BY ROBERTA PIKEOf the many issues that have plagued this industry for years, none tends to come up more often than those concerning worker classification and (more importantly) misclassification. Every day courts across the country are tasked with answering the question of whether a given entity’s workers are employees of the company, or whether they are independent contractors engaged in the operation of their own individual businesses.
Similar inquiries are routinely made by state and federal agencies, including the Department of Labor. The consequences for a business that misclassifies its employees can be formidable. In the context of a lawsuit, a court may award unpaid minimum wages and overtime, punitive damages, and legal fees. The company may also find itself on the hook for unpaid employment taxes and related penalties, and for workers’ compensation, disability, and unemployment insurance obligations if an unfavorable decision results. So serious are the consequences for getting things wrong, even unintentionally, that many companies have been migrating away from the independent contractor model rather than risk the cost and expense of a misclassification lawsuit.
While those of us within the executive ground transportation industry tend to view the misclassification issue as primarily affecting TNCs (and there is no question that the industry has been hit hard by enterprising drivers and their counsel seeking to cash in on the uncertainty, much of which they themselves create).
“In order to determine whether a worker is an employee, courts use a test developed by the U.S. Supreme Court: the ‘economic reality’ test.”
In fact, misclassification claims are hardly unique to the transportation business. In March, home improvement giant Lowe’s entered into a $2.85M settlement with a group of New Jersey installation workers who alleged that they had been misclassified as independent contractors. In the same month, a class action lawsuit was filed against the Hooters restaurant chain, alleging that the company misclassified its assistant store managers as supervisors, notwithstanding the fact that the position primarily entailed non-managerial functions such as cleaning and stocking supplies, rather than typical supervisory functions such as hiring and firing employees. And in June of last year, FedEx settled a massive $240M lawsuit that challenged the company’s classification of ground and home delivery drivers in 20 states as independent contractors. As is typically the case with wage and hour lawsuits, each asserted claims under both the Fair Labor Standards Act (FLSA) and under state labor laws. Likewise, all were pursued: Not individually on behalf of a handful of workers, but rather on a class and collective basis—an approach that makes lawsuits of this sort exceptionally costly to defend against.
It certainly would be easy to conclude that winning a class action wage and hour lawsuit is impossible in light of all of these settlements; however, such a conclusion would not be accurate. On April 12, 2017, the U.S. Court of Appeals for the Second Circuit issued a lengthy and well-reasoned decision affirming the prior dismissal of such a lawsuit against a well-known New York black car company, Corporate Transportation Group (CTG), together with its related companies. While there is nothing new or unique about the legal content of the decision (the case law and legal concepts it relies upon are well-known), what makes this case notable is its clear and thoughtful analysis of the facts, and its application and adoption of so many “IC friendly” concepts en masse.
In order to determine whether a worker is an employee, courts use a test developed by the U.S. Supreme Court: the “economic reality” test. This test analyzes the totality of the circumstances surrounding the parties’ relationship and the workers’ circumstances. Put another way, courts look at the “big picture” to determine if the number of factors that point to an employment relationship are outweighed by those that imply an independent contractor relationship, and vice versa. If the workers are, as a matter of economic reality, dependent upon the business to which they render service, they will be found to be employees.
In the CTG case, the district court and the appellate court both found that the plaintiff drivers were not economically dependent upon CTG, but rather were “small businessmen” operating their own transportation businesses. More specifically, the Second Circuit found that “Plaintiffs independently determined (1) the manner and extent of their affiliation with CTG; (2) whether to work exclusively for CTG accounts or provide rides for CTG’s rivals’ clients and/or develop business of their own; (3) the degree to which they would invest in their driving businesses; and (4) when, where and how regularly to provide rides for CTG clients.” The court also noted that the plaintiffs took home the bulk of each fare (up to 85 percent in some cases), classified themselves as independent contractors on their tax returns, and took business deductions.
