against class-action lawsuits alleging the misclassification of employees as independent contractors.
For more information, check out our resources page on misclassification and compliance, or contractor engagement best practices. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help.