NLRB About to Rule That Independent Contractor Misclassification Alone Violates Law

Is independent contractor misclassification, standing alone, a violation of the National Labor Relations Act? Last month, the National Labor Relations Board issued a decision in a case involving workers who were found to be misclassified by a company as independent contractors. While the NLRB did not answer the question above, it dropped a footnote sending a clear signal that the agency is intending to reverse its current position that independent contractor misclassification is not itself a violation of the NLRA. For companies using workers they classify as ICs, this NLRB development creates an even greater imperative for them to enhance their independent contractor compliance. By elevating their IC compliance regarding such workers, businesses will be able to minimize their exposure to IC misclassification liability and union organizing of those they regard as ICs before the NLRB carries out its intention to change its existing law. As noted below in our “Takeaways,” use of a process such as IC Diagnostics (TM) will maximize IC compliance not only under the NLRA but also under other federal and state law tests for IC status. We also offer best practice suggestions below on the steps businesses can take to avoid unfair labor practices under the NLRA related to independent contractor issues.

The Decision

On September 30, 2024, a three-member panel of the NLRB adopted the recommended decision by an administrative law judge in Atomic Fire Protection, LLC, 373 N.L.R.B. No. 109. It held that under the NLRB’s 2023 decision in The Atlanta Opera, Inc., 372 N.L.R.B. No. 95, which set forth the NLRB’s current 10-part test for IC status, the company had misclassified sprinkler protection installation workers as ICs instead of employees. See our prior blog post on that case. The three members of the NLRB panel further concluded that the company committed unfair labor practices in violation of the NLRA when it interrogated the workers about their union activities and sympathies, told them they could not work for the company if they joined the union, and terminated two of those workers because of their union activities.

The ALJ in Atomic Fire Protection noted that in 2019 – at a time when the NLRB was governed by a Republican-appointed majority – the Board issued a decision in Velox Express, 368 N.L.R.B. No. 61, declining to find that an employer violated the NLRA simply by misclassifying workers as ICs or merely informing workers they are ICs and not employees. The NLRB held in Velox Express, as we stated in a prior blog post, that an employer would violate the NLRA if it intentionally misclassifies employees as ICs in an effort to prevent them from union organizing or erroneously tells employees that it would be futile for them to unionize or engage in union activity because they are ICs and not employees under the NLRA. In Atomic Fire Protection, the ALJ noted that the NLRB’s General Counsel argued that Velox Express should be overruled to the extent it concluded that misclassification itself does not violate the NLRA. The ALJ stated that, because the evidence only showed that the workers were misclassified as ICs and did not show that the company misclassified them for engaging in union or protected activity or to prevent them from engaging in such activity, she had no authority to overrule prior decisions under the NLRA and, therefore, was “unable to find that the misclassification violated … the Act under existing Board precedent.”

In adopting the ALJ’s recommended decision in Atomic Fire Protection, the two members of the NLRB panel who are regarded as Democratic Party appointees stated in a footnote that they would be “open to reconsidering Velox Express in a future appropriate case where the record evidence establishes that the employees knew that their employer was classifying them as independent contractors.” It appears, therefore, that it is only a matter of time before the NLRB, with its current majority of Democratic Party appointees, overrules Velox Express. However, as noted below, any such effort by the NLRB may well be rejected by the federal courts as being contrary to the “free speech” section of the NLRA.

Velox Express Is Based on a Statutory Provision Allowing Employers to Lawfully Express Their View and Opinions

We noted in a blog post at the time Velox Express was issued by a Board majority in 2019 that the holding in that case was premised on Section 8(c) of the NLRA, which was added by Congress to the NLRA in 1959. Section 8(c) states as follows: “The expressing of any views, argument, or opinion, or the dissemination thereof, whether in written, printed, graphic, or visual form, shall not constitute or be evidence of an unfair labor practice . . . , if such expression contains no threat of reprisal or force or promise of benefit.” The Board majority in Velox Express concluded that when an employer decides to classify its workers as independent contractors, it forms a legal opinion regarding the status of those workers and “its communication of that legal opinion to its workers is privileged by Section 8(c) of the Act….”

