United States: Rare Decision Finds Workers Were Properly Classified As Independent Contractors

Last Updated: April 30 2015
Article by Renee Inomata

Convincing a court that a company has properly classified a worker as an independent contractor has become increasingly difficult in Massachusetts. So, the Massachusetts Supreme Judicial Court's decision just last week that taxicab drivers are, in fact, properly classified as independent contractors was somewhat unexpected.

The Massachusetts Independent Contractor Law (M.G.L. c. 149, §148B), is known to have one of the highest thresholds for classifying workers properly as independent contractors. As I have written in Employees Misclassified as Independent Contractors Pose Significant Risks and Beware of Choice of Law When Drafting Independent Contractor Agreements, Massachusetts applies what is known as the "ABC test." That is, a worker is presumed to be an employee and that presumption only can be rebutted by showing all of the following:

  1. The worker is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
  2. The service is performed outside the usual course of the business of the entity receiving the services; and
  3. The worker is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

In Bernard Sebago v. Boston Dispatch, Inc., Justice Cordy carefully outlined the application of the Massachusetts independent contractor law with respect to the taxicab drivers' relationships with (a) the taxi garage which housed and fixed taxicabs, (b) the owner of the hackney medallion leased by the taxicab drivers, and (c) the radio association hired by the medallion owners to provide dispatch services.

In Boston, pursuant to Boston Police Department Rule 403 Hackney Carriage Rules and Flat Rate Handbook ("Rule 403"), taxicabs are permitted to operate only if they have a hackney license, known as a medallion. The City of Boston grants the hackney license, usually to an entity that is in the business of holding and leasing the medallions. The medallion owners do not necessarily own the vehicles or supply the drivers of the vehicles. The medallion owners contract with "radio associations" who dispatch riders for taxicab services.  A taxicab driver typically owns the vehicle and leases a medallion from a medallion owner. A taxicab owner may also contract with a taxi garage to house the taxicab and to maintain it. The plaintiffs in Sebago owned the actual vehicles and paid the medallion owner for a license to use the medallion. As a condition of the medallion license, the medallion owner required the taxicab driver to use a specific radio association to act as a dispatcher. In Sebago, there was common ownership of the medallion owner, the radio association and the taxi garage that some of the plaintiffs used, although each was a separate corporate entity.

The taxicab drivers brought claims against the medallion owner, radio association and taxi garage, claiming that they all misclassified the drivers as independent contractors, thereby depriving them of minimum wages, overtime and other compensation and benefits to which they would have been entitled if they were employees.

In assessing whether or not the taxicab drivers were employees, the court applied the ABC test. It quickly dispatched the claim against the taxicab garage on the basis that the taxicab drivers provided no service to the taxicab garages. As for the claims against the medallion owners and radio associations, the crux of the dispute was whether or not the services provided by the taxicab drivers was "outside the usual course of the business of the employer." In its analysis of the facts in the record, the SJC explained that:

  • With respect to the medallion owners, because the medallion owners were engaged in the business of leasing medallions, the lease payments made by the taxicab drivers were based on a flat fee (and not tied to fares or tips collected by the taxicab drivers), and the taxicab drivers provided only an ancillary benefit to the medallion owners in terms of providing opportunities to sell advertising, the taxicab drivers were not engaged in the usual course of the medallion owner's business.
  • With respect to the radio associations, the SJC held that the radio associations were offering a dispatching service to medallion owners and not to taxicab drivers. The court also noted that because this arrangement was created by Rule 403, and not by the radio association, the radio association was not creating a business model simply to skirt the independent contractor law. Rather, the court found the radio associations were offering a dispatch service to medallion owners, funded by the medallion owners, in compliance with Rule 403.

Although this may be great news to the taxicab medallion owners, radio associations and taxicab garages who operate as the defendants in this case did, in house counsel and businesses should not rely on this case. Indeed, the result does not reflect a changing trend in finding more workers properly classified as independent contractors. Instead, because of the framework for the taxicab business in Boston was framed by Rule 403, it appears that this would only apply in contexts with narrow parameters where the relationships are set by the government or some other third party that is not directly related to the worker or the entity receiving the workers' services.

Unlike in this case, in more cases than not where the question of proper classification arises, workers are working side by side with employees performing services that are at the core of the company for whom they are providing services, or are under the control of the company in the method or means by which they perform the services, or are not engaged in an independent business of their own, where they offer the same services to other businesses. As a result, now is a good time for in-house counsel to review the arrangements with "contractors" or "consultants" of the company, before a lawsuit forces the company to analyze the arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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