While Uber has dominated the headlines when it comes to whether drivers on their on-demand, ride-sharing platforms are independent contractors or employees, similar battles are being waged elsewhere in the car service industry. One such battle that has received considerable attention involves a class and collective action lawsuit brought under federal and state law against a traditional car service company and drivers who have chosen to invest in and become franchisees of that business.  Few independent contractor misclassification cases will have stronger facts demonstrating IC status than this case, so it was hardly surprising that the U.S. Court of Appeals for the Second Circuit affirmed the district court’s grant of summary judgment in favor of the car service company.  What was somewhat surprising is that the U.S. Department of Labor filed a “friend of the court” brief arguing that the district court had erred, where there are so many cases currently pending in the courts with strong facts indicating that workers have been misclassified as ICs.

The Second Circuit’s Decision

The decision in Saleem v. Corporate Transportation Group Ltd., No. 15-88-cv, was issued yesterday, April 12, 2017. The case involves black-car drivers in the greater New York City area who brought a class and collective action under New York Labor Law (NYLL) and the federal Fair Labor Standards Act (FLSA) asserting claims against Corporate Transportation Group (CTG), the owner of a black-car “base license,” and their affiliated entities.  The drivers claimed that they had been misclassified as independent contractors instead of employees and sought allegedly unpaid overtime and other damages.  CTG made a motion for summary judgment, and federal district court judge Jesse Furman granted the motion on both the federal and state wage claims.

On appeal, the Second Circuit Court of Appeals addressed what the court referred to as the ultimate question – the “economic reality” of the drivers’ relationship with CTG. Before undertaking that analysis, the Second Circuit noted that:

• some of the drivers elected to purchase a franchise, either directly from CTG or on the secondary market, while others opted to rent a franchise;
• there were wide variations in the price of franchises and the fees associated with using them;
• the terms of the franchise agreements were for substantial durations, some even indefinite duration, subject to termination only for breach of the terms of the agreement;
• the drivers were free to and in many circumstances did indeed drive for competitors or for personal clients, and in some cases chose not to drive at all or permitted other individuals to drive for them, without violating their franchise agreements;
• the drivers “invested heavily” in their driving businesses;
• the drivers had ultimate schedule flexibility – they could choose how much to work and when, where, and how often to work (if at all);
• CTG did not require drivers to notify it when they intended to work or not work, and made no effort to coordinate drivers’ schedules;
• the drivers were free to accept or reject “job offers” when they registered with the CTG dispatcher and they reached the front of the queue; and
• the drivers’ fees from fares reflected wide disparities in gross earnings due to the frequency that they provided services and duration they chose to work each day.

In an effort to persuade the Second Circuit to reverse the district court judge and allow the drivers to present their case to a jury, the drivers argued that CTG negotiated rates with clients and charged a per-ride fee to drivers; that CTG maintained a roll of corporate clients seeking transportation services; and that CTG exerted influence over the drivers by enforcing the CTG Rulebook (which CTG was required to do by rules of the NYC Taxi and Limousine Commission). The drivers also argued that the case should turn on CTG’s “power to control” the performance of services rendered by the drivers, not whether CTG exercised control.

The Second Circuit was unmoved; it stated that “Whatever ‘control’ CTG exerted over negotiated fares and its rolls of institutional clients, Plaintiffs retained ‘viable economic status that [could] be [and was] traded to other [car companies].’” The court also stated that while the monitoring and enforcement of the Rulebook constituted a “degree of control over Plaintiffs’ conduct,” CTG “wielded virtually no influence over other essential components of the business, including when, where, in what capacity, and with what frequency Plaintiffs would drive.”

In the view of the Second Circuit, the limited control exercised by CTG did not impact the drivers’ opportunity for profit and loss, which “was determined by the drivers to a greater degree than [it was by CTG].”In its final footnote, the court also rejected the drivers’ argument that “power to control” should govern, not the exercise of control. The court then concluded: “In short, the economic reality was that Plaintiffs, with the assistance of CTG and as a ‘subscriber to [its] services,’ operated like small businesses; they decided to affiliate with [CTG] based on their perceived economic interests, and not those of CTG.”

Analysis and Takeaways

Many of the facts in this case are similar to the facts in the Uber and Lyft cases, but there are some key differences. One of the most meaningful differences is that the drivers in this black car case either purchased their franchises on the secondary market or directly from CTG (paying varying amounts of franchise fees up to as much as $60,000), or they rented their franchises for $130 to $150 per week.

Another key factor not found in the standard Uber or Lyft contracts is that the agreement with drivers cannot be terminated except for breach of the terms of the agreement.

The court also noted that, “whatever ‘the permanence or duration’ of Plaintiffs’ affiliation with CTG, both its length and the ‘regularity’ of work was entirely of Plaintiffs’ choosing.”

The Second Circuit cautioned, though, that its decision has a “narrow compass.” It remarked that the facts pointed out by the drivers may, in other cases, lead to a different result: “[W]e do not here determine that it is irrelevant to the FLSA inquiry that [CTG] provided Plaintiffs with a client base, that [CTG] charged fees when Plaintiffs utilized [CTG’s] referral system, or that [CTG] had some involvement, if limited, in rule enforcement among franchisees. We conclude only that assessing the totality of the circumstances here . . . , undisputed evidence makes clear as a matter of law that these Plaintiffs were not employees of [CTG]. In a different case, and with a different record, an entity that exercised similar control over clients, fees, and rules enforcement in ways analogous to [CTG] here might well constitute an employer within the meaning of the FLSA.”

In a final rebuke to the Plaintiffs (and those who filed “friend of the court” briefs in favor of the drivers), the court noted that this case, however, did not involve any material facts in dispute.  The court therefore held: “The district court therefore properly found them to be independent contractors as a matter of law.”

Takeaways

What takeaways does this decision by the Second Circuit offer those companies that make use of independent contractors in their business?

First, the facts matter to the courts. Cases finding individuals to be misclassified in a particular industry have little precedential value where the facts are distinguishable in meaningful ways.

Second, laws and regulations matter. Courts typically do not regard as direction and control a company making sure that all applicable laws are followed.

Third, there are few if any cases where there won’t be at least some facts favoring employee status, but that does not mean the individuals are employees and not ICs. As the court noted in this case, there was some degree of control exercised but that level of control was overmatched by the facts demonstrating independence.

Fourth, agreements matter. In this case, the court made reference to provisions in the parties’ agreement that weighed heavily in favor of independent contractor status, such as the provision that the agreement could not be terminated by CTG unless a driver breached its terms.

Fifth, it appears that CTG anticipated that it may be sued in the future for IC misclassification, and it undertook steps to structure, document, and implement its relationships with drivers to withstand such a legal challenge. One such proprietary process that some companies use is IC Diagnostics™, which examines whether a group of workers who are not being treated as employees would pass the applicable tests for IC status under governing state and federal laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws. One such alternative is the process of restructuring, re-documenting, and re-implementing IC relationships to minimize misclassification liability.