Decisions, Decisions

Recent SJC Rulings Reject Efforts to Constrain Employers

By PETER VICKERY, Esq.

In April, the State Supreme Judicial Court (SJC) issued two important employment-law decisions. In both cases, the SJC rejected arguments that would have further constrained the ability of employers to run their businesses flexibly and efficiently.

The first relates to the Tips Act (M.G.L. c. 149, §152A) and should come as good news to restaurateurs and bar owners. The second case involves the independent-contractor law (M.G.L. c. 149, §148B), and, although it concerns the highly regulated field of Boston taxi cabs, the way the SJC interpreted the statute may help businesses in other fields rebut the legal presumption that any given individual performing a service is, by default, an employee.

The case about tips, Meshna v. Scrivanos, concerned a Dunkin’ Donuts franchisee that adopted a no-tipping policy. In Massachusetts, employers have to ensure that employees receive their tips by the end of the day or in their next paycheck at the latest. Violating the Tips Act can have drastic consequences: having to pay restitution plus 12% interest, and criminal penalties ranging from hefty fines to one year’s imprisonment (for a first offense).

To avoid both potential liability under the Tips Act and the administrative costs of dividing up tips among the employees, the franchisee adopted a policy of prohibiting tips altogether. In addition to telling employees not to accept tips, the employer put up signs for customers stating “no tipping” and “thank you for not tipping.”

Prior to the Meshna case, two Superior Court justices and one federal district court had ruled no-tipping policies lawful under the Tips Act. Nevertheless, some current and former Dunkin’ Donuts employees, all of whom earned at least the minimum wage, filed suit in Superior Court alleging that the no-tipping policy violated the law.

The Tips Act provides that no employer “shall demand, request, or accept from any staff employee, service employee, or service bartender any payment or deduction from a tip or service charge given to any such staff employee, service employee, or service bartender by a patron.” The employees and the Labor Relations and Research Center at UMass Amherst (which filed an amicus brief) argued that the words ‘deduction from’ are flexible enough to mean ‘prohibit’ — i.e. no employer shall prohibit an employee from receiving a tip.

Not so, said the SJC. When it enacted the statute, the Legislature’s intent was to bar employers from deducting or retaining tips that customers had given to the waitstaff. Making it unlawful for restaurant and bar owners to keep or skim tips is not the same as forbidding employers from trying to prevent customers from tipping in the first place. A no-tipping policy simply does not violate the statute. And so long as the owner clearly communicates the policy to customers, if they still leave money behind, the servers do not have the right to claim that money as theirs. The employer is not breaking the law by keeping it or giving it away.

The take-away for employers? If you have a no-tipping policy, make sure that you get the message across to your customer clearly.

In the second case, Sebago v. Boston Cab Dispatch Inc., the issue was whether licensed Boston taxi drivers were independent contractors or the employees of the defendants (taxi-cab license owners, radio associations, and a taxi-servicing garage). Three drivers, together with the Massachusetts AFL-CIO, argued that the separate defendants really constituted one monolithic industry, a sham designed to evade the strictures of wage and overtime laws.

The SJC disagreed, holding that the various entities were not all one and the same and that “distinctions in services within the taxi-cab industry as a whole are not illusory, but quite real.”

Much of the court’s decision revolves around the municipal rule that regulates taxis in Boston, namely Police Department Rule 403, which establishes four possible business models for cabs. One permissible model allows the owners of medallions (taxi licenses) to lease their medallions to drivers at a flat rate, not a percentage of the fares. This was the model at issue in the Sebago case: the drivers paid the medallion owners a fixed amount rather than a cut of their takings.

Rule 403 requires parties using that business model to sign a City of Boston Hackney Carriage Shift Lease Agreement, which includes an optional independent-contractor clause. Under the independent-contractor clause of the city-mandated contract, the drivers are free to operate anywhere they choose, and to pick and choose which radio dispatches to accept. As the SJC noted, drivers “may lease taxicabs and medallions from whomever they wish … each day of the week, they may lease from a different owner, each using a different radio association… earn as much as they are able and need not accept a single dispatch.” Moreover, the statutes governing workers’ compensation, unemployment insurance, and income-tax withholding all exclude taxi drivers operating under flat-rate leases from the definition of ‘employee.’

Nevertheless, the plaintiffs argued that they were employees. This is because, under Massachusetts default rule, the onus is on the defendant to rebut the presumption that an individual is an employee, and this can be done only by clearing three distinct hurdles. The defendant has to prove that:

(1) the individual 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;
(2) the service is performed outside the usual course of the business of the employer; and
(3) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

The Sebago case hinged on the second factor, i.e. whether the service that the drivers provide is outside the usual course of the defendants’ business. That depends on whether the service is necessary to that business or merely incidental to it. So is taxi-driving necessary or incidental to the medallion owners’ business? Incidental, said the SJC. The medallion owners are in the business of leasing medallions, something that is “not directly dependent on the success of the drivers’ endeavors.”

At first blush, this interpretation of the term ‘usual course of the [defendant’s] business’ may appear a stretch. How can cab drivers be merely incidental to — rather than necessary to — the business of a company whose sole raison d’être is the leasing of taxi licenses? After all, without the drivers, the medallions would be worthless. In fact, this was the approach that the Superior Court judge took in denying the defendants’ motion for summary judgment.

But the SJC said that the judge’s reasoning “proves too much.” Taken to its logical conclusion, it would mean that “all lessees would be deemed presumptive employees of their lessors.” Instead, the SJC stated that the second prong (the ‘usual course of the business’) does not include all aspects of the business.

The nutshell for business owners? First, Sebago arose in a unique regulatory environment involving city-prescribed contracts governing the leasing of city-issued licenses. Second, the courts remain vigilant for Rube-Goldbergian contractual arrangements involving several legal entities designed to evade the Wage Act. But with those two caveats, business owners operating several connected but distinct entities should remember that individuals claiming to be employees rather than independent contractors must establish — and not simply assert — that the several entities are merely alter egos.

If the companies are not organized as part of a ruse but are legitimately separate, the courts will be more likely to define the ‘usual course of the business’ narrowly, to the benefit of the business owner. So, while the Massachusetts independent contractor remains an endangered species, it is not yet extinct.

Peter Vickery practices law in Amherst; (413) 549-9933; www.petervickery.com