Blaw Project 2 Business Law (LAW 1000)
Are Your Workers Employees or Independent Contractors?
Next PR is a home workout equipment and subscription service company (similar to Peloton). Clients can purchase workout equipment and take classes using the equipment through the subscription service in their own homes. Clients take classes, participate in challenges, and try to hit their next personal record – their Next PR!
As a central part of its business, Next PR contracts with drivers to deliver exercise equipment to its customers and setup certain equipment for the customers under an “Operating Agreement” (OA). The drivers must wear Next PR uniforms, drive Next PR-approved vehicles, and groom themselves according to Next PR’s appearance standards. Next PR tells its drivers which equipment to deliver and setup, as well as the days and times of delivery. Drivers must deliver and setup equipment every day that Next PR is open for business and must deliver every package they are assigned each day . . . within a specific window of time negotiated between Next PR and its customers. After each delivery, drivers must use an electronic scanner to send data about the delivery to Next PR. Although Next PR does not require drivers to follow specific delivery routes, Next PR’s tracking and maps software
recommends routes to its drivers that will “reduce travel time” and “minimize expenses and maximize earnings and service.” [With Next PR’s consent, drivers may operate multiple delivery routes and hire third parties to help perform their work.]
Next PR does not expressly dictate working hours, but it structures drivers’ workloads to ensure that they work between 9.5 and 11 hours every working day. Drivers are compensated according to a somewhat complex formula that includes per-day and per-stop components.
Next PR trains its drivers on how best to perform their job and how to interact with customers. A driver’s managers may conduct up to four ride-along performance evaluations each year, “to verify that [the driver] is meeting the standards of customer service” required by the OA. Drivers must follow Next PR’s “Safe Driving Standards” and setup equipment according to the Next PR manual.
Drivers enter into the OA for an initial term of one, two, or three years. At the end of the initial term, the OA provides for automatic renewal for successive one-year terms if neither party provides notice of their intent not to renew.
Next PR requires its drivers to provide their own vehicles. Vehicles must not only meet “all applicable federal, state and municipal laws and regulations,” but also must be specifically approved by Next PR. The OA allows Next PR to dictate the “identifying colors, logos, numbers, marks and insignia” of the vehicles. All vehicles must be painted “Next PR blue,” a specific shade of Sherwin-Williams paint, or its equivalent. They must be marked with the Next PR logo, and be “maintained in a clean and
presentable fashion free of body damage and extraneous markings.” Next PR requires vehicles to
have specific dimensions, and all vehicles must also contain shelves with specific dimensions. Managers may refuse to let drivers work if their vehicles do not meet these requirements. Drivers must provide maintenance at their own expense and must “bear all costs and expenses incidental to operation” of the vehicle. Drivers
authorize Next PR to pay for vehicle licensing, taxes, and fees, and to deduct these costs from the
drivers’ pay.
The OA requires drivers to comply with personal-appearance standards and wear a Next PR uniform “maintained in good condition.” The required uniform includes a uniform shirt with the Next PR logo, uniform pants or shorts, dark sneakers and socks, and, if the driver chooses to wear a jacket or cap, it must bear the Next PR logo. Drivers must keep their “personal appearance consistent with
reasonable standards of good order as . . . promulgated from time to time by Next PR.” Drivers must “keep hair neat and trimmed, be free of body odor.” Managers may refuse to let drivers work if they are improperly dressed or groomed.
Next PR characterizes its drivers as independent contractors, governed by the company’s “Operating Agreement.” The OA provides
[T]his Agreement will set forth the mutual business objectives of the two parties. . . but the manner and means of reaching these results are within the discretion of the [driver], and no officer or employee of Next PR . . . shall have the authority to impose any term or condition on [the driver] . . . which is contrary to this understanding.
Recently, hundreds of Next PR drivers in California sued Next PR, asserting claims for employment expenses and unpaid wages under the California Labor Code on the ground that Next PR had improperly classified the drivers as independent contractors. Plaintiffs also brought claims under the federal Family and Medical Leave Act (FMLA), which similarly turned on the drivers’ employment status. The U.S. District Court for the Northern District of California granted summary judgment for Next PR, concluding that the drivers were independent contractors, and the drivers appealed.
Directions for this group exercise: As a group, assume you are a
panel judges on the Ninth Circuit Court of Appeals assigned to decide this case. Using the
six-factor “economic realities” standard for classifying workers as employees or independent
contractors (articulated by the DOL’s Administrative Interpretation and the
IRS Guidelines, and applied by the Eleventh Circuit in the Scantland v. Jeffry Knight case), how would you rule? Use the following questions to guide your IRAC analysis.
