From JDSupra, Michael Marra and Richard Meneghello discuss a recent case before the 2nd Circuit Court of Appeals in which the court identified three factors that were key to determining whether a worker was an employee or independent contractor. Michael and Richard write:
Court Establishes A 3-Step Plan For Success
The court first noted that any independent contractor misclassification dispute arising under the FLSA must be examined under an “economic realities” test. Such a test looks to the realities of the business relationship and ignores technical concepts, focusing primarily on whether CTG exercised “control” over the drivers to such a degree as to create an employment relationship.
The court concluded that, “even when the historical facts and relevant factors are viewed in the light most favorable to [the drivers], and despite the broad sweep of the FLSA’s definition of ‘employee,’ the record here does not permit the conclusion that [the drivers] were employees, but instead establishes that they were in business for themselves.”
They found the following three factors to be crucial to its decision:
- The Drivers Had Entrepreneurial Opportunities Not Available to Employees
First, the court pointed out the drivers were permitted to work for direct competitors, and, in its calculus, “a company relinquishes control over its workers when it permits them to work for competitors.” It noted the drivers’ ability to earn income through work for others made them less economically dependent on CTG, thereby limiting any indicia of an employment relationship (.i.e., the economic reality of the relationship was not one of the drivers’ complete dependence on CTG).The first lesson: employers that allow affiliated individuals to have broad entrepreneurial opportunities, even for competitive businesses, are much more likely to defeat a misclassification claim.
- The Drivers Made A Heavy Investment In Their Business
Second, the court noted the drivers invested heavily in their own driving businesses. “Large capital expenditures,” the court said, “are highly relevant to determining whether an individual is an employee or an independent contractor,” as opposed to negligible items or simply providing the labor itself.In this case, the drivers first had to purchase a franchise to be eligible to work in CTG’s system, which ran in the tens of thousands of dollars. Then, they had to acquire their own vehicle, at similar, substantial cost. On top of these one-time expenses, drivers were solely responsible for the costs of fuel, repair costs, maintenance fees, licensing, registration, and insurance, not to mention tolls, parking, and tickets. Some drivers even invested more heavily in their own businesses through their own advertising.The next lesson, then: to the extent possible, technology and other sharing businesses should require any workers utilizing the company’s platform to invest in the workers’ own business through the purchase of tools, equipment, licensing, transportation, and similar items. You can provide the tools (like apps) that can help a worker unleash the scale and productivity of their own business, but you should not become the equivalent of an investor or partner or bank for the workers’ independent businesses. The more heavily invested the worker is, and less reliant on your company, the better your chance of winning a worker classification battle.
- The Drivers Maintained A High Level Of Flexibility
Third, the court pointed to the many ways in which the drivers dictated their own fortunes, free of control from CTG. They chose how much to work or whether to work at all, and were not required to notify CTG when they took days (or weeks) off. The schedules were entirely of the drivers’ own making. There was no incentive structure in place to reward drivers for operating at certain times, dates, or locations. In fact, drivers could decide when and where to drive free of any control of CTG, and could turn down requests for rides at any time.It might go without saying when describing a sharing economy business model, but to the greatest extent feasible independent workers should be free to pick and choose the work they do (or reject). Not only will this help attract the most qualified or dedicated workers to perform tasks on a given platform – gig workers routinely indicate they most crave the freedom afforded them by this kind of work – but it will also be an absolute key to prevailing against legal challenges regarding worker classification.