Trial Magazine

Not all workers are classified as “employees.” Instead, some are classified as independent contractors. Considered self-employed, these workers are deprived of many federal and state law protections that traditional employees are entitled to regarding minimum wage and overtime pay, collective bargaining, and prohibiting discrimination. These protections include the National Labor Relations Act (NLRA), the Fair Labor Standards Act (FLSA), and Title VII of the Civil Rights Act of 1964.

Independent contractors also are not eligible for health and retirement benefits and must pay both employer and employee payroll taxes; and they are not covered under the Employee Retirement Income Security Act (ERISA), the Social Security Act, or state workers’ compensation or unemployment insurance laws. Companies that misclassify their workers as independent contractors are trying to avoid the cost of paying many of these benefits.

With the rise of the on-demand or gig economy and the increased use of internet and smartphone applications in the “sharing economy” in recent years, classifying workers as independent contractors has become fiercely contested.¹ Ridesharing companies such as Uber and Lyft; food and delivery and grocery shopping services; and trucking and delivery companies, such as FedEx, have faced litigation all over the country regarding their independent contractor business model.

But depending on the federal or state law violations or protections at issue, the factors relevant to determining a worker’s status will vary. Before taking a misclassification case, you must be familiar with the three main tests that courts use and be aware that the exact version of these tests will differ depending on the claim and the jurisdiction.

When Congress passed the NLRA, the FLSA, and other federal labor and employment statutes, it intended to protect employees’ rights to collectively bargain and to be paid minimum wages and overtime.² These laws created protections within the employer-employee relationship, but Congress used circular definitions to define that relationship within them.³ Under the NLRA, for example, “employer” refers to “any person acting as an agent of an employer, directly or indirectly,” while “employee” includes “any employee” and should not be “limited to the employees of a particular employer.”⁴ As a result, courts have adopted different tests to determine whether someone is misclassified as an independent contractor in a wide variety of labor and employment contexts. These tests fall under three general categories.

When the statute at issue does not clearly define the term 'employee,' the common law agency test is the dominant test.

Common Law Agency Test

When the statute at issue does not clearly define the term “employee,” the common law agency test is the dominant test.⁵ It examines the extent of the employer’s right to control the means and manner of a worker’s job performance.⁶ The more extensive an employer’s right to control is, the more likely the worker will be considered an employee—merely labeling someone an independent contractor is not dispositive.⁷ Although courts have held repeatedly that other factors—such as the skill required to perform the job, the location of the work, and whether the work is part of the employer’s regular business—are also considered in this analysis, the right to control remains the central factor.⁸

For example, in Alexander v. Avera St. Luke’s Hospital, the Eighth Circuit affirmed the district court’s conclusion that a pathologist was an independent contractor primarily on the basis that he exercised complete control over his professional services, such as setting his own schedule and hiring substitute pathologists at his own expense.⁹

When deciding whether the control element has been satisfied, the requirements and restrictions that employers impose on their workers are particularly relevant. For example, courts have concluded that the extent of control is considerable when employers require delivery and cab drivers to attend company trainings, comply with company policies and procedures, use company signage and logos, and follow strict disciplinary protocols and dress codes, as well as when they restrict the workers’ ability to operate independent businesses.¹⁰

‘Economic Realities’ Test

As its name suggests, the “economic realities” test examines the economic reality of the parties’ relationship: Is the worker economically dependent on the employer?¹¹ Factors include the degree of the employer’s control, the worker’s investment in required equipment or materials, the worker’s opportunity for profit or loss, and the skill required to do the job.¹² The test is supposed to be broader than the common law test because although control is still a relevant factor, it is important only when it helps decide the degree of the worker’s economic dependence on the employer.¹³

Economic dependence is primarily a question of whether the workers are in business for themselves or depend on finding employment in the businesses of others.¹⁴ Some courts have ruled that economic dependence is significant when workers were unable to negotiate or otherwise determine their pay rates, and when the employer exercised significant control over the business’s financial aspects and determined whether the workers could operate their own businesses, work for others, or earn additional income from customers.¹⁵

For example, in Scantland v. Jeffry Knight, Inc., the Eleventh Circuit found that the employer’s extensive control over what jobs a class of cable technicians did, how much they were paid, how many hours and days they worked, and whether they could work for others suggested economic dependence and strongly pointed toward employee status.¹⁶

The ‘ABC’ Test

More than 20 states apply the “ABC” test to determine a worker’s status for purposes of unemployment insurance benefits.¹⁷ Under this test, a worker is an employee unless he or she is free from control or direction, the services performed are outside the -employer’s usual course or location of business, and the worker is “customarily engaged” in an independent trade or business.¹⁸ The last factor is probably not met if, for example, the worker is new to the trade or business, does not register as an independent business, and advertises only informally.¹⁹ If any one of the three factors is not established, the worker will be considered an employee.²⁰

The question of which test will apply is not always straightforward; it often goes hand in hand with what statutory violations and protections apply.

