Second Circuit Addresses Two Hot-Button Employment Law Issues

May 25, 2017 Advisory

In two recent cases the Second Circuit issued published opinions that speak to a pair of workplace issues that have proved divisive and vexing: independent contractor classifications and the scope of protected activity under the National Labor Relations Act (NLRA). The first case was brought by "black car" drivers who claimed they should have been classified as employees so as to be entitled to protection under the wage and hour laws, and the second case challenged an employee's dismissal for a profane Facebook rant targeting his supervisor that was posted two days before a union election. The employer fared well in the independent contractor case, but not so well in the NLRA case.

"Black Car" Drivers Properly Classified as Independent Contractors

Bolstering the growing body of case law addressing independent contractor misclassification claims, the Second Circuit held in Saleem v. Corporate Transportation Group that New York City area "black car" drivers who have franchise agreements with dispatch companies are indeed independent contractors. Plaintiffs had brought a putative class action for overtime wage protection under the Fair Labor Standards Act (FLSA), arguing they were misclassified as independent contractors and were employees instead. After the U.S. District Court for the Southern District of New York granted CTG's motion for summary judgment, the drivers appealed to the Second Circuit.

In an opinion issued on April 12, 2017, the Second Circuit relied on a multifactor economic reality test to uphold the independent contractor classification, explaining that "this Court has focused on ‘the totality of the circumstances' in addressing our ‘ultimate concern… whether, 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.'" In applying this test, the Court emphasized "it is not what [plaintiffs] could have done that counts, but as a matter of economic reality what they actually do that is dispositive." The following economic reality factors were examined and applied by the Court of Appeals in rejecting the plaintiffs' overtime pay claims:

1. Affiliation with CTG: Here, the Court inquired into how much control CTG had over the drivers through the franchise agreement, which CTG offered to drivers in a variety of different configurations and price points. Particularly relevant was the termination provision, since it enabled drivers to drive for competitors, for personal clients, or not at all for CTG. Furthermore, the agreement itself defined the drivers as independent contractors, and while "an employer's self-serving label of workers as independent contractors is not controlling… such a designation in the franchise agreement is pertinent to ‘the parties' beliefs about the nature of the relationship.'" The Court also noted that some drivers formed corporations to operate their franchises and ultimately concluded the drivers were "in business for themselves," having shown the "independence and initiative in selecting franchise agreements that best fit their business plans" and in their ability to choose to continue in those affiliations.

2. Entrepreneurial Opportunities: The Court also determined that the drivers maintained significant independence and discretion as to matters affecting their income. First, there were three different ways the drivers generated revenue from non-CGT clients, including driving for the competition, driving personal clients, and picking up passengers via street hail. Some drivers even hired individuals to drive for them, instead of allowing their franchise to languish unused. These facts suggest an arrangement typical of an independent contractor, where a worker can profit based on his or her "initiative, judgment[,] or foresight," and where CTG was just one vehicle for income generation.

3. Investment and Return: On this point, the Court found that drivers "invested heavily in their driving businesses," and this was "another indication that they were ‘in business for themselves.'" The facts showed that the drivers committed financial resources with the goal of generating a "return on investment." Estimated expenses to purchase a franchise totaled between $68,838 and $89,038, and included substantial sums beyond the purchase or rental of the franchise. CTG did not reimburse drivers for any of these or other business-related expenses. That this initial investment "created the platform for a black-car business," whether affiliated with CTG or not, also suggests independent contractor status. Overall, these facts support the conclusion that drivers maintained significant control over "essential determinants of profits in [the] business," a classic characteristic of a true independent contractor relationship.

4. Schedule and Flexibility: Finally, the Court observed that the drivers set their own schedules, including work days, hours and vacations, without any interference or incentive structure imposed by CTG. The fact that CTG "has little control over when [p]laintiff drove, how much he dr[o]ve, or how frequently," "‘very persuasive[ly]' supported independent contractor status."

