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Are These Workers Employees or Independent Contractors? It Depends Who is Asking and Why They Want t Are These Workers Employees or Independent Contractors? It Depends Who is Asking and Why They Want t

Are These Workers Employees or Independent Contractors? It Depends Who is Asking and Why They Want to Know.

Within one week, both the National Labor Relations Board (“NLRB”) and the Indiana Supreme Court revamped their definitions of “independent contractor,” in some ways clarifying and in some ways complicating, a complex area of the law. On January 23, 2019, the Indiana Supreme Court overturned an appellate court ruling to focus on the so-called “ABC” test to determine when a worker is an employee or an independent contractor. Two days later, on January 25, 2019, the NLRB overturned a previous decision and revised its employment classification test to focus on the role of “entrepreneurial opportunity” in determining whether workers are properly characterized as employees or independent contractors. And those two recent decisions are only part of the puzzle for employers.

There are at least four different governmental entities that have come up with their own definitions of what it means to be an independent contractor, all for different purposes. The Internal Revenue Service has its 20-factor test for federal tax purposes, the United States Department of Labor has its six-factor test for federal wage and hour purposes, the NLRB has its own test for purposes of determining coverage under the National Labor Relations Act (“NLRA”), and each state, including Indiana, has developed tests for various purposes, including unemployment taxation. Most employers have encountered these tests at one time or another, and it can be quite perplexing as to how to effectively answer the question about whether your workers are employees or independent contractors, because it so often depends on who is asking and why.

The Indiana Supreme Court recently attempted to clarify one of those tests. On January 23, 2019, the Court overturned a lower court ruling on how to distinguish between these two groups of workers in Q.D.-A, Inc. v. Indiana Department of Workforce Development. The main issue in the case was how to determine when a company, which acts as a broker matching truck drivers with large-vehicle customers, should consider those drivers as “employees” for unemployment tax purposes. The lower court had ruled the drivers were employees for unemployment tax purposes, and the broker appealed, arguing the drivers were independent contractors. The Indiana Supreme Court’s analysis focused on the “ABC Test” as set forth in Ind. Code § 22-4-8-1(a). Under the ABC Test, a worker is presumed to be an employee, unless the employer can show: (A) the worker performs services free from control and direction of the employer; (B) the service is performed outside the usual “course of business” of the employer; and (C) the individual either: (i) is customarily engaged in an independently established trade, occupation, profession, or business similar to the service performed; or (ii) is an independent sales agent who solely receives commission. Significantly, the Court defined “course of business” for purposes of the “B” part of the test, as a regular or continuous practice that constitutes part of the enterprise’s usual course of business, regardless of how substantial it is. The Court ultimately determined the drivers in the case were free from the employer’s control (“A”), the employer did not customarily perform driving services itself (it only brokered such services) (“B”), and the workers were customarily engaged in an independently established trade (“C”). As such, under the ABC Test, the workers were independent contractors for Indiana unemployment tax purposes. 

As the independent contractor versus employee status debate evolves in state court, it is also evolving at Federal agencies. On January 25, 2019, the NLRB ruled, in SuperShuttle DFW, Inc., that it would return to a common-law independent contractor test that had been abandoned in 2014, for purposes of determining if a worker is an independent contractor under the National Labor Relations Act (“NLRA”). The classification of workers is just as important for purposes of the NLRA as it is for tax purposes, although for entirely different reasons. If a person is determined to be an employee under the NLRA, then the person has the protection of the law and may utilize the NLRB's processes, may join unions, and may engage in protected concerted activity, with the NLRB’s oversight. If not, the worker is unprotected by the NLRA. Some courts have noted that over time, the NLRB’s analysis had shifted from focusing on the business’s “control” of the worker to focusing on whether the worker had “significant entrepreneurial opportunity for gain or loss.” Although the concept of “entrepreneurial opportunity” was never a test in and of itself, it was a principle to help evaluate the overall significance of the other independent contractor factors. This entrepreneurial opportunity principle was significantly diminished in its importance by the NLRB during the Obama administration. In 2014, the NLRB ruled the independent contractor focus should be on whether the worker was “economically dependent” on the employer, rather than focusing on the “entrepreneurial opportunity.” This change made it significantly more difficult for a business to show a worker was an independent contractor.

In SuperShuttle, the NLRB overruled the position taken in 2014 and returned to application of the entrepreneurial opportunity principle and the ten common-law factors of analysis. Again, the NLRB was careful to make clear that “entrepreneurial opportunity” is not an independent factor, but is a principle by which to evaluate the overall effect of the ten common-law factors on a putative contractor’s independence to pursue economic gain versus a traditional employment relationship. In this particular case, the NLRB found that SuperShuttle franchisees (their job was to drive customers to and from Dallas-Fort Worth and Love Field Airports) were independent contractors, not employees because, among other things, the drivers had to make a significant investment in their businesses by either purchasing or leasing shuttle vans, remitting a weekly flat fee payment to the franchisor (regardless of how much they earned), and maintaining complete control of their daily schedules by determining when and where they would offer shuttle services. These factors showed significant entrepreneurial opportunity for gain or loss, even if the franchisee was economically dependent on the franchisor.

Although Q.D.-A, Inc. and SuperShuttle provide some clarity on worker classification analysis for purposes of Indiana unemployment tax and the NLRA, respectively, the tests for classifying workers in other contexts remain substantially different and may also evolve. With the continuing expansion of the gig economy (these two cases are variations on that theme), it becomes increasingly important for employers to effectively assess how they characterize their workers. And because these determinations are made on a case-by-case basis, it is imperative for all businesses to stay up to date when determining whether their workers should be treated as independent contractors or employees. This is one area of the law where a little knowledge can be a dangerous thing, because the independent contractor tests are not always easily compatible, depending on who is asking and the purpose of the inquiry.

For more information about these recent decisions, please contact Paul Sinclair.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

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