July 2014 Monthly Independent Contractor Compliance and Misclassification Update

The leading development this month in the area of independent contractor compliance and misclassification is an Arizona case that deals with a commonplace event – but  one that carries with it the potential for unanticipated independent contractor misclassification liability – where a company outsources a function to a subcontractor, who uses ICs to render the service.  If the ICs claim that they are employees who have been misclassified, they may also allege that the company that outsourced the work and is indirectly receiving the benefit of the work is a “joint employer” with the subcontractor.  This type of claim is most likely to arise where the ICs are indirectly providing a service to a single client or customer of the subcontractor, or to a select few clients or customers.  The case below finds that the outsourcing company was not a joint employer under the facts in that matter, but if some of the facts were changed in any material respect, the court may have concluded that the outsourcing company could be exposed to IC misclassification liability.  The “Takeaway” below explains how outsourcing companies can minimize this potential exposure.

In the Courts (5 cases)

  • ARIZONA COURT FINDS HOME DEPOT IS NOT A JOINT EMPLOYER WITH 3PD DELIVERY, WHICH RETAINED DRIVERS TO DELIVER HOME DEPOT GOODS. As detailed in prior blog posts, drivers who provide delivery services to 3PD customers have succeeded in a number of IC misclassification cases against 3PD; in some cases, they have already collected millions of dollars in class action settlements. This class action case, brought in an Arizona federal district court seeking relief under state and federal wage and hour laws, sought to hold Home Depot liable as a joint employer with 3PD for allegedly misclassifying the drivers as ICs. The court disagreed with the drivers, however, and found that Home Depot, whose products were being delivered by the drivers who had contracted with 3PD, was not a joint employer of the drivers. In reaching its conclusion, the court concluded that Home Depot (1) did not have the power to hire and fire the drivers; (2) did not supervise and control driver work schedules or conditions of employment; (3) did not control the rate and method of pay; and (4) did not maintain employment records of the drivers. The court also took into account additional factors such as Home Depot’s lack of ownership of the trucks; that uniforms were provided by 3PD and the driver (not by Home Depot); and the driver’s profits were determined based on his own managerial skill – each of which, the court concluded, militated against a finding of Home Depot as a joint employer. Montoya v. 3DP, Inc., No. CV-13-8068-PCT-SMM (D. Ariz. July 9, 2014).
    Takeaway: Where independent contractors provide services to a single client of the business that retains them, or to only a few customers, the client itself may be a secondary target of plaintiff class action lawyers, especially if the client has “deeper pockets” than the contracting business. Home Depot was able in this case to deflect the joint employer claim by the drivers providing services to 3PD. However, other clients or customers that direct or control the manner in which the services are performed or otherwise play a role in the performance of the workers’ services may unwittingly be exposed to IC misclassification liability that they never anticipated. Prudent customers require their vendors who provide services to them through individuals classified as ICs to satisfy the applicable tests for proper IC classification. This can be accomplished through the use of IC Diagnostics™, a proprietary process that minimizes IC misclassification exposure.
  • CALIFORNIA APPELLATE COURT UPHOLDS ARBITRATION AGREEMENT IN LAWSUIT ALLEGING IC MISCLASSIFICATION. A field agent for a Washington State real estate company who had filed a class action lawsuit in California alleging that the firm had misclassified him and other similarly situated workers was ordered by a California appellate court to arbitrate his claims instead of pursuing them in court. The class action lawsuit sought to adjudicate claims for unpaid overtime, missed meal and rest breaks, and unreimbursed expense claims against the real estate firm, Redfin Corporation, under the California Labor Code and the state Unfair Competition Laws. The plaintiff had signed a Field Agent Independent Contractor Agreement that contained an arbitration clause covering all disputes arising under the Agreement and requiring arbitration in Washington State. Although the plaintiffs argued that a number of the claims were pleaded under California statutes and therefore did not arise under the Agreement, the appellate court rejected that argument, finding instead that because the “Agreement is the instrument that classified him as [an independent contractor] and that governed his relationship with defendant, including the services he was to provide and the method by which those services would be compensated,” the claims therefore “arose out of” the Agreement. Galen v. Redfin, No. A138642 (Cal. Ct. App. 1st Dist. July 21, 2014).
  • GO-GO DANCERS AT GAY NIGHT CLUB GAIN CLASS CERTIFICATION IN IC MISCLASSIFICATION CASE IN GEORGIA. A federal district court in Georgia granted class certification to group of male go-go dancers at a gay night club, BJ Roosters, in an IC misclassification lawsuit alleging violations of the FLSA and retaliation. The court based its decision to grant class certification for a proposed class of hundreds of dancers because it determined that the dancers had similar responsibilities; were all subject to the club’s policies; set the dancers’ schedules; had the authority to approve or ban dancers’ stage names; retained control of the clothing the dancers could wear at the club; retained strict control over which dancers could perform in different areas of the club; and had controlled which dancers would be permitted to entertain guests in VIP rooms and the compensation dancers could receive from customers in those rooms. Allen v. Jobo’s, Inc. d/b/a BJ Roosters, No. 1:13-CV-3768-RWS (N.D. Ga. July 3, 2014).
  • TUTORING COMPANY FOUND TO HAVE MISCLASSIFIED TUTORS AS INDEPENDENT CONTRACTORS IN NEW YORK. A New York appellate court determined that a tutoring referral and billing company, Ivy League Tutoring Connection, misclassified tutors as ICs where the tutors provided in-home tutoring sessions to clients seeking assistance with school work and test preparation. The Court based its decision, which upheld an administrative determination by the Unemployment Insurance Appeal Board, on the following factors: the company screened, interviewed and conducted criminal background checks on prospective tutors; it paid the tutors a set hourly rate; it matched clients with the tutor it deemed best suited for each client’s needs; and it restricted the tutor’s solicitation of the company’s clients both during the relationship and for three years after the relationship ended. Matter of Ivy League Tutoring Connection, Inc. v. Commissioner of Labor, No. 517901 (N.Y. App. Div. 3d Dep’t July 24, 2014)
  • TRANSPORTATION COMPANY IN CALIFORNIA CANNOT USE FEDERAL LAW TO PREEMPT STATE CLAIMS FOR IC MISCLASSIFICATION. The California Supreme Court held that IC misclassification claims against a trucking company, Pac Anchor Transportation, Inc., alleging violations of the California Unfair Competition Law (UCL), are not preempted by the Federal Aviation Administration Authorization Act (FAAAA). The complaint was brought by the State of California against Pac Anchor, alleging that the company misclassified drivers as independent contractors and thereby illegally lowered their costs of doing business by engaging in acts of unfair competition, including but not limited to, failing to pay unemployment insurance taxes, provide workers’ compensation coverage, withhold state disability taxes, and paying the minimum wage. The FAAAA provides that a state “may not enact or enforce a law, regulation, or other provision having the force and effect of a law related to a price, route or service of any motor carrier…with respect to the transportation of property.” In rejecting the preemption argument, he California Supreme Court held: “The sections of the California Labor Code and Unemployment Insurance Code … make no reference to motor carriers or the transportation of property. Rather, they are laws that regulate employer practices in all fields and simply require motor carriers to comply with labor laws that apply to the classification of their employees. In fact, the [trucking company] conceded ‘that those state employment laws…are laws of general application whose effects on the carriers’ prices, routes, and services is remote.’” People ex rel. Harris v. Pac Anchor Transportation, Inc., No. S194388 (Sup. Ct. Cal. July 28, 2014).
    Regulatory and Enforcement Initiatives
    (2 Matters)
  • MASSACHUSETTS COLLECTED $15.6 MILLION IN IC MISCLASSIFICATION LIABILITIES IN 2013. Massachusetts Labor and Workforce Development Secretary Rachel Kaprielian announced on July 23, 2014 that the Joint Enforcement Task Force on the Underground Economy and Employee Misclassification, comprised of multiple state agencies and the Attorney General’s Office, collected $15.6 million in 2013 in unpaid wages, back taxes, unemployment insurance premiums, and fines and penalties related to employer fraud and worker misclassification. According to the press release, the Massachusetts Misclassification Task Force has recovered since its inception “nearly $56 million from unlawful businesses by enforcing labor, licensing and tax laws.” Massachusetts Attorney General Martha Coakley stated: “This ongoing effort ensures that we are protecting workers by combatting fraud and abuse, returning significant funds to the Commonwealth, and leveling the playing field for all businesses that play by the rules.”
  • MISSOURI LABOR DEPARTMENT EXPLAINS IC MISCLASSIFICATION TEST IN THAT STATE. Officials from Missouri Department of Labor and Industrial Relations, participating in the Mid-America Labor Management Conference on July 8, 2014, explain that the most important factor in determining whether an individual is an independent contractor or employee under Missouri law is whether the business retaining the worker exercises control over the manner in which the work is performed. Thomas Pudlowski, contribution field manager in the Missouri Division of Employment Security (DES), said the DES uses the IRS 20-factor test and “looks at the substance of the relationship rather than the label.” He also advised: “There is not just one factor that can be relied upon for determining whether you have a business-independent contractor relationship or an employer-employee relationship. You’ve got to look at all the factors as a whole.
    On the Legislative Front
  • VIRGINIA LAW INCREASES IC MISCLASSIFICATION PENALTIES UNDER ITS WORKERS’ COMPENSATION LAW. Effective July 1, 2014, a new law takes effect with respect to penalties for Virginia businesses that fail to provide workers’ compensation coverage to those who have been misclassified as independent contractors. According to the Virginia Workers’ Compensation Commission website, the new state law provides that an employer shall be assessed a civil penalty of up to $250 per day of noncompliance, subject to a maximum penalty of $50,000, plus collection costs. The Commission advises businesses that “the facts of the work circumstances will determine if the individual is covered for workers’ compensation, regardless of payment on a 1099 designation.”

