Independent contractor classification remains at the forefront of the employment and labor law landscape, with non-compliance a trigger for potential liability under virtually every employment law. With a recent National Labor Relations Board (NLRB) decision, however, employers have received some welcome news that independent contractor misclassification is not a stand-alone violation of the National Labor Relations Act (NLRA).
Independent contractor status backdrop
Independent contractor classification remains one of the key employment issues of the modern workforce. While there has been increased prominence attributable to the emergence of the so-called gig economy, where workers are often classified as contractors, these issues also resonate in other workplaces where flexible and nontraditional working arrangements are used.
Complicating these issues for employers is the uncertainty created by the tangle of differing legal standards applied by state, federal and local regulators, from the IRS and the US Department of Labor to state workers compensation and unemployment insurance agencies. Political differences on the issue have often led to wildly swaying interpretations, guidelines and enforcement agendas.
Recent decisions and actions of courts and government regulators have further highlighted the uncertainty and risk in these contractor relationships. For example, the IRS and Department of Labor have established a joint initiative to pursue and impose monetary penalties on employers for misclassification. Even more recently, the California Supreme Court’s Dynamex Operations v. Supreme Court decision sent shockwaves by embracing a strict legal test constraining the ability of employers to classify workers as contractors in California, a test that the California legislature is currently considering codifying more broadly to workers in the state, in the hotly debated Assembly Bill 5. Some version of the strict ABC test adopted by California is already the law in other states as well, including Massachusetts and New Jersey.
Against this backdrop comes the National Labor Relations Board’s recent decision in Velox Express, Inc., 368 N.L.R.B. No 61 (2019). Classification of workers is a fundamental threshold issue under federal labor law, as only statutorily defined “employees” are covered under the National Labor Relations Act (NLRA). Under Section 2(3) of the NLRA, independent contractors are specifically excluded from the protections afforded to employees. Accordingly, many NLRB decisions preliminarily have to resolve whether certain workers classified by employers as independent contractors are properly classified as such or are instead statutory employees subject to the NLRA. Employee/contractor classification issues typically arise in the context of determining who is eligible to vote in a NLRB election and in resolving whether certain workers are protected by Section 8(a)(1) of the NLRA.
Recently, the NLRB clarified the test to be used in resolving this threshold determination of whether an independent contractor is properly classified under federal labor law, focusing the inquiry on the putative contractor’s opportunity for entrepreneurial gain or loss. SuperShuttle DFW, Inc., 367 N.L.R.B. No. 67 (2019).
In Velox Express, the NLRB addressed a related issue − could an employer’s mere act of misclassifying workers as independent contractors itself be a violation of Section (8)(a)(1) of the NLRA, which prohibits an employer from interfering with, restraining, or coercing employees in the exercise of the organizational rights guaranteed by the NLRA? The NLRB answered that question in the negative, holding that an employer does not violate Section 8(a)(1) of the National Labor Relations Act by misclassifying its workers as independent contractors.
On December 18, 2015, the Division of Advice operating under then-NLRB General Counsel Richard Griffin issued an Advice Memorandum that concluded that one of the NLRB’s regional offices should issue a complaint alleging that the employer’s misclassification of its employees as independent contractors itself violated Section 8(a)(1) of the NLRA. Pac. 9 Transp., Inc., No. 21-CA-150875 (NLRB Div. of Advice Dec. 18, 2015) (released Aug. 26, 2016). This was a new theory of liability – the National Labor Relations Board had never previously found that misclassification itself was a violation of the NLRA.
Based on the initiative laid out in this advice memorandum, the Board issued a number of unfair labor practice complaints incorporating this novel theory, which led in turn to several Administrative Law Judge rulings finding that employers had violated Section 8(a)(1) of the Act by misclassifying their workers as independent contractors instead of employees. See, eg, Intermodal Bridge Transp., No. 21-CA-157647 (NLRB Div. of Judges Nov. 28, 2017). One such ALJ ruling that found a stand-alone misclassification violation was in a case involving Velox Express, Inc. Velox Express, Inc., 15–CA–184006 (NLRB Div. of Judges September 25, 2017).
