Court Continues to Define Independent Contractors

In FedEx Home Delivery v. National Labor Relations Board, 07-1391 (D.C. Cir. April 21, 2009), the District of Columbia Circuit Court of Appeals expanded upon the long-standing common law test for determining independent contractor versus employee status. In doing so, the court moved away from the traditional “right to control” approach and placed particular emphasis on workers' “potential for entrepreneurialism.” Concluding that FedEx Home Delivery drivers were independent contractors rather than employees, the court echoed earlier decisions which highlighted the “degree to which one functions as an entrepreneur” over the “degree of supervision under which one labors.” While not eliminating the risk inherent in classifying workers as independent contractors, the court's ruling provides another avenue for businesses to defend such classification.

Background and Holding

FedEx operates multiple divisions including FedEx Home Delivery, which delivers packages of up to 75 pounds to residential customers. In July 2006, the International Brotherhood of Teamsters, Local Union 25 (the “Union”), filed two petitions with the National Labor Relations Board (“NLRB”) seeking representation elections at two of FedEx's terminals. FedEx refused to bargain with the Union, arguing that the drivers were independent contractors and therefore were not “employees” within the meaning of the National Labor Relations Act (“NLRA”). FedEx argued the NLRB did not have jurisdiction over the drivers or their relationship with FedEx. The NLRB disagreed and ruled that FedEx committed an unfair labor practice by refusing to bargain with the Union. FedEx challenged the ruling.

On review, the D.C. Circuit Court of Appeals first discussed the common law agency test for determining employee versus independent contractor status, which includes several factors, including: the extent of control which, by the agreement, the master may exercise over the details of the work; the kind of occupation; whether the worker supplies the instrumentalities, tools, and the place of work; the method of payment, whether by time or by job; the length of time for which the person is employed; whether the work is a part of the regular business of the employer; and the intent of the parties. Concluding that the non-exhaustive test “is not especially amenable to any sort of bright-line rule,” the court noted with frustration that the legal distinction between employees and independent contractors “is permeated at the fringes by conclusions drawn from the factual setting of the particular industrial dispute.”

While most courts leading up to FedEx Home Delivery emphasized the employer or principal's “right to exercise control” over the means by which workers accomplish their jobs, the FedEx Home Delivery court stepped away from that traditional approach and focused instead on the degree to which workers have “significant entrepreneurial opportunity for gain or loss.” According to the court, “while all the considerations at common law remain in play, an important animating principle by which to evaluate those factors in cases where some factors cut one way and some the other is whether the position presents the opportunities and risks inherent in entrepreneurialism,” even if the workers do not take advantage of those opportunities. This includes both the opportunity to earn additional profits as well as the risk of incurring losses.

In determining whether the FedEx drivers retained sufficient “entrepreneurial potential” to warrant independent contractor status, the court observed that the drivers signed independent contractor agreements, were not subject to reprimands or other discipline, provided their own vehicles “although the vehicles [were required to] be compliant with government regulations and other safety requirements,” and were responsible for all costs associated with operating and maintaining their vehicles. They were also allowed to use their vehicles for non-related commercial or personal purposes, could hire drivers as temporary replacements for their routes, and could assign their contractual rights to their routes to others without FedEx's permission. In comparison, the court downplayed the NLRB's argument that the drivers should be classified as employees because, among other things, FedEx required them to wear a recognizable uniform and conform to grooming standards; paint their vehicles a particular color (white) and stay within a particular vehicle size range; display FedEx's logo on their vehicles in a larger format than required by Department of Transportation (“DOT”) regulations; complete a driving course or equivalent and be insured; and undergo two customer service rides per year to audit performance. According to the court, such facts “reflect differences in the type of service the [drivers] are providing rather than differences in the employment relationship.” After considering all of the facts before it, the court held that the FedEx drivers were independent contractors, not employees, and therefore the NLRB did not have jurisdiction to hold union elections or determine whether unfair labor practices occurred.

Advice For Employers:

Before classifying a worker as an independent contractor, businesses should consult legal counsel. The analysis necessary to determine appropriate classification is fact-specific and cannot simply be determined based on the intent of the parties. To the extent workers are classified as independent contractors, businesses must take steps to ensure the workers operate as entrepreneurs and have opportunities for profit and loss. Providing similar services for other businesses, hiring their own employees, using their own tools/equipment, and having the ability to incorporate are some of the factors that will assist in supporting independent contractor status.

Although FedEx Home Delivery assists businesses in defending independent contractor classifications, California's Employment Development Department (“EDD”) continues to conduct audits and independent contractors continue to file lawsuits challenging their classification (often even though they agreed to or requested the classification in the first place). Even if businesses correctly classify workers, they may nonetheless face a costly legal challenge. As a result, it is important to discuss all options and potential outcomes with counsel.