1. What is the issue before the court?
2. What is the appropriate legal rule? What are the six factors of the “economic realities” test?
3. How does each of the factors apply here? Which factors seem to favor classifying the workers as employees? Which suggest that independent contractor would be the proper classification?
4. What is your conclusion—are these workers employees or independent contractors? How should the appellate court rule?
Right as if you are the judges doing the opinion. Therefore, I am looking for a concise decision that is written like a paper, NOT just question-answer responses to the above questions.
Your paper is subject to a maximum page limit of five (5) pages, double spaced. It certainly can be shorter. Stick to the scope of the assignment. Your writing should be accurate, logical, and clear. In professional life, managers, colleagues, investors, etc. will judge your work based on their interpretation of your writing, rather than what you may have intended. You should therefore ensure that your writing is clear and unambiguous.
EXCERPTS FROM FLSA, DOL INTERPRETATION NO. 2015-1, AND IRS GUIDELINES
FLSA, 29 U.S.C. § 203—Definitions
(d) “Employer“ includes any person acting directly or indirectly in the interest of an employer in relation to an employee and includes a public agency, but does not include any labor organization (other than when acting as an employer) or anyone acting in the capacity of officer or agent of such labor organization.
(e)(1) Except as provided in paragraphs (2), (3), and (4), the term “employee” means any individual employed by an employer.
(g) “Employ” includes to suffer or permit to work.
DOL: Administrator’s Interpretation No. 2015-1 (July 15, 2015)
In order to make the determination whether a worker is an employee or an independent contractor under the FLSA, courts use the multi-factorial “economic realities” test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself The
distinction between workers who are economically dependent on employers and the narrower subset of workers who are truly independent businesspersons must not be eclipsed by a mechanical application of the economic realities test Each factor of the economic realities test is discussed
below . . . .
A. Is the Work an Integral Part of the Employer’s Business?
If the work performed by a worker is integral to the employer’s business, it is more likely that the
worker is economically dependent on the employer Work can be integral to a business even if the work is just one component of the business and/or is performed by hundreds or thousands of other workers.
Example: For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.
B. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
In considering whether a worker has an opportunity for profit or loss, the focus is whether the
worker’s managerial skill can affect his or her profit or loss. A worker in business for him or herself
faces the possibility to not only make a profit, but also to experience a loss [A] worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job . .
. .[T]he worker’s ability to work more hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill and do little to separate employees from
independent contractors—both of who are likely to earn more if they work more and if there is more work available.
Example: A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs [T]he worker does not exercise managerial skill that affects his profit or loss. Rather, his earnings may fluctuate based on the work available
. This lack of managerial skill is indicative of an employment relationship between the worker and the cleaning company.
In contrast, a worker provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients. This worker exercises managerial skill that affects his opportunity for profit and loss, which is indicative of an independent contractor.
C. How Does the Worker’s Relative Investment Compare to the Employer’s
Investment?
The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business.
Even if the worker has made an investment it should not be considered in isolation; it is the relative investments that matter For example, investing in tools and equipment is not necessarily a
business investment or a capital expenditure that indicates that the worker is an independent contractor. Instead the tools and equipment may simply be necessary to perform the specific work for the employer. Even if the investment is possibly a business investment, the worker’s investment must be significant in nature and magnitude relative to the employer’s investment in its overall business to indicate that the worker is an independent businessperson.
D. Does the Work Performed Require Special Skill and Initiative?
A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in
determining whether the worker is economically independent The technical skills of cable installers, carpenters, construction workers, and electricians, for example, even assuming that they are special, are not themselves indicative of any independence or business initiative Only
carpenters, construction workers, electricians and other workers who operate as independent businesses, as opposed to being economically dependent on their employer, are independent contractors.
E. Is the Relationship between the Worker and the Employer Permanent or Indefinite?
Permanency or indefiniteness in the worker’s relationship with the employer suggests that the
worker is an employee However, a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship, and the reason for the lack of permanence or indefiniteness should be carefully reviewed to determine if the reason is indicative of the worker’s running an independent business The key is whether the lack of permanence or indefiniteness is
due to “operational characteristics intrinsic to the industry” (for example, employers who hire part-
time workers or use staffing agencies) or the worker’s “own business initiative ” A worker’s lack of
a permanent or indefinite relationship with an employer is indicative of independent contractor
status if it results from the worker’s own independent business initiative.
F. What Is the Nature and Degree of the Employer’s Control?
The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business And the worker’s control over
meaningful aspects of the work must be more than theoretical—the worker must actually exercise it .
. . . For example, an employer’s lack of control over workers is not particularly telling if the workers work from home or offsite.
