Uber Suffers Another Independent Contractor Misclassification Setback in California

Uber has not fared well in court battles recently. After losing an unemployment case last month in Florida, it has now just lost an independent contractor misclassification wage case in California. This loss in California comes on the heels of a judicial setback for Uber in March, where a federal court denied its motion for summary judgment and ordered Uber to stand trial before a jury on the issue of whether it misclassified its drivers in that state as independent contractors instead of employees for purposes of the California Labor Code.

The most recent setback for Uber involved an individual claim by a driver who represented herself before the California Labor Commissioner seeking allegedly unpaid wages, including overtime, as well as unreimbursed “employee” expenses under California law. The driver, Barbara Berwick, worked for Uber and its operating company, Rasier-CA LLC, for less than two months in 2014. She entered into a standard driver agreement with Uber’s operating company that, among other things, set forth the relationship of the parties as independent contractors. The Labor Commissioner found that Berwick “was Defendants’ employee.”

Uber and Rasier yesterday filed an appeal of the Labor Commissioner’s decision in the Superior Court of California for the County of San Francisco.  Berwick v. Uber Technologies, Inc., No. CGC-15-546378 (Super. Ct. San Francisco County, June 16, 2015).

The Decision

The Labor Commissioner’s decision first focused on the Uber/Rasier contract signed by Berwick, quoting at length many of the contract clauses. The decision then addressed each of Uber’s arguments as to why Berwick was an independent contractor and, hence, not covered under the California Labor Code.  The Commissioner considered Uber’s arguments under the traditional California test for independent contractor status, setting out 11 different factors.

The Labor Commissioner then made the following findings:

  • Uber retained control over the operation as a whole, and was “involved in every aspect of the operation.”
  • Uber vets prospective drivers.
  • Drivers must pass background checks.
  • Uber controls the tools used by the drivers to the extent Uber dictates details about the types of cars that can be used.
  • Uber monitors the drivers’ approval rating and terminates their relationship with Uber if the rating falls below a specific level.
  • While Uber allows drivers to hire others, only Uber approved drivers can use the Uber software.
  • Uber discourages tips by customers.
  • Uber exercises its discretion to decide if a cancellation fee will be paid to drivers.

“In light of the above,” the Labor Commissioner held, “[Berwick] was Defendants [Uber and Rasier’s] employee.”

The Labor Commissioner then noted that California Labor Code 2802 requires an employer to indemnify (reimburse) an employee for all expenses that an employee “necessarily expends in the discharge of the employee’s duties.”  The Commissioner then calculated the amount of necessary expenses using the IRS rate for miles driven ($0.56 per mile), plus toll charges, which totaled $3,878.  With interest, the total award amounted to $4,152.

Berwick did not succeed, however, on her unpaid wage claim, but that was because, for unexplained reasons, she failed to provide the Labor Commissioner with her hours worked and payment information.

Analysis and Takeaways

While the decision technically affects a single employee, Berwick, and the award to her was only $4,000, the impact of the decision may be far more profound if upheld on appeal. To begin with, had Berwick worked a year with Uber instead of under two months, the amount of liability for unreimbursed expenses for a single employee for only one year would exceed $25,000. Liability at that rate to Uber would be a multiple of $25,000 per driver per year of service.

Recently, FedEx settled an independent contractor misclassification class action case in California for $228 million, and it is believed that the bulk of the settlement will be for reimbursement of necessary expenses.

The legal test for independent contractor status applied by the Labor Commissioner in California is comparable in many respects to the test used under the federal wage and hour law. Other states have more stringent tests than does California, although there is a case pending before the California Supreme Court that may impose a more worker-friendly standard in California than applied by the Labor Commissioner.

In defending against the claim by Berwick, Uber advanced arguments rather similar to those it asserted unsuccessfully in the recent California federal court case where its motion for summary judgment was denied.