Which Test Applies

The question of which test will apply is not always straightforward; it often goes hand in hand with what statutory violations and protections apply. Because the NLRA, most federal antidiscrimination statutes, and ERISA do not define the term “employee,” courts generally apply some version of the common law test to determine whether a worker is an employee under those statutes.²¹

Although the FLSA, like the NLRA, defines “employer” and “employee” in a circular fashion, it also expansively defines the verb “employ” to include “to suffer or permit to work,”²² thus encompassing employer-employee relationships that statutes such as the NLRA otherwise would not cover.²³ As a result, most courts have adopted the broader economic realities test in the FLSA context.²⁴ Because the Family Medical Leave Act (FMLA) incorporates by reference the FLSA’s definitions of “employ” and “employee,” some courts also have used the economic realities test for FMLA cases.²⁵

For determining employee status under federal antidiscrimination statutes, some federal appellate courts have adopted versions of a hybrid test that combines elements of the common law and economic realities tests.²⁶ Usually, the right to control remains the primary factor.²⁷

Butler v. Drive Automotive Industries of America, Inc., for example, involved sexual harassment claims brought under Title VII by a worker hired through an employment agency to work at a factory.²⁸ In applying a version of the hybrid test, the Fourth Circuit held that she was an employee of the factory primarily on the basis that it had effective control over her hiring and that its employees handled the day-to-day supervision of her work on the factory floor.²⁹

State law violations. If the misclassification claim alleges violations of employment rights under a state statute, courts have adopted specific tests to determine employee status. Even within the same practice area, there can be quite a bit of variation from one state to another. In the wage-and-hour context, for example, some courts have adopted some version of the economic realities test while others have adopted some version of the common law test.³⁰

In deciding whether to adopt a version of the economic realities test, some state courts have compared the language and the remedial purposes of the FLSA and the state statute and looked at how state agencies charged with carrying out those laws have interpreted them.³¹ For example, the New Jersey Supreme Court adopted a version of the ABC test in the wage-and-hour context by relying on the state department of labor’s regulations.³²

Some state laws include their own tests for determining employee status, instead of deferring this question to the courts.³³ If a state statute does not provide its own test and courts have not specifically identified one for the statute, you should review the statute’s definitions and pay attention to any regulations or interpretations by the state agency responsible for implementing the statute.

Burden of proof. In a misclassification case, the burden of proof does not always lie with the worker. For example, in wage-and-hour cases, some courts have articulated a burden-shifting test for determining employee status: Once the worker presents evidence that he or she performs services for an employer, the burden then shifts to the employer to rebut that presumption by proving that the worker is an independent contractor under the applicable test.³⁴

For instance, in Narayan v. EGL, Inc., a group of drivers established a prima facie case that they provided freight pickup and delivery services for the company and thus were its employees.³⁵ The Ninth Circuit, using the then-applicable California common law test for wage claims, reversed summary judgment for the company because it had failed to overcome the hurdle of showing that the drivers were independent contractors.³⁶

An Evolving Landscape

Several months ago, in Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court abandoned its multi-factor common law test and adopted a simplified, three-factor burden-shifting ABC test for purposes of state wage orders: A worker is considered an employee unless the employer establishes each of the three factors.³⁷ The decision likely will significantly impact misclassification cases against companies such as Uber in the ridesharing industry in California. It likely will also add to the existing legal jigsaw puzzle in which a group of workers can be employees under one set of legal rights and obligations but not under another.

One factor focuses on whether the worker performs work outside the usual course of the employer’s business. In at least one district court, Uber has unsuccessfully argued that it is merely a technological intermediary between riders and drivers, not a transportation company.³⁸ Unless the company can show that its drivers perform services outside Uber’s usual course of business, the drivers will be considered employees under California’s wage-and-hour law.

