When Is An Individual An Independent Contractor And Not An Employee--Roadway Pac

On the same day that it handed down the Roadway and Dial-A-Mattress decisions, the Board remanded AmeriHealth Inc./AmeriHealth, 326 N.L.R.B. No. 55, 1998 WL 574960 (1998), back to the Regional Director of Region 4 and ordered a full evidentiary hearing. The case addresses the question of whether physicians under the AmeriHealth HMO are employees or independent contractors within the meaning of the NLRA.

In the Notice to Show Cause, the Regional Director had posed the following questions to be addressed by the parties:

1.How do all the factors that comprise the "right of control" test, as enunciated by the Board in Standard Oil Co., 230 N.L.R.B. 967, 968 (1977), apply to the instant petition?

2.What is the nature of the physicians' practices, i.e., sole practitioner, group practice, hospital staff, or other type of practice? Approximately what proportion of the physicians fall into each category? What proportion of the physicians' total incomes are derived through compensation from AmeriHealth? To what extent does the physicians' compensation encompass work performed by their staffs?

3.To what extent, if any, can physicians negotiate the terms of their Provider Service Agreements with AmeriHealth? To what extent can physicians negotiate how they will be compensated by AmeriHealth for their services?

4.To what extent, if any, does AmeriHealth restrict the physicians' medical judgment? To what extent, if any, does AmeriHealth regulate the operation of the physicians' practices? To what extent, if any, does AmeriHealth regulate the physicians' obtaining of facilities or equipment, their obtaining and maintaining of malpractice and other insurance, or their hiring and compensation of their staffs? To what extent are AmeriHealth's regulations concerning physicians' practices in turn dictated by regulations issued by agencies of the state of New Jersey or other governmental entities that are uniformly applicable to health maintenance organizations?

5.How many of the physicians employ nurses, clerical employees, and other staff members? What effect, if any, does the fact that they maintain staffs have on a determination of the issue of whether they are AmeriHealth's employees? Are any or all of the physicians supervisors within the meaning of the Act and/or managerial employees? What facts form the basis for these conclusions? The Regional Director had posed five questions to the parties

AmeriHealth argued that the physicians were independent contractors based on the following factors:

The physicians operate their own independent medical practices, which they set up, staff, equip, market and insure. See AmeriHealth Brief in Support of Dismissal of the Representation Petition at 17-19.

Most of the physicians operate under professional corporations or associations, advertise under trade names, and pay taxes as corporate entities. Id. at 20-22.

Because they are never paid by AmeriHealth on an hourly or salaried basis, the physicians bear the complete risk of profit or loss based on their efficiency and entrepreneurial ingenuity. Id. at 24.

The physicians are free to contract with other managed care organizations ("MCO") or health insurance companies, negotiate with AmeriHealth over fees and manner of payment, and can terminate their contract with AmeriHealth for any reason. Id. at 23.

Although the Board has yet to consider the issue of whether a physician who contracts with a HMO is an employee or independent contractor of that HMO, AmeriHealth argued that case law in the medical malpractice context supported a finding of independent contractor status.1/ Id. at 15-16.

The contract language, specifically defining the physicians as independent contractors, demonstrates that AmeriHealth contracts for a range of medical services, not the labor of the physician. Id. at 27.

The physicians are highly skilled practitioners offering specialized skills that the purported employer does not possess. Id. at 30.

The efforts to monitor, evaluate, and improve the covered services provided to its members were distinct from a company's control of the means by which an employee provides his or her labor. The fact that it monitors the quality of the medical care being provided to its members does not transform the physicians into employees, since managed care is closely regulated by governmental controls and standards. The vast majority of AmeriHealth's quality standards are mandated by New Jersey law and the national HMO accrediting association, and therefore do not, under established legal precedent, constitute "control" by AmeriHealth. The few quality management standards not mandated by outside sources merely represented efforts by AmeriHealth to monitor, evaluate, and improve the "ends" required by AmeriHealth's contracts with its members. Id. at 31-40.

Although AmeriHealth does decide whether certain medical procedures are covered under its agreements with its members, that "coverage" decision is subject to review by an independent utilization review organization ("IURO"), as provided by New Jersey law. Id. at 42-47.