Many commentators are already predicting that this new decision in California is yet another nail in the coffin of the Uber’s business model.  If Uber stands pat, then that may hold true in California and other states for purposes of independent contractor misclassification liability. But companies with on-demand business models need not stand still, they should evolve. While they may wish to be the next Uber in the sharing economy, they surely do not wish to be the next Uber-type defendant in an independent contractor misclassification case.

Based on the facts in this decision by the Labor Commissioner, it appears that Uber has not yet taken meaningful steps to enhance its independent contractor compliance sufficient to comply with the laws in California and other states. Nothing prevents Uber from reexamining the way it has structured, documented, and implements its business model, even though it is in the midst of litigation.  Other on-demand companies in the sharing or “gig” economy that hope to be as successful from a business standpoint as Uber would be well advised to do so from an independent contractor misclassification standpoint.  This type of litigation is preventable for most companies using independent contractors and, even if not preventable for companies as successful as Uber, are winnable under most circumstances.

Enhancing independent contractor compliance with California and other state and federal laws is not daunting; rather, it is very attainable for many companies. But there is generally no quick fix or universal solution. Rather, businesses are well served if their compliance solution is sustainable, practical, and customized to actually work “in the field” yet, at the same time, fully serve the company’s business needs.

Some businesses have chosen to utilize IC Diagnostics™ to accomplish this objective. As more fully set forth in the White Paper entitled “Independent Contractor Misclassification: How Companies Can Minimize the Risks,” there are a number of alternative measures to prudently minimize or eliminate misclassification exposure. Those choices include restructuring, re-documenting, and re-implementing the independent contractor relationship (which most companies opt to do); reclassification (by voluntary means or through a government program), or redistribution (by use of a staffing or workforce management firm). Which alternative is best for each company is a decision each business should make if it is currently using an independent contractor model or if it uses independent contractors to supplement its workforce.  In view of these recent Uber decisions, which have brought media interest and greater attention by regulators and class action lawyers to the use of independent contactors, the only imprudent choice is inaction.

Written by Richard Reibstein.

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance | Leave a comment

$228 Million: The Cost of Independent Contractor Misclassification for FedEx Ground in California

Yesterday, June 12, FedEx announced in papers filed with the SEC that its Ground Division “has reached an agreement in principle with [drivers] in the independent contractor litigation that is pending in …California [federal court] to settle the matter for $228 million.” The proposed agreement, which has not yet been filed in court, is subject to judicial approval. This proposed settlement comes nine months after the U.S. Court of Appeals for the Ninth Circuit ruled in appeals from federal district courts in California and Oregon that, as a matter of law, the drivers whom FedEx Ground treated as independent contractors (ICs) were employees and, therefore, FedEx had misclassified them and denied them rights and benefits under law.

In our blog post on August 29, 2014 entitled “Earthquake in the Independent Contractor Misclassification Field,” we noted that FedEx Ground has been at the epicenter of the crackdown on IC misclassification by government regulators, state legislators, and plaintiffs’ class action lawyers since 2007. But in 2010, FedEx Ground won a significant court decision involving the IC status of its Ground Division drivers in an opinion by a federal district court judge presiding over dozens of IC misclassification cases in a “multi-district litigation.” But all changed on August 27, 2014, when the Ninth Circuit Court of Appeals reversed that lower court decision in cases involving drivers in California and Oregon.

This settlement covers 2,300 drivers in California who had filed class action claims for a variety of alleged violations under federal and state law, including claims for reimbursement of business expenses, unpaid overtime, failure to provide meal and rest periods, reimbursement of deductions in pay, and non-payment of termination pay. The drivers also sought litigation costs and attorneys’ fees in their court complaint. Alexander v. FedEx Ground Package System, No. 3:05-cv-00038-EMC (N.D. Calif.).

In its June 12, 2015 SEC filing, FedEx stated that it “faced a unique challenge in defending this case given the decision of the Ninth Circuit Court of Appeals last summer.” It noted that the settlement “resolves claims dating back to 2000 that concern a [business] model FedEx Ground no longer operates.”

