November 2014 Independent Contractor Compliance and Misclassification Update

This month’s headline developments are two independent contractor misclassification class action lawsuits: one was filed in New York against a Silicon Valley giant, Google Inc., and the second was filed in California against a Silicon-valley start-up, Handy.com.  While the principal claims are similar (failure to pay for all hours worked or at the minimum wage, and failure to pay overtime), the companies’ workforce business models are quite different:  Google uses 1099 freelancers to supplement its vast W-2 employee workforce, whereas Handy’s workforce is almost entirely comprised of independent contractors paid on a 1099 basis.  Thus, while companies like Google are exposed to considerable financial exposure if found to misclassify the freelancers retained to complement its workforce, businesses like Handy.com are potentially exposed to a bet-your-company liability if they have not structured, documented, and implemented their freelance relationships in a manner that enhances their compliance with federal and state independent contractor laws.  Regardless of whether  a business uses ICs to supplement its workforce or provides services almost exclusively by use of 1099ers, companies that wish to minimize exposure to independent contractor misclassification liability may wish to examine the publishers’ White Paper on the subject.

Tech companies may also wish to glance at the publishers’ September 18, 2014 blog post, Silicon Valley Misclassification: ‘New York’ Magazine Focuses on How the 1099 Economy May Be Exposing Tech Start-Up Companies to Costly Liability for Their Use of Independent Contractors.

In the Courts (6 cases)

  • GOOGLE SUED IN FEDERAL CLASS ACTION MISCLASSIFICATION LAWSUIT BY FREELANCE COMPUTER SERVICE PROVIDER. Google, Inc. and its global freelance staffing company, Elance-oDesk, were sued on November 12, 2014 in New York federal district court by a Site Merchandiser who was classified as a 1099er for independent contractor misclassification. The plaintiff, who was paid on a 1099 basis, alleges that he and other similarly situated freelancers who provided services to Google through a freelance staffing company were not paid at all for hours worked beyond those budgeted by Google and not paid overtime for hours worked over 40 in a workweek.  The class action lawsuit seeks damages under the federal Fair Labor Standards Act and the New York Labor Law.  The plaintiff alleges generally that “. . . Google maintains policies and practices of misclassifying employees as independent contractors who are not covered by wage and hour laws, paying these employees through outside agencies, and not paying them for all hours worked.” Specifically, the complaint alleges, among other things, that Google had a practice of limiting the number of hours for which the freelancer was paid, while assigning more work than could be completed in the allotted time; were required to adhere to the same Code of Conduct that Google employees were obligated to follow, including provisions addressing appropriate attire, blogging, and absenteeism; were not permitted to use competing products or services; were trained as to how to perform their services; and sat side-by-side with regular W-2 Google employees at Google’s Manhattan offices. The plaintiff also alleges that he was terminated after he complained about not being paid for all hours worked.  Google has not yet responded to the complaint. McPherson v. Google Inc., No. 1:14-cv-09026 (S.D.N.Y. Nov. 12, 2014).
  • HANDY.COM, A CLEANING SERVICES START-UP, SUED IN CLASS ACTION LAWSUIT IN CALIFORNIA. Handy, a California start-up company that provides cleaning services for private homes, offices, and apartments, was sued by two cleaners who seek to represent a proposed class of cleaners in state court. They allege that Handy misclassified them as independent contractors instead of employees and thereby violated various California wage and hour laws by failing to pay minimum wage and overtime pay, failing to reimburse required business expenses, and failing to provide meal and rest periods, among other alleged violations. Handy’s business of engaging cleaners and connecting them with clients is allegedly conducted through the use of mobile phone applications and Handy’s website. The cleaners claim that Handy exercises extensive control over the manner and means by which the cleaners perform their jobs, including Handy’s ability to terminate the cleaners at will; the provision of training and instructions on how the cleaners should complete their tasks; mandating which supplies the cleaners must bring to each cleaning job; monitoring and tracking each cleaner’s performance; and requiring the cleaners to follow detailed company guidelines, procedures, and protocols.  Zenelaj v. Handybook, Inc., No. RG14746429 (Super. Ct. Cal. October 30, 2014).
  • MASSACHUSETTS COURT FINDS LEADING THIRD PARTY ADMINISTRATOR FOR IC’S IN THE COURIER AND TRUCKING INDUSTRY TO BE LIABLE FOR UNEMPLOYMENT CONTRIBUTIONS. On November 12, 2014, a Massachusetts appellate court affirmed a lower court’s ruling that Subcontracting Concepts, Inc. (SCI), a company engaged in providing drivers and vehicles to perform delivery work for client courier and trucking services, is liable for contributions to the state unemployment insurance fund due to its misclassification of the drivers as independent contractors instead of employees. Applying the state’s so-called “ABC” test for independent contractor status, the Court found that SCI failed to satisfy the “A” prong  requiring the ICs to be free from direction and control because SCI had the authority to exercise a substantial degree of control over numerous details of the performance of the services. The court noted that SCI, for example, controlled how the driver maintained his vehicle and who was permitted to be present in the vehicle while servicing SCI’s clients; that SCI required the driver to check with the SCI client prior to working for other carriers; that the driver was required to follow the routes established by SCI’s clients; and that the drivers were required to wear T-shirts with the client’s logo.  The court also found that SCI had failed to satisfy Prong “C” of the test requiring that the worker be engaged in an independently established trade, occupation, business, or profession was not satisfied because the driver “depended on a single employer for the continuation of the services he performed while not wearing the hat of his own independent enterprise.” Subcontracting  Concepts, Inc. v. Commissioner of the Division of Unemployment Assistance,   13-P-269 (Ct. App. Middlesex, Mass. November 12, 2014).
  • FEDERAL APPEALS COURT UPHOLDS INJUNCTION REINSTATING FIRED PORT DRIVERS HIRED AS IC’S. The U.S. Court of Appeals for the Ninth Circuit denied an emergency motion by a California company, Green Fleet Systems (GFS), to stay an injunction issued by a federal judge against the company at the request of the National Labor Relations Board.  The injunction reinstated two port truck drivers who were allegedly terminated by GFS for challenging their classification as independent contractors, filing wage claims with the California Division of Labor Standards Enforcement, and publicly supporting the Teamsters union, were returned to work as employees of GFS.  Garcia v. Green Fleet Systems, LLC, 14-56656 (9th Cir. Oct. 31, 2014).
  • OFFSHORE DRILLING COMPANY SUED FOR ALLEGEDLY MISCLASSIFYING OIL RIGGERS AS IC’S. An oil rig consultant has filed a class action lawsuit seeking to represent 25 similarly situated rig consultants who performed work on offshore drilling rigs in the Gulf of Mexico for Onward LLC.  The rigger alleges that he and other rig consultants were improperly classified as independent contractors for a four-month period when they performed services for Onward. The lawsuit alleges that Onward violated the FLSA’s overtime provisions. In support of its misclassification claim, the consultant alleges, among other things, that the companies hired, trained and supervised the consultants’ daily work; required the consultants to comply with instructions about how to do their work; required their attendance at an onshore training course; required the consultants to perform the work personally; and set all days and hours of work for the consultants.  The lawsuit also alleges that after the four-month period when the rig consultants were ICs, they were reclassified as employees, yet still were denied pay for all hours worked and for overtime, in violation of the FLSA. Austin v. Onward LLC, 3:14-cv-00350 (S.D. Tex. Nov. 3, 2014).
  • STRIP CLUB ORDERED TO PAY OVER $10 MILLION FOR MISCLASSIFYING EXOTIC DANCERS AS IC’S. A class of exotic dancers was  awarded $10.9 million in damages by a New York federal court in a misclassification lawsuit brought against Rick’s Cabaret.  This court had issued prior rulings that the dancers were employees and not independent contractors of Rick’s Cabaret.  In addition to awarding damages, the Court denied the club’s motion to decertify the class of exotic dancers, rejecting its arguments that the dancers failed to establish commonality. Hart v. Rick’s Cabaret International, Inc., 09 Civ. 3043 (PAE)  (S.D.N.Y. Nov. 14, 2014).

