Regulatory Topic: Independent Contracting
Regulatory Agency: NLRB
Independent contracting has become a controversial issue as administrative agencies, Congress, and even some states try to redefine who is an employee and who is an independent worker.
By attempting to switch to an “ABC test” or other restrictive tests or factors, some government leaders are attempting to stop independent workers from working for themselves─ and instead turn them into employees that can more easily be unionized and subjected to their regulatory powers.
On December 27, 2021, the National Labor Relations Board (NLRB) asked for briefs in The Atlanta Opera, Inc. 371 NLRB No. 45 (2021) case, which could make it harder for independent workers to remain self-employed and enjoy the flexibility they seek.
Note: The U.S. Department of Labor (DOL) is also considering a regulation on independent contracting, for more on the DOL rule please see our “Independent Contracting – DOL” page here.
The National Labor Relations Board (NLRB), formed as part of the 1935 National Labor Relations Act (NLRA), oversees private sector union elections and related matters across the United States. By using labor cases brought before the board or advancing new rules, the NLRB can attempt to enforce new policies that American workers and businesses must comply with, including in the independent contractor (IC) space. Currently, the NLRB is attempting to make it harder for workers to be self-employed.
On December 27, 2021, the NLRB issued a notice related to The Atlanta Opera, Inc. 371 NLRB No. 45 (2021) 10-RC-276292 case, asking the public to submit briefs on “whether the Board should reconsider its standard for determining the independent contractor status of workers.” The board signaled discontent with its long-standing “common law” test, asking if it should return to a previous anti-IC standard such as the one established in a 2014 case decision that was overturned by different NLRB leadership in 2019 (see below). Briefs were due in February 2022, and the NLRB has not taken further public action yet.
What is independent contracting?
Independent contracting is the process where self-employed workers perform services for clients on a contractual basis for income. While independent contractors (ICs) do have to meet certain standards and other expectations of clients regarding the quality and timing of their work product, they are not under the direct control of business clients like traditional employees are and retain entrepreneurial opportunity for their own profit and loss.
Because ICs are self-employed, their business clients do not collect payroll taxes or enforce certain federal and state labor laws that apply to traditional employees such as government-mandated hourly and wage requirements among others.
Of over 59 million freelancers in the U.S. economy as of 2021, tens of millions earn income as ICs across many industries including transportation, construction, medical, educational, entertainment, financial, legal, housing, agriculture, and other service roles. ICs with their small businesses also employ tens of millions of additional workers and create many of the small businesses that fuel communities. In addition to pursuing self-employment for more income, many prefer the additional flexibility in these careers to raise children as a result of personal or family health issues.
A federal study by the Bureau of Labor Statistics (BLS) also found that nearly 80 percent of ICs prefer independent work over traditional jobs and less than 10 percent would switch to a traditional job if given the choice.
In order to determine if a worker is a traditional employee or an IC, the process is not as simple as ICs making a personal choice about their self-employed status with clients. Instead, different federal and state agencies utilize employment tests to make determinations. At the federal level alone, this includes different processes for determinations by the Internal Revenue Service (IRS), Department of Labor (DOL), and National Labor Relations Board (NLRB). Being classified as an employee by one agency jeopardizes a person’s IC status broadly. Examples of employment tests include:
- IRS and NLRB Common Law Test – The IRS and NLRB common law tests are different but similar. Of note, both tests allow for a broad interpretation such that ICs and employees can share some factors in common but remain classified differently as a result of reviewing a totality of individual situations.
- NLRB common law test – Over time, federal courts interpreted how the NLRB must enforce the NLRA in making employment determinations, which particularly governs whether workers are eligible for unionization. While specific factors have been changed by the NLRB over time and through ensuing court decisions (because no statute provides a specific test), the recurring perspective supported in courts is that a worker is determined to be an IC if he or she has entrepreneurial opportunities for profit and loss. The 2019 SuperShuttle case reinstated the common law standards that were solidified in 1968 (see above).
- Internal Revenue Service (IRS) common law test – The IRS makes employment determinations for federal taxation purposes using a common law test that has also been established through court precedent rather than formally through statute. Traditionally, the common law test was a 20 factor test that has since evolved into three primary categories: behavioral, financial, and type of relationship. These evaluate the degree of control and dependence of workers with no definitive factors used solely to determine employment status.
- ABC tests – Used by a number of states such as California and Massachusetts, ABC tests are particularly restrictive against independent contracting. A range of factors are established under three main categories – Absence of Control, Business of the Worker, and the Usual Course of Business. Unlike other tests, ABC tests presume all workers are employees, and failing to fully meet any of the subjective criteria in an ABC test is grounds for governments reclassifying ICs to employees. Among other harmful provisions, the NLRB would be required to utilize an ABC test if the PRO Act were enacted. This legislation passed the U.S. House in 2021 and is endorsed by President Joe Biden.
