The issue of whether a worker is an “employee” or an “independent contractor” has vexed employers and workers for decades. The impact for misclassifying an employee as an independent contractor can have severe (and costly) consequences for employers. Employers and their lawyers look to the courts, legislatures and government agencies for guidance, and for standards employers should follow when making the determination of whether a worker is an employee or an independent contractor. But, depending on the political environment, the standards set by the courts and government agencies are in constant flux, changing from administration to administration. The most recent example of this flipflop in standards comes from the National Labor Relations Board (“NLRB” or “Board”) which issued a new decision on June 13, 2023 that once again set the new standard or, more accurately, reverted to the standard implemented by the prior Board appointed by President Obama.
What is the NLRB?
The NLRB is an independent federal agency enforcing the National Labor Relations Act (“Act”) enacted by Congress in 1935 which, according to the NLRB website, “guarantees the right of most private sector employees to organize, to engage in group efforts to improve their wages and working conditions, to determine whether to have unions as their bargaining representative, to engage in collective bargaining, and to refrain from any of these activities. It acts to prevent and remedy unfair labor practices committed by private sector employers and unions.” The Act is codified at 29 U.S.C. §§ 151-169.
The Board has 26 regional offices and is headquartered in Washington, DC. Regional offices investigate and prosecute alleged violations of the Act under the authority of the General Counsel.
The Board has five Members and primarily acts as a quasi-judicial body in deciding cases on the basis of formal records in administrative proceedings. Board Members are appointed by the President to 5-year terms, with Senate consent, the term of one Member expiring each year. The General Counsel, appointed by the President to a 4-year term, is independent from the Board and is responsible for the investigation and prosecution of unfair labor practice cases and for the general supervision of the NLRB field offices in the processing of cases.
(As a result, the political and judicial “philosophy” of the Board and the General Counsel are constantly changing depending on the political affiliation of the President. This reality, more than anything else, has led to the ever-changing decisions made by the Board.)
The Atlanta Opera, Inc. decision
On June 13, 2023, the Board (consisting of Members appointed by Democratic President Biden) issued a new decision in The Atlanta Opera, Inc. that, once again, establishes a new standard for determining independent contractor status under the Act. To be more specific, the Board returned to the prior standard that was created in 2014 in FedEx Home Delivery (“FedEx II”) (issued by the Board consisting of President Obama appointees) and in force until 2019 when the Board (consisting of President Trump appointees) reversed course in its decision in SuperShuttle DFW, Inc.
Given the political appointments, it should come to no surprise that the Board’s “new” standard is more pro-employee than the SuperShuttle DFW, Inc. standard implemented only four years ago.
The Atlanta Opera (“Opera”) opposed a petition by a group of makeup artists, wig artists, and hairstylists (“Stylists”) who performed work for the opera to be represented by a union, arguing that the artists are independent contractors, and not statutory employees entitled to protection under the Act. After a hearing, an NLRB Regional Director ruled that the Stylists in the proposed bargaining were statutory employees.
In December 2021, the Board granted review of the case. The Opera’s appeal focused on one argument: that the Regional Director misapplied the then-existing independent-contractor factors as set forth in the 2019 decision in SuperShuttle DFW, Inc. However, the Board seized on the opportunity to re-visit its independent-contractor standard entirely. The Board raised the following questions:
(1)Should the Board adhere to the independent contractor standard in SuperShuttle DFW?
(2) If not, what standard should replace it? Should the Board return to the standard in FedEx II, either in its entirety or with modifications?
To no one’s surprise, the Biden-appointed Board overruled the Trump-appointed Board’s decision in SuperShuttle DFW, Inc., and “re-installed” the Obama-appointed Board’s decision in FedEx II.
In The Atlanta Opera decision, the Board’s majority decision reverted back to the independent-business analysis, concluding that the focus on the “entrepreneurial opportunity” - which was previously observed by the District of Columbia Circuit Court of Appeals and adopted in SuperShuttle DFW - cannot not be “reconciled” with the Board’s prior precedent. Rather than “entrepreneurial opportunity” the Board should apply the “independent-business analysis” which considers whether the putative contractor: “(a) has a realistic ability to work for other companies; (b) has proprietary or ownership interest in their work; and (c) has control over important business decisions,” such as scheduling, hiring, assignment of employers, purchasing equipment, and committing capital.
The Board held that “entrepreneurial opportunity” is merely one additional consideration among the other nondispositive factors that the Board must consider in a fact-intensive analysis of an employer’s workforce when determining who is an employee or independent contractor. Furthermore, the Board held that when the “entrepreneurial opportunity” is considered, it “should only give weight to actual (not merely theoretical) entrepreneurial opportunity” by analyzing the limits employers impose on workers seeking such opportunities.