Regulatory and Enforcement Initiatives (1 matter)

  • NEW HAMPSHIRE IS 17TH STATE TO SIGN COORDINATION AGREEMENT WITH U.S. LABOR DEPARTMENT TO COMBAT MISCLASSIFICATION. The New Hampshire Department of Labor is the latest agency to enter into a Memorandum of Understanding with the United States Department of Labor. According to a News Release issued on November 11, 2014 by the U.S. Labor Department, both agencies will share information and coordinate law enforcement in order to reduce misclassification of employees.  New Hampshire Labor Commissioner James W. Craig stated: “Misclassification of workers steals benefits and protections from employees, and allows unfair advantages to businesses that do it. This agreement will help us grow our state and regional economy by leveling the playing field for honest and law-abiding employers.”

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

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Posted in IC Compliance

October 2014 Independent Contractor Compliance and Misclassification Update

In the Courts (8 cases)

  • TAX COURT DECISION REMINDS COMPANIES THAT “OFFICERS” ARE STATUTORY EMPLOYEES AND THEREFORE CANNOT BE INDEPENDENT CONTRACTORS. The United States Tax Court held that a company that was engaged in the buying, reconditioning, and selling of cars misclassified as independent contractors instead of employees two of its officers and another worker and failed to pay employment taxes on their earnings. Because the officers (the President and Secretary/Treasurer) performed more than minor services for the company and both received remuneration for such services, the Tax Court concluded that they were “statutory employees” for employment tax purposes. Specifically, the President supervised and assigned work to others, determined the pay of other workers, and had the right to hire and terminate the employment of others; and the Secretary/Treasurer was responsible for detailing the cars for resale, including painting, washing and cleaning the cars. The third worker was found to be an employee under the common law right to control test. The worker, whose responsibilities included picking up and delivering cars and obtaining license plates and title certificates for them, was found to be subject to direction and control by the President, was not in a position to increase his profit through his own efforts, and had no risk of loss and needed minimal skill to perform his job. Central Motorplex, Inc. v. Commissioner of Internal Revenue, No. 2014 TNT 195-13 (October 7, 2014).
  • NEWSPAPER AGREES TO PAY $3.2 MILLION TO ITS DELIVERY WORKERS ALLEGEDLY MISCLASSIFIED AS INDEPENDENT CONTRACTORS. A California federal court granted preliminary approval of $3.2 million class action settlement of state wage and hour claims by nearly 800 newspaper delivery workers suing the publisher of the North County Times, Lee Publications. The newspaper carriers alleged they were misclassified as independent contractors and that the publisher engaged in unfair business practices and failed to pay minimum wage and overtime compensation, reimburse for business expenses, and keep accurate pay records. The proposed settlement would be allocated as follows: $2.27 million for class members’ claims; an estimated $800,000 in attorneys’ fees; and $36,000 in additional awards to the named plaintiffs. A fairness hearing is scheduled for February 2015. Dalton v. Lee v. Lee Publications, No. 308-cv-01072 (S.D. Cal. October 17, 2014).
  • THREE STRIP CLUBS FARE POORLY IN CLAIMS FOR UNPAID MINIMUM WAGES AND/OR OVERTIME PAY. We have been reporting on clubs that classify their exotic dancers as independent contractors for over four years, beginning with our blog post dated October 29, 2010. This past month, strip clubs experienced adverse developments in three separate class action independent contractor misclassification lawsuits brought by exotic dancers in Florida, Nevada and New York. In each case the dancers had alleged that they had been denied overtime pay or minimum wages. Although these three cases below apply only to strip clubs that fail to pay fees to dancers that exceed the minimum wage and/or fail to pay dancers overtime for hours worked over 40 per week, clubs whose dancers work less than 40 hours per week and that pay their dancers more than minimum wage may still have misclassification liability exposure under state wage payment laws barring deductions from the earnings of dancers if they have been misclassified as independent contractors.
    • First, the Supreme Court of Nevada, in a case brought by dancers against the Sapphire Gentlemen’s Club in Las Vegas, reversed a lower state court decision that performers were independent contractors and not employees. The performers were not paid by the club; rather their only compensation was derived from patrons’ tips and payments with the club’s “dance dollars,” from which “the club took a cut.” As a threshold matter, the court adopted the Fair Labor Standards Act’s economic realities test for determining independent contractor/employee status in the context of Nevada’s minimum wage laws, which the dancers alleged they were not paid. The court selected the federal test because it found it was the test most closely fostering the intent of the Nevada Legislature when it passed an amendment that was intended to encompass as many or more entities as the FLSA definition of “employer” under federal law. In applying the test, the court chose to reverse the lower court and concluded that the performers were employees and not independent contractors, relying principally on the control exercised by the club by giving the performers little choice but to use “dance dollars” that could only be used for a type of dancing, the manner of which the club dictated. Terry v. Sapphire Gentlemen’s Club, No. 59214 (Sup. Ct. Nevada Oct. 30, 2014).