Published by Richard Reibstein, Lisa Petkun, and Andrew Rudolph. Compiled by Janet Barsky.

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Posted in IC Compliance

June 2014 Monthly Independent Contractor Compliance and Misclassification Update

JUNE 2014

In the Courts (10 Cases)

  • FEMALE FOOTBALL PLAYERS SUE LINGERIE LEAGUE FOR IC MISCLASSIFICATION. A former Lingerie Football League player has filed a class action lawsuit in a California state court against the all-female, professional league (now called the Legends Football League). The lawsuit claims that current and former players were willfully misclassified as independent contractors instead of employees. The complaint alleges a number of violations of the California wage and hour laws, including failure to pay compensation for all hours worked; failure to pay at least the minimum wage; and failure to pay overtime wages. The League allegedly mandated attendance at practices, games, and promotional events on dates and at times set by the League and reserved the right to discipline players for failure to attend such events; prevented the players from engaging in any outside activities that might result in serious physical injury; and did not allow any negotiation regarding the terms of the independent contractor agreement. Margulies v. Legends Football League, LLC, No. BC550244 (Super. Ct. Cal. June 27, 2014).
  • UBER CAR SERVICE SUED IN MASSACHUSETTS BY DRIVERS. A Massachusetts car service driver has commenced a lawsuit in Massachusetts state court against Uber Technologies on behalf of individuals who have worked in the state as Uber car service drivers. Uber is a car service that provides customers with the ability to request, ride and pay via their mobile phones. The lawsuit claims, among other things, that Uber misclassified the drivers under the state law as ICs instead of employees. The complaint alleges that the drivers are required to follow detailed requirements imposed upon them by Uber including cleanliness of their vehicles, timeliness in picking up customers, and how to speak to customers – and the drivers are subject to termination if they fail to abide by such rules. The complaint further states that because of the alleged unlawful misclassification, the drivers have improperly been required to bear the expenses of their employment, such as the costs for maintaining or leasing their vehicles, insurance, fuel, and phone data charges. Yucesoy v. Uber Technologies, Inc., Docket No. SUCV2014- 02056 (Super. Ct. Mass. June 26, 2014).
  • AIRLINE AND ITS AIRCRAFT SUBCONTRACTOR SUED FOR IC MISCLASSIFICATION IN MAINE.  A division of Lutfhansa Airlines and its subcontractor, Global Aircraft Service, have been sued in a class action lawsuit filed in the U.S. District Court for the District of Maine for allegedly misclassifying sheet metal workers as ICs in violation of state and federal wage/hour laws. According to the complaint, the workers, who were to provide services in furtherance of Lufthansa’s aircraft restoration project, were allegedly denied overtime compensation for hours over 40 in a workweek when they worked on average over 63 hours per week; were not permitted to deviate from the schedule set by the companies; were provided with tools to be used on the job; were required to wear Global Aircraft tee shirts every day; and were provided with a company e-mail address, furnished apartments, and/or housing allowances. Venegas v. Global Aircraft Service, Inc., No. 2:14-cv-00249 (D. Maine June 24, 2014).
  • LOGISTICS COMPANY FOUND TO HAVE MISCLASSIFIED ITS DRIVERS AS ICs. The United States Court of Appeals for the Ninth Circuit held that yet another logistics and delivery company, Affinity Logistics Corp., misclassified its drivers as independent contractors. As discussed more fully in our prior blog post dated June 20, 2014, the federal appeals court, applying California law, concluded that 300 drivers who were retained by the company to make home deliveries and install products purchased by customers from Sears were employees and not independent contractors, even though the contractors were all separate entities. Ruiz v. Affinity Logistics Corp., No. 3:05-cv-02125- JLS-KSC (9th Cir. June 16, 2014).
  • AIRPORT SHUTTLE COMPANY AGREES TO $11.9 MILLION IC MISCLASSIFICATION SETTLEMENT.  Car service drivers of SuperShuttle, a shared-ride transportation service that provides door-to-door service to and from California airports, have secured an $11.9 million settlement in their IC misclassification lawsuit filed in federal court in California. The drivers alleged that SuperShuttle improperly classified them as independent contractors or franchisees. The drivers contended that SuperShuttle improperly failed to pay the drivers for business expenses, overtime pay, and minimum wages and failed to comply with California meal and rest period laws. SuperShuttle maintained that the franchisees and the non-franchisee drivers have at all times been properly classified as non-employees. The settlement amount allocated to the drivers under the proposed settlement would be about $7.6 million, to be distributed to over 3,000 class members, with the average class member receiving approximately $2,350. The settlement agreement also provided for payment of the drivers’ attorneys’ fees of up to $4 million, plus court costs of up to $300,000. A fairness hearing is scheduled for October 2014. Kairy v. SuperShuttle International, Inc., No. 4:08-cv-02993-JSW (N.D. Cal. June 12, 2014).
  • PELLA WINDOWS BEATS ILLINOIS IC MISCLASSIFICATION CLAIM BY “BONA FIDE” CORPORATE INDEPENDENT SUBCONTRACTOR.  An Illinois appeals court has affirmed a lower court’s grant of summary judgment in favor of Pella Products, Inc., finding that when a “bona fide corporation” rather than an individual performs services for a contractor, the Illinois Employee Classification Act does not apply. Pella Products, which sells and installs windows and doors, entered a subcontracting agreement with Robert Michael Homes, Inc., an incorporated residential contracting business, to provide window and door installation services for Pella. The Act’s administrative regulations promulgated by the state Department of Labor provide that incorporated businesses like Robert Michael Homes are excluded from the Act because they are not “individuals.” Those factors include whether the corporation is capitalized, has issued corporate stock, maintains a corporate bank account, intermingles corporate and personal accounts or funds, holds itself out as a corporation, maintains corporate books and records, files corporate tax returns, and has filed articles of incorporation. The court found that the subcontracting company satisfied those factors and that Robert Michael Homes, Inc., and not the corporation’s owner, Robert Michael, had rendered services individually to Pella Products through the subcontracting company’s own employees. Additionally, the court found that, under the agreement between Pella Products and the subcontracting company, the latter agreed to supply labor, skills, and tools necessary to perform the work; determined its employees’ rate of pay; hired, fired and paid its employees; paid employees out of its corporate account; and set the schedules for its employees, even though Pella scheduled the installation jobs to meet customer demand. Michael v. Pella Products, Inc., 2014 Ill. App. (1st Dist.) 132695 (June 25, 2014).
