Business Law (LAW 1000)
Are Your Workers Employees or Independent Contractors?
Next PR is a home workout equipment and subscription service company (similar to Peloton). Clients can purchase workout equipment and take classes using the equipment through the subscription service in their own homes. Clients take classes, participate in challenges, and try to hit their next personal record – their Next PR!
As a central part of its business, Next PR contracts with drivers to deliver exercise equipment to its customers and setup certain equipment for the customers under an “Operating Agreement” (OA). The drivers must wear Next PR uniforms, drive Next PR-approved vehicles, and groom themselves according to Next PR’s appearance standards. Next PR tells its drivers which equipment to deliver and setup, as well as the days and times of delivery. Drivers must deliver and setup equipment every day that Next PR is open for business and must deliver every package they are assigned each day . . . within a specific window of time negotiated between Next PR and its customers. After each delivery, drivers must use an electronic scanner to send data about the delivery to Next PR. Although Next PR does not require drivers to follow specific delivery routes, Next PR’s tracking and maps software recommends routes to its drivers that will “reduce travel time” and “minimize expenses and maximize earnings and service.” [With Next PR’s consent, drivers may operate multiple delivery routes and hire third parties to help perform their work.]
Next PR does not expressly dictate working hours, but it structures drivers’ workloads to ensure that they work between 9.5 and 11 hours every working day. Drivers are compensated according to a somewhat complex formula that includes per-day and per-stop components.
Next PR trains its drivers on how best to perform their job and how to interact with customers. A driver’s managers may conduct up to four ride-along performance evaluations each year, “to verify that [the driver] is meeting the standards of customer service” required by the OA. Drivers must follow Next PR’s “Safe Driving Standards” and setup equipment according to the Next PR manual. Drivers enter into the OA for an initial term of one, two, or three years. At the end of the initial term, the OA provides for automatic renewal for successive one-year terms if neither party provides notice of their intent not to renew.
Next PR requires its drivers to provide their own vehicles. Vehicles must not only meet “all applicable federal, state and municipal laws and regulations,” but also must be specifically approved by Next PR. The OA allows Next PR to dictate the “identifying colors, logos, numbers, marks and insignia” of the vehicles. All vehicles must be painted “Next PR blue,” a specific shade of Sherwin-Williams paint, or its equivalent. They must be marked with the Next PR logo, and be “maintained in a clean and presentable fashion free of body damage and extraneous markings.” Next PR requires vehicles to have specific dimensions, and all vehicles must also contain shelves with specific dimensions.
Managers may refuse to let drivers work if their vehicles do not meet these requirements. Drivers must provide maintenance at their own expense and must “bear all costs and expenses incidental to operation” of the vehicle. Drivers
authorize Next PR to pay for vehicle licensing, taxes, and fees, and to deduct these costs from the drivers’ pay.
The OA requires drivers to comply with personal-appearance standards and wear a Next PR uniform “maintained in good condition.” The required uniform includes a uniform shirt with the Next PR logo, uniform pants or shorts, dark sneakers and socks, and, if the driver chooses to wear a jacket or cap, it must bear the Next PR logo. Drivers must keep their “personal appearance consistent with reasonable standards of good order as . . . promulgated from time to time by Next PR.” Drivers must “keep hair neat and trimmed, be free of body odor.” Managers may refuse to let drivers work if they are improperly dressed or groomed.
Next PR characterizes its drivers as independent contractors, governed by the company’s “Operating Agreement.” The OA provides
[T]his Agreement will set forth the mutual business objectives of the two parties. . . but the manner and means of reaching these results are within the discretion of the [driver], and no officer or employee of Next PR . . . shall have the authority to impose any term or condition on [the driver] . . . which is contrary to this understanding.
Recently, hundreds of Next PR drivers in California sued Next PR, asserting claims for employment expenses and unpaid wages under the California Labor Code on the ground that Next PR had improperly classified the drivers as independent contractors. Plaintiffs also brought claims under the federal Family and Medical Leave Act (FMLA), which similarly turned on the drivers’ employment status. The U.S. District Court for the Northern District of California granted summary judgment for Next PR, concluding that the drivers were independent contractors, and the drivers appealed.
Directions for this group exercise: As a group, assume you are a
panel judges on the Ninth Circuit Court of Appeals assigned to decide this case. Using the
six-factor “economic realities” standard for classifying workers as employees or independent contractors (articulated by the DOL’s Administrative Interpretation and the
IRS Guidelines, and applied by the Eleventh Circuit in the Scantland v. Jeffry Knight case), how would you rule? Use the following questions to guide your IRAC analysis.
1. What is the issue before the court?
2. What is the appropriate legal rule? What are the six factors of the “economic realities” test?
3. How does each of the factors apply here? Which factors seem to favor classifying the workers as employees? Which suggest that independent contractor would be the proper classification?
4. What is your conclusion—are these workers employees or independent contractors? How should the appellate court rule?
Write as if you are the judges doing the opinion. Therefore, I am looking for a concise decision that is written like a paper, NOT just question-answer responses to the above questions.
Your paper is subject to a maximum page limit of five (5) pages, double spaced. It certainly can be shorter. Stick to the scope of the assignment. Your writing should be accurate, logical, and clear. In professional life, managers, colleagues, investors, etc. will judge your work based on their interpretation of your writing, rather than what you may have intended. You should therefore ensure that your writing is clear and unambiguous. You are not to discuss this assignment with anyone
except your group members. Sharing this assignment or your analysis outside your group is a
violation of the honor code.