    • Second, a Florida federal district court granted conditional certification of a Fair Labor Standards Act proposed collective action that may cover as many as 500 dancers at a Miami club, King of Diamonds. The alleged violations in this case involved claims that the dancers were not paid minimum wages or paid overtime for all hours worked in a workweek over 40. Espinoza v. Galardi South Enterprises, No. 14-21244-CIV-Goodman (S.D. Fla. Oct. 23, 2014).
    • Third, a $4.3 million settlement was reached between a class of 250 exotic dancers and trio of New York strip clubs, known as New York Dolls, Private Eyes, and Flashdancers. The dancers alleged, among other things, that they had been misclassified as independent contractors and that the clubs had violated the Fair Labor Standards Act as well as New York State wage/hour laws regarding the payment of minimum wages and overtime compensation. The dancers claimed that they were subject to control by the Clubs because they were required by the Clubs to work a minimum number of shifts, work certain days to which they were assigned, purchase uniforms approved and often provided by the Clubs, and share tips with others. Additionally, the dancers allegedly were prohibited from using glitter and heavy perfume, leaving the Clubs with customers, discussing the Club’s operating procedures with customers, or wearing particular clothing and hairstyles (even though the prohibitions did not relate to any particular theme of the clubs). Flynn v. New York Dolls Gentlemen’s Club, No. 13 CIV 6530 (S.D.N.Y. Oct. 6, 2014).
  • DIRECTV TECHNICIANS SEEK TO CONSOLIDATE CLASS ACTION LAWSUITS AROUND THE COUNTRY. Satellite television technicians who allege they are being misclassified as independent contractors requested the Judicial Panel on Multidistrict Litigation to consolidate eleven Fair Labor Standards Act lawsuits against DirecTV and its network of home service providers. The technicians argue that the claims “are dominated by common questions of fact that present identical legal issues” and that the common threshold question is “whether the economic realities of DirecTV’s uniform policies and practices render each [technician] as an employee of the Defendants, as opposed to an independent contractor.” The technicians seek an order from the Panel to transfer the actions currently pending across the country to a single federal district for consolidated proceedings. They assert that they expect 34 more suits to be filed soon, eventually creating 45 related cases across 35 federal districts on behalf of nearly 500 plaintiffs.  In Re DirecTV Inc. Fair Labor Standard Act Wage and Hour Litigation, MDL No. 2594 (October 16, 2014).
  • FEDEX GROUND DRIVERS CONTINUE AVALANCHE OF SUCCESSES AGAINST FEDEX GROUND IN INDEPENDENT CONTRACTOR CHALLENGES. FedEx experienced an avalanche of independent contractor misclassification rulings in the course of one week. As more fully discussed in our blog post dated October 6, 2014, both the Supreme Court of Kansas and the National Labor Relations Board considered the classification status of FedEx’s Home Delivery and Ground Division drivers in Kansas and Connecticut, respectively.  In blockbuster decisions that may portend extensive misclassification liability for FedEx, the court and federal agency concluded that the drivers had been misclassified as independent contractors under Kansas law and under the National Labor Relations Act. These decisions come on the heels of a profound victory for FedEx Ground and Home Delivery drivers only six weeks earlier, when the U.S. Court of Appeals for the Ninth Circuit found in two separate cases that the drivers were employees and not independent contractors under California and Oregon law.  See our blog post dated August 29, 2014.  For a recent discussion about FedEx’s business model in the wake of these decisions, see the October 23, 2014 article in the Washington Post entitled, “How Fedex is trying to save the business model that saved it millions,” in which this blog’s co-publisher, Richard Reibstein, is quoted.

On the Legislative Front (one matter)

  • CALIFORNIA PASSES NEW LAW AIMED AT STAFFING COMPANIES THAT REFER INDEPENDENT CONTRACTORS. A new California law imposes costly risks to companies using misclassified independent contractors supplied by staffing and recruiting firms. This new law was the subject of our blog post dated October 1, 2014, which includes an in-depth analysis of the new law and describes the way in which staffing companies and companies that utilize their services can minimize misclassification liability exposure.