  • DRIVER FOR LOGISTICS COMPANY HELD EMPLOYEE, NOT INDEPENDENT CONTRACTOR. A driver who delivered auto parts for a logistics company, BMS Limited 1999, was held by a Utah court to be an employee and not an independent contractor where the court found that the driver was not customarily engaged in an independently established trade or business. It was reported earlier this month that the Utah Court of Appeals held, in late May 2014, that although the logistics company was able to satisfy some of the seven factors considered in analyzing whether an individual has an independently established business under the Utah Employment Security Act, it failed to meet its statutory burden when all seven of the factors were evaluated. Although the court found that the driver had at one point obtained a business license, kept track of expenses, provided his own equipment including his own vehicle, and could realize a profit or loss, such factors were outweighed by the fact that the worker was required to secure the initial business license, the driver did not supply any equipment beyond his vehicle, tarps, and straps, the company paid some of the driver’s fuel expense, and there was no evidence that the driver serviced or attempted to obtain other customers. BMS Limited 1999, Inc. v Department of Workforce Services, No. 20130499-CA (Ct. App. Utah May 22, 2014).
  • HOME CARE WORKERS SUE CALIFORNIA COMPANY FOR MISCLASSIFYING THEM AS FRANCHISEES INSTEAD OF EMPLOYEES. A California home care franchisor, Griswold International LLC, has been sued in federal district court for $3 million by group of franchisees who claim they entered franchise agreements based on misrepresentations by Griswold that the independent contractor business model used by Griswold was “proven, thoroughly tested, validated by 30 years’ experience, documented and defended by the best legal minds, and supported by [Griswold’s] ongoing specialists in state and local laws and regulations, and that it was specifically valid in California.” In this action, where the franchisees are seeking damages for fraud, negligent misrepresentation, fraudulent concealment, and violation of the California Franchise Investment Law, the franchisees allege that at the same time they were entering into these agreements, Griswold allegedly knew or should have known that classification of caregivers as independent contractors had been under attack for several years by various state labor and employment departments, that California had introduced and passed relevant legislation, and that in some states the franchisor had already converted to an employee-based business model and/or a modified independent contractor business model. Andersen v. Griswold International LLC, No. 3:14-cv-02560 (N.D. Cal. June 3, 2014).
  • ANOTHER FEDERAL COURT FINDS EXOTIC DANCERS WERE MISCLASSIFIED AS ICs. An Arkansas federal court finds class of exotic dancers, who sued an adult entertainment club operated by French Quarter Partners, LLC are employees under the federal Fair Labor Standards Act (FLSA). In applying the “economic realities” test used under the FLSA, the Court concluded that (1) control was exercised by the club over the dancers because they were expected to abide by certain rules while working at the club; were expected to appear for work at specified times subject to penalty; were not supposed to leave while on a shift even if no customers were present; were not supposed to hire themselves out to dance in people’s homes or at parties; and the club set the prices charged for private dances; (2) although the dancers made some investment in order to dance at the club, such as purchasing their own costumes, shoes, and cosmetics, the club had a much more significant investment including renting the space used by the dancers, procuring the business license, and attending to the maintenance, cleaning, and renovations of the club; (3) the dancers required little specialized skill and initiative to perform their work; (4) the dancers’ relationship with the club was transient in nature; and (5) the dancers were an integral part of the club’s business. The court found that all of the factors, other than factor 4, supported IC status. Whitworth v. French Quarter Partners, LLC, Case No. 6:13-CV-6003 (W.D. Ark. June 30, 2014).
  • CALIFORNIA SUPREME COURT ALLOWS CLASS ACTION LAWSUITS FOR IC MISCLASSIFICATION. The Supreme Court of California has held that the independent contractor/employee misclassification claims asserted by newspaper carriers delivering papers against Antelope Valley Newspapers may be brought as a class action lawsuit. The Court stated that “Certification of class claims based on the misclassification of common law employees as independent contractors generally does not depend upon deciding the actual scope of the hirer’s right of control over its hires. The relevant question is whether the scope of the right to control, whatever it might be, is susceptible to class-wide proof.” The court found that the newspaper carriers’ relationship with the newspaper company was governed by one of two form contracts covering all of the workers, both of which addressed the extent of the company’s control over many aspects of the deliveries. The California Supreme Court directed that the trial court, on remand, examine the contract closely to determine whether “the degree of control it spells out is uniform across the class.” In addition, besides the central factor of right to control, secondary factors including whether carriers are engaged in a distinct occupation/business, may be considered as to whether those factors will require individual inquiries or can be assessed on a class-wide basis. Finally, the court ruled that alleged wage/hour violations such as unpaid overtime, unlawful deductions, failure to provide meal breaks, and failure to reimburse for expenses, could not be managed on a class-wide basis. Ayala v. Antelope Valley Newspapers, Inc., S206874 (Sup. Ct. Cal. June 30, 2014).

