Blog: The California Workplace Advisor

Monte Grix discusses the Issue of “Entrepreneurs’ or Exploited Workers?” in an article in the Daily Journal.

The full article can be found below.

‘Entrepreneurs’ or Exploited Workers?

By Monte Grix

For years, employers have reacted to the size and breadth of employment laws and regulations in California by finding other means of classifying people who perform services for them. As a result, California employers today frequently attempt to sidestep those onerous regulations by classifying workers as interns or independent contractors.

Those changes have not gone unnoticed by the plaintiffs’ bar and the Legislature. Indeed, there have been several well-publicized decisions against studios, media conglomerates and television shows challenging the propriety of interns who allegedly served as “gofers” or production assistants trying to “break in” to highly coveted entertainment industry positions. And last year, the Legislature increased the penalties for employers who misclassify employees as independent contractors.

The 9th U.S. Circuit Court of Appeals recently entered the fray in Alexander v. FedEx Ground Package System Inc., a decision which underscores the need for caution in classifying workers as independent contractors. FedEx treats its drivers as independent contractors, even though FedEx drivers wear FedEx uniforms, drive FedEx-approved trucks, abide by FedEx grooming standards, and deliver packages according to instructions from FedEx. Ordinarily, when an employer exerts “control” over a worker like that, it is evidence of an employment relationship, not an independent contractor relationship.

FedEx’s novel approach was dictated by the “entrepreneurial opportunities FedEx afforded” to the drivers, namely that under their contracts with FedEx, drivers could take on multiple routes and subcontract for coverage of a delivery route with FedEx’s approval. In other words, FedEx offered drivers the opportunity to run their own business, employ their own employees, and make a profit off of the work of others.

FedEx convinced the trial court of the “drivers’ class-wide ability to own and operate distinct businesses, own multiple routes, and profit accordingly” and thus their status as independent contractors. But in the 1989 decision of S.G. Borello & Sons Inc. v. Department of Industrial Relations — which has long been the California litmus test for the independent contractor versus employee assessment — the state Supreme Court was not swayed by a similar “entrepreneur” argument. In that case, the principal engaged “sharefarmers” as independent contractors where such sharefarmers retained control of their crops from “planting to sale.” The court concluded, however, that the sharefarmers merely retained control over one phase of production, i.e., that they “retain[ed] all necessary control over a job which can be done only one way.” (Emphasis added.) The court concluded that the sharefarmers’ work otherwise “follow[ed] the usual line of an employee,” that the “control” that the sharefarmers exercised (and by implication, the entrepreneurial opportunity) was not “meaningful,” and that they were really employees.

In this case, and consistent with Borello, the 9th Circuit reversed the trial court, centering its inquiry on the degree of control a putative employer exercises over the work performed. Borello found that the single most critical factor is “control”: “[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.”

California courts also consider “several ‘secondary’ indicia of the nature of a service relationship.” The right to terminate at will, without cause; whether the worker is engaged in a distinct occupation or business; the kind of occupation, with reference to whether the work at issue is usually done under the direction of the principal or by a “specialist without supervision”; the skill required for the work or occupation; whether the principal or the worker supplies the instrumentalities, tools and the place of work; the length of time for which the work is to be performed; whether the worker is compensated by time or by the job; whether the work is a part of the “regular business of the principal”; and the parties’ belief regarding their relationship (employer-employee versus principal and contractor).

As can be guessed from the sheer number of factors listed here, the Borello test is a fact-intensive one, and the weight accorded to one factor versus another can and does vary based upon such facts and “often on particular combinations” of such factors.

Looking first at the issue of control, the court determined that FedEx exercised significant control over the “manner and means” by which the drivers accomplished their work, and that this primary factor strongly favored plaintiffs. Although the drivers’ relationship with FedEx was governed largely by a written “operating agreement” that went into great detail about the parties’ roles as principal and contractor, the court noted that it would look behind such descriptions to the substance of the relationships: “California law is clear that ‘[t]he label placed by the parties on their relationship is not dispositive, and’ … [w]hat matters is what the contract, in actual effect, allows or requires.” The agreement, the court found, permitted FedEx to control an entire range of authority over such work, from the uniforms that the drivers wore, to the appearance and configuration of the delivery vehicles that the drivers used (including specifying the exact color of the van, the logos affixed, and the dimensions of, and materials used, for the parcel shelving inside such vehicles), to how and when such vehicles are loaded with parcels for delivery, to how long (and when, generally) the drivers are engaged in package delivery on a daily basis.

In the court’s view, three of the secondary factors slightly favored FedEx, five favored (sometimes slightly) the plaintiffs, and one was neutral. For example, the fact that FedEx’s ability to terminate its drivers was somewhat constrained (compared to at-will termination), and that the equipment necessary to perform the work, including delivery vehicles and package (radio frequency) scanners, was owned by the drivers, favored FedEx. On the other hand, the drivers had little choice but to buy the scanners and other equipment from FedEx, and in any event, the purchase or provision of tools by a worker was not dispositive of the independent contractor issue (consistent with the holding of Borello, among others).

As to the contracting parties’ beliefs, the responding party noted that the operating agreement expressly recited that the drivers and FedEx were contractors and principal, respectively, and that this factor slightly favored FedEx since other parts of the agreement clearly expressed a degree of control by FedEx over the drivers that belied any such independent contractor status. Moreover, the court reiterated that the parties “perception of their relationship as one of independent contracting” is not dispositive. In sum, the few pluses that FedEx garnered did not outweigh the numerous and more significant minuses.

So, does this case really change anything? Yes and no. If anything else, the decision refocuses attention on the level of control exerted by a putative principal/business. For FedEx, it was enough that the company dictated what the drivers wore, what trucks they drove, and how and when they worked. And, to be sure, the “entrepreneurial opportunity” argument will be met with great scrutiny now that the 9th Circuit rejected it — at least in this context. Employers offering that defense should be very sure that such opportunities are real and that they really do offer workers an opportunity to start a business, rather than being a subterfuge for saving costs attendant to having employees.

Monte Grix is an attorney in the Santa Monica office of Hirschfeld Kraemer LLP. He can be reached at MGrix@hkemploymentlaw.com, or via the firm’s website https://www.hkemploymentlaw.com.

Originally published in the Los Angeles Daily Journal, Sept., 19, 2014. Copyright 2014 Daily Journal Corporation, reprinted with permission.