Regulatory and Enforcement Initiatives (2 matters)

  • U.S. LABOR DEPARTMENT SIGNS UP ALABAMA AS THE 16TH STATE TO ENTER INTO A FEDERAL-STATE MISCLASSIFICATION PACT. The Alabama Department of Labor signed a memorandum of understanding with the United States Department of Labor’s Wage and Hour Division (“WHD”) “to protect the rights of employees by preventing their misclassification as something other than employees, such as independent contractors.” A News Release dated October 2, 2014 reported that the Alabama DOL became the 16th state agency to enter such a partnership with the federal government. Dr. David Weil, Administrator of the WHD, stated: “This memorandum of understanding sends a clear message that we are standing together with the state of Alabama to protect workers and responsible employers and ensure everyone has the opportunity to succeed.” The News Release clarified that the use of independent contractors is not “inherently illegal,” but that misclassification is a serious problem and the use of an independent contractor business model may not be used to evade compliance with federal labor law. As the publishers of this blog have stated in blog posts when reporting on other states that have signed up with the federal DOL, businesses using independent contractors have ways by which they can minimize the risk that increased government regulation will determine that a company’s otherwise legitimate independent contractor relationships are being used to evade compliance.
  • ILLINOIS RENEWS ITS PACT WITH U.S. DOL TO COMBAT INDEPENDENT CONTRACTOR MISCLASSIFICATION. In an effort to help coordinate state/federal investigations and other enforcement activities to detect and deter independent contractor misclassification in Illinois, the Administrator of the U.S. Labor Department’s Wage and Hour Division announced the renewal of a memorandum of understanding signed by the U.S. and Illinois Departments of Labor on October 17, 2014. According to a News Brief dated October 23, 2014, “the renewal of the MOU represents a continued effort on the part of the two agencies to protect workers and level the playing field for responsible employers by reducing the practice of misclassification.”

Other Noteworthy Matters (1 matter)

  • An article in Fusion on October 23, 2014 focused on the risks faced by companies in the “sharing economy” that utilize an independent contractor business model. In the article, entitled “Lawsuits May Cause Business Owners to Rethink ‘Sharing Economy,’” a co-publisher of this blog, Richard Reibstein, was quoted as follows: “Those [new businesses] that are not structured and documented consistent with the law will have to pay a very substantial cost, or go bankrupt.” He added: “It’s only a matter of time and good fortune, because there is a lot of low-hanging [liability] fruit among companies that haven’t gotten their independent contractor act together.”

Published by Richard Reibstein, with 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.

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Posted in IC Compliance

September 2014 Independent Contractor Compliance and Misclassification Update

This month’s headline developments are the crescendo of cases finding against FedEx Ground’s classification of drivers as independent contractors.  On the heels of last month’s decision by the U.S. Court of Appeals for the Ninth Circuit, which held that FedEx Ground had misclassified drivers who should have been classified as employees in California and Oregon, this month’s update includes a case decided by the NLRB and another case decided by a federal district court, both of which are adverse to FedEx’s interests.  (A fourth recent decision unfavorable to FedEx was issued in October; it was one of the subjects of our blog post earlier today, and will appear in next month’s update.)  Collectively, these cases not only are a huge setback for FedEx, but also are likely to prompt even more legal challenges by state and federal regulatory agencies and plaintiffs’ class action lawyers to the misuse of independent contractors by businesses. Companies that wish to minimize exposure to independent contractor misclassification liability may wish to examine the publishers’ White Paper on the subject.

In the Courts (6 cases)

  • TRUCK DRIVERS FOUND TO HAVE BEEN MISCLASSIFIED IN CALIFORNIA. California federal district court finds class of 300 current and former truck drivers have been misclassified as independent contractors and not employees by Shippers Transport Express, Inc. (STE), a trucking and logistics company providing land transportation services for ocean containers to and from international ports in California. Among the state law claims asserted by the drivers are failure to pay minimum wage and failure to reimburse business expenses. In granting the drivers’ motion for partial summary judgment, the Court found that STE not only retained the right to exercise control over the manner and means of the truckers’ accomplishing the desired results, but also exercised such control. Taylor v. Shippers Transport Express, Inc., CV 13-02092 BRO (PLAx) (C.D. Cal. September 30, 2014).
  • U.S. OPEN TENNIS UMPIRES ARE IC’S, NOT EMPLOYEES. A New York federal district court granted the United States Tennis Association’s motion for summary judgment, finding a class of umpires performing services at the U.S. Open to be independent contractors. In seeking to recover unpaid overtime, the umpires claimed that they should have been classified as employees under the Fair Labor Standards Act and the New York Labor Law. Applying the economic realities test under the FLSA, the court determined that the umpires were in business for themselves; were highly skilled professional umpires who exerted a high degree of control over their work; had “immense” discretion, within the parameters of the rules of tennis, to conduct their duties; invested themselves as professional umpires by pursuing additional certifications and officiating at other tournaments; controlled their own schedules; and had a short-term relationship with the USTA, even if they officiated each year. The court reached the same outcome under New York state law. Meyer v. United States Tennis Association, No. 1:11-cv-06268 (SDNY September 11, 2014 (ALC) (MHD).
  • MISCLASSIFICATION CLAIMS BY CAR SERVICE DRIVERS IN NYC DISMISSED. “Black car” drivers providing services in New York City to clients of Corporate Transportation Group have been held by a federal court to be independent contractors. The drivers had alleged violations of the FLSA and New York Labor Law, including claims for unpaid overtime. The court found that the company had limited control over the drivers; the drivers had the opportunity for profit or loss; the drivers had an investment in the business because they could rent or buy a franchise and had to buy or rent a car; the drivers needed to exercise a significant degree of independent initiative to be successful; and the drivers could terminate their contracts at will. The court reached the same conclusion under state law, finding that the drivers worked at their own convenience; were free to engage in other employment; did not receive fringe benefits; were paid as non-employees; were not on the company’s payroll; and did not have fixed schedules. Saleem v. Corporate Transportation Group, Ltd., 12-CV-8450 (SDNY September 16, 2014) (JMF).
  • FED EX DRIVERS MAY MAINTAIN LAWSUIT FOR THE VALUE OF EMPLOYEE BENEFITS. A Missouri federal district court held that ERISA does not pre-empt state law claims by FedEx drivers for the value of employee benefits they claim they would have received had they been properly classified by FedEx as employees and not independent contractors. By statute, ERISA pre-empts a state law if the claim broadly “relates to” an ERISA plan. The court noted that a state law claim “relates to” an ERISA plan if it either expressly refers to an ERISA plan or has a connection with such a plan. The court determined that the FedEx drivers’ claims did not have a connection to an ERISA plan and, therefore, the state law claims were not pre-empted. It reasoned: “These are not claims to recover benefits due under the terms of FedEx’s plans, to enforce rights under the terms of the plans or to clarify rights to future benefits under the terms of the plans. Rather, Plaintiffs seek the value of employee benefits denied them based on their misclassification as independent contractors; any damages would come from FedEx, not from the plan itself.” Gray v. FedEx Ground Package System, Inc., No. 4:06-CV-00422 (E.D. Mo. September 5, 2014) (JAR).
  • NEWSPAPER CARRIERS FOUND TO BE MISCLASSIFIED. A class of newspaper carriers for the Sacramento Bee have been found to have been employees misclassified as independent contractors. The Superior Court for the County of Sacramento based its holding on, among other things, that the newspaper had the right to (and did) exercise pervasive control of the manner and means of the performance of the carriers’ work; the carriers had little or no right to negotiate the terms of their IC agreement; the carriers received daily mail that set forth how they were to deliver the newspapers each day; and the newspaper managed, trained, and supervised the carriers. Sawin v. The McClatchy Company, No. 34-2009-00033950 (Sacramento Super. Ct. September 22, 2014) (GWW).
  • NLRB HOLDS FED EX GROUND DRIVERS ARE EMPLOYEES AND MAY BE UNIONIZED. As noted in our blog post earlier today, the NLRB held that FedEx Home Delivery drivers are employees under the National Labor Relations Act and, therefore, may be represented by the Teamsters local that had petitioned the NLRB for an election among single-route drivers in Connecticut. The majority opinion of the NLRB expressly noted that it “declined to adopt the District of Columbia Circuit’s recent holding [in another FedEx case], insofar as [the Court] treats entrepreneurial opportunity . . . as an ‘animating principle’ of the inquiry.” One member of the NLRB dissented, concluding that the D.C. Circuit’s decision should be followed by the Board. FedEx Home Delivery, an Operating Division of FedEx Ground Package Delivery Systems, 361 N.L.R.B. No. 155 (September 30, 2014).  

