Many of my clients are looking for ways to redefine the working relationship away from the employee model. There are various motives for this: the desire to avoid employee liability, the hope to avoid paying taxes and benefits, and the goal to avoid “head count” (whatever that means). But the law (and government regulators) presumes that your worker is an employee unless you can prove otherwise.
Companies are using new and varied ways to avoid falling into the employer category. Some of them share profits with workers and call them “partners.” Some provide workers with a license to use proprietary “apps” or engage drivers, delivery personnel, and casual labor as “licensees” or “franchisees.”
Declaration of independence
The standard way to circumvent employment status is by engaging “independent contractors” rather than employees. I see problematic independent contractor arrangements every day. When I point to the dangers, some clients take my advice and clean up their practice, while others stand firm that their worker classifications are correct, usually adding, “Look, everyone else is doing it, so it must be OK!” Then, after the first company falls in Court, the rest topple like dominoes.
Whether a worker is an employee or an independent contractor is governed by a multifactor test, and it’s easy to satisfy parts of that test. One factor is a written “independent contractor agreement” in which the worker consents to being an independent contractor. It’s not difficult to make sure everybody signs such an agreement. Another factor is whether workers are charged for their use of equipment. Again, a small equipment charge is easy to insert in the independent contractor agreement.
9th Circuit delivers FedEx a lesson on classifying employees
But don’t fool yourself into thinking you have no “employees” just because you’ve satisfied all the small factors. As FedEx learned recently, you can be on the right side of almost all those factors and still lose on the independent contractor classification question.
The U.S. 9th Circuit Court of Appeal (whose rulings apply to Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington employers) found that FedEx’s arrangement with its drivers contained many factors indicative of independent contractor status, including charges for their use of FedEx trucks and equipment and a very sophisticated agreement detailing their independent contractor status. But the 9th Circuit ruled that because FedEx exercised control over how they did their jobs, a class of 2,300 FedEx drivers were employees, a holding that may cost the company several hundred million dollars.
The court’s ruling should not surprise you. FedEx drivers must make deliveries according to a particular schedule, must wear a uniform and drive FedEx trucks, and must scan their locations at every stop. That doesn’t happen by accident; rather, they are trained on the procedures and on many other “means” of doing their job, from making sure their trucks are locked, to scheduling their pickups, using a dolly, and racking packages in their truck.
So it was easy to find against FedEx on the most important factor because it does control how the drivers perform their jobs. The company couldn’t have it any other way. You wouldn’t use FedEx if you couldn’t track your packages, count on an on-time delivery, and have a cookie-cutter experience, no matter who the individual driver is, everyplace in the country.
That one factor generally tells the tale, but almost as important is the fact that deliveries are “the essence of FedEx’s business.” Workers who are central to your business are generally deemed employees. In other words, if you plan to base your core business model on independent contractors, odds are you’ll lose any challenge to your worker classification system.
Uber could be next
Uber doesn’t consider its drivers to be employees but rather independent contractors. Some legal factors bearing on that designation are in Uber’s favor: Drivers supply their own vehicles, they decide when they’re going to work, and their contract describes them as independent contractors.
However, other tests suggest the drivers are employees. Drivers who have sued Uber in a nationwide class action pending in San Francisco allege that Uber imposes on them “a litany of detailed requirements” on which they are graded, including timeliness, the cleanliness of their cars, and the quality and substance of passenger communications. Perhaps most important, a person who performs the inherent core function of a business—and without which a business can’t exist—is ordinarily an employee. Uber’s basic function is to drive people around, suggesting the drivers have employee status.
On Tuesday a judge granted the class action status, noting “Uber’s uniform and unilateral right to control its drivers’ compensation” as “important common proof that bears directly on the class members’ work status.”
New economy wars
This unevenly regulated new economy is fighting its wars outside the ordinary judicial and regulatory process as well. Uber has effectively used its political clout in San Francisco, Sacramento, and Portland, among other places, collecting tens of thousands of customer signatures to block regulations that could put it out of business. On the other hand, cab drivers in major cities all over the country have engaged in strikes and protests against Uber and other unlicensed driving companies.
Meanwhile, Uber is widely advertising bonuses to new drivers and extra cash to people who jump ship from another passenger carrier. These moves carry their own backlash. After former Lyft CEO Travis VanderZanden joined Uber as vice president of international growth, Lyft sued him for taking confidential information. He now has countersued Lyft for invasion of privacy.
When the dust settles, look for many more people to be deemed employees—all over the country, and especially in California. Many people have tried to weaken Sacramento’s proemployee rules; none have succeeded.
Employers must take heed. FedEx was very sophisticated in skewing most of the independent contractor factors in its favor, but it should have predicted that its exercise of control over driver activity (important to maintaining the quality and consistency of the FedEx brand) would sink its independent contractor claim. When you absolutely, positively have to get it there overnight, you’re probably gonna have to call an employee.