NLRB Returns to Independent Contractor Fundamentals in SuperShuttle

In a ruling with significance for businesses using independent contractors, the National Labor Relations Board has reaffirmed that entrepreneurial opportunity is a significant factor in weighing independent contractor status.

On January 25, the National Labor Relations Board (NLRB or Board) returned to the “traditional test” for independent contractor status under the National Labor Relations Act (NLRA) in SuperShuttle DFW, Inc.,[1] which reversed the Board’s 2014 decision in FedEx Home Delivery.[2] This development is extremely important for businesses that utilize independent contractors, including most “gig economy” enterprises.

The Traditional Independent Contractor Test

For 50 years prior to the FedEx decision, the Board applied the common law agency test to determine whether a worker is an employee or an independent contractor, with the burden of proof on the party asserting independent contractor status.[3] The inquiry involved application of the nonexhaustive common law factors from the Restatement (Second) of Agency § 220 (1958):

1. The extent of control which, by the agreement, the master 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 part of the regular business of the employer.
9. Whether or not the parties believe they are creating the relation of master and servant.
10. Whether the principal is or is not in business.

In applying this test, courts instructed that no one factor should be determinative, but rather each factor must be assessed and weighed accordingly.

One of the courts frequently ruling on NLRA independent contractor decisions has been the US Court of Appeals for the DC Circuit. In one such case 10 years ago (also involving FedEx Home Delivery), the DC Circuit observed that whether putative independent contractors possessed significant “entrepreneurial opportunity” for gain or loss had become a hallmark of independent contractor status in weighing the Restatement factors.[4] Thereafter, the presence or lack of entrepreneurial opportunity became an important principle in evaluating the impact of the Restatement factors, with the relative significance of entrepreneurial opportunity depending on the specific facts of each case.

The Board’s 2014 FedEx Decision

Five years later, in another case involving FedEx, the Obama-era Board rejected the significance of entrepreneurial opportunity in reviewing the Restatement factors. Instead, the Board noted that it would only “give weight to actual, but not merely theoretical, entrepreneurial opportunity, and it should necessarily evaluate the constraints imposed by a company on the individual’s ability to pursue this opportunity.”[5] Further, the FedEx majority added an essentially new factor to the traditional common law analysis: rendering services as part of an “independent” business. It was within this factor that the majority placed entrepreneurial opportunity as a possible element for consideration. Thus, the significance of entrepreneurial opportunity went from a hallmark of independent contractor status to only a sub-element of merely one factor of the 10 (or arguably 11) factors. The diminishment of entrepreneurial opportunity as a factor in the analysis (and emphasis on there being an independent business) significantly narrowed the scope of independent contractor status under the NLRA. The proof was in the case results. The same type of FedEx Home Delivery drivers whom the DC Circuit had held to be independent contractors in 2009 were held by the Board to be employees in 2014.

In a strongly worded dissent, then Board Member Harry Johnson opined that the majority had “fundamentally shifted the independent contractor analysis, for implicit policy-based reasons, to one of economic realities, i.e., a test that greatly diminishes the significance of entrepreneurial opportunity and selectively overemphasizes the significance of ’right to control’ factors relevant to perceived economic dependence”—a test that was expressly rejected by Congress.[6]

Unsurprisingly, the DC Circuit refused to enforce the Board’s new test in FedEx—rebuking the Board for coming to a different conclusion for the same type of drivers.[7] But the Board, for its part, continued to apply the FedEx test in subsequent independent contractor cases. SuperShuttle has now ended the Board’s FedEx test.

The Board’s New SuperShuttle Decision

The Board majority in SuperShuttle returned to the traditional test prior to FedEx, agreeing with then Member Johnson’s position. In rejecting FedEx, the majority noted that it is not necessary to apply the entrepreneurial opportunity principle to each and every common law factor in each and every case. “Instead, consistent with Board precedent . . . the Board may evaluate the common-law factors through the prism of entrepreneurial opportunity when the specific factual circumstances of the case make such an evaluation appropriate.”[8] Applying this new (old) approach, the Board held that SuperShuttle’s driver-franchisees were independent contractors under the traditional test.

Analysis

Many industries will be affected by this decision, including various “gig economy” companies. Although a fulsome analysis of the Board’s application of the traditional test in SuperShuttle is beyond the scope of this LawFlash, the decision is especially notable for rejecting the idea that economic reality is tied principally or solely to the independence of a business, and finding that the lack of control by the putative employer over daily tasks is an important factor to be considered. The Board’s discussion here is particularly relevant to app-based companies where the people who perform the relevant work are free to log on to and off of “the system” at will:

As noted above, SuperShuttle [driver-]franchisees are free from control by SuperShuttle in most significant respects in the day-to-day performance of their work. Franchisees have total autonomy to set their own work schedule. They merely turn on their Nextel device and wait for the next bid offer. Once a trip is offered, franchisees, except in very limited circumstances [note omitted], can decide whether to accept the trip or not. Further, when a franchisee wishes to take a break or end the work day, he merely turns off his Nextel device. Other than the receipt of data from the Nextel device, there is little record evidence of communication between a franchisee and SuperShuttle during day-to-day operations. Franchisees’ discretion in deciding when to work and which trips to accept weighs in favor of independent-contractor status.[9]

Notably, the Board found that the control drivers exercised over their own day-to-day tasks, combined with the facts that drivers (1) owned their own vans and (2) could select their own fares to maximum their profits, was an extremely important factor when viewed through the “prism” of entrepreneurial opportunity:

Franchisees’ ownership (or lease) and control of their vans, the principal instrumentality of their work, the nearly complete control franchisees exercise over their daily work schedules and working conditions, and the method of payment, where franchisees pay a monthly fee and keep all fares they collect, all weigh strongly in favor of independent-contractor status. Moreover, these three factors provide franchisees with significant entrepreneurial opportunity and control over how much money they make each month.[10]

However, while the traditional test has returned, employers who wish to maintain valid independent contractor relationships need to carefully ensure that the factors described above, on balance, lean toward independent contractor status and evince entrepreneurial opportunity. No one factor controls this test, but, post-SuperShuttle, the Board will consider each element individually through the prism of entrepreneurial opportunity.

Contacts

If you need assistance designing a business model that utilizes independent contractors, drafting independent contractor agreements, or analyzing your existing agreements, please contact any of the following Morgan Lewis lawyers:

Century City
Harry I. Johnson, III 

Los Angeles
Nicole A. Buffalano

Miami
Anne Marie Estevez

New York
Christopher A. Parlo
Melissa C. Rodriguez

Philadelphia
Michael J. Puma
Joseph C. Ragaglia

Washington, DC
Daniel P. Bordoni
Jonathan C. Fritts
Philip A. Miscimarra