Regulatory and Enforcement Initiatives (5 matters)

  • U.S. DEPARTMENT OF LABOR AWARDS OVER $10 MILLION TO STATES TO CURB IC MISCLASSIFICATION. Our blog post on September 16, 2014 reported that the U.S. Department of Labor awarded $10.2 million in federal grants to 19 states including California, Delaware, Florida, Hawaii, Idaho, Indiana, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oregon, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin to implement or improve worker misclassification detection and enforcement initiatives. In a News Release dated September 15, 2014, U.S. Secretary of Labor Thomas E. Perez stated that the federal grant awards “will enhance states’ ability to detects incidents of worker misclassification and protect the integrity of state unemployment insurance trust funds.” An additional $2 million bonus was shared by Maryland, New Jersey, Texas, and Utah due to their high performance or most improved performance in detecting incidents of misclassification.
  • TECH START-UPS FACE MISCLASSIFICATION LIABILITY. A New York Magazine article highlighted the potential exposure of tech start-up companies to costly liability for their misuse of independent contractors in their business models. In our September 18, 2014 blog post entitled “Silicon Valley Misclassification: ‘New York’ Magazine Focuses on How the 1099 Economy May Be Exposing Tech Start-Up Companies to Costly Liability for Their Use of Independent Contractors,” we discuss the misclassification risks that may be present in such 1099 start-ups as TaskRabbit, Homejoy, Uber, BloomThat, Washio, and Spoonrocket. The blog post also examines whether courts can destroy the 1099 model and how private equity firms should conduct due diligence in the area of independent contractor misclassification risk – and how such investors can minimize their risks.
  • U.S. LABOR DEPARTMENT FINDS AUTO PARTS COMPANY MISCLASSIFIED OVER 200 DRIVERS. An Arizona auto parts company has been found to have misclassified its delivery drivers as independent contractors. The U.S. Department of Labor, Wage and Hour Division, reported in the Department’s Newsletter that Delivery Driver Solutions has paid 240 drivers $80,000 in back wages due to overtime violations. The drivers delivered auto parts from retailers to auto repair shops and dealerships in the Phoenix area.
  • OFCCP ISSUES INDEPENDENT CONTRACTOR TEST. The Office of Federal Contract Compliance Programs has published a list of Frequently Asked Questions on the Department of Labor website to help federal contractors in assessing whether a worker is an employee or independent contractor. The FAQs inform contractors how the OFCCP determines which workers are employees that must be included in Affirmative Action Plans under Executive Order 11246, Section 503 of the Rehabilitation Act of 1973, and the Vietnam Era Veterans’ Readjustment Assistance Act.
  • IRS FOUND BY INSPECTOR GENERAL TO HAVE FAILED TO SECURE NECESSARY INFORMATION FOR ITS VCSP PROGRAM. The Treasury Inspector General for Tax Administration (TIGTA) issued a report on September 24, 2014 finding that the Internal Revenue Service (IRS) does not obtain the information it needs to ensure that employers are eligible for, and comply with, the Voluntary Classification Settlement Program (VCSP). The VCSP had been implemented to allow employers to voluntarily reclassify workers from independent contractors to employees for federal employment tax purposes, as noted in our prior blog post on the program. In a press release issued that same day, TIGTA stated that the IRS does not require the workers’ names and social security numbers, yet without that information, the IRS cannot determine if the VCSP applicant met VCSP eligibility requirements. TIGTA made five recommendations, including that the IRS (1) require employers applying for the VCSP to provide the names and Social Security Numbers for the workers being reclassified; (2) revise internal procedures for processing VCSP applications to evaluate employer eligibility and ensure that worker compensation and the VCSP payment is accurate; (3) develop follow-up review processes to ensure compliance with the terms of agreements; (4) develop reporting capabilities to allow for a single system for both tracking inventory and monitoring program performance; and (5) revise processes to ensure that accepted agreements are successfully sent to and received by the IRS business units responsible for monitoring.