- US Department of Labor (DOL) economic realities test – In enforcing the Fair Labor Standards Act of 1938 (FLSA), DOL utilizes an “economic realities test” that has largely been set by court precedent over decades. Subjective factors to determine IC vs. employee status include opportunities for profit and loss, operation of an independent business, nature and degree of control by principals, permanency of relationship, and extent to which services are integral to a principal’s business.
Further Background on recent NLRB actions:
- 1968 – NLRB v. United Ins. Co. of America, 390 U.S. 254 (1968) – This NLRB case solidified the common law test the NLRB uses for employment determinations today, which was re-instated in 2019.
- 2007 to 2009 – FedEx Home Delivery v. NLRB, No. 07-1391 (D.C. Cir. Apr. 21, 2009) – Known as “FedEx I,” in this decision by the DC Circuit Court of Appeals, a 2007 NLRB determination that under the “common law” standard, independent contractors delivering FedEx routes were in fact employees was overturned. The court determined that the drivers remained ICs under the common law test, particularly through displayed opportunity for entrepreneurial activity.
- 2014 – Fedex Home Delivery, an Operating Division of Fedex Ground Package Systems, Inc. and International Brotherhood of Teamsters, Local Union No. 671. Cases 34–CA–012735 and 34–RC–002205 – Under the Obama administration, the NLRB revisited this issue, de-emphasizing the opportunity for entrepreneurial activity and instead instituting a new interpretation of common law factors emphasizing its interpretation around economic dependency. With its modified employment test, the NLRB again reclassified some ICs delivering FedEx routes as employees. After an appeal by FedEx Home Delivery, the NLRB again upheld its decision in 2015.
- 2017 – Known as “FedEx II,” the DC Circuit Court of Appeals overturned the 2014 NLRB ruling again, arguing the circumstances remained similar to FedEx I and that the drivers in question were ICs, not employees, as the NLRB determined under its modified interpretation of the common law test.
- 2019 – SuperShuttle DFW, Inc. and Amalgamated Transit Union Local 1338. Case 16–RC–010963 – In January 2019, the NLRB in its SuperShuttle DFW, Inc. case removed the 2014 modified NLRB test, restoring its previous long-standing standard in which entrepreneurial opportunity plays a key role in employment status. In the case, franchisees of SuperShuttle at DFW Airport were determined to be ICs, not employees, due to significant entrepreneurial opportunity.
- 2021/22 – The Atlanta Opera, Inc. and Make-Up Artists and Hair Stylists Union, Local 798, IATSE. Case 10– RC–276292 – On December 27, 2021, the NLRB requested briefs in considering a change to its independent contracting standard, which were due in February 2022. The case involves an employment determination for make-up artists and hair stylists who perform services for clients at The Atlanta Opera, Inc.
- Worker Classification: Employee Status Under the National Labor Relations Act, the Fair Labor Standards Act, and the ABC Test. https://crsreports.congress.gov/product/pdf/R/R46765/1
- Amidst inflation, President Biden should refocus his efforts on expanding flexible work careers for Americans. https://thehill.com/opinion/congress-blog/3593484-amidst-inflation-president-biden-should-refocus-his-efforts-on-expanding-flexible-work-careers-for-americans/
- Ready, Fire, Aim. How State Regulators Are Threatening the Gig Economy and Millions of
- Workers and Consumers. https://www.uschamber.com/assets/archived/images/ready_fire_aim_report_on_the_gig_economy.pdf
- THE ROLE OF INDEPENDENT CONTRACTORS IN THE U.S. ECONOMY. https://iccoalition.org/wp-content/uploads/2014/07/Role-of-Independent-Contractors-December-2010-Final.pdf
- RESOLUTION IN SUPPORT OF INDEPENDENT CONTRACTING. https://alec.org/model-policy/statement-of-principles-on-independent-contracting/
- Freelance Forward Economist Report. https://www.upwork.com/research/freelance-forward-2021
- 11TH ANNUAL STATE OF INDEPENDENCE. The Great Realization. https://www.mbopartners.com/state-of-independence/
- Who are independent contractors, and how would the PRO Act limit their opportunity? https://americansforprosperity.org/who-are-independent-contractors-pro-act/
- Biden must reverse course and protect independent contractors. https://thehill.com/opinion/white-house/3526515-biden-must-reverse-course-and-protect-independent-contractors/
- The State of Gig Work in 2021. https://www.pewresearch.org/internet/2021/12/08/the-state-of-gig-work-in-2021/
- Three-in-Ten U.S. Jobs Are Held by the Self-Employed and the Workers They Hire. https://www.pewresearch.org/social-trends/2015/10/22/three-in-ten-u-s-jobs-are-held-by-the-self-employed-and-the-workers-they-hire/