Regulatory and Enforcement Initiatives (3 matters)

  • TENNESSEE ISSUES NEW PROCEDURES TO CRACK DOWN ON IC MISCLASSIFICATION. The Tennessee Department of Labor and Workforce Development, through its Workers’ Compensation Division, announced in a press release on June 4, 2014 that it has issued and implemented new procedures to identify employers who intentionally misclassify workers as independent contractors, failing to report all wages paid, misrepresenting the kind of work performed by its workers, or paying workers “under the table.” To support its initiative, the Department has established a referral process for possible criminal prosecution, hired additional investigators, been acquiring fraud detection software, launched a public awareness initiative, and created a website that provides useful distinctions between employees and independent contractors, as well as a tip form to report businesses suspected of misclassifying employees.
  • IRS ANNOUNCES INCREASED CORPORATE AUDITS FOR IC MISCLASSIFICATION. The Internal Revenue Service has announced that it plans to audit more S corporations because many are misclassifying their employees as independent contractors, according to Gerry Kelly-Brenner, senior stakeholder liaison for the IRS Small Business/Self-Employed Division, who participated in the IRS-San Jose State University Small Business Tax Institute on June 18, 2014. Ms. Kelly-Brenner reminded companies that “a corporate officer is always an employee, whether part-time or full-time.”
  • DRYALL CONTRACTOR SETTLES IC MISCLASSIFICATION INVESTIGATION FOCUSING ON CONSTRUCTION WORKERS. A drywall contractor, TJ Drywall, agreed to pay a $300,000 penalty imposed by the Tennessee Department of Labor, which alleged that the construction contractor had misclassified construction workers and materially understated its payroll to its insurance carrier. The penalty was reported in a June 4, 2014 press release, which noted that the amount of the penalty was the largest to date in a statewide crackdown in Tennessee against the misclassification of employees as independent contractors.