In the end, the Court concluded that the plaintiffs were "driver-owners" who maintained significant autonomy over the operation of their small businesses, and were therefore decidedly independent contractors. At the same time, the Court emphasized the narrowness and fact-specific nature of its ruling, noting there were several indicia of an employment relationship present that, while not enough to carry the day in these particular circumstances, could prove to be more compelling in another case: CTG provided the drivers with a client base, charged the drivers fees to use CTG's referral system, and had some role, even if limited, in enforcing rules among franchisees. The Court went so far as to say that an entity like CTG that "exercised similar control over clients, fees, and rules enforcement" in similar ways "might well constitute an employer within the meaning of the FLSA" in a different case with a different record.

Regardless of the outcome in this particular case, the Saleem decision is highly instructive and provides a useful roadmap for evaluating the propriety of an independent contractor classification in virtually any setting. Employers operating within the Second Circuit's boundaries (i.e., New York, Connecticut and Vermont) would be wise to consult this opinion as part of the critical due diligence process associated with worker classification decisions.

Keep in mind though that the test for independent contractor status varies somewhat from statute to statute and state to state, so it is important to analyze the issue on a claim-by-claim basis. For example, the IRS maintains its own independent contractor test for tax reporting purposes and the factors for determining whether a worker is an employee eligible for unemployment insurance benefits are not uniform. In short, hiring entities must remain vigilant and ensure that the classification passes muster under all applicable tests, in all applicable states.

Profane Facebook Post Not Grounds for Dismissal

A few days after handing down its opinion in the Saleem case, the Second Circuit weighed in on another hot-button employment law issue, enforcing a National Labor Relations Board (NLRB) decision finding that a catering company violated the NLRA by firing an employee who posted pro-union comments laced with profanity on Facebook two days before a union election. The case, NLRB v. Pier Sixty, LLC, was decided on April 21, 2017.

During an authorized break from work, a Pier Sixty employee by the name of Hernan Perez penned a post on his Facebook page maligning his supervisor and his supervisor's family and encouraging readers to "Vote YES for the UNION!!!!!!!" Three days later, upon realizing the post was public, he took it down. By that time, though, the post had already attracted the attention of Pier Sixty's management. An investigation followed culminating in Perez's discharge some two weeks later. Perez responded by filing a complaint with the NLRB alleging that he was fired for engaging in "protected concerted activities." The presiding Administrative Law Judge (ALJ), and later a three-member panel of the NLRB, agreed that the firing was unlawful. On appeal, the Second Circuit framed the issue as whether Perez's Facebook post was so "opprobrious" as to lose the protection that the NLRA affords union-related speech.

Relying "heavily on the deference afforded to NLRB's interpretation of the NLRA and its factual findings," derived from evidence adduced in the course of a six-day bench trial, the Court enforced the NLRB's order despite concluding that Perez's "conduct sits at the outer-bounds of protected, union-related comments." The Second Circuit did so after applying the so-called Atlantic Steel factors historically employed by the NLRB to determine whether an employee engaged in ostensibly protected concerted activity did so in such an abusive manner as to forfeit statutory protection. That test considers (1) the place of the discussion; (2) the subject matter of the discussion; (3) the nature of the employee's outburst; and (4) whether the outburst was, in any way, provoked by an employer's unfair labor practice. Applying these factors and other considerations that are germane to social media cases, the Second Circuit declined to override the NLRB's determination that Perez's Facebook post was statutorily protected, explaining that "even though Perez's message was dominated by vulgar attacks on [the supervisor] and his family, the ‘subject matter' of the message included workplace concerns—management's allegedly disrespectful treatment of employees, and its upcoming union election." The Court of Appeals further emphasized that "Pier Sixty consistently tolerated profanity among its workers," as well as the fact that "the ‘location' of Perez's comments was an online forum that is a key medium of communication among co-workers and a tool for organization in the modern era." There were also mitigating considerations driving the Court's determination "that Perez's Facebook post, although vulgar and inappropriate, was not so egregious as to exceed the NLRA's protection," in particular Perez's assertion "that he mistakenly thought that his Facebook page was private and took the post down three days later, upon learning that it was publicly accessible."

The Pier Sixty case is yet another cold reminder that the scope of protected concerted activity under the NLRA is exceedingly broad and only rarely subject to forfeiture. As this decision vividly illustrates, employers must act with extreme caution before meting out discipline based on employee outbursts that can be even generously depicted as addressing terms and conditions of employment, especially in the context of a union organizing campaign or other union-related activity.