Transportation Alert: ‘Entrepreneurialism' Makes Workers Independent Contractors

Date: Sep 28, 2009

The Fair Labor Standards Act ("FLSA") generally requires that when an employee has exceeded a 40-hour workweek, that individual is entitled to time-and-a-half compensation for all hours worked in that week over 40. Independent contractors, however, are not entitled to overtime pay under the FLSA. Indeed, many companies need to structure independent contractor relationships with the workers on whom they rely in an effort, in part, to reduce the financial burdens those companies would otherwise encounter in attending to payment of payroll taxes and worker benefits attendant upon the use of employees.

For the above-stated reasons, companies functioning in the transportation industry frequently strive to establish independent contractor relationships with the drivers whom they utilize. Given that fact, it is instructive to note that plaintiffs in several recent cases – including some involving FedEx Corporation – have attempted to limit a company's ability to successfully invoke the independent contractor model.

To determine whether a worker is an employee or independent contractor, the National Labor Relations Board ("NLRB") and courts historically have applied a ten-factor test that has focused, among other considerations, on the extent of control exercised by the worker over the tasks performed, whether the worker supplies the "tools of the trade," if you will, and the length of time that person is so engaged by a particular company in the tasks in which the worker engages.

Parties challenging a company's contention that the workers it uses are independent contractors often successfully highlight the amount of control exerted by the company over its drivers. For example, transportation companies frequently require drivers to wear an approved company uniform and follow company policies. Courts often found these drivers to be employees.

A current example involves a pending class action brought by 27,000 drivers against FedEx Ground. The suit alleges that FedEx Ground misclassified its pickup and delivery drivers as independent contractors, rather than employees, and failed to pay wages due under state and federal wage statutes, as well as employee benefits.

While this case remains pending, a recent decision by the D.C. Circuit reversing the decision of the NLRB below that had concluded that the workers in question were employees may benefit FedEx Ground in its class action.

FedEx Home had independent contractor agreements with 4,000 contractors nationwide. In July 2006, the International Brotherhood of Teamsters, Local Union 25, filed two petitions with the NLRB seeking representation elections at two FedEx Home terminals. The Union won both elections and was certified as the collective bargaining representative at both facilities.

FedEx Home had refused to bargain with the Union and disputed the fact that its single-route drivers were "employees." On appeal, the Court of Appeals for the D.C. Circuit, while retaining and applying the above-noted ten factor test, placed heavy emphasis on the driver's opportunities for significant entrepreneurial gain or loss.

The court concluded that sufficient entrepreneurial opportunities existed warranting a classification of the FedEx Home drivers as independent contractors. It noted that the drivers retained the ability to hire others without FedEx Home's participation and that the drivers owned their routes. The court also found the drivers to be independent contractors because they retained the ability to operate multiple routes.

In its holding, the court identified the key factor not as the degree of supervision under which one labors, but the degree to which one functions as an entrepreneur – taking economic risks with opportunities to profit from working smarter, not just harder.

In another recent NLRB decision, Velocity Express, a shipping company, was ordered to pay more than $100,000 in back pay for misclassifying two drivers as independent contractors. According to the NLRB, the most important factor was the fact that the drivers were not free to employ others to do the company's work and thus did not have a significant entrepreneurial opportunity for gain or loss.

This NLRB decision, which was affirmed by the 10th Circuit, is consistent with the D.C. Circuit's analysis. Both rulings offer transportation companies a potential avenue for establishing independent contractor relationships with drivers. In light of this ruling, companies should endeavor not to obstruct independent drivers' opportunities to take entrepreneurial risks and reap financial benefits.

Caution must always be exercised in attempting to structure bona fide independent contractor relationships. Companies that have misclassified employees have been required to pay unpaid federal, state and local income tax withholdings, unemployment insurance and worker's compensation premiums, employee benefits such as healthcare premiums, and overtime wages.

The severity of potential misclassifications should not be underestimated. Recently, the IRS assessed FedEx $319 million plus interest in back taxes and penalties after tentatively concluding that FedEx Ground and FedEx Home had misclassified 15,000 employees as independent contractors.

Transportation companies should work closely with their transportation and employment counsel when establishing independent contractor relationships.