Where Did FedEx Ground Fail?

In the case of FedEx Ground, the Ninth Circuit was not won over by FedEx’s argument that it lacked control over the drivers’ jobs. FedEx pointed out that the FedEx IC agreement permits a driver to delegate to other drivers, take on additional routes, or sell his route to a third party. But the Court noted that FedEx may refuse to let a driver take on additional routes or sell his route to a third party, and FedEx’s senior managers have the authority to reject proposed replacement drivers based on failure to meet FedEx standards such as grooming requirements. The Court concluded that a lack of control over certain parts of the drivers’ roles was not sufficient to “counteract the extensive control [FedEx] does exercise.”

The Kansas Supreme Court last year reached a similar conclusion, but it was not as mellow in its critique of the contract used by the company. The Kansas court characterized the IC agreement as 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.” Said in fewer words but with even more imagery by the Court: “FedEx established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing.”

The Impact of This Settlement on FedEx – and Others Using ICs

This settlement by FedEx Ground resolves only the claims by its drivers in California. IC misclassification claims have been brought against it in other states, some of which have already been resolved, such as a lawsuit it settled for $5.8 million with FedEx Ground drivers in Maine. FedEx may choose to resolve cases that remain pending or have not been reported as having fully resolved in other state venues, such as those in Kansas, Missouri, Massachusetts, Florida and Oregon that have been the subject of our monthly IC misclassification updates on this site.

FedEx Ground has not only been plagued by driver misclassification lawsuits over the years but also by state attorney generals and state workforce agencies in New York, Montana, Massachusetts, and other states for allegedly unpaid unemployment insurance taxes.

FedEx Ground also faces unionization efforts in Connecticut and other locations following decisions by the National Labor Relations Board (NLRB) that its Ground Division and Home Delivery drivers are employees and not independent contractors under the federal labor laws.

As we noted following the Ninth Circuit decisions last August, this setback for FedEx Ground is likely to reinvigorate the crackdown against companies using ICs to supplement their workforce or are built on an IC business model, where the IC relationship is not structured, documented, or implemented in a manner that complies with state or federal IC laws.

Lessons For Other Companies Using ICs

IC misclassification can, as we observed in our White Paper on the subject, be the result of intentional violations of the labor, tax, and employee benefits laws or, as is quite common, unintentional or misplaced failures to comply with applicable state and federal laws governing the use of ICs. Many businesses face a situation similar to FedEx Ground – a company that sought to comply with the law but did not fully satisfy the requirements. So, what lessons can be learned from this $228 million settlement and the other recent setbacks suffered by FedEx Ground?

1.  A failure to properly structure, document, and implement independent contractor relationships can and should be avoided

The laws in almost all states allow companies to contract with individuals or businesses to provide services to customers and clients of the company, yet many companies that do so fail to take steps to properly structure, document, and implement their IC relationships to fully comply with those laws.

Prudent businesses that use independent contractors or pay workers on a 1099 basis address the issue of IC compliance before being served with a class action summons and complaint and before receiving a notice from a state unemployment, wage, or workers compensation office, the IRS, or the NLRB inquiring about workers whose wages are reported on a Form 1099 but may well be employees misclassified as ICs.

As noted above, FedEx Ground lost before the appellate courts because of a misplaced reliance on an IC agreement and its policies and procedures that were good, but by no means good enough.  A quick review of the language in the FedEx IC agreement and the policies and procedures issued by FedEx would give one the impression that FedEx and its lawyers knew what to write and how to write it, but close scrutiny by the courts found one fallacy after another – sufficient in degree to lead to rulings against the company. By their very nature, therefore, IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs not only to face legal challenges they may otherwise have been able to avoid but, once sued, they may well have been able to win.