Published by Richard Reibstein, Lisa Petkun, and Andrew Rudolph. Compiled by Janet Barsky.

* * * * To receive blog posts and regular Monthly IC Compliance and Misclassification News reports, you may subscribe by e-mail or RSS to the Independent Contractor Compliance and Misclassification Legal Blog.

* * * * Invitation to upload content: Readers may contribute to this repository of newsworthy matters by sending an e-mail to ICComplianceBlog with any recent:

  • court cases commenced;
  • developments or updates in existing court cases, including any judicial decisions;
  • legislative bills proposed or enacted;
  • regulatory or administrative actions, including enforcement initiatives and task force developments; and
  • other newsworthy matters, such as newspaper articles, white papers, and government press releases and reports.
Posted in IC Compliance

Another Logistics and Delivery Company Found to Have Misclassified its Drivers as Independent Contractors

The use of independent contractors in the logistics and home delivery industry has suffered another legal setback. Earlier this week, the United States Court of Appeals for the Ninth Circuit, applying California law, concluded that 300 drivers who were retained by Affinity Logistics Corp. to make home deliveries and install products purchased by customers from Sears were common law employees who had been misclassified as independent contractors – even though the contractors were all separate business entities.

The drivers’ class action lawsuit sought damages for unpaid sick leave, vacation pay, holiday pay, and severance wages; it also alleged that Affinity had charged drivers for workers’ compensation insurance premiums. The lower court had found that the drivers had been properly classified as independent contractors, but the Ninth Circuit disagreed. The decision did not create new law; it merely applied well-established California law to the undisputed facts.

As noted below in the “Analysis and Takeaways,” this is yet another case where misclassification occurred because of what appears to have been inadequate structuring, documentation, and implementation of the independent contractor relationship. Businesses using independent contractors need not only understand how to structure an independent contractor relationship in light of the applicable state and federal laws, but also how to record the relationship in a state-of-the-art fashion and put it into practice on a day-to-day basis without creating the seeds for a class action lawsuit or regulatory audit.

The Applicable Law

The Ninth Circuit set forth the governing law in California that the “right to control work details is the most important or most significant consideration.” In determining which work details are important, the Court stated that the key are those details that relate to control over “the manner and means of accomplishing the result.” The Court also noted that under California law, there are “secondary” factors that can be relevant to whether the worker is an independent contractor, including whether the work is a distinct occupation; whether the work is specialized and done without the supervision of another; the skill required; who supplies the tools and place of work; the duration of the relationship; the method of payment; whether the work is part of the regular business of the principal; and the intent of the parties.

For those familiar with the common law test for independent contractor status, such as the test used by the IRS, the test under California law is similar in many respects. It is rather different, however, from those state laws that have statutory tests, such as what is commonly called an “ABC” test of three factors, all of which must be proven to establish independent contractor status. Thus, California law is, relatively speaking, a less challenging test for independent contractor status than many other states. But, despite the less restrictive test that Affinity was required to meet in this case, the Ninth Circuit concluded that the drivers were misclassified because Affinity “had the right to control the details of the drivers’ work.” The specifics of such control are listed below.

Affinity’s Control Over the Drivers’ Work

The Ninth Circuit found that Affinity controlled the following aspects of the drivers’ work:

  • their rates,
  • their schedules,
  • their routes,
  • their days off,
  • their equipment, including the trucks, tools, and mobile phones,
  • the helpers used by the drivers,
  • their uniforms, and
  • their personal appearance.

In addition, the Court found that Affinity closely supervised and monitored the drivers; required them to adhere to a “Procedures Manual”; and had the right to terminate the relationship on 60 days’ notice without cause.

While every driver operated as a separate business entity, the Court found that Affinity told the drivers they needed a fictitious business name, a business license, and a commercial business checking account, and even prepared the paperwork for the drivers, leaving only blank spaces for their signatures. The Court found that “these businesses were in name only.”

Each driver was required to sign an Independent Truckman’s Agreement and an Equipment Lease Agreement, the terms of which were evidently not subject to bargaining. The Court noted that even though the drivers leased their trucks from Affinity, the company allowed other drivers to use their trucks to make deliveries on days the drivers were not operating their trucks themselves. Even worse, the drivers who had leased the vehicles were not compensated for such use.

The Court also found that the drivers did not own any of their equipment or tools (not even their cell phones), were “essentially paid by a regular rate of pay,” performed a service that was at “the core of Affinity’s regular business,” and often worked with Affinity for many years.

Analysis and Takeaways  

Class action cases involving drivers who deliver commercial goods have proliferated in recent years, and most cases have reached results similar to the ruling in Affinity or have settled for millions of dollars payable to the drivers and their counsel.  See, for example, our prior blog post on 3Pdelivery, our blog post dealing with XPO/Pacer Cartage and Bimbo Bakeries, our blog post on American Eagle Express (AEX Group), and  our many blog posts on FedEx Ground.