Other Noteworthy Matter

Published by Richard Reibstein, with 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:

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  • 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

FedEx Hit with Avalanche of Independent Contractor Misclassification Rulings

In the past week, the Supreme Court of Kansas and the National Labor Relations Board have issued lengthy, comprehensive opinions finding that FedEx misclassified its Home Delivery and Ground Division drivers as independent contractors as a matter of law. Those two decisions, which dealt with drivers in Kansas and Connecticut, come only a month after the U.S. Court of Appeals for the Ninth Circuit reached the same conclusion under California and Oregon law. All three decisions essentially conclude what the Kansas court found: “FedEx has established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing.”

The Supreme Court of Kansas Decision

All three decisions are significant setbacks for FedEx. But the decision of the Supreme Court of Kansas may well be the most damaging. It was issued in response to a request by the U.S. Court of Appeals for the Seventh Circuit, which is considering appeals in dozens of state law class actions that had been consolidated and heard by a single district court judge, who had ruled in favor of FedEx in 42 lawsuits covering drivers in 27 states. The Seventh Circuit chose to first consider the class action arising under the Kansas wage payment law, but turned to the Kansas Supreme Court for guidance when it found that the law of Kansas was not crystal clear. This decision issued by the state court last Friday, October 3, 2014, may well be relied upon by the Seventh Circuit in deciding some or all of the other FedEx cases on appeal.

The Kansas Supreme Court noted in its opinion in Craig v. FedEx Ground Package System, that the test under Kansas law as to whether an individual is an employee or independent contractor is the so-called common law “right to control test,” which it defined as “whether the employer has the right of control and supervision over the work of the alleged employee, and the right to direct the manner in which the work is to be performed, as well as the result which is to be accomplished.” The Court noted that this test differs somewhat from the “economic realities” test under the federal wage and hour law. Under the federal test, the determination of an individual’s status focuses more on whether, as a matter of economic reality, a worker is dependent on a given employer. Because the “right to control” test is generally regarded as more favorable to a finding of independent contractor status, the Court’s decision that FedEx misclassified its drivers leads to the conclusion that the company is even less likely to prevail in those states that use the “economic realities” test.

In reaching its decision, the Kansas Supreme Court set forth 20 factors that Kansas considers when making a determination of independent contractor status. (This is not the same 20-factor test as used by the IRS, but is similar.) The Court then examined all 20 factors in depth. Among the factors that the Court concluded were those favoring employee status were the following:

  • FedEx issued instructions and required compliance therewith.
  • The services of the drivers were an integral part of FedEx’s business.
  • There was a continuing relationship between the drivers and FedEx.
  • FedEx requires written reports about deliveries.
  • The drivers’ ability to earn a profit is constrained by FedEx’s controls.
  • As a matter of reality and practicality, drivers cannot work for more than one company at a time.
  • The drivers’ services are not regularly made available to the public.
  • The drivers may unilaterally terminate their relationship with FedEx at any time without financial repercussion.

In its decision, the Kansas Supreme Court noted that this is a “close case” and, indeed, it found that at least five or six of the 20 factors favored independent contractor status (and the remaining factors were neutral). But, the significance of those factors, according to the Court, were undermined by “FedEx’s control and micromanaging” of the drivers.

The Kansas Court concluded its decision with a body blow to FedEx. The Seventh Circuit not only asked the Supreme Court of Kansas if single-route drivers were employees under the Kansas wage payment law, but also whether drivers who “acquire more than one service area from FedEx” are also employees. This question is potentially critical for FedEx because, in or about 2010, it initiated a new business model intended to comply with independent contractor laws. That business model, described in our August 12, 2010 blog post, gave its single-route drivers three options for continuing to work with FedEx on a going-forward basis: (a) become a multi-route Independent Service Provider (ISP) by incorporating as a business, (b) become an employee driver of an approved FedEx Ground ISP (that is, become a driver for another driver that has set up a business as an ISP); or (c) terminate his or her relationship with FedEx Ground at the expiration of its current independent contractor agreement, which would not be renewed. The Kansas Supreme Court concluded that “the employer/employee relationship between FedEx and a full-time delivery driver . . . is not terminated or altered when the driver acquires an additional route for which he or she is not the driver.”

The NLRB Decision

The decision by the NLRB in FedEx Home Delivery, an Operating Division of FedEx Ground Package Systems was issued September 30, 2014. It addresses the independent contractor status of FedEx Home Delivery drivers in Connecticut, who are being petitioned to be represented by a Teamsters Union.

The key issue in the case involves the entrepreneurial opportunities for drivers to earn a profit by having the right to operate two or more FedEx routes. The majority opinion of the Board held that entrepreneurial opportunity is one of many factors to be considered in determining independent contractor status. In contrast, a dissenting Board member viewed this factor as one warranting the same special emphasis that was given to this factor by the U.S. Court of Appeals for the District of Columbia in its 2009 decision dealing with FedEx Home Delivery drivers in Massachusetts. In that case, the D.C. Circuit concluded that the Massachusetts drivers were independent contractors and, therefore, not capable of being unionized by a union.

The majority opinion of the Board expressly noted that it “decline[s] to adopt the District of Columbia Circuit’s recent holding, insofar as it treats entrepreneurial opportunity . . . as an ‘animating principle’ of the inquiry.” Further, the Board majority states, it should give weight to “actual, not merely theoretical, entrepreneurial opportunity” and should evaluate any constraints placed on drivers who wish to pursue this opportunity. What exactly does this all mean?

In reaching its decision, the Board majority said it would not be taking into account the fact that six drivers had operated multiple routes that offered them the opportunity to earn a profit by hiring other drivers to operate one or more routes besides the one that they handled themselves. Why? Because the Teamsters local who sought to represent the drivers excluded all multiple route drivers from the unit of drivers it sought to represent. As the Board majority states, “Evidence that goes only to employees who are outside of the petitioned-for unit is unlikely to have probative effect.” In effect, the Board majority has, according to the dissenting Board member, “determined that little weight be assigned to the entrepreneurial opportunity factor.”

As former NLRB member Ronald Meisburg has suggested, this decision by the NLRB could lead to another show-down between the NLRB and the one federal court of appeals with nationwide jurisdiction to review NLRB decisions.