Although AmeriHealth may conclude that a specific service is not covered, the physician is free to provide any non-covered services that he or she believes are medically necessary, and to charge the patient for that non-covered service. Id. at 47.

AmeriHealth suggested that the "interference" argument proffered by the physicians is a smoke screen for their true motive -- banding together unlawfully, under the guise of the NLRA, to raise the price of their medical services in violation of federal and state antitrust laws. Moreover, AmeriHealth believed that a finding of "employee" status for these physicians would render meaningless Congress' explicit directive to remove independent contractors from coverage under the NLRA. More importantly, it warned that such a finding would have serious repercussions throughout the health care industry and by clear analogy to other professionals who contract to provide their services. AmeriHealth urged that such a finding would implicate numerous public policy issues that are best resolved in a legislative forum. Id. at 4.

Not surprisingly, the petitioning physicians argued that AmeriHealth controls the means and manner with which the physicians' provide medical services. They claimed that the following demonstrated employee status:

• The Participation Provider Agreements are not truly voluntary, since many patients were covered by AmeriHealth and the physicians would lose these patients if they did not sign these agreements. See Union Reply Brief in Support of Representation Petition and in Response to the NLRB's Notice to Show Cause at 3.
• The physicians are unable to negotiate over fees and capitation rates, nor do they have an opportunity to utilize a fee-for-service compensation scheme. Id. at 5-6.
• AmeriHealth evaluates the performance of every physician by coming into the offices of physicians to review records as part of the PCP Medical Record Quality Project and to gather information concerning office performance. Id. at 7-9.
• AmeriHealth demands certain tests and procedures, such as flu shots, that it deems appropriate, regardless of whether the physician thinks they are appropriate. Although AmeriHealth has increased the scope of services that primary care physicians and specialists are expected to provide, without a corresponding adjustment in rate or capitation fees. Even though flu shots not covered, AmeriHealth has taken no action to compensate PCPs with a higher reimbursement rate. Id. at 8.
• The physicians cannot exercise their independent medical judgment, for they need to get AmeriHealth permission to perform services that are medically necessary. The physicians believe that determinations of medical necessity are not based on a concern for patient care. Id. at 10-12.

The petitioning physicians argued that the common-law right-of-control test must apply, and that all factors are relevant, with no one factor being determinative. Id. at 14-15. They asserted that one can find employee status even if a number of factors point to an independent contractor relationship. Id. at 14-15. Thus, neither the fact that the contract refers to them as independent contractors, nor the fact that physicians have their own insurance, their own offices, and operate as independent businesses for tax purposes is determinative. Id. at 17-18. On the other hand, they argued that the unilateral determination of reimbursement and capitation rates is indicative of employee status. Id. at 19-23. They also pointed to that fact that the rates are uniform and set by AmeriHealth, and they therefore can not maximize profit. Id. They also claimed that AmeriHealth has substantially more control over them than is required by government regulations. Id. at 23-34.

The Regional Director concluded that the physicians were independent contractors. However, the Board found merit in the petitioners' arguments that a "hearing is necessary. . . for determining the extent to which AmeriHealth monitors and controls the provision of medical care to AmeriHealth patients." Id. at *1. According to the Board, a hearing "would give a fuller picture of the nature of the health care market in the era of managed care and the dependency of petitioned-for physicians on the health maintenance organizations for access to patients." Id. "The involvement of the HMOs in the physicians' delivery of health care services and access to patients is a feature of the changing nature of the health care industry . . . . It calls into question the historical understanding of the status of physicians who maintains their own practices." Id. at *2. The Board found that direct and cross-examination of witnesses would "provide a more complete picture of the day-today interaction between physicians and the HMOs and the impact of the HMOs on the physicians' access to and care of patients." Id. The Board stressed that its decision to remand for a hearing "is not to be construed as suggesting that we would find differently on that issue than the Regional Director." Id.

