Employee or Independent Contractor?

Labor Department’s Last-Day Opinion Letter: Distributors of Food Products are Independent Contractors

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From JDSupraRichard Reibstein discusses an opinion letter issued on the last day of the Trump Administration that says distributors who resell retail food products bought from food manufacturers can classified as independent contractors. Richard notes that the opinion letter is based on the new rule on classifying workers as independent contractors and the new rule may be rescinded or modified by the new Biden administration. Richard writes:

Today, less than 24 hours before the end of the Trump Administration, the Labor Department issued an opinion letter that distributors who resell to retail outlets food products they purchase from two or more unnamed food manufacturers can be lawfully classified as independent contractors under the federal wage and hour law. Distributors of food products have brought a number of class and collective actions against food manufacturers over the past few years, as reported in this blog. One large food manufacturer paid over $47 million in settlements of collective and class action lawsuits brought by distributors alleging independent contractor misclassification. While this last-minute opinion letter may be useful to companies defending these types of cases, savvy food manufacturers that have chosen to elevate their level of compliance with federal and state IC laws through the use of a process such as IC Diagnostics (TM) shouldn’t need to rely on this administrative action to successfully establish the IC status of their independent distributors.

The Opinion Letter 

The opinion letter contains three pages of detailed facts dealing with the terms of the distribution agreements, the distributors’ business operations, the distribution business, the optional items supplied by the food manufacturers, and the contacts between the distributors and manufacturers. It then sets forth the general legal principles, drawing mostly from the recently promulgated final regulations issued by the Labor Department on January 7, 2021. Those Regulations, which were the subject of a blog post on this site, are not, however, effective until March 8, 2021.

The Regulations focus on five factors, the first two of which are regarded as “core factors” to which the Regulations give more weight.  The first factor is the nature and degree of control over the work. The opinion letter concludes that this control factor favors independent contractor status where the distributors, among other things:

  • are free to set their own schedules;
  • choose their own assignments;
  • work with little or no supervision;
  • are free to distribute products from other manufacturers including competitors and, in some instances, they generate more than 50% of their sales from the products of other manufacturers;
  • do not have to attend meetings with the manufacturers’ representatives;
  • are not required to follow any particular marketing process or participate in marketing promotions offered by the manufacturer;
  • can decide what prices to charge to non-centralized customers;
  • decide when and how often to make sales calls and in what order;
  • may discontinue doing business with a retailer;
  • may sell to customers outside their territories, which are not exclusive,
  • have the right to choose their customers within the territory;
  • may enter into distribution agreements for additional territories;
  • are not required to purchase a minimum number of products or to make purchases from the manufacturer in any given week;
  • are only required to use their “best efforts” to maximize sales in their territories, furnish appropriate customer service, and uphold the manufacturer’s reputation;
  • are not supervised or monitored by the manufacturer;
  • may delegate work to employees and are not required to perform the services personally;
  • select and pay for their own trucks and warehouses for the products they purchase for resale from the manufacturer; and
  • do not have to wear uniforms.

In contrast, in terms of control by the manufacturer, distributors are required to maintain certain insurance and manufacturers have the right to inspect warehouses, approve changes in the ownership of the distributor, and require a financial guarantee.

The manufacturers offer “optional items and programs” that the distributors can, but are not required to accept, such as: promotional price discounts to pass on to retail; customers, clothing with its branding, centralized billing for some clients, a lock for the distributors to secure its warehouse (which the manufacturer can open if the distributors wish to give access to the manufacturers), and a 2-3 week orientation program for new distributors.

In addition, the opinion letter indicates it is possible the manufacturer requires specific ways to place orders and post invoices, conform to health and safety standards, and locate warehouses in particular areas.

The next “core” factor to be considered is the worker’s opportunity for profit or loss based on initiative or investment – the second of the two “core factors.”  The opinion letter concluded this factor favors independent contractor status because the distributors have discretion to determine:

  • which and how many products to purchase;
  • which customers to solicit, service, or no longer serve;
  • what prices to charge non-centralized customers;
  • what types of vehicles and warehouse space to invest in; and
  • which assistants, if any, to employ.

The opinion letter then examined the three “non-core factors” listed in the final Regulations on IC status.  The Labor Department found that the factor of “skill” did not favor IC or employee status, finding that some of the distributors’ tasks require little specialized training whereas others are “more complicated.”  It concluded that the factor of “permanence” may weigh in favor of employee status to the extent that some distributors have “continuous relationships” with the food manufacturers.  Finally, the Labor Department viewed the factor of “integration” as favoring IC status, concluding that “the distributors are consumers of the manufacturers’ products” and not integrated into its production process.

The opinion letter concluded that “[b]oth of the core factors, control and opportunity for profit or loss, point to independent contractor status, and the non-core factors do not indicate a reason to disagree with that conclusion.”

Analysis and Takeaway

As with all Department of Labor opinion letters, the agency offers its official views based on a set of facts described by the party requesting the opinion. To the extent the facts governing the relationship between distributors and food products manufacturers differ in any material manner from the facts set forth in the opinion letter, the views of the Labor Department would be of limited value.

The opinion letter is issued under the Fair Labor Standards Act and has no application to other federal laws, such as the National Labor Relations Act or the ERISA. Nor does it have any application to state laws governing independent contractor versus employee status.

Further, the opinion letter is based on the application of the recently finalized regulations on independent contractor status, and those regulations will not be effective until March 8, 2021.  By that date, the incoming Biden Administration or the courts may have taken action to diminish or eliminate the significance and legal import of those new regulations.

Nonetheless, the opinion letter is generally beneficial to the food industry and those companies that rely on independent distributors to distribute and sell their products on a direct store delivery (DSD) basis and certainly should be cited to the extent the facts are somewhat similar in whole or in part.  The opinion letter, however, is hardly a panacea, nor is it a cure, for companies that have failed to structure, document, or implement their IC relationships in a manner that maximizes compliance with federal and state laws governing independent contractors.

Some food companies using a DSD business model already have placed themselves in a heightened level of compliance by using a process such as IC Diagnostics (TM) to restructure, re-document, and re-implement their IC relationships in a manner that minimizes or eliminates their exposure to IC misclassification liability in the jurisdictions in which they operate.  Such companies that are ahead of the curve are far less likely to be sued in a class action IC misclassification lawsuit and far more likely to successfully defend themselves should they receive a summons and complaint.

Source: Labor Department’s Last-Day Opinion Letter: Distributors of Food Products are Independent Contractors | Locke Lord LLP – JDSupra

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