Meanwhile. states have begun to legislate new independent contractor tests for delivery and other types of truck drivers.  Most notably, New York recently enacted the Commercial Goods Transportation Industry Fair Play Act, which imposes a new legal challenge for companies that retain independent contractors to transport commercial goods in that state using vehicles with a gross vehicle weight rating of more than 10,000 pounds.  As set forth in a number of prior blog posts, such companies must meet a three-part ABC test or an 11-part separate business entity test.  Few transportation and delivery companies operating in New York or other states can meet either of those tests without considerable restructuring and re-documentation, which has taken the authors of this blog post months to create a workable model to maximize compliance.

Remarkably, few companies in this industry have seen fit to structure, document, and implement an independent contractor relationship that offers maximum protection from judicial scrutiny in class action cases or by regulatory agencies seeking to enforce the types of tests now applicable in New York and other states.  Oftentimes, the companies themselves have created an abundance of documentary evidence that is then used against them, as was the situation in the Affinity case. Further, many companies are under a mistaken impression that rulings in administrative cases such as unemployment or workers’ compensation proceedings provide a defense to a new class action lawsuit, but judges may choose to give little if any credence to prior determinations not only by regulatory agencies but also by courts in other states – especially if the record at an earlier judicial or administrative proceeding differs from the evidence submitted in a new lawsuit.

Companies that have been seeking to enhance their level of independent contractor  compliance under an array of different laws at the state and federal level have found IC Diagnostics™ to be a useful process to minimize the risks of independent contractor misclassification liability. This process uses proprietary tools to diagnose a company’s level of independent contractor compliance and provides a methodology to restructure, re-document, and re-implement independent contractor relationships in a state-of-the-art manner, consistent with applicable laws and nuances of the industry. By proceeding in this fashion, companies can obtain the benefits of an independent contractor business model while diminishing the potential of spending hundreds of thousands of dollars in legal fees and millions of dollars in settlement costs to defend class action lawsuits that can usually be avoided.

Richard Reibstein, Lisa Petkun, Andrew Rudolph

Posted in IC Compliance

April/May 2014 Monthly Independent Contractor Compliance and Misclassification Update


In The Courts


Paul Johnson Drywall, Inc. agreed to pay $600,000 in back wages and liquidated damages to 445 current and former employees as result of the U.S. Department of Labor investigation into independent contractor misclassification by its construction labor subcontractor, Arizona Tract LLC. Paul Johnson Drywall had entered into an agreement in 2013 with Arizona Tract for the provision of drywall labor, but the U.S. Department of Labor concluded that the contractor misclassified the drywall workers as ICs instead of employees. While some businesses continue to believe that hiring labor through a contractor or staffing company insulates them from IC misclassification liability, the regional administrator for the Wage and Hour Division’s west region stated in a press release that, “With increasing frequency, we are entering into agreements, like this one . . . .” Perez v. Paul Johnson Drywall, Inc., 2:2014-cv-01062 (D. Ariz. May 19, 2014).


Overturning prior precedent involving the classification of independent contractors, the Colorado Supreme Court held that the “totality of the circumstances” test should be used when determining if an individual is “customarily engaged in an independent trade, occupation, profession or business related to the service performed” under the Colorado Employment Security Act (CESA). Colorado, like about half of the states, has a form of the “ABC” test for purposes of unemployment benefits. Previously, Colorado courts found that an individual that provided similar services to another business at the same time was determinative of whether the individual was engaged in an independent business. Industrial Claims Appeals Office v. Softrock Geological Services, Inc., 2014 CO 30 (Sup. Ct. Colo. May 12, 2014).


Lowe’s Home Centers agreed to pay $6.5 million to settle a class action lawsuit brought by home improvement contractors who allege they were misclassified as ICs instead of employees. In addition, the settlement calls for attorneys’ fees of 25% of the settlement amount. This settlement, which was the subject of our blog post on May 26, 2014, is scheduled for a “fairness hearing” on June 27, 2014. The case is yet another in a long line of cases that are the subject of blog posts where it appears that the business did not structure its relationship with the ICs in a manner that enhanced compliance with state or federal IC laws. Shepard v. Lowe’s HIW, Inc., No. 12-CV-03893-JSW (N.D. Cal. May 23, 2014).


A Missouri federal district court denied competing motions for summary judgment in lawsuit by cable installers suing Integrity Communications, Inc. for IC misclassification resulting in alleged violations of federal and state wage/hour laws. The cross-motions sought a determination of whether the cable installers were employees covered by the Fair Labor Standards Act or independent contractors exempt from the federal Fair Labor Standards Act. The court applied a six-part “economic realities test,” considering the degree of control by the alleged employer over the manner in which the installers perform their work; whether the installers had an opportunity for profit or a risk of loss; the installers’ investment in equipment or materials; whether a special skill was involved; the duration of the working relationship; and the degree of integration into the company’s business. In denying the cross-motions, the Court concluded that there were genuine issues of material fact with respect to many of the six factors, thereby precluding summary judgment and requiring that the parties proceed to trial. Pennington v. Integrity Communications, Inc., No. 1:12-CV-5 SNLJ (E.D. Mo. May 20, 2014).


A New York appellate court upholds two administrative determinations that newspaper photojournalists who provided services to the New York Post were employees and not independent contractors for purposes of the New York unemployment insurance laws. Included among the factors found by the court to demonstrate an employer-employee relationship were the need for a trial photography session, the existence of a reasonably regular work schedule, the requirement that the worker adhere to the production standards set forth in a New York Post memo, and the restrictions imposed upon the photojournalist’s ability to grant rights to the photos taken for the newspaper. Matter of Nance, No. 516996 (N.Y. App. Div. 3d Dep’t May 22, 2014); Matter of Price, No. 516297 (N.Y. App. Div. 3d Dep’t May 22, 2014).