This and similar class action lawsuits illustrate the value of using, in advance of a legal challenge, a methodology to evaluate whether an existing or proposed IC 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 ICs and not employees. Some companies have used IC Diagnostics™ to enhance their level of IC compliance and determine whether a group of workers not being treated as employees would pass the applicable legal tests for IC status under governing state and federal law. That process also offers a number of practical, alternative solutions to enhance compliance with those laws, such as reclassification and redistribution.

2.  Retaining contractors who operate in the form of business entities, such as LLCs, do not necessarily insulate companies from IC misclassification exposure

A common misconception by many businesses is that contracting with an LLC, corporation, or other form of business entity eliminates the possibility of misclassification liability. While FedEx Ground observed in its comments to its June 12, 2015 SEC filing that it was settling a case that involved “a model FedEx Ground no longer operates,” its current business practice is not necessarily free from legal exposure. Beginning a few years ago, FedEx announced that it was converting to a new business model where it would only contract with incorporated Independent Service Providers (ISPs) who operate three or more routes in the same geographical area. Yet, last year, the Kansas Supreme Court ruled 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.” Drivers who “acquire more than one service area from FedEx” are also employees, the court held.

In January of this year, Lowe’s Home Centers settled an IC misclassification class action brought by home improvement contractors comprised of both individuals and small businesses. The $6.5 million settlement includes payments not only to individuals but also to LLCs and other forms of business entities.

Some state laws expressly carve out from their definitions of “employee” a business entity where the hiring party does not exercise direction or control over the performance of the services and meets other requirements. Companies that wish to minimize IC misclassification liability wisely do not rely solely on the fact that the IC has chosen to operate as a business entity. Structuring, documenting, and implementing a compliant IC relationship is still the key.

3.  There are “hidden costs” of class action settlements as well as other misclassification exposures that can arise after settlement

FedEx has invested heavily in its legal defense of dozens of IC misclassification lawsuits as well as audits, investigations, and proceedings by state and federal regulatory agencies. These “hidden costs” are not reflected in settlements such as the one just entered into by FedEx in California. Typically, class action settlements include legal fees that can range as high as 25-33% of the amounts paid to the class members, and oftentimes the legal fees paid by the companies defending such lawsuits equal or exceed the amount of fees paid to the plaintiffs’ class action lawyers.

The costs of worker misclassification do not always terminate once a class action is settled and all monies are paid to the workers involved, their counsel, and the lawyers representing the business being sued.  Companies that settle class action cases may also be facing claims for unpaid payroll and unemployment taxes at the state and federal levels and unpaid workers compensation premiums – although there may be defenses to those types of claims.

Finally, settlements in one state can provoke new lawsuits in other jurisdictions or create pressure to settle other outstanding IC misclassification claims. Plainly, the most prudent path is to enhance compliance when the potential for IC misclassification exposure first becomes evident to a business that is based on an IC business model or uses ICs to supplement its workforce.

This is particularly meaningful to start-up companies in the on demand, sharing, or gig economy. Businesses like Uber, Lyft and an array of other tech businesses are quickly finding that they, too, are targets of class actions, regulatory enforcement, and labor organizing by those who believe that such start-ups are not complying with federal and state IC laws. They are quickly rivaling FedEx Ground as a lightning rod for those seeking to crack down on IC misclassification. The hidden costs of such misclassification lawsuits and administrative proceedings are undoubtedly increasing.

4.  Companies that can financially survive class action IC misclassification settlements or judgments in court or before an administrative agency need not necessarily reclassify the workers as employees

FedEx is a Fortune 100 company, so it can absorb the $228 million settlement. FedEx is a good example of a company that chose to revise its business model while in the midst of legal challenges. While it is too early to tell if its actions to restructure, re-document, and re-implement its IC/ISP relationships will survive legal scrutiny, it wisely choose not to stand pat.