On December 1, 2017, the new NLRB General Counsel, Peter Robb, issued General Counsel Memorandum GC 18–02, which rescinded, among other Advice Memoranda, the memorandum arguing that an employer’s misclassification of employees as independent contractors is itself a violation Section 8(a)(1) of the NLRA.
Recognizing the significance of this issue, on February 15, 2018, the NLRB issued a Notice of Invitation to File Briefs in the Velox Express matter, which was at the time on appeal to the NLRB, on the following question:
Under what circumstances, if any, should the Board deem an employer’s act of misclassifying statutory employees as independent contractors a violation of Section 8(a)(1) of the Act?
This invitation drew great interest. In addition to the parties to the underlying case and the NLRB’s office of General Counsel, 28 outside parties submitted 13 briefs weighing in on the issue.
The Velox Express decision
On August 29, 2019, the NLRB issued its decision in Velox Express. Velox Express is a company that provides medical courier services for clients who perform laboratory testing of medical specimens. Velox’s drivers, whom the company treated as independent contractors, collect medical specimens for Velox’s clients in Arkansas and western Tennessee.
The NLRB’s Office of General Counsel brought a complaint based on a charge filed by one of these drivers alleging, among other things, that the company misclassified the drivers as contractors. The NLRB’s complaint alleged that, by misclassifying them, Velox was violating their Section 7 organizational rights. The case was heard before an Administrative Law Judge, who found, among other things, that Velox had misclassified its drivers as independent contractors, and that, by doing so, had violated Section 8(a)(1) of the NLRA. The ALJ reasoned that by misclassifying the drivers, Velox “restrained and interfered with their ability to engage in protected activity by effectively telling them that they are not protected by Section 7 and thus could be disciplined or discharged for trying to form, join or assist a union . . . .”
Velox appealed the ALJ’s ruling to the NLRB. As an initial matter, the Board affirmed the ALJ’s ruling that Velox Express had misclassified the drivers as independent contractors. However, the Board, by a 3-1 majority, held that an employer’s misclassification of its employees as independent contractors does not violate the NLRA; it reversed the ALJ’s finding that Velox Express had violated section 8(a)(1) of the NLRA by misclassifying the drivers.
The Board majority held that an employer’s communication to its workers of its opinion that they are independent contractors does not, standing alone, violate the NLRA if that opinion turns out to be mistaken. The Board reasoned that such communication does not inherently threaten those employees with termination or other adverse action if they engage in activities protected by the NLRA, nor does it communicate that it would be futile for them to engage in such activities. Accordingly, under Section 8(c) of the NLRA, such a communication is privileged as long as it “contains no threat of reprisal or force or promise of benefit.”
In addition, in reaching its conclusion, the Board noted the challenge in classification determinations: reasonable minds can and do differ over the application of the Board’s own test, not to mention the other tests used by state, federal and local regulatory bodies. To impose liability for an employer’s mistaken belief that an independent contractor classification is proper, the Board reasoned, would unduly chill the creation of independent contractor relationships, which would be contrary to the Congressional intent to preserve independent contractor relationships as reflected by the NLRA.
The Board also observed that a stand-alone misclassification violation would improperly shift the burden of proof in cases where misclassification was found. All the General Counsel would have to do would be to allege employee status, and the employer would be forced to prove that the contractors were properly classified or be liable for an unfair labor practice. The Board further noted that if misclassification as an independent contractor could be found to violate 8(a)(1), then so could other employer categorizations with implications for coverage under the NLRA, such as the classification of an employee as a statutory supervisors.
Takeaway for employers from Velox Express
Classification of workers as independent contractors is a subject fraught with risk and uncertainty for employers due to the multiplicity of often-changing applicable legal standards and increased regulatory attention given to misclassification issues. Against this backdrop, the NLRB’s decision in Velox Express provides something of a respite for employers, offering at least some measure of certainty that an employer will not be found liable for an unfair labor practice violation merely for a mistaken classification decision.
Given the potential for liability and business disruption from the need to satisfy the numerous intersecting legal standards imposed by federal, state and local regulatory agencies and courts, employers should consult with experienced counsel to determine the best approach to independent contractor classification concerns. Please contact the authors or the other DLA Piper attorneys listed below for assistance with these issues.
Joseph A. Piesco