Having different multi-factor tests that vary depending on the statutory claims and jurisdiction creates a legal landscape where a worker can be an employee entitled to protections in one state under one statute but not under another.³⁹ You can help minimize uncertainty about how your client’s misclassification issue may play out in litigation by considering these tests early on.

Vincent Cheng is an attorney at Block & Leviton in Oakland, Calif. He can be reached at vincent@blockesq.com.

Notes

1. See, e.g., Gray v. FedEx Ground Package Sys., Inc., 799 F.3d 995, 1003 (8th Cir. 2015) (reversing summary judgment for FedEx drivers); Cotter v. Lyft, Inc., 60 F. Supp. 3d 1067, 1081 (N.D. Cal. 2015) (denying cross motions for summary judgment); Razak v. Uber Techs., Inc., 2018 WL 1744467, at *19 (E.D. Pa. Apr. 11, 2018) (granting defendant summary judgment); O’Connor v. Uber Techs., Inc., 82 F. Supp. 3d 1133, 1153 (N.D. Cal. 2015) (recognizing “[t]he application of the traditional test of employment—a test which evolved under an economic model very different from the new ‘sharing economy’—to Uber’s business model creates significant challenges”). Whether a determination about a worker’s status is a question of law or fact will vary by jurisdiction, especially when you are opposing summary judgment on the worker’s status. See, e.g., Lerohl v. Friends of Minn. Sinfonia, 322 F.3d 486, 488 (8th Cir. 2003); Hughes v. Fam. Life Care, Inc., 117 F. Supp. 3d 1365, 1369 (N.D. Fla. 2015); Gray v. FedEx Ground Package Sys., Inc., 799 F.3d 995, 999 (8th Cir. 2015); O’Connor, 82 F. Supp. 3d at 1135. 
2. National Labor Relations Act, 29 U.S.C. §§151–169 (West current through P.L. 115–193); Fair Labor Standards Act of 1938, 29 U.S.C. §§201–219 (West current through P.L. 115–193).
3. See, e.g., 42 U.S.C. §§2000e(b) & (f) (West current through P.L. 115–193) (Title VII definitions); 29 U.S.C. §§1002(5) & (6) (West current through P.L. 115–193) (ERISA definitions).
4. 29 U.S.C. §§152(2),(3). Likewise, the FLSA defines “employer” to mean “any person acting directly or indirectly in the interest of an employer in relation to an employee” and “employee” to mean “any individual employed by an employer.” 29 U.S.C. §§203(d), (e).
5. See Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 739–40 (1989).
6. Id. at 751–752; Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992).
7. See, e.g., O’Connor, 82 F. Supp. 3d at 1140; State ex rel. Workforce Safety and Ins. v. Larry’s On Site Welding, 845 N.W.2d 310, 314 (N.D. 2014).
8. See, e.g., Darden, 503 U.S. at 323–24 (enumerating factors in the Restatement (Second) of Agency §220 (1958)); Salamon v. Our Lady of Victory Hosp., 514 F.3d 217, 228 (2d Cir. 2008), as amended (Apr. 22, 2008); Alexander v. Avera St. Luke’s Hosp., 768 F.3d 756, 762 (8th Cir. 2014).
9. 786 F.3d at 762.
10. See Nat’l Labor Relations Bd. v. Friendly Cab Co., Inc., 512 F.3d 1090, 1099–1101 (9th Cir. 2008); Craig v. FedEx Ground Package Sys., Inc., 335 P.3d 66, 81–92 (Kan. 2014); Padovano v. FedEx Ground Package Sys., Inc., 2016 WL 7056574, at *5 (W.D.N.Y. Dec. 5, 2016).
11. Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1311 (11th Cir. 2013); Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th Cir. 2008).
12. Scantland, 721 F.3d at 1312; Hopkins, 545 F.3d at 343.
13. See Scantland, 721 F.3d at 1312; Craig, 335 P.3d at 76.
14. Scantland, 721 F.3d at 1312; Hopkins, 545 F.3d at 343.
15. See Scantland, 721 F.3d at 1316–17; Hopkins, 545 F.3d at 343–46.
16. 721 F.3d at 1313–17.
