If your business model includes extensive use of independent contractors, you’re going to want to pay attention to the Ninth Circuit’s decision in NLRB v. Friendly Cab Company, Inc., Case No. No. 05-73813 (9th Cir., January 8, 2008). In the latest attack on the independent-contractor business model, the Ninth Circuit upheld an NLRB finding that the taxi drivers who leased cabs from Friendly Cab were not independent contractors but, in fact, were employees. The NLRB reached this conclusion despite the fact that, after making lease payments, the drivers kept all of their fares. Ordinarily, this factor – that the risk of profit or loss falls on the worker — creates a "strong inference" of independent contractor status because the purported employer would have no incentive to control the means and manner of the drivers’ performance. Nevertheless, the court deferred to the NLRB’s conclusion that this inference was rebutted by other evidence that Friendly Cab, in fact, exerted significant control over the drivers and, as a result, found that Friendly Cab was obligated to meet and bargain with the drivers’ union.

As in every case involving analysis of independent contractors status, the decision was very fact intensive and, in many ways, limited to the taxi industry. On the other hand, the court relied on some familiar concepts in finding an employer-employee relationship. To begin, the court was troubled by Friendly Cab’s limitations on the drivers’ ability to develop entrepreneurial opportunities. Indeed, the drivers were not permitted to respond to dispatches from any company other than Friendly Cab and could not solicit customers on their own. Furthermore, the drivers could not employ others to drive their cabs or sublease the cab. In addition, the court noted that Friendly Cab’s actual control over the drivers’ performance was substantial, extending even to the details of cab operation including how to accelerate and stop the vehicles.

Bottom line, companies that use "independent contractors" extensively should consider evaluating their methods to ensure that the classification will withstand scrutiny. As companies as diverse as FedEx and Friendly Cab are learning, ignorant bliss on this front could be costly.