The Ninth Circuit’s Decision

In our August 29, 2014 blog post, we discussed the Ninth Circuit’s decisions issued two days earlier, which held that FedEx’s standard independent contractor agreement and its nationwide policies and procedures established that single-route FedEx drivers in California and Oregon were employees and not independent contractors. We noted that despite the fact that FedEx lacks control over some parts of its drivers’ jobs, the Court concluded that such lack of control is not sufficient to “counteract the extensive control [FedEx] does exercise.”

Analysis and Takeaways

Both the Kansas and Ninth Circuit decisions relied on the independent contractor agreement, which FedEx drafted and used with all its Ground Division drivers, as the principal evidence finding misclassification. The Kansas Supreme Court was not particularly soothing in its critique of the contract, noting that it agreed with a California appellate court that FedEx’s independent contractor agreement is a “‘brilliantly drafted contract creating the constraints of an employment relationship with [the drivers] in the guise of an independent contractor model—because FedEx not only has the right to control, but has close to absolute actual control over [the drivers] based upon interpretation and obfuscation.'”

These decisions remind businesses that use independent contractors that the form of their agreements is little protection if either (a) the document gives a right to independent contractors with one hand, and then takes it away with the other; or (b) the contract does not accurately represent the parties’ practice. These decisions confirm that the best protection for businesses using independent contractors is to structure, document, and implement the independent contractor relationship in a manner that is consistent with the laws in the states in which the business operates. The law in California, Oregon, Kansas, and most other states all vary considerably, yet have a common thread: the less direction and control over the individuals in question, the better.

That is one of the hallmarks of IC Diagnostics™, a proprietary process that examines whether a group of workers would pass the applicable tests for independent contractor (IC) status under governing state and federal laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws. For existing businesses, those alternatives include restructuring, reclassification, or redistribution, as more fully described in our White Paper.

For those businesses that can, consistent with applicable laws, retain their independent contractor relationships without undue exposure to misclassification liability, IC Diagnostics™ affords them a way to restructure, re-document, and re-implement those relationships in a manner that enhances IC compliance and minimizes misclassification exposure. Not every business can restructure in a manner that complies with applicable laws, but most can – and should, not only to avoid the types of misclassification liability that FedEx Ground is now facing after these recent court decisions, but also to avoid the prospects of unionization if they wish to remain union-free.

Published by Richard Reibstein, with Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance

New California Law Imposes Costly Risks to Companies Using Independent Contractors Supplied by Staffing and Recruiting Firms – But Risks Can Be Minimized

On September 28, 2014, Governor Jerry Brown of California signed a bill that puts a potentially enormous liability risk on companies that use workers supplied by “labor contractors” that fail to pay all wages due the workers. Assembly Bill 1897 requires client employers to “share with a labor contractor all civil legal responsibility and civil liability for all workers supplied by that labor contractor for . . . the payment of wages and failure to secure workers’ compensation coverage . . . .”

There are three important exclusions: First, the new law covers “workers provided to perform labor within [the client company’s] usual course of business from a labor contractor.” Businesses with a workforce of less than 25 workers (including the number of workers provided by labor contractors) and businesses with five or fewer workers supplied by labor contractors are not covered.

Second, the law defines “worker” to exclude those who are exempt from payment of overtime as executive, administrative, or professional employees.

Third, the statute also specifically excludes bona fide “independent contractors” supplied by a labor contractor. However, non-exempt employees who are found to have been misclassified by the labor contractor as independent contractors are covered by the new law when provided to a client company.

The new law raises a number of questions, which we will answer below.

What does this mean for client companies in California that use staffing, recruiting, and other firms to supply them with more than five contract workers that are being paid on a 1099 basis?

Client companies that are prudent will now need to ask whether the labor contractor is treating the workers as independent contractors or employees (i.e., paying them on a 1099 or a W-2 basis) and then determine, for all workers who are being 1099’d, whether the labor contractor has properly classified them as independent contractors. This new law, therefore, is likely to propel client companies to insist that any labor contractors that provide them with contract labor have properly classified as independent contractors any workers who are being treated as 1099ers. This blog post discusses in the “Takeaways” (below) how client companies can do so effectively.

What does this mean for staffing, recruiting and other companies that provide contract labor to clients in California?

This new law puts a premium on labor contractors (i.e., firms that supply individuals to perform work for client companies) to make sure that all workers who are being paid on a 1099 basis are genuine independent contractors under California law. Otherwise, their clients will likely begin to choose competitors of theirs who are more independent contractor compliant. We discuss below in the “Takeaways” an effective means for companies, which supply 1099ers to client companies, to enhance their level of independent contractor compliance.

Does the new law include any definitions of independent contractor?

No. The law expressly notes that it does not change the definition of independent contractor under state law. As noted in a prior blog post on October 12, 2011, California enacted an independent contractor misclassification law prohibiting willful misclassification, but that law likewise does not provide a definition of who is an employee and who is an independent contractor.  California, like many states, uses a modified form of the general common law definition of “employee.”  California’s test is sometimes referred to as the “economic realities” standard, which is similar (but not identical) to the “economic realities” test used in cases arising under the Fair Labor Standards Act (the federal wage and hour law).  Although the economic realities test under California law has a similar starting point as the classic common law test  (“the principal test of an employment relationship [in California] is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired . . . ”), the courts in California and the California Labor and Workforce Development Agency give different weight to certain factors than do courts applying the classic common law test for independent contractor status.

While both the economic realities and classic common law tests have a number of factors to be taken into account in determining whether a worker is an employee or independent contractor – for example, the IRS maintained for years its oft-quoted “20 factor test” and the California Labor and Workforce Development Agency lists 11 factors on its website describing the “economic realities” standard – the courts applying these tests have almost universally held that no one factor is determinative under these definitions of “employee.”  Thus, because these tests are fact-specific, they can be subject to some confusion, which can result in a number of workers falling into the proverbial “gray area” between employee and independent contractor.

What workers are treated as exempt from overtime and are therefore excluded from this law?

