Watch out NYC FHV Industry- the Independent Contractor Model under the "Gig Economy" is at Risk for Re-Evaluation.

In the the past 6 years or so, the for-hire vehicle industry in NYC has been pretty solid in its position as drivers affiliated with car services have been firmly established by appellate court decisions, based upon cases I litigated and argued, and the legislative creation of the livery fund (and black car fund) as being independent contractors as opposed to being deemed employees.

Now, with Uber and the increase in the use of services in the "gig economy" those working in the economy and the social reformers who want to provide employee-type benefits to independent contractors are starting to challenge the prevailing distinction between an independent contractor and an employee. The is because the distinction is an all or nothing proposition (if you are an employee, you get all the benefits and if you are an independent contractor, you get none). Some social reformers see this as unfair while others believe the gig economy involves individuals who provide services that represents something between that of an employee and an independent contractor. Personally, I think it is way too early in the stages of this new type of economy for the courts or the legislature to be messing with firmly entrenched standards that are used in many aspects of the operations of a business.

So many issues arise in this question: Whether to withhold taxes, is the person entitled to unemployment, do I have to offer heath insurance, etc, etc, etc. This is an issue that is dealt with by the IRS, the DOL, the Workers' Compensation Board, etc, etc. Also, the stake are high. A bad judgment call by an employer can lead to dire consequences, especially in back payments and massive penalties. But the problem is that with this new Gig Economy and the legal, financial and business operational issues it presents, the law in this area will again become unclear. Lack of clarity in the law leads businesses to make decisions to give or not to give benefits based upon whether they believe a person the provides services to them is an employee or an independent contractor. These decisions may be based solely upon financial considerations, which is not the best way to analyze it, or it may be based upon an actual analysis with the advise of legal counsel. Hence, the need to have a good and firm basis in fact and in law from someone who has experience in this field to render an opinion that you can rely upon. Perhaps the best idea the local, state and federal government can do in this new gig economy is that if a business makes an error in its determination, but a good faith error as they relied upon the advise of counsel, then perhaps any penalties should be waived and some measure of compassion shown for this type of business, as opposed to those who simply refuse to pay benefits when they really know a person is an employee and not an independent contractor. Again, certainty in the law is important and this is why each business must analyze not only their business operations, but do so in the context of the industry around them. Most of all, an analysis of the costs of an erroneous decision should be performed, so a well informed decision can be made with full knowledge of the potential adverse consequences.

One of the most severe types of cases where the wrong decision on how to classify a worker is most amplified is under the NYLL (NY Labor Law) and the FLSA (Federal Fair Labor Standard Act). With remedies like, back pay, penalties, treble damage and attorneys fees , these cases present a clear and present danger...and a recent case highlights this for one particular company.

In a case addressing issues likely to grow increasingly prominent in the emerging “gig” economy, the United States Court of Appeals for the Second Circuit (located in NYC) unanimously vacated the District Court’s dismissal of a Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”) suit, ruling that there were factual disputes which must be resolved by trial as to whether the plaintiffs were independent contractors, or “employees” covered by the FLSA and NYLL. Thomas v. TXX Services, Inc., 15-cv-03424 (Oct. 25, 2016).

Plaintiffs are former and current delivery drivers who contracted with TXX Services to deliver freight. In their complaint, the plaintiffs alleged that TXX violated the FLSA by withholding overtime and violated the NYLL by reducing their wages, failing to pay wages in a timely manner, withholding overtime wages, and failing to comply with notice requirements. By order entered September 30, 2015, the District Court granted summary judgment in favor of TXX. In its ruling, the District Court determined that the plaintiffs were independent contractors and not employees and, as such, not entitled to the protections of the FLSA and NYLL.

In reversing, the Second Circuit reviewed the employee test under FLSA which determines whether “based on the totality of circumstances and, as a matter of economic reality, the workers depend upon someone else's business for the opportunity to render service or are in business for themselves." The Court also noted that under the "economic reality" test, courts consider “(1) the degree of control exercised by the employer over the workers, (2) the workers' opportunity for profit or loss and their investment in the business, (3) the degree of skill and independent initiative required to perform the work, (4) the permanence or duration of the working relationship, and (5) the extent to which the work is an integral part of the employer's business. Similarly, whether a worker is an employee under the NYLL “depends upon factors such as whether he or she "(1) worked at his [or her] own convenience, (2) was free to engage in other employment, (3) received fringe benefits, (4) was on the employer's payroll, and (5) was on a fixed schedule."

Based on this approach, the Second Circuit determined that the District Court erred in that, rather than determining whether there were factual issues in dispute, it resolved the factual issues itself. The Second Circuit noted many factual disputes, including “whether (1) TXX required drivers to drive delivery vehicles conforming to TXX specifications; (2) drivers could take breaks on their delivery routes without facing disciplinary action by TXX; (3) TXX required drivers to work a minimum number of hours; (4) plaintiffs were economically dependent on TXX; and (5) TXX controlled plaintiffs and, if so, to what extent.” Indeed, stressed the Appeals Court, both sides submitted detailed affidavits which conflicted on many relevant facts providing the need for resolution by trial.

This decision underscores the fact that the courts, often loath to grant summary judgment on factually intensive labor and employment matters, retains a skeptical eye on claims of “independent contractor” status as a defense to the FLSA and NYLL coverage, even in the new economy. Rather than acting as a defense to a car, the words “independent contractor” ultimately lead to the first step in a prolonged litigation over this fact intensive inquiry. Litigaiton and a trial on these issues create a high stake game that no employer should ever want to play.

Speak with a lawyer, consult with your accountant and interact with your trusted advisors.  The cost of an error may lead to the loss of your business or worse, personal liability for the debts of the company.