For a variety of reasons, employers may prefer to treat those who provide services to them as independent contractors rather than employees. However, when employers exercise a sufficient level of control over the ostensible independent contractors (as outlined in various “factor” tests), they may be considered employees under the law. If that happens, employers can face significant legal consequences. For example, the newly reclassified employees could sue for unpaid minimum and overtime wages, and the employer could face fines, penalties, and other liability under state workers’ compensation statutes. The IRS and state and local taxing authorities might seek income and employment tax withholdings that were not, but should have been, made.
Now, the General Counsel of the National Labor Relations Board has weighed in, giving employers one more reason to worry about employee misclassifications. On August 26, 2016, the General Counsel issued an advice memorandum directing the Regional Director for Region 9 of the NLRB to treat employee misclassifications as a violation of the National Labor Relations Act. The General Counsel explained that informing “employees” they are not employees, but rather independent contractors, has the effect of interfering with their rights under Section 7 of the NLRA to organize a union and engage in other concerted activities for mutual aid and protection. In other words, if they are not employees, they are not covered by the NLRA and, therefore, have no rights under that statute. If they are in fact employees, they are covered. Pacific 9 Transp., Inc., 21-CA-150875 (decided Dec. 18, 2015; issued Aug. 26, 2016).
The memorandum discussed a fairly typical case. A trucking company employed a number of drivers directly, but also engaged a number of independent contractors under contracts containing many typical provisions that might support a finding of an independent contract relationship. For example, the agreement recited that these drivers were free to accept or reject any loads, could use their own trucks or rent trucks from the employer, would be compensated by the load and not by the hour, and were required to maintain insurance on the trucks.
In reality, the employer apparently exerted more control than spelled out in the contract. If they were offered and rejected a load, the drivers were passed over for other loads. Because of the employer’s schedule and the loads offered, they practically were excluded from accepting loads from other carriers. Ninety percent of the drivers rented their trucks from the employer, and, despite what the contract said, the employer maintained the insurance on the trucks. When drivers first signed the agreement, they were given an employee handbook spelling out performance expectations and discipline that would be issued for traffic infractions. Thus, the General Counsel concluded, because of the actual day-to-day control exercised over the drivers, they were in fact statutory employees under the NLRA.
This new advice memorandum adds to the many good reasons for employers to consider carefully whether to classify individuals who perform services for them as independent contractors. The potential risks are substantial and the likelihood the individual will be found to be an actual independent contractor very low.
An agreement like the one discussed in the advice memorandum is critical, but should not be considered a panacea. No matter what words are used, it is more important to ensure that on a day-to-day basis, the individual performing services is truly an independent contractor. If it is necessary to exercise any significant control over the day-to-day work activities of individuals performing services, the prudent course often is to classify and treat these individuals as employees and avoid potentially substantial liability in the future.