On the other hand, many companies treat the costly termination of a class action lawsuit or an adverse determination by a regulatory agency as imparting upon them an obligation to treat the workers in question as employees on a going-forward basis. This overlooks the fact that many businesses can adopt an IC model, even after the commencement or termination of a class action lawsuit or an adverse regulatory ruling, that may well survive future scrutiny under federal and most state laws. How? By undertaking bona fide restructuring, re-documentation, and implementation of new, state-of-the-art IC compliance practices. This is one of the reasons some businesses have resorted to methodologies such as IC Diagnostics™ even after they have become the target of legal challenges.

While efforts today to enhance IC compliance cannot eliminate past exposure to misclassification liability, any changes that enhance compliance with the IC laws going forward 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.

Written by Richard Reibstein

Published by Richard Reibstein, Lisa Petkun, and Andrew Rudolph

Posted in IC Compliance

New Independent Contractor Misclassification Study Is Belied By Government Report and Disregards the Legitimate Use of Independent Contractors

The Economic Policy Institute, a respected nonprofit, nonpartisan think tank, has just released a working paper authored by a respected professor who co-authored a number of early academic studies detailing independent contractor misclassification in two Northeastern states. The working paper, entitled “(In)dependent Contractor Misclassification,” surprisingly contains little more than a restatement of widely acknowledged propositions of the economic and legal aspects of independent contractor misclassification and references to prior studies and reports by federal and state government agencies. The author assails the use of independent contractors, noting that they lack access to workers’ compensation, are not entitled to unemployment, minimum wage or overtime, and pay the full FICA tax. However, the working paper overlooks key conclusions of the recently issued, comprehensive report issued by the U.S. Government Accountability Office (GAO) on the contingent workforce including independent contractors. Two of the empirical findings in that report, as noted in one of our recent blog posts, are that 85% of independent contractors “appeared content with their employment type,” and that significantly more independent contractors (57%) were “very satisfied” with their jobs than those who held standard full-time employment (45%). The working paper also overlooks the recent statement by the Secretary of Labor Thomas Perez that while the use of independent contractors has been abused, “there’s an important place for independent contractors” in our economy.

The working paper repeatedly characterizes independent contractor misclassification as a form of theft and fraud, yet it also acknowledges that one of the causes is “ignorance” of the laws and can be the result of “honest mistakes on the part of businesses.” In addition, the working paper notes that there are a multitude of situations where workers and employers “operat[e] in the gray zone between wage employment and self-employment.”

The author of the working paper advocates an increase in fines for intentional independent contractor misclassification rather than a wholesale change in the legal tests for determining independent contractor status, which, the author notes, differ considerably under various federal and state laws.

Finally, the paper reviews a number of recent court decisions involving independent contractor misclassification.  It highlights decisions involving FedEx Ground and other transport companies, citing to one of our blog posts, “Earthquake in the Independent Contractor Misclassification Field: Changed Landscape Following Serious Legal Blow to FedEx Ground by Federal Appellate Court.”  Concurring with our view of the impact of the two FedEx decisions we reviewed, the working paper suggests that such recent court decisions “are likely to have ramifications beyond FedEx Ground for company practices in the package delivery and heavy freight shipping industries.”

As we noted in that blog post, those FedEx decisions did not involve intentional misclassification but rather spoke to the consequences of misplaced misclassification.  We stated:

“FedEx Ground lost these two decisions because of a misplaced reliance on an IC agreement and its policies and procedures that were good, but by no means good enough.  A quick review of the language in the Operating Agreement and the policies and procedures would give one the impression that FedEx knew what to write and how to write it, but close scrutiny by a court found one fallacy after another – sufficient in degree to lead the court to rule against FedEx. By their very nature, therefore, IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”


For those businesses that use independent contractors and wish to comply with the law in a manner recognized by Labor Secretary Perez as legitimate, this new working paper from the Economic Policy Institute merely restates the question faced by such companies – how do we enhance our compliance? – but provides no answers. Businesses that worry about the risks of unintentional independent contractor misclassification are, however, readily able in most situations to minimize their exposure by use of one of three alternatives: (1) restructuring, re-documenting, and re-implementing independent contractor relationships consistent with the applicable tests under federal and state laws; (2) reclassifying independent contractors, either voluntarily or by means of government programs; or (3) redistribution of independent contractors by use of a knowledgeable staffing or workforce management company. Tools by which that can be accomplished are detailed in the 2015 Update of our White Paper on minimizing the risks of independent contractor misclassification.