A federal district court in New York granted a taxi company’s motion for summary judgment in a class action lawsuit brought under federal and state law by cab drivers seeking damages for allegedly being misclassified as independent contractors. In dismissing the drivers’ FLSA claims for alleged failure to pay overtime compensation, the court determined that the drivers operated “taxi cabs” and that they therefore fell within the FLSA’s taxicab exemption to the maximum hours rule for “any driver employed by an employer engaged in the business of operating taxis.” The court also dismissed the drivers’ state minimum wage, overtime, and spread of hours claims, finding that the drivers were not covered by the New York labor laws because they were “drivers engaged in operating a taxi cab.” However, with respect to the drivers’ claims for minimum wage protection under the FLSA, the court found that the company’s argument that the drivers were independent contractors not covered by the FLSA’s minimum wage protections was not suitable for summary judgment because there were material factual disputes regarding the drivers’ independent contractor/employee status under the “economic realities test” applicable to FLSA claims. Joseph Arena v. Plandome Taxi Inc., No. 2:12-cv-01078 (E.D.N.Y. Apr. 14, 2014).


A Colorado federal court approved a $2 million settlement in an independent contractor misclassification collective action brought under the FLSA by oil field workers who monitored oil and gas wells against J&A Services, LLC. As part of the settlement, 71 workers who had been treated as independent contractors will receive payments for unpaid overtime. Howard v. J &A Services, Inc., No. 1:12-cv-02987 (D. Colo. Apr. 8, 2014).


The U.S. Department of Labor was ordered by Texas federal court to pay almost $600,000 in attorneys’ fees and expenses to Gate Guard Services, a limited partnership that provides services to oil field operators by contracting with gate attendants to log in vehicles entering and exiting oil field operation sites. The court found that the Labor Department’s threatened prosecution of the company for independent contractor misclassification was not substantially justified and because the partnership had a net worth of under $7 million and less than 500 employees, it was entitled to legal fees under the Equal Access to Justice Act. Gate Guard Services L.P. v. Perez, No. 6:10-cv-00091 (S.D. Tex. Apr. 9, 2014)


Over 400 limousine drivers will share in a class action settlement of $3.5 million against Sunny’s Limousine Services in their lawsuit alleging that the company misclassified drivers as independent contractors. See our blog post of April 21, 2014 describing this case. Munir v. Sunny’s Limousine Service, Inc., No. 13-cv-1581 (VSB) (S.D.N.Y. Apr. 18, 2014).


Former members of the Buffalo Jills, the cheerleading squad for the Buffalo Bills, have sued the professional football franchise and others in New York State court alleging misclassification as independent contractors and violations of the state labor laws, including the minimum wage law. The cheerleaders claim that the Bills and others failed to pay them for all hours worked for each season, failed to reimburse them for business expenses in a timely fashion, and took unlawful deductions from their pay. In addition, they allege that the Bills and others exercised direction and control over the cheerleaders by requiring them to attend all preseason, regular and postseason home football games; attend and participate in all practices, rehearsals, photo sessions and meetings; participate in a Youth cheerleading program; follow a Buffalo Jills handbook; and be subject to monitoring of their activities and behavior, with disciplinary consequences for noncompliance. S., Jaclyn v. Buffalo Bills, Inc., No.804088/2014 (Sup. Ct. Erie County N.Y. Apr. 22, 2014).

Regulatory and Enforcement Initiatives


The California Labor Commissioner issued citations of over $1.5 million to two janitorial companies for allegedly engaging in multiple wage violations, including misclassification of 52 workers as independent contractors and failure to provide rest or meal breaks or pay minimum wage or overtime wages. The janitorial companies, NLP Janitorial and Coast to Coast West, provided cleaning services to hotels, resorts, theater chains, and restaurants. In a News Release (No. 2014-42) dated May 8, 2014, the Labor Commissioner stated: “There is a high cost to unfair competition, and these 52 workers bore the brunt of it when their earned wages were stolen from them. Honest janitorial employers struggling to compete against scofflaws also pay.”


The New York State Department of Labor issued standards for determining whether a commercial truck driver operating in New York is an independent contractor or employee under the recently enacted New York State Commercial Goods Transportation Fair Play Act. The Labor Commissioner also issued posters required to be posted by businesses using drivers who are covered under the new law, which applies to drivers operating commercial vehicles with a Gross Vehicle Weight Rating of over 10,000 pounds. See our blog post on April 30, 2014 for further explanation of the Labor Commissioner’s newly released standards, as well as our blog post dated March 18, 2014 elaborating upon the important technical amendments made to the new law and our April 2, 2014 blog post offering insights into how to comply with the new law.

On the Legislative Front


Earlier this month, Congress re-introduced a bill to address independent contractor misclassification. As noted in our prior blog post of May 20, 2014, the Payroll Fraud Prevention Act of 2014, if enacted, would expand the federal Fair Labor Standards Act (which currently addresses minimum wage, overtime and child labor laws) to cover a new category of workers – non-employees – and make it a prohibited act to “wrongly classify an employee as a non-employee.” The bill would also add new recordkeeping responsibilities on all businesses and impose severe penalties for violations by businesses.

Other Newsworthy Matters


National Employment Law Project (NELP) published a report on May 7, 2014 entitled: “Who’s the Boss: Restoring Accountability for Labor Standards in Outsourced Work,” which condemns independent contractor misclassification. The report concluded that the increasing use of outsourcing, including agency temporary workers (temps), independent contractors, contract company workers, day laborers, and direct-hire temps, often results in lower wages and dangerous working conditions. The report contains many far-reaching objectives including extending liability “up the supply chain” to businesses that use outsourcing and staffing firms; and creating more laws at the state level that create presumptions of employee status.