The “independent-business analysis” is based on Section 220(2) of the Restatement (Second) of Agency which addresses the relationship between “masters” and servants.” The Restatement identifies a list of factors to be considered “[i]n determining whether one acting for another is a servant or an independent contractor.” The following factors are considered:
- Extent of control by the employer
- Whether or not the individual is engaged in a distinct occupation or business
- Whether the work is usually done under the direction of the employer or by a specialist without supervision
- The amount of skill required in the occupation
- Whether the employer or the individual supplies the instrumentalities, tools, and place of work
- The length of time for which the individual is employed
- The method of payment
- Whether or not the work is part of the regular business of the employer
- Whether or not the parties believe they are creating an independent-contractor relationship
- Whether the principal is or is not in business
- Whether the evidence tends to show that the individual is, in fact, rendering services as an independent business
Applying the decision to the Stylists, the Board found that most of the common-law employment factors pointed toward the workers being employees, rather than independent contractors. The Board stated that Opera exercises control over their day-to-day work, gives feedback and instructions on their work, provides necessary equipment and supplies, and pays an hourly wage with the potential for overtime pay. At the same time, the Board noted that the Stylists’ distinct occupations, special skillsets, and lack of expectation of continuous employment weighed in favor of them being considered independent contractors.
For those keeping score at home, this chart shows how the Board decided on each of the above factors, and the rationale for each:
Opera dictated the creative and logistical components of the Stylists’ work, and dictated the time and place of the work.
The Stylists’ work required specific training and similar to other artistic and creative professions.
Work done under direction of supervisor
Opera communicated a continuous stream of detailed feedback and instructions to the Stylists.
Amount of skill required
Considerable skill required by the Stylists to execute Opera’s artistic vision.
Supply of tools and place of work
Opera supplied all equipment, supplies and workspaces.
Length of employment
Work performed by the Stylists was on a project basis.
Method of payment
The Stylists were paid an hourly wage with potential for overtime; however, no tax withholding or benefits.
Work is regular business of employer
Opera’s regular business is to stage operas and the Stylists performed a function (makeup, hair and wig treatments) that is essential to this endeavor.
Opera and the Stylists entered into informal oral agreements that did not specify relationship; Opera asked for W-9s without explanation.
Principal is in business
Opera is in the business of presenting operas and the Stylists played an essential role.
Individual rendering services as an independent business
Stylists “fundamentally constrained in their ability to make entrepreneurial decisions” because Opera controlled schedules; Stylists agreed to a fixed hourly wage; Stylists did not receive a percentage of sales revenues; Stylists had no proprietary or ownership interest in their work; Stylists lacked ability to subcontract their positions or hire helpers/replacements
The Board’s decision makes clear that determining the status of a worker “ ‘ requires more than a quantitative analysis based on adding up the factors on each side; it requires the difficult task of assessing the relative significance of each factor, and ultimately each set of factors, in light of the impact of each factor on the overall relationship’ between the parties.” That said, the Board noted that the “majority of the traditional common-law factors, as incorporated in the Restatement (Second) of Agency, point toward employee status.”
The Atlanta Opera decision returns the Board to an independent-contractor standard that could make it more likely that workers will be found to be employees entitled to the protections under the Act, including the right to organize for union representation. The labor-friendly ruling is in line with recent decisions of the Board under its current makeup as the Biden-appointed General Counsel continues to push an aggressive, pro-labor agenda. Employers wishing to utilize independent contractors may want to review their workplace policies and procedures governing use of independent contractors.
Employers should consider engaging in a fact-specific analysis of their workforce through the common-law test’s prism to determine which workers may now be found covered under the Act. Employers can expect that the NLRB General Counsel’s office will aggressively enforce Atlantic Opera’s holding, especially against employers in industries that are heavily populated with independent contractors.
Opera will undoubtedly appeal the Board’s decision to the which may result in a delay in enforcement. Regardless, employers should be mindful of how their engagements with “gig workers” are structured, and how these workers might be assessed in a non-weighted application of the 10-factor common law Restatement test. Relying on the method of payment (e.g., payment via 1099 or W-2) or past practices/norms (e.g., consultants are always independent contractors) to classify and treat service providers as independent contractors or employees is no longer sufficient. The legal risks and attendant financial exposure are too great for any business to ignore this evolving area of law, and employers seeking to evaluate their contractual relationships under the reinstated FedEx II standard are advised to consult counsel.