Authored by Richard Reibstein.   

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

Posted in IC Compliance

May 2015 Independent Contractor Compliance and Misclassification News Update

May 2015 was one of the busiest months for independent contractor (IC) misclassification cases in the courts and administrative agencies – no less than a dozen cases including such well-known companies as BMW, the NFL and Buffalo Bills, Sleepy’s, FedEx, Super 8 Motels, and Uber, as well as some lesser known industry leaders in the cleaning/janitorial and theatre businesses. A new government report was also released to the public in May; it showed that 85% of independent contractors “appeared content with their employment type” and significantly more independent contractors (57%) were “very satisfied” with their jobs than those who held standard full-time employment (45%). Thus, it is no surprise that more and more businesses including those in the sharing and on-demand economy are making use of ICs and that workers are attracted to this form of work.

So, while more companies are using ICs, more plaintiffs’ class action lawyers and regulatory bodies are continuing to target companies that are believed to be misclassifying ICs.  This suggests that companies would be wise to enhance their level of compliance with the rules governing ICs. While the cases described below indicate that many large businesses have not yet succeeded in demonstrating that they are complying with those rules, there are tools available, such as IC Diagnostics™, that companies can use to attain a greater level of comfort and assurance that they are minimizing or avoiding exposure when they make use of independent contractors.

In the Courts (9 cases)