Technological advances and enhanced monitoring mechanisms may encourage companies to engage workers not as employees yet maintain stringent control over aspects of the workers’ jobs, from their schedules, to the way that they dress, to the tasks that they carry out. [T]he nature and degree of the employer’s control must be examined as part of determining the ultimate question whether the worker is economically dependent on the employer.
Conclusion: In sum, most workers are employees under the FLSA’s broad definitions The factors
should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee).
IRS GUIDELINES
2. Employee or Independent Contractor?
To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined Facts that provide
evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.
Behavioral control.
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:
Instructions that the business gives to the worker. An employee is generally subject
to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
• When and where to do the work.
• What tools or equipment to use.
• What workers to hire or to assist with the work.
• Where to purchase supplies and services.
• What work must be performed by a specified individual.
• What order or sequence to follow . . . .
The key consideration is whether the business has retained the right to control the details of a
worker’s performance or instead has given up that right.
Training that the business gives to the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
Financial control.
Facts that show whether the business has a right to control the business aspects of the worker’s job include:
The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer.
The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.
The extent to which the worker makes his or her services available to the relevant
market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is often paid a flat fee or on a time and materials basis for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.
Type of relationship. Facts that show the parties’ type of relationship include:
• Written contracts describing the relationship the parties intended to create.
• Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
• The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.
• The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the
attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
EXCERPTS FROM SCANTLAND V. JEFFRY KNIGHT (11TH CIR. 2013)
The plaintiffs . . . are current and former technicians who installed and repaired cable, internet, and digital phone services for defendant Jeffry Knight, Inc. (Knight), an installation and repair service contractor for the cable company Bright House Networks (BHN) in Florida. Plaintiffs appeal the district court’s order on summary judgment holding that they were independent contractors—not employees—and therefore not entitled to overtime and minimum wage protections afforded by the Fair Labor Standards Act (FLSA or Act), 29 U.S.C. § 201 et seq [W]e conclude that
the district court erred in this determination . . . .
The FLSA’s overtime and minimum wage protections extend only to “employees,” a term
given rough outline by a series of broad definitions in the Act. An “employee” is any individual employed by an employer The term “employ” “includes to suffer or permit to work.”
These definitions are intended to be “comprehensive enough” to include “working
relationships, which prior to this Act, were not deemed to fall within an employer-employee
category.” These “broad” definitions do not, however, bring “independent contractors” within the
FLSA’s ambit.
To determine whether an individual falls into the category of covered “employee” or exempted “independent contractor,” courts look to the “economic reality” of the relationship
between the alleged employee and alleged employer and whether that relationship demonstrates dependence This inquiry is not governed by the “label” put on the relationship by the parties or
the contract controlling that relationship, but rather focuses on whether “the work done, in its essence, follows the usual path of an employee.” . . .
Both parties . . . rely on the following six factors, used as guides in applying the economic
reality test:
1) the nature and degree of the alleged employer’s control as to the manner in which the work is to be performed;
2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill;
3) the alleged employee’s investment in equipment or materials required for his task, or his employment of workers;
4) whether the service rendered requires a special skill;
5) the degree of permanency and duration of the working relationship;
6) the extent to which the service rendered is an integral part of the alleged employer’s business
. . . .
No one of these considerations can become the final determinant, nor can the collective answers to all of the inquiries produce a resolution which submerges consideration of the dominant factor— economic dependence . . . .
[T]hese six factors are not exclusive and no single factor is dominant. We view the facts
relevant to each factor through the lens of “economic dependence” and whether they are more
analogous to the “usual path” of an employee or an independent contractor . . . .
A. Control
The first factor considers the nature and degree of the alleged employer’s control as to the manner in which the work is to be performed. . . . The facts indicate that Knight exercised
significant control over plaintiffs such that they did not stand as “separate economic entities” who
were “in business for themselves.”
Technicians were required to report to a Knight facility by 7:00 to 7:15 each morning. Technicians would turn in equipment from the previous day and submit their work orders, which included the billing codes that determined their pay for particular jobs. These billing codes were set by Knight, and managers could unilaterally change the codes that technicians reported, thereby reducing a
technician’s pay. Plaintiffs would also receive a “route” detailing the current day’s work orders, which were generally assigned in two-hour timeslots. Though plaintiffs’ “Independent Contractor Service Agreements” provided that they could “decline any work assignments,” plaintiffs testified that they could not reject a route or a work order within their route without threat of termination or being refused work in the following days. Thus, while a technician might consider a specific route or work order unprofitable, because, for example, it was low-paying or far away, plaintiffs had no power to decline the assignment . . . .
Plaintiffs could, according to their contract, employ others to help them, but any such
“employees” had to be technicians already engaged by Knight, and were therefore bound by Knight’s
policies . . . .