Board Member Brame dissented from this remand, holding that the Board did not dispute the findings of the Regional Director. Furthermore, since the majority's belief that a hearing would provide a "more complete picture," Brame concluded that "the only purpose for the remand is to provide the Petitioner with another opportunity to present evidence favorable to its position." Id. at *4. Characterizing the remand as nothing more than a costly "fishing expedition," Brame pointed out that the outcome would be inevitable given the findings of the Regional Director. Brame pointed out:

The Regional Director found that the physicians make the fundamental decisions that determine the profitability of their practices, including whether to affiliate with one or more health maintenance organizations (HMOs). She further found that the physicians exercise total control over the expenses and staffing of their offices, hold themselves out and advertise to the public under their own name, and are not subject to any restrictions by the employer on expanding, contracting, merging, or selling their practice. Moreover, the employer has only a 10-percent share of the Atlantic and Cape May County HMO market and the average petitioned-for physician contracts with four HMOs in addition to the Employer. Id. at 3.

According to Brame, there was some evidence that pointed to employee status, but the Regional Director found that the evidence of independent contractor status simply overwhelmed these factors.

On remand, the Regional Director conducted fourteen days of hearings involving the testimony of eighteen witnesses. The matter has been fully briefed and a decision is expected sometime this spring.

In viewing the issue of independent contractor status from a broader perspective, one cannot help but conclude that the proliferation of various "factors" to be considered by the Board or by courts addressing the issue under other employment-related statutes has resulted in an unacceptable level of uncertainty for employers, unions, independent contractors and employees. The following statutes all have their own variations of the right-of-control test: ERISA. See Darden, 503 U.S. at 320 (when Congress does not helpfully define the term "employee," the Court will presume it meant to employ common-law agency principles).

Employment Discrimination Statutes. After the Supreme Court's decision in Darden, supra, the federal employment discrimination statutes (ADA, ADEA, and Title VII) most likely will follow the common-law test. See Lambertsen v. Utah Dep't of Corrections, 79 F.3d 1024, 1028 (10th Cir. 1996) (applying Darden analysis to Title VII claims); Frankel v. Bally, Inc., 987 F.2d 86, 90 (2d Cir. 1993) (applying Darden analysis to an ADEA claim); Lundstedt v. City of Miami, No. 93-1402, 1995 WL 852443, at *5 (S.D. Fla. Oct. 11, 1995) (applying Darden analysis to an ADA claim).

Immigration Reform and Control Act. Although the "right to control" is the central inquiry, the Immigration and Naturalization Service looks to other factors, such as opportunity for profit, that are not traditionally included in the test. See 8 C.F.R. § 274a.1(j) (1996). Note that IRCA explicitly prohibits employers from entering into independent contractor relationships with workers in order to evade the statute's provisions. 8 U.S.C. § 1324a(4).

OSHA. See Loomis Cabinet Co. v. Occupational Safety and Health Review Comm'n, 20 F.3d 938, 942 (9th Cir. 1994) (determining who controls the work environment is the "central inquiry").

WARN. Although this is a developing area of the law, the fact that the Act does not "helpfully define" the term "employee" lends support, under Darden, for use of the common-law test.

State Workers' Compensation Acts. Although each state should be individually consulted, most workers' compensation decisions appear to apply the "right-to-control" test. See, e.g., North Penn Transfer, Inc. v. Workmen's Compensation Appeal Bd., 61 Pa. Commw. 469, 472, 434 A.2d 228, 229 (1981) (holding that key element is employer's "right to control").

At least two statutes have adopted what amounts to an economic realities test:

• FLSA. See Secretary of Labor v. Lauritzen, 835 F.2d 1529, 1535 (7th Cir. 1987), cert. denied, 488 U.S. 898 (1988). The FLSA definition of "employee" is considered the broadest among the labor statutes.
• FMLA. See 29 C.F.R. § 825.105 (1996) (noting that the FMLA uses the same broad definition contained in the FLSA).