  • BMW’S ELECTRIC CAR SHARING / RENTAL UNIT SUED FOR IC MISCLASSIFICATION BY DRIVERS. DriveNow, a unit of BMW, operates an electric car-sharing rental service in the San Francisco Bay area. DriveNow’s phone app allows customers to locate available DriveNow vehicles on an interactive map of the area and to reserve the vehicle that is most conveniently located. BMW retained drivers whose services included locating vehicles that had been dropped off by customers and driving them to locations where they are needed, retrieving the electric rental cars with low battery levels that needed to be serviced, and driving fully-charged vehicles from DriveNow headquarters to locations where customers had left the rental car to make a vehicle exchange. A driver has alleged, on behalf of himself and other similarly situated DriveNow drivers, that they are employees who were misclassified as independent contractors. The complaint, brought under the California Labor Code and the state Private Attorneys General Act, alleges that DriveNow failed to pay minimum wage and overtime compensation, failed to provide meal and rest periods, failed to pay all wages due upon termination, and required that the drivers pay a commission out of their wages to TaskRabbit for managing the payroll system. In support of the IC misclassification claim, the driver further alleges that DriveNow “retained pervasive control over the work performed by the drivers,” supplied all items needed to perform the work, did not require drivers to make any investments in equipment or tools, retained the drivers for an indefinite amount of time, and terminated the drivers at will.  Costas v. BMW of North America LLC, No. CGC 15-545541 (Super. Ct. San Francisco County, CA).
  • $5.5 MILLION SETTLEMENT APPROVED BETWEEN MASSACHUSETTS FRANCHISEES AND COMMERCIAL CLEANING SERVICES COMPANY. In a case that started out as a simple claim by one janitor who filed for unemployment insurance benefits over a decade ago, a Massachusetts federal court judge preliminarily approves a $5.5 million settlement of a protracted IC misclassification class action brought by franchisees against Coverall North America, a commercial cleaning services company. As noted in our prior blog posts of February 1, 2015 and February 5, 2013, the federal court in 2010 found that 166 custodians who had signed franchise agreements were employees under Massachusetts’ strict “ABC” independent contractor law and had been misclassified as franchisees by Coverall. In 2013, the court entered judgment for $4.8 million and Coverall appealed. Shortly before arguments were about to commence before the U.S. Court of Appeals for the First Circuit in early January 2015, the parties reached a proposed class action settlement, which has now been preliminarily approved by the court. The settlement provides awards of back pay to, among others, all persons who provided cleaning services to Coverall’s customers in Massachusetts for an 11-year period and $1.8 million in attorneys’ fees. Awuah v. Coverall North America, Inc., No.1:07-cv-10287 (D. Mass. May 11, 2015).
  • JANITORIAL WORKERS BRING SUIT AGAINST A NATIONWIDE CLEANING COMPANY AND MOVIE THEATER CHAIN ALLEGING IC MISCLASSIFICATION. Seven janitorial workers filed a collective action lawsuit against Simply Right, a Utah-based, national janitorial company with 850 workers in 30 states, and Cinemark, the third largest U.S. movie theater company, in federal district court in Colorado alleging misclassification as independent contractors. The janitorial workers who clean Cinemark’s movie theaters claim that they were misclassified as ICs and have been denied overtime compensation and that the flat fee they were paid is less than the minimum wage when calculated on an hourly basis. Sanchez v. Simply Right, No. 1:15-cv-00974-RM-MEH (D. Colo. May 7, 2015).
  • COURT DENIES NFL’S REQUEST TO BE DROPPED FROM BUFFALO JILLS IC MISCLASSIFICATION LAWSUIT. A New York State court denied a motion to dismiss the National Football League (NFL) as one of the several defendants in a IC misclassification suit brought by former members of the Buffalo Jills, who served as cheerleaders at NFL games for the Buffalo Bills. The court viewed the motion as premature because discovery has not yet been conducted regarding the NFL’s involvement in the lawsuit. Included among the allegations against the NFL are that the NFL aided and abetted the Buffalo Bills in the misclassification of the Jills as independent contractors and that the NFL furthered the Jills’ misclassification when Roger Goodell, the NFL Commissioner, approved broadcast rights contracts between the Bills and its former radio broadcasting company in which the NFL required the broadcasting company to have each cheerleader sign a contract and release stating that she was working as an independent contractor and would not be paid for working at Bills games. Ferrari v. Mateczun et al., No. 804125-2014 (Sup. Ct. Erie County, N.Y. May 4, 2015).
  • NEW JERSEY FEDERAL COURT REVIVES AN IC MISCLASSIFICATION LAWSUIT BY DELIVERY DRIVERS AGAINST SLEEPY’S UNDER THE NEW STATE LAW TEST FOR IC STATUS IN WAGE CLAIMS. Applying the new independent contractor test recently adopted by the New Jersey Supreme Court, the Third Circuit Court of Appeals vacates a New Jersey District Court’s prior grant of summary judgment to Sleepy’s in an IC misclassification lawsuit brought by delivery drivers under the New Jersey state wage laws. The Third Circuit had asked the New Jersey Supreme Court to articulate the proper test to apply in lawsuits claiming that workers had been misclassified as ICs. On January 14 of this year, the state Supreme Court issued an opinion where it adopted the test found in the unemployment compensation law – a worker-friendly version of the ABC test, as detailed in our blog post of January 15, 2015. Because the District Court had applied the “right to control” test set forth by the U.S. Supreme Court in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992), the Third Circuit ruled that the District Court must now revisit the Sleepy’s case and apply the ABC test to the drivers’ wage claims. Hargrove v. Sleepy’s LLC, Nos. 12-2540 & 12-2541 (3d Cir. May 12, 2015).