The new law defines “worker” as excluding an “employee who is exempt from the payment of an overtime rate of compensation for executive, administrative, and professional employees pursuant to wage orders by the [California] Industrial Welfare Commission described in Section 515 [of the California Labor Code].”  Thus, the new law appears to impose shared liability for wages and workers’ compensation obligations on client companies only with respect to non-exempt employees provided by labor contractors.  Notably, one of the wage orders described in Section 515 includes, under the “Professional Exemption,” an employee in the computer software field who is paid on an hourly basis if a number of specific criteria are met; such computer software workers therefore appear to be outside the coverage of this new law.  This is important in a state such as California, where there is a heightened need for systems analysts, software designers and engineers, computer programmers, and the like. Our recent call with a government official knowledgeable about the new law indicates that it likely excludes such workers.

Are all companies that supply a client with workers considered “labor contractors” under this new law?

No. The term “labor contractor” is defined as an individual or entity that supplies a “client employer” with workers to perform labor “within the client employer’s usual course of business.” The term “usual course of business” means the regular and customary work of a business, performed at the premises or worksite of the client employer.

The term “labor contractor” specifically excludes (a) a bona fide non-profit, community-based organization that provides services to workers; (b) a bona fide labor organization (union) or apprenticeship program or hiring hall operated pursuant to a collective bargaining agreement; (c) a motion picture payroll services company; and (d) a third party to an employee leasing arrangement if the arrangement contractually obligates the client employer to assume all civil legal responsibility and civil liability under this new law.

Does the “payment of wages” for which a client employer may be liable include payroll and unemployment taxes?

Yes. The term “wages” is defined to include all sums payable to an employee or to the state based on the failure to pay wages. It would therefore appear to cover state unemployment taxes and may also cover the withholding of state income taxes in California.

Can a client employer shift its legal duties or liabilities to the labor contractor by contract; if not, can a client employer or labor contractor agree by contract to an indemnification provision?

By law, the shared wage and workers’ compensation responsibilities and obligations imposed on a client employer under the law may not be “shifted” by contract or in any other manner to the labor contractor. In other words, a client company cannot prevent itself from being sued and having a judgment against it.  However, the law expressly permits the parties to enter into contracts with indemnification provisions between them, whereby one party will become liable to reimburse the other party for their respective liabilities under the new law.

May a worker who has been denied payment of all lawful wages file a lawsuit against the client employer?

Yes, but the worker must provide the client employer at least 30 days’ notice prior to filing any such lawsuit.

What other rights does a worker have under this new law?

Like most labor and employment laws, the new law also protects workers from any retaliatory action by a labor contractor or a client employer for filing a lawsuit or giving notice of a violation to the client employer.

Does this new law have any effect on any of the types of claims or theories of liability that workers have asserted for independent contractor misclassification?

No. The law provides that the imposition of shared liability upon a client employer adds another form of relief for misclassified workers.  The law also provides that the rights, remedies, and obligations in the new law “are in addition to, and shall be supplemental of, any other theories of liability or requirements established by statute or common law.”

Takeaways

Staffing, recruiting, and other contract labor firms that provide workers to client companies sometimes pay the workers on a 1099 basis and sometimes on a W-2 basis.  Where the workers are paid on a 1099 basis, they are not typically paid for any overtime, not typically provided with any benefits, and typically are required to pay for their own expenses.  If properly classified as independent contractors, this treatment is permissible.  Likewise, those who retain properly classified independent contractors are not required to withhold taxes, have no payroll tax liability for such workers, and are not obligated to provide unemployment or workers’ compensation coverage.

How do client companies know whether the labor contractor has properly classified  contract workers as independent contractors?  And what can a client company do to best protect itself from this new form of “shared” liability under California law? 

One means for client companies to assure themselves that the labor contractor maintains an enhanced level of independent contractor compliance is through the use of IC Diagnostics™, a proprietary system designed to measure compliance with IC laws and provide tools to minimize IC misclassification liability.  While IC Diagnostics™ is principally designed for use by businesses that retain ICs directly, the same tools can be effective for a client company in measuring a labor contractor’s level of IC compliance.

Oftentimes, even a quick review of a labor contractor’s IC agreement will reveal the general level of its IC compliance, determined in accordance with the applicable state and federal laws.  Labor contractors that use 1099ers to furnish services to client companies should be favored if their IC relationships, both by contract and in actual practice, reflect a heightened level of IC compliance.  Those labor contractors that have a diminished level of IC compliance should be disfavored by client companies, especially in California, given the enactment of the new law.

Almost all IC relationships can be enhanced to a considerable degree.  Therefore, client companies can insist that their labor contractors enhance their level of IC compliance if they wish to continue to do business with the client.  Client companies can also demand indemnification provisions in their agreements with labor contractors; however, indemnification clauses cannot alone minimize the likelihood that the client company will be sued for shared wage and workers’ compensation liability if the labor contractor has been misclassifying its workers as ICs.  The combination of improved IC compliance by the labor contractor and insistence on a suitable indemnification provision is a prudent approach for client companies to avoid exposure to this new liability under California law.

How can labor contractors that provide 1099ers to client companies enhance their level of IC compliance and gain a competitive advantage in California over those firms that are not IC-compliant?

Labor contractors can use IC Diagnostics™ to obtain a competitive edge over other labor contractors if they use that process to heighten their level of IC compliance in comparison to their competitors.  Enhancements in IC compliance can be achieved by the use of informed restructuring, re-documentation, and/or re-implementing of the IC relationships with the labor contractor’s 1099ers, using state-of-the-art tools.

Ideally, such IC enhancements are accomplished before a client company demands them as a condition of continuing its relationship with the labor contractor.  Such firms can also use their heightened level of compliance as a client retention tool with existing client companies, a marketing tool with potential new clients, and of course a means to reduce their own potential for IC misclassification liability.

Richard Reibstein, Lisa Petkun, Andrew Rudolph, Jeffrey M. Goldman

Posted in IC Compliance