• Have more than one paragraph per page.
• Use a legible typeface (eg, 12 point, Arial font). Don’t try to cram in additional material by using smaller font, narrow margins, etc.
• Proofread your written paper at least twice. Watch your logic, spelling, and grammar, repetition, etc. – all count toward your grade.
• Run spellcheck, but don’t rely solely on this resource
• This assignment is subject to copyright. Unauthorized copying, posting, etc. of the assignment (or even answers to the assignment) are prohibited.
EXCERPTS FROM FLSA, DOL INTERPRETATION NO. 2015-1, AND IRS GUIDELINES
FLSA, 29 U.S.C. § 203—Definitions
(d) “Employer“ includes any person acting directly or indirectly in the interest of an employer in relation to an employee and includes a public agency, but does not include any labor organization (other than when acting as an employer) or anyone acting in the capacity of officer or agent of such labor organization.
(e)(1) Except as provided in paragraphs (2), (3), and (4), the term “employee” means any individual employed by an employer.
(g) “Employ” includes to suffer or permit to work.
DOL: Administrator’s Interpretation No. 2015-1 (July 15, 2015)
In order to make the determination whether a worker is an employee or an independent contractor under the FLSA, courts use the multi-factorial “economic realities” test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself The
distinction between workers who are economically dependent on employers and the narrower subset of workers who are truly independent businesspersons must not be eclipsed by a mechanical application of the economic realities test Each factor of the economic realities test is discussed
below . . . .
A. Is the Work an Integral Part of the Employer’s Business?
If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer Work can be integral to a business even if
the work is just one component of the business and/or is performed by hundreds or thousands of other workers.
Example: For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.
B. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
In considering whether a worker has an opportunity for profit or loss, the focus is whether the worker’s managerial skill can affect his or her profit or loss. A worker in business for him or herself faces the possibility to not only make a profit, but also to experience a loss [A] worker’s decisions
to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job . .
. .[T]he worker’s ability to work more hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill and do little to separate employees from independent contractors—both of who are likely to earn more if they work more and if there is more work available.
Example: A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs [T]he worker does not exercise managerial skill that
affects his profit or loss. Rather, his earnings may fluctuate based on the work available
. This lack of managerial skill is indicative of an employment relationship between
the worker and the cleaning company.
In contrast, a worker provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients. This worker exercises managerial skill that affects his opportunity for profit and loss, which is indicative of an independent contractor.
C. How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business.
Even if the worker has made an investment it should not be considered in isolation; it is the relative investments that matter For example, investing in tools and equipment is not necessarily a
business investment or a capital expenditure that indicates that the worker is an independent contractor. Instead the tools and equipment may simply be necessary to perform the specific work for the employer. Even if the investment is possibly a business investment, the worker’s investment must be significant in nature and magnitude relative to the employer’s investment in its overall business to indicate that the worker is an independent businessperson.
D. Does the Work Performed Require Special Skill and Initiative?
A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent The technical skills of cable
installers, carpenters, construction workers, and electricians, for example, even assuming that they are special, are not themselves indicative of any independence or business initiative Only
carpenters, construction workers, electricians and other workers who operate as independent businesses, as opposed to being economically dependent on their employer, are independent contractors.
E. Is the Relationship between the Worker and the Employer Permanent or Indefinite?
Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee However, a lack of permanence or indefiniteness does not automatically
suggest an independent contractor relationship, and the reason for the lack of permanence or indefiniteness should be carefully reviewed to determine if the reason is indicative of the worker’s running an independent business The key is whether the lack of permanence or indefiniteness is
due to “operational characteristics intrinsic to the industry” (for example, employers who hire part-
time workers or use staffing agencies) or the worker’s “own business initiative ” A worker’s lack of
a permanent or indefinite relationship with an employer is indicative of independent contractor status if it results from the worker’s own independent business initiative.
F. What Is the Nature and Degree of the Employer’s Control?
The issue before the court is whether the drivers contracted by Next PR to deliver exercise equipment and set up certain equipment for customers are employees or independent contractors.
The appropriate legal rule is the six-factor “economic realities” test used to determine whether a worker is an employee or independent contractor. The six factors are:
The degree of control exercised by the employer over the worker.
The worker’s opportunity for profit or loss.
The worker’s investment in equipment or materials required for their task.
The degree of skill required for the task.
The permanence of the working relationship.
The extent to which the worker’s tasks are an integral part of the employer’s business.
The degree of control factor weighs heavily in favor of classifying the drivers as employees. Next PR controls the drivers by telling them which equipment to deliver, which days to work, and what route to take. The drivers are required to wear Next PR uniforms and maintain a certain appearance, and their vehicles must meet specific requirements dictated by Next PR. The opportunity for profit or loss factor weighs in favor of classifying the drivers as independent contractors, as they are compensated based on a complex formula that includes per-day and per-stop components. However, the investment in equipment factor weighs in favor of employee classification, as the drivers must provide their own vehicles and bear all expenses related to their operation. The degree of skill required factor is neutral, as the drivers require basic driving and equipment setup skills, but not a high degree of specialized training. The permanence of the working relationship factor is also neutral, as the drivers enter into an initial term contract that is