Published by Richard Reibstein, Lisa Petkun, and Andrew Rudolph. Compiled by Janet Barsky.

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Posted in IC Compliance

$6.5 Million Independent Contractor Misclassification Settlement Between Lowe’s and Its Home Improvement Contractors

On Friday, May 23, 2014, Lowe’s Home Centers agreed to settle a class action brought by its home improvement contractors who allege that they were misclassified as independent contractors instead of employees. The maximum settlement amount, depending on the number of contractors who file claims, is $6,500,000, plus an additional 25% payment for plaintiffs’ attorneys. A hearing is scheduled for June 27, 2014, where a federal district court judge in California, Judge Jeffrey S. White, will approve the proposed settlement if he finds it meets applicable standards of “fairness.” Shepard v. Lowe’s HIW, Inc., No. 12-CV-03893-JSW (N.D. Cal. May 23, 2014).

The Lawsuit

The plaintiffs in this case are home improvement contractors comprised of both individuals and businesses. They allege that Lowe’s Home Centers offered its customers the opportunity to hire contractors to install products and services purchased from Lowe’s. Such installations included appliances, kitchens, bath and plumbing fixtures, flooring, doors and windows, garage doors, lighting, outdoor fixtures, and insulation. The complaint, originally filed in state court, alleged that Lowe’s had the right to control, and did control, all aspects of installation jobs by, among other things, requiring that the installers:

  • identify themselves as “installers for Lowe’s” or “I work for Lowe’s”;
  • wear Lowe’s hats and shirts at work sites;
  • use signs stating “Lowe’s Installation”;
  • attend training by Lowe’s; and
  • comply with Lowe’s production requirements;

The complaint also alleged that Lowe’s Production Office managed each installation project; Lowe’s set the fees to be earned by each home improvement contractor; imposed a non-compete covenant on installers; and marketed the contractors’ services on its website on an “Installation” page that provided “Let Us Do The Installation For You” with our “trained installers,” who services were “guaranteed by Lowe’s warranty.”

The installers alleged that Lowe’s failed to provide them with an array of benefits that were available to employees, including comprehensive group medical insurance, prescription drug coverage, vision care, group life insurance, paid sick leave, paid vacation, tuition reimbursement, employee discounts for purchases, short and long term disability coverage, a stock purchase plan, and a matching 401(k) savings plan. The installers alleged that they were entitled to such benefits under California Labor Code Sections 2750.5 (which establishes a rebuttable presumption that a worker performing services for which a license is required is an employee and not an independent contractor). The installers also alleged that under California Labor Code Section 2802. They were entitled to reimbursement, as employees, for all necessary expenses incurred in performing their services.

Lowe’s denied the allegations and maintains that the installers are independent contractors. After numerous motions and extensive discovery including the exchange of thousands of pages of documents and depositions of both the plaintiffs and Lowe’s personnel, the parties settled their disputes at a private mediation.

The proposed settlement notes that if the case went to trial, the maximum amount recoverable for the class would be approximately $33 million, but the case presents “complex legal and factual issues” including the risk that class certification will be denied. Those issues, the plaintiffs’ counsel claim, make the maximum settlement amount of $6.5 million a fair and reasonable compromise that is in the best interests of the class members.

Analysis: A Failure to Structure, Document, and Implement IC Relationships

It appears from the allegations that Lowe’s Home Centers may not have structured its relationship with home improvement contractors in a manner that enhanced compliance with independent contractor laws in California and other states. While the laws in almost all states allow companies like Lowe’s to contract with individuals or businesses to provide services to customers and clients of the company, many companies that do so fail to take steps to structure, document, and implement properly their independent contractor relationships to fully comply with those laws.

Businesses that use many independent contractors or pay workers on a 1099 basis are well advised to address the issue of their independent contractor compliance before being served with a class action summons and complaint or before receiving a notice from a state unemployment or workers compensation office, the IRS, or state revenue department.

This case illustrates the value of using, in advance of a legal challenge, a methodology such as IC Diagnostics™ to evaluate whether an existing or proposed independent contractor relationship can be legitimately structured as such, and if so, whether it needs to be restructured, re-documented, and re-implemented to maximize the likelihood that those workers will be regarded by the courts and government regulators as independent contractors and not employees.  Other proprietary compliance tools include the 48 Factors-Plus™ analysis and IC Compliance Scale.™

While Lowe’s itself continues to deny any wrongdoing, the cost of the lawsuit, when the company’s own legal fees are included, is likely to exceed $10 million. Further, the costs of misclassification do not always come to an end in class action cases when the last payment is made to the workers.  Companies that settle class action cases may also be facing claims for unpaid payroll taxes at the state and state levels, unpaid unemployment tax payments, and unpaid workers compensation premiums – although there may be defenses to those types of claims.

Neither the settlement of a class action or an adverse determination by a regulatory agency should necessarily be regarded as an obligation on the part of the affected business to treat the workers in question as employees on a going-forward basis. Many businesses can adopt an independent contractor model that may well survive future scrutiny under federal and most state laws, provided the business properly engages in bona fide restructuring, conducts proper re-documentation, and implements and follows new, state-of-the-art independent contractor practices.

While efforts today to enhance independent contractor compliance cannot eliminate past exposure to misclassification liability, any changes that enhance compliance with the independent contractor laws will not only minimize or avoid future liability but also lessen the likelihood that the business will become a target for class action lawyers and government agencies.

Richard Reibstein
Lisa Petkun
Andrew Rudolph

Posted in IC Compliance