The NLRB majority in Velox Express concluded that even if a company is wrong in its view that certain workers are ICs and is later found to have misclassified the workers, “erroneously communicating to workers that they are independent contractors does not, in and of itself, contain any ‘threat of reprisal or force or promise of benefit.’”

The NLRB majority in Velox Express also supported its decision on public policy grounds, noting that “independent-contractor determinations are difficult and complicated enough when only considering the Act, but the Act is not the only relevant law.” It added: “An employer must consider numerous Federal, State, and local laws and regulations that apply a number of different standards for determining independent-contractor status. Unsurprisingly, employers struggle to navigate this legal maze. Further, in classifying its workers as independent contractors, an employer may be correct under certain other laws but wrong under the Act—which is all the more reason why it would be unfair to hold that merely communicating that classification is unlawful.” As a purely legal issue, this public policy basis for the holding in Velox Express may not have the same force and effect as does the free speech defense, which is based on a specific section of the NLRA.

Takeaways and Best Practices

When the current NLRB majority finds a “future appropriate case” in which to overrule Velox Express, the decision will be subject to review by a federal appellate court. The NLRB has not fared well in the past decade when its decisions of significance have been reviewed by the courts, particularly by the U.S. Court of Appeals for the D.C. Circuit, as we commented in a post discussing The Atlanta Opera decision.

Until the NLRB reverses Velox Express, companies using ICs should take certain actions to protect themselves and should also avoiding the types of actions that the Board in Velox Express found to have violated the NLRA.

First, as a proactive matter, companies can protect themselves by documenting their good faith belief as to why they believe the workers regarded as ICs have been properly classified. Prior to doing so, businesses should consider evaluating their current IC relationships to determine if they can enhance their level of compliance by restructuring, re-documenting, and/or re-implementing such relationships in a customized and sustainable manner, as is done in a process such as IC Diagnostics (TM). Once their IC compliance level is enhanced, it is far more challenging for the NLRB to argue that the business does not have a good faith belief in its legal opinion that the workers have been properly classified.

There are additional ways such businesses can protect themselves, including avoiding the types of conduct in which Velox Express was found to have engaged – terminating or otherwise retaliating against workers classified as ICs when such workers have supported a union’s effort to organize them and others performing similar services. Such actions may be deemed to be independent unfair labor practices, as the NLRB found in Velox Express. Other types of actions that may constitute an unfair labor practice (and could otherwise cause a company to lose the protections of Section 8(c) of the NLRA) include threats of reprisal, promise of benefits, interrogating workers about their efforts to unionize, and similar conduct.

Companies with a good faith belief in their classification of workers as ICs would be wise to simply classify workers as ICs and say or do nothing else. If asked by a worker to explain why they classify workers in that fashion, such companies may wish to do nothing more than briefly provide their legal position, if they choose to respond at all. If a worker or group of workers disagree, a company may simply “beg to differ” without arguing the point.

Irrespective of what the NLRB does, its decisions only address the test for independent contractor status under one law – the NLRA. Such decisions have no application whatsoever to a worker’s IC status under the federal Fair Labor Standards Act (FLSA), which governs minimum wage and overtime; the federal non-discrimination laws (such as Title VII, the Americans with Disabilities Act, and the Age Discrimination in Employment Act); the federal law governing pensions and employee benefits (ERISA); and the employee payroll tax laws under the Internal Revenue Code – each of which has its own test for independent contractor status. Likewise, any decision by the NLRB has no application to any state laws, including those involving minimum wage and overtime, wage payments, reimbursement of expenses, unemployment benefits, workers’ compensation, and employment taxes.

In sum, businesses that have chosen to enhance their IC compliance can maximize the likelihood they will be able to avoid any type of IC misclassification challenge, or prevail if one is brought, including an unfair labor practice charge filed with the NLRB.

Written by Richard Reibstein

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