With respect to the plaintiffs’ affiliation with CTG, the appellate court noted that the plaintiffs chose from a wide range of franchises with different terms. The court also observed that the plaintiff drivers were free to terminate their franchises, and could work for competitors or their own customers without violating the terms of the franchise, while the defendants were committed to maintaining the franchises for lengthy or indefinite periods. While the franchise agreements contained a restrictive covenant (vouchers for CTG clients had to be processed through CTG), the court found it was a proper limitation, and not overreaching.
Another important factor was that the drivers had choices. They had the choice of whether to buy or rent a franchise; whether to buy from a CTG-related company or a third party (existing franchisee) or to rent, and from whom to rent; they had multiple choices with regard to work and how to secure it; they weren’t restricted from working for others, including competitors; and they could refuse or reject calls.
“Every little bit of control exerted over a driver tends to exponentially tip the scales in favor of a finding that the driver is an employee ... thus eliminating those bits of control is crucial to a successful outcome.”
The exceptional flexibility offered to the plaintiff drivers weighed in favor of finding them to be independent contractors. The court took note of the fact that (a) the plaintiffs set their own schedules and selected when, where, and how often to work; (b) that CTG did not provide an incentive for plaintiffs to drive at certain times or on particular days; (c) that notice was not required when plaintiffs wished to work; (d) that certain plaintiffs took weeks/months/years off without notifying CTG; and (e) that plaintiffs accepted jobs in their discretion. The facts further demonstrated that the plaintiffs exercised these choices, and that through these choices (all of which involve initiative, judgment, or foresight) they could suffer losses or experience profits. In the court’s words, “[b]y toggling back and forth between different car companies and personal clients, and by deciding how best to obtain business from CTG’s clients, drivers’ profits increased through their initiative, judgment, or foresight—all attributes of the typical independent contractor.”
Yet another factor that weighed in CTG’s favor was the significant investments the plaintiffs had made in their franchises, inclusive of the initial franchise fee, and the cost of other items “notably going to third parties,” such as the vehicle, smartphone, insurance, vehicle registration, and TLC license fee.
The plaintiffs did present some evidence that CTG demonstrated exercised control over the drivers; however, the court found it insufficient to change the “economic reality” of CTG’s relationship with the plaintiffs. Specifically, the plaintiffs pointed out that CTG supplied clients, developed and operated the dispatch system, and negotiated rates with clients and charged fees to drivers. None of this, meanwhile, was strong enough to overcome the other more significant factors the court relied upon (e.g., significant investment, ability to set one’s own schedule, etc.).
In issuing its decision, the Second Circuit expressly noted that it was affirming the district court’s decision based upon the specific factual record before it, and that “[i]n a different case, and with a different record, an entity that exercised similar control ... in ways analogous to the Defendants here might well constitute an employer within the meaning of the FLSA.”
Courts look at the “big picture” when it comes to deciding cases of this sort, and this statement constitutes a warning that how you conduct your business is critical. If the picture presented to a court is one of a business that treats its drivers as independent contractors in some respects but that also seeks to exert control over them, an employer-employee determination is likely. However, if you truly treat your drivers as independent contractors and only exercise a miniscule amount of control (or ideally none at all) over them, courts will tend to find them to be independent contractors.
While the classification war between the independent contractor and employee model is far from over, it’s not to say that if you classify your company’s drivers as independents and a battle ensues, a loss is a foregone conclusion. As the CTG case demonstrates, such battles can be won, provided your company’s methods of operation can withstand the “economic reality” test. The less control exerted upon the driver, and the more freedom the driver has to determine every aspect of what occurs in between the time when he or she leaves home to go to work and when he or she returns, the more likely it is that the company will prevail in any wage and hour litigation that may ensue. Likewise, every little bit of control exerted over a driver tends to exponentially tip the scales in favor of a finding that the driver is an employee, thus eliminating those bits of control is crucial to a successful outcome. The CTG decision marks a welcome change from the many employee-friendly decisions we have seen in the past, and reaffirms that the independent contractor model is a legitimate way of doing business. The key to successfully defeating challenges is through a demonstration that a truly independent and arms-length relationship between your company and its drivers. [CD0817]
Disclaimer: The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.
Roberta Pike is a Partner with Pike, Tuch & Cohen Law Firm in Bellmore, N.Y. She may be reached at email@example.com.