17. See U.S. Dep’t of Labor, Coverage 1-4-1-7, https://oui.doleta.gov/unemploy/pdf/uilawcompar/2018/coverage.pdf. 
18. Id. at 1–4.
19. See Great N. Construction, Inc. v. Dep’t of Labor, 161 A.3d 1207, 1218 (Vt. 2016) (worker was not registered as an independent business and advertised only by word-of-mouth).
20. Id. at 1214 (the ABC test places the burden of establishing all three factors on the employer).
21. See, e.g., Friendly Cab Co., Inc., 512 F.3d at 1096–97 (applying common law test in NLRA context); Darden, 503 U.S. at 323 (ERISA context); Eisenberg v. Advance Relocation & Storage, Inc., 237 F.3d 111, 113–14 (2d Cir. 2000) (Title VII context); see also FedEx Home Delivery v. Nat’l Labor Relations Bd., 563 F.3d 492, 497 (D.C. Cir. 2009) (modifying common law test in NLRA context to include consideration of “whether the position represents the opportunities and risks inherent in entrepreneurialism”).
22. 29 U.S.C. §203(g); Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947).
23. Rutherford Food Corp., 331 U.S. at 728–29; Darden, 503 U.S. at 326.
24. See Scantland, 721 F.3d at 1311 (applying economic realities test in FLSA context); Hopkins, 545 F.3d at 343 (same).
25. 29 U.S.C. §2611(3); see Mendel v. City of Gibraltar, 727 F.3d 565, 569–70 (6th Cir. 2013); Heningburg v. CSS Corp., 2015 WL 13081182, at *6 (N.D. Ga. Aug. 14, 2015).
26. Butler v. Drive Auto. Indus. of Am., Inc., 793 F.3d 404, 412–13 (4th Cir. 2015); Schwieger v. Farm Bureau Ins. Co. of Neb., 207 F.3d 480, 484 (8th Cir. 2000).
27. Butler, 793 F.3d at 412–13; Schwieger, 207 F.3d at 484.
28. Butler, 793 F.3d at 406–07.
29. Id. at 415.
30. Compare Anfinson v. FedEx Ground Package Sys., Inc., 244 P.3d 32, 45–46 (Wash. Ct. App. 2010) (adopting economic realities test used by federal circuit courts for determining employee status under Washington Minimum Wage Act), aff’d, 281 P.3d 289 (Wash. 2012), and Terry v. Sapphire Gentlemen’s Club, 336 P.3d 951, 953 (Nev. 2014), with Craig v. FedEx Ground Package Sys., Inc., 335 P.3d 66, 75 (Kan. 2014) (discussing Kansas’s common law test), and Carlson v. FedEx Ground Package Sys., Inc., 787 F.3d 1313, 1318–19 (11th Cir. 2015) (discussing Florida’s common law test).
31. See, e.g., Anfinson, 244 P.3d at 39–42; Craig, 335 P.3d at 75–6.
32. See Hargrove v. Sleepy’s, LLC, 106 A.3d 449, 463–64 (N.J. 2015).
33. See, e.g., Ill. Admin. Code tit. 56, §210.110 (West current through rules published in the Illinois Register Volume 42, Issue 26, June 29, 2018); Mass. Gen. Laws Ann. ch. 149, §148B(a) (West current through Chapter 108 of the 2018 2nd Annual Session).
34. See, e.g., Narayan v. EGL, Inc., 616 F.3d 895, 900 (9th Cir. 2010); Chambers v. RDI Logistics, Inc., 65 N.E.3d 1, 7–8 (Mass. 2016); see Hargrove, 106 A.3d at 464 (the adopted ABC test “presumes that the claimant is an employee and imposes the burden to prove otherwise on the employer”).
35. Narayan, 616 F.3d at 897, 900.
36. Id. at 900–03.
37. Dynamex Operations W., Inc. v. Super. Ct., 416 P.3d 1, 8, 40 (Cal. 2018). In California, wage orders are “constitutionally-authorized, quasi-legislative regulations that have the force of law.” Id. at 6 n. 3; see Cal. Code Regs. tit. 8, §11090 (West current through June 29, 2018). Wage orders impose rights and requirements regarding minimum wages, maximum hours, and meal and rest breaks.
38. O’Connor, 82 F. Supp. 3d at 1141–43.
39. Compare Alexander v. FedEx Ground Package Sys., Inc., 765 F.3d 981, 997 (9th Cir. 2014) (finding delivery drivers employees under California law), with FedEx Home Delivery, 563 F.3d at 504 (finding delivery drivers not employees under NLRA).