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The Practical Employer

2nd Circuit Provides Plan for Employers to Win Misclassification Cases

Key factors include entrepreneurial opportunities, personal investment and flexibility to establish the legitimacy of the classification of workers as independent contractors.

In Saleem v. Corporate Transportation Group (2nd Cir. 4/12/17) [pdf], the 2nd Circuit Court of Appeals considered whether a company properly classified a group of black-car taxi drivers as independent contractors, or whether it should have classified them as employees. In ruling for the company, the court gifted employers a game plan to use when classifying workers to minimize risk in making the key determination of whether a worker is an employee or an independent contractor.

In so ruling, the court considered three factors to be crucial as to the “economic realities” of the relationship between company and drivers in this case.

1. The drivers had entrepreneurial opportunities available to them.

The fact that Plaintiffs could (and did) work for CTG’s business rivals and transport personal clients while simultaneously maintaining their franchises without consequence suggests, in two respects, that CTG exercised minimal control over Plaintiffs. First, on its face, a company relinquishes control over its workers when it permits them to work for its competitors. Second, when an individual is able to draw income through work for others, he is less economically dependent on his putative employer. … Plaintiffs here possessed considerable independence in maximizing their income through a variety of means.   By toggling back and forth between different car companies and personal clients, and by deciding how best to obtain business from CTG’s clients, drivers’ “profits increased” through “the[ir] ‘initiative, judgment[,] or foresight’” — all attributes of the “typical independent contractor.”

2. The drivers were personally financially invested in their work.

Regardless whether they actually purchased a franchise, the record also shows that Plaintiffs invested heavily in their driving businesses — another indication that they were “in business for themselves.” … One Franchisor Defendant estimated expenses for an individual purchasing a franchise as totaling between $68,838 and $89,038.30. Such sums constitute a substantial financial outlay on Plaintiffs’ part, even beyond the purchase or rental of the franchise itself, and in essential facets of Plaintiffs’ business operations: vehicle acquisition, fuel, repair, and maintenance, license, registration, and insurance fees, and tolls, parking, and tickets. CTG did not provide reimbursements for these expenses, never mind for discretionary investment in business cards, advertising, or other ventures designed to attract customers.

3. The drivers maintained a high degree of flexibility in how they performed their work.

The ability to choose how much to work also weighs in favor of independent contractor status. … After purchasing or leasing a franchise and securing a suitable vehicle, Plaintiffs set their own schedules, selecting when, where, and how often to work (if at all). Defendants provided no incentive structure for Plaintiffs to drive at certain times, on particular days, or in specific locations, leaving the decision to work “to the whims [and] choices” of its drivers. Likewise, Defendants required no notice on the part of drivers as to when they intended to work, nor did they make any effort to coordinate drivers’ schedules. … Plaintiffs also exercised considerable discretion in choosing when and where to drive. … Additionally, the record demonstrates that, as a matter of economic reality, Plaintiffs accepted and rejected (despite the penalty of being placed at the end of the queue) varying numbers of job offers, a fact indicative of the discretion and independence associated with independent contractor status.

The court, however, was not without a warning for employers in making this important determination between employee and contractor:

To be clear, we note in conclusion the narrow compass of our decision. Specifically, we do not here determine that it is irrelevant to the FLSA inquiry that the Defendants provided Plaintiffs with a client base, that Defendants charged fees when Plaintiffs utilized Defendants’ referral system, or that Defendants had some involvement, if limited, in rule enforcement among franchisees … In a different case, and with a different record, an entity that exercised similar control over clients, fees, and rules enforcement in ways analogous to the Defendants here might well constitute an employer within the meaning of the FLSA.

In other words, at the end of the day, the key inquiry still remains whether, when examining the totality of the circumstances, the “economic realities” of the relationship dictate that “the workers depend upon someone else’s business for the opportunity to render service or are in business for themselves.” Nevertheless, as the Saleem court makes clear, three of the key factors that you should be examining in making this determination for your workers are entrepreneurial opportunities, personal investment, and flexibility, which clearly help establish the legitimacy of the classification of workers as independent contractors, both in the gig economy and elsewhere.

Jon Hyman is a partner at Meyers, Roman, Friedberg & Lewis in Cleveland. To comment, email editors@workforce.com. Follow Hyman’s blog at Workforce.com/PracticalEmployer.