Misclassifying Employees as Independent Contractors is Not Unfair Labor Practice

November 5, 2019

For the first time, the National Labor Relations Board (NLRB) has addressed whether misclassifying employees as independent contractors violates the National Labor Relations Act (NLRA). While not un-duly tying its hands from making future exceptions, the Board recently decided misclassifying workers doesn’t violate the Act.

Facts

Velox Express, Inc., had a contract with a diagnostic medical laboratory to collect samples from clinics and hospitals and deliver them to the lab for analysis. It entered into independent contractor agreements with the drivers who collected and trans-ported the samples. Each driver had an assigned route and was compensated based on its size. The drivers bought their own insurance and drove and kept up their own vehicles.

Jeannie Edge, one of the drivers, complained that Velox was treating them more like employees than independent contractors. She was subsequently terminated. She then filed an unfair labor practice charge containing numerous allegations, including that she was fired for engaging in protected concerted activity when she complained to management that she was being treated like an employee. She also alleged Velox had violated the NLRA by misclassifying the drivers as independent contractors.

The NLRA provides protection for employees. Section 2(3) specifically excludes independent contractors from the definition of “employee.” One of Velox’s primary defenses was that the drivers were in fact independent contractors and therefore not protected by the Act.

NLRB’s Analysis

The NLRB began by noting that in determining whether a worker is an employee versus an independent contractor, the common-law agency test is used. Under current Board law, entrepreneurial opportunity, while not a separate factor in the analysis, is a principle by which to evaluate the common-law factors’ overall effect on the prospective contractor’s “independence to pursue economic gain.” Using that approach, the Board noted:

  • The drivers had little opportunity for economic gain or, conversely, risk of loss. For example, the drivers had no discretion to determine when and how long they worked, set their own routes, or choose the customers they serviced.
  • They had no proprietary interest in their routes in that they couldn’t sell or transfer them, nor could they hire employees to service them.
  • Velox paid drivers a flat rate, which it unilaterally set, for servicing the routes each day.

Because the drivers were guaranteed the same rate of compensation each day, over which they had no control, they had no real opportunity for economic gain or risk of loss through their own efforts and initiative. Consequently, the NLRB determined they were employees under the NLRA rather than independent contractors.

Is Misclassification a Violation?

The NLRB then went on to address whether the fact that the drivers were misclassified was itself a violation of the NLRA. The administrative law judge (ALJ), whose decision was being reviewed by the Board, determined that by misclassifying the drivers, Velox had restrained and interfered with their ability to engage in protected activity. The ALJ reasoned that Velox had effectively told its drivers they weren’t protected by the Act and thus could be disciplined or discharged for trying to form, join, or assist a union or engage in other protected concerted activities.

The NLRB noted it has never previously found that an employer’s misclassification of its employees as independent contractors (or as any other excluded category under the NLRA) was, standing alone, a per se (or automatic) violation of the Act. The Board pointed out Edge’s primary argument was that an employer’s misclassification of its employees as independent contractors inherently coerces them in the exercise of their Section 7 rights and did so regardless of the employer’s intent. She pointed to the well-settled principle that a violation of the Act may be found even without an unlawful motive.

Edge’s argument, however, assumed the misclassification of employees as independent contractors was in fact coercive. The NLRB didn’t agree with the assumption. The Board noted an employer’s mere communication to its workers that they’re classified as independent contractors didn’t expressly invoke the Act. It didn’t prohibit them from engaging in Section 7 activity, threaten them with adverse consequences for doing so, or promise benefits for refraining from doing so.

The NLRB also reasoned that an employer’s decision to classify its workers as independent contractors is a legal opinion about their status and that its communication of that opinion to them is privileged by Section 8(c) of the NLRA. The Board noted the communication is protected even if it’s erroneous. The Board pointed to cases in which employers had violated the Act by invoking a misclassification to expressly prohibit employees from engaging in Section 7 activity or to indicate that engaging in union or other protected activities would be futile. Employers also have unlawfully reclassified employees as independent contractors to interfere with their union activities. The NLRB stated “it is a bridge too far for us to conclude” an employer coerces its workers in violation of Section 8(a)(1) when it informs them of its position that they’re independent contractors if the Board ultimately determines the employer is mistaken.

Important legal and policy concerns also weigh against finding a stand-alone misclassification to be an NLRA violation. To form a legal opinion about worker status under the Act, employers have the “unenviable task” of applying the common-law agency test, according to the NLRB. Citing the U.S. Supreme Court, the Board said innumerable situations arise in the common law in which it’s difficult to say whether a particular individual is an employee or an independent contractor. In addition, the NLRA isn’t the only relevant law. Employers must consider numerous federal, state, and local laws and regulations that apply different standards for determining independent contractor status. An employer may be correct in classifying workers as independent contractors under certain laws, but wrong under the Act. All the more reason why the Board felt it would be unfair to hold that merely communicating the classification would be unlawful.

After an employer has made a classification decision, it must be communicated to the workers. The NLRB reasoned the employer must first inform them of their classification status before the two sides can intelligently discuss other facets of the business relationship. The common-law test includes consideration of whether the parties believe they were entering into an independent contractor relationship. To satisfy that factor, the employer would be required to communicate its belief that they are independent contractors. Velox Express, Inc. and Jeannie Edge, 368 NLRB No. 61 (2019).

Bottom Line

Based on Velox, there will be no independent 8(a)(1) violation of the NLRA when an employer’s wrongful classification of its workers as independent contractors is rejected and they are determined to be employees. If an employer uses the misclassification as a basis to interfere with an individual’s Section 7 activity, however, there is no reason to believe the Board would not be quick to find a violation of the Act. The fact that the employer reasonably believed the worker was an independent contractor versus an employee won’t be a defense to such allegations.

This article, slightly modified to note recent updates, was featured in the October issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.

For more information about "Misclassifying Employees as Independent Contractors is Not Unfair Labor Practice," contact Michael J. Westcott at mwestcott@axley.com or 608.283.6722.