To make matters worse, the Internal Revenue Service has adopted a twenty-factor test to determine employee status. Although the IRS purports to follow the common-law "right-of-control" test, it believes that its own set of "twenty questions" will lead to a correct classification for tax purposes. Rev. Rul. 87-41, 1987-1 C.B. 296. These questions are:

• Is the worker required to comply with instructions?
• Is the worker provided with training?
• Are the worker's services integrated into business operations?
• Must the worker render the services personally?
• Who has the power to hire, supervise and pay assistants?
• Is there a continuing relationship?
• Are there set hours of work?
• Is there a full time work requirement?
• Is the work done on the premises of the business?
• Is the order of sequence of the work established?
• Are oral or written reports required?
• Is payment made by the hour, week or month?
• Who pays the worker's business and/or travel expenses?
• Who furnishes the worker's tools and materials?
• Has the worker made significant investment for work facilities?
• Will the worker realize a profit or loss from the activity?
• Does the worker work for more than one business at a time?
• Are the worker's services available to the general public?
• May the worker be discharged?
• Does the worker have the right to terminate the relationship?

To further complicate matters, the tax code deems certain workers to be employees even if they do not qualify as such under the twenty-factor test. These "statutory employees" include: (1) traveling or city salespersons, (2) life insurance salespersons, (3) agent or commission drivers, and (4) certain homeworkers.

Further, some workers will not be treated as employees for tax purposes even if they satisfy the above test. These "statutory non-employees" include: (1) licensed real estate agents, and (2) direct sellers. It is important to keep in mind that these exceptions apply only to classification for tax purposes and do affect the analysis under the other statutes discussed above.

In 1995, the White House hosted a Conference on Small Business. When asked what was their most important tax concern, delegates placed employee classification problems and overzealous IRS enforcement at the top of their list. This response led to congressional hearings, and in March 1996, the IRS announced several initiatives to help resolve classification problems.

Under the new Classification Settlement Program ("CSP"), disputes over classification are handled as early in the administrative process as possible, safe harbor tax relief procedures are employed, and examiners offer worker classification settlements using a standard closing agreement. After a two-year test period, the IRS announced in April of 1998 that the program will be extended "until further notice." A second procedure allows businesses to appeal employment tax issues to the IRS Appeals function even while an examination of other issues is in progress. Finally, the IRS has revised its worker classification training guidelines to clarify the cumbersome twenty-factor test.

These actions, however, have not ended the debate, as many in Congress have demanded greater simplification in worker classification. In September of 1998, Representative Jennifer Dunn (R-WA) reintroduced in the House of Representatives the Independent Contractor Tax Simplification Act of 1998 to amend the Internal Revenue Code of 1986. See H.R. 4622, 105th Cong. (1998). Representative Jon Christensen (R-Neb) had sponsored this bill earlier in the year as well as in prior years. See H.R. 3722, 105th Cong. (1998); H.R. 1972, 104th Cong (1995). Indeed, his 1995 version (H.R. 1972) had the support of 100 initial co-sponsors. Finding the current common law "too subjective" and seeking "to establish realistic and consistent guidelines," the proposed legislation would enable employers to label workers as independent contractors if a three-part test, paraphrased below, is met:

I.Required to meet at least one of the following five conditions relating to investment, the service provider must --

1)have a significant investment in assets and/or training;

2)incur significant unreimbursed expenses;

3)agree to perform the service for a particular amount of time or to complete a specific result and be liable for damages for early termination without cause;

4)be paid primarily on a commissioned basis; OR

5)purchase products for resale.

II.One of the following two conditions must be met relating to the service provider's independence:

1) The service provider:

A)has a principal place of business,

B)does not primarily provide the service in the service recipient's place of business,

C)pays a market rent for use of the service recipient's place of business;

2)The service provider:

A)is not required to perform services exclusively for the service recipient,

B)in the year involved, or in the preceding or subsequent year:

i)has performed a significant amount of service for others,

ii)has offered to perform service for others through

I)advertising

II)individual written or oral solicitations,

III)listing with registries, agencies, brokers or others in the business of providing referrals to other service recipients, OR

IV)other similar activities, OR

iii)provides service under a business name which is registered with (or for which a license has been obtained from) a State, a political subdivision of a State, or any agency or instrumentality of one or more States or political subdivisions.

III.The services must be performed pursuant to a written contract, and the contract must state that the service provider will not be treated as an employee with respect to such services.