Plaintiffs were subject to meaningful supervision and monitoring by Knight. Technicians routinely communicated with dispatch during the day and were required to log in and out of Work Force Management—a service on their cellular phones that they paid for via payroll deductions—to indicate when they arrived on a job, when they completed a job, and what their estimated time of arrival was for their next job . . . .
Plaintiff technicians worked five to seven days a week; some were required to work six days a week and sometimes seven days a week because of a requirement that they work rotating Sundays. Plaintiffs regularly worked more than forty hours a week. Technicians either had to inform their supervisors that they would be taking time off or request time off in advance, sometimes in writing.
In sum, Knight controlled what jobs plaintiffs did, how much they were paid, how many hours they worked, how many days they worked, their daily work schedule, whether they could work for others, whether they could earn additional income from customers, and closely monitored the quality of their work . . . .
Assuming factual inferences in favor of plaintiffs, this factor points strongly toward employee status.
B. Opportunity for Profit or Loss
The second factor considers the alleged employee’s opportunity for profit or loss depending upon his managerial skill [P]laintiff’s opportunity for profit or loss depended more upon Knight’s
provision of work orders and technicians’ own technical skill and efficiency than their managerial skill
. . . .
Plaintiffs’ opportunity for profit was largely limited to their ability to complete more jobs than assigned, which is analogous to an employee’s ability to take on overtime work or an efficient piece- rate worker’s ability to produce more pieces. An individual’s ability to earn more by being more
technically proficient is unrelated to an individual’s ability to earn or lose profit via his managerial
skill, and it does not indicate that he operates his own business . . . .
Technicians could not negotiate or otherwise determine the rates they were paid for jobs . . . .
Plaintiffs’ ability to earn additional income through their own initiative was limited Plaintiffs
could not sell non-BHN services to customers nor work for other companies because of either a flat prohibition or because the schedules demanded by Knight prevented them from
pursuing other work.
Plaintiffs were able to exert some control over their opportunity for profits by pairing up to complete jobs and trading jobs among each other, but this ability was ultimately limited by the number and types of jobs Knight assigned them and whether Knight’s assigned schedule permitted them time to do so . . . .
[T]his factor suggests economic dependence, and points strongly toward employee status.
C. Investment in Equipment or Materials
The third factor considers the alleged employee’s investment in equipment or materials required for his task, or his employment of workers. This factor favors independent contractor status, although it does so only weakly . . . .
Technicians are required to have vehicles, auto insurance, tools and safety equipment, and commercial general liability insurance [E]ven though a technician who initially bought his tools
from Knight and paid for them via withholdings has some economic independence when the tools are paid for, it is analogous to the independence any employee has who has gained experience and the ability to market himself to competing employers . . . .
D. Special Skill
The fourth factor considers whether the service rendered requires a special skill. This factor favors independent contractor status, but it does so only weakly.
Plaintiffs were clearly skilled workers . . . .
Plaintiffs were dependent upon Knight to equip them with the skills necessary to do their jobs.
The skills attained by technicians point toward a degree of economic independence insofar as a highly trained technician could gain economic independence by the ability to market his skills to a competing employer. This does not, however, significantly distinguish such a worker from the “usual path of an employee.” To the extent that this factor favors independent contractor status, it does so weakly . . . .
E. Permanency and Duration
The fifth factor considers the degree of permanency and duration of the working relationship.
This factor points strongly toward employee status.
Named plaintiffs worked for Knight for an average of more than five years. Their contracts were for year terms, were automatically renewed, and were terminable only with thirty days’ notice. These facts suggest substantial permanence of relationship . . . .
F. Integral Part of Alleged Employer’s Business
The sixth and final factor considers the extent to which the service rendered is an integral part of
the alleged employer’s business. This factor weighs clearly and strongly toward employee status.
Approximately two-thirds of Knight’s business consists of the telecommunications installation and repair services it performs for BHN. . . .
The integral role played by technicians in Knight’s business shows that the arrangement follows
more closely that of an employer-employee relationship than an independent contractor dynamic . . .
.
Assuming factual inferences in favor of plaintiffs, this factor points strongly toward employee status.
G. Weighing the Factors
When all the facts are viewed in the light most favorable to the plaintiffs and all reasonable inferences are drawn in their favor, four of the six factors weigh strongly in favor of employee status. The two factors that do not—investment and special skill—weigh only very slightly toward independent contractor status. Neither contributes in any significant manner to the workers’ economic independence or to distinguishing the workers from the “usual path of an employee.” Thus, we conclude that, viewing the facts most favorably toward plaintiffs and with all justifiable inferences drawn in their favor, plaintiffs were “employees”—not “independent contractors”—under the FLSA.
