The importance of ?entrepreneurial opportunity?

The importance of æentrepreneurial opportunityÆ       Employers have long struggled to engage individuals to perform work for them as independent contractors, rather than employees, without running afoul of the law. The difference is significant because whether someone has the legal status of an independent contractor, rather than an employee, has important consequences. A mistake can result in unexpected liability for payroll taxes and can subject the employer to unforeseen union organizing and liability under the discrimination, wage-hour and other laws.
      To make matters worse, it was often impossible to know in advance how a given situation would be evaluated. The issue often was dealt with only when an 'independent contractor' went to court claiming he really was an employee and entitled to the rights and benefits of an employee. The judge, typically with little real-world business experience and applying '20/20 hindsight,' would evaluate the nature of the relationship between the plaintiff and the business, focusing on the amount of control and supervision exercised by the business over the individual. Because, even with independent contractors, businesses would often exercise some degree of control and supervision for quality assurance and customer services reasons, more often than not the court would conclude that the individual a business thought was an independent contractor, really was an employee. The court thereby retroactively and prospectively bestowed upon that individual all the rights of an employee. Suddenly, the person could have pension rights, the right to join a union, to be paid at overtime rates under the wage-hour laws, and to all the other rights and protections afforded to employees.
      The approach of our courts was rooted in English common law conceptions of the 'master' and 'servant' relationship, leading American courts to focus on so-called 'common law factors' to determine the extent to which a business exercised control and supervision over the contractor. For example, if the 'contractor' could show that he worked a schedule set by the business, was required to follow procedures established by the business, and used equipment and tools furnished by the business, our courts would often determine that an employer-employee relationship, not an independent contractor relationship, existed.
      Now, in a case involving FedEx drivers, one of the leading federal courts in the country has held that the focus of the contractor versus employee inquiry should not be on the traditional 'common law' factors of control and supervision, but on whether the individual has an 'entrepreneurial interest' in his work. This new focus provides opportunities for businesses across the country to reassess its employment and independent contractor relationships.
      The case, FedEx v National Labor Relations Board, involved an attempt by the Teamsters to organize drivers in two of FedEx Home's terminals in Wilmington, Mass. FedEx refused to engage in collective bargaining with the union, claiming that the drivers were independent contractors and therefore not entitled to unionize. The NLRB sided with the drivers and the union, applying the traditional 'common law factors' of control and supervision. The NLRB was apparently influenced by the fact that the drivers were required to run routes established by FedEx, and follow various FedEx policies and procedures: their trucks had to be painted with the FedEx logo, and they were required to wear FedEx uniforms and conform to FedEx grooming requirements.
      The U.S. Court of Appeals for the District of Columbia Circuit reversed the NLRB ruling, finding that the drivers were properly deemed independent contractors and therefore did not have the right to unionize. The Court of Appeals emphasized that the proper test had evolved from emphasizing the traditional control and supervision factors to focusing on the importance of 'entrepreneurial opportunity.' The FedEx drivers owned their own trucks. They could incorporate if they wished, sell their routes to someone else for a profit, or hire a substitute driver without FedEx's involvement. The court found that these facts demonstrated that the FedEx drivers had the kind of entrepreneurial interest in their work that was characteristic of an independent contractor, not an employee. The court emphasized that the degree to which the FedEx drivers bore the economic risks of their work was more important to the assessment of their status as independent contractors than was the fact that FedEx provided a degree of control and supervision through its policies and procedures.
      Through careful planning and well-structured arrangements which impose some economic risk on the individual, businesses in the shipping industry may now be able to ensure that at least some of their workers, like the drivers in the FedEx case, are deemed independent contractors and not employees, and thereby reduce the risk of unionization and liability under wage hour, discrimination and other laws which protect 'employees' but not contractors.

David Barmack
chairman, employment, labor and benefits section, Mintz Levin,
Washington, D.C.