See H.R. 4622, 105th Cong. (1998); H.R. 3722, 105th Cong. (1998); H.R. 1972, 104th Cong. (1995). Representative Christensen testified that his bill "does not eliminate the 20-factor test nor the safe harbors under Section 530. It simply provides for an alternative test that can be used if you comply with all income reporting requirements." Hearings on H.R. 1972 Before the Subcomm. on Taxation and Finance of the House Comm. on Small Bus., 104th Cong. (1995). In 1996, Senator Christopher Bond (R-MO), with eight co-sponsors, introduced this bill to the Senate, adding only one additional factor to section one of part two of the test: that the service provider "operate primarily from equipment not supplied by the service recipient." S. 1610, 104th Cong. (1996).

This legislative proposal is certainly a step in the right direction, but it should be expanded beyond the Internal Revenue Code to include all federal employment-related statutes. One federal standard for independent contractors is sufficient. More than one standard creates confusion, results in unpredictability, and engenders the type of protracted litigation that we have seen in the Roadway, Dial-A-Mattress and AmeriHealth cases.

1/The Restatement (Second) of Agency §220(2) (1958) contains no significant changes to this test, adding only one factor, §220(2)(j), which asks "whether the principal is or is not in business." Otherwise, this Restatement test has not changed since 1933.

2/Dial-A-Mattress had argued alternatively that the owner-operators were supervisors and thus excluded from the Act's coverage. The Regional Director never addressed this supervisory status argument.

3/"(1) A "van availability settlement" of $40 per day for "each business day" that a driver provides services under the agreement; (2) one rate for each package delivered and picked up, and one rate for each stop; (3) a "temporary core zone density settlement" to supplement the piece rates based on a rate for a driver's particular primary service area which may contain one or more core zones; (4) a voluntary "flex program" to compensate participating drivers $5 per day (in addition to the standard package pickup rates) for agreeing to pick up and deliver any overflow work from fellow drivers; (5) a "quarterly performance settlement" of 2.25 percent of the quarterly gross settlement for drivers with at least 1 year of service; (6) a "service bonus" of $500 per year for each of the first 4 years a driver is under the agreement, and $1000 per year after being under the agreement for 5 years or more; (7) a "customer service program" that provides a bonus paid for no at-fault accidents and no verified customer complaints based on driver and terminal performance; and (8) a "service guarantee program" under which the drivers are eligible for loans from Roadway of up to $5000, depending on the amount maintained in the driver's "service guarantee account," which is an interest-bearing savings account to which Roadway makes matching contributions of 20 percent each quarter, or 80 percent annually." Id. at *6.

4/Since the Roadway and Dial-A-Mattress decisions were both handed down on August 27, 1998, the Board discussed the legal issues in detail only in the Roadway case.

5/The Board quoted the following from the United Insurance as the relevant factors: "[T]he agents do not operate their own independent businesses, but perform functions that are an essential part of the company's normal operations; they need not have any prior training or experience, but are trained by company supervisory personnel; they do business in the company's name with considerable assistance and guidance from the company and its managerial personnel and ordinarily sell only the company's policies; the 'Agent's Commission Plan' that contains the terms and conditions under which they operate is promulgated and changed unilaterally by the company; the agents account to the company for the funds they collect under an elaborate and regular reporting procedure; the agents receive the benefits of the company's vacation plan and group insurance and pension fund; and the agents have a permanent working arrangement with the company under which they may continue as long as their performance is satisfactory." Roadway at *11 (quoting United Insurance, 390 U.S. at 259).

6/Raglin v. HMO Illinois, Inc., 595 N.E.2d 153, 158 (Ill. App. Ct. 1992) (rejecting a medical malpractice action brought against the defendant HMO for the negligence of its participating physicians because they were not employees; such measures as quality assessment and utilization review guidelines were "really just a manner of tracking the independent medical groups to determine if they are complying with the rules and regulations of [the HMO]"); Chase v. Independent Practice Ass'n, 583 N.E.2d 251, 254 (Mass. App. Ct. 1991) (holding that an independent practice association which contracted with an obstetrics group was not vicariously liable for the acts of physicians employed by that group because it had no right to control the physician's medical decisions, activities, or terms and conditions of employment; requiring the physicians to follow some cost-containment and utilization review measures was not legally significant to establish respondeat superior liability).

This article is published to inform clients and friends of Morgan Lewis and should not be construed as providing advice on any specific matter.