  • PORT TRUCKING FIRMS SETTLE ONE IC MISCLASSIFICATION CASE FOR $11 MILLION WHILE ANOTHER LAWSUIT IS FILED. A California federal district judge approves an $11 million settlement in a class action lawsuit brought by Los Angeles port truckers against Shippers Transport Express, Inc. and SSA Marine, Inc. alleging that they were misclassified as independent contractors. The settlement included $4.9 million in attorneys’ fees, which the court found to be reasonable. On average, each of the 540 drivers in the class will receive about $13,000. Taylor v. Shippers Transport Express., Inc., No. 2:13-cv-02092 (C.D. Cal. May 11, 2015). In another California port trucking case, two Los Angeles and Long Beach drivers filed a class action suit against their former employer, Sterling Express Services, Inc. (Sterling), a freight shipping and trucking firm, in an IC misclassification case alleging violations of the California Labor Code. They have reportedly alleged that, among other things, Sterling Express improperly deducted truck lease, fuel, registration, parking and other fees from the drivers’ pay; that the drivers did not receive overtime compensation or timely wage payments; and that if they rejected assignments, they would be subject to retaliation. This lawsuit is an outgrowth of the California Labor Commissioner’s prior decision several months ago in which it was determined that the drivers were employees and not independent contractors. In that administrative proceeding, the Labor Commissioner ordered Sterling to pay the drivers over $202,000. Vasquez v. Sterling Express Services, Inc., Los Angeles County Super. Ct. (May 6, 2015).
  • FEDEX GROUND DRIVERS’ IC MISCLASSIFICATION LAWSUIT IN FLORIDA REVIVED BY FEDERAL APPELLATE COURT; JURY TO DETERMINE WORKER STATUS. The U.S. Court of Appeals for the Eleventh Circuit reverses a district court’s grant of summary judgment in favor of FedEx Ground Package Systems and allows Florida FedEx Ground drivers to have a jury decide whether they are independent contractors or employees under Florida law. This decision is yet another in the recent setbacks faced by FedEx after a series of victories in the dozens of class action cases brought against it by its Ground Division drivers, as noted in our blog post of August 29, 2014 and October 6, 2014. The appeals court found that “the FedEx Operating Agreement and FedEx’s standard practices and procedures, and the inferences to be drawn from them, create a genuine issue of material fact” as to the Florida drivers’ employment status. Although the appellate court detailed in its decision a number of factors that supported a conclusion that the drivers were ICs, including the Operating Agreement that recited that the drivers were independent contractors, it found the following factors, among others, could lead a jury to conclude that they were employees: the Agreement and FedEx practices provided an exhaustive and detailed list of procedures that the drivers are required to follow; selection and replacement of the drivers’ trucks is subject to consent by FedEx; additional trucks could only be used on the route if approved by FedEx; drivers must prepare daily driver logs and daily inspection sheets; and drivers were required to follow specific directions as to how to load the truck. The court did not find it appropriate for a court to determine how to weigh these conflicting factors “on the critical question of control,” nor did it believe that it was the responsibility of the court to determine which inferences should be drawn from the evidence. Instead, the appellate court concluded that only a jury could make that decision. Carlson v. FedEx Ground Package Systems, Inc., No. 13-14979 (11th Cir. May 28, 2015).
  • EXOTIC DANCERS IN GEORGIA FAIL TO PROVE PINUPS NIGHTCLUB WILLFULLY MISCLASSIFIED THEM. A Georgia federal district court judge who previously held in December 2013 that exotic dancers at The Great American Dream d/b/a/ Pin Ups Nightclub were employees, grants summary judgment in favor of the Club finding that, based on the undisputed facts, the Club did not willfully misclassify the dancers. Consequently, the Club is subject to a 2-year statute of limitations for alleged Fair Labor Standards Act (FLSA) violations and not a 3-year statute of limitations for willful violations. In so finding, the Court concluded that (although mistaken) the Club believed in good faith that its compensation structure was consistent with the FLSA , that it “relied upon the advice of accountants, consultants, including wage and hour experts, attorneys and business managers,” and relied on decades-long industry practice. Additionally, although the dancers sought to hold the Club’s President individually liable under the FLSA, the Court granted summary judgment in favor of the President because he was not an “employer” within the meaning of the FLSA, finding that he was neither involved in the day-to-day operation of the Club nor did he bear direct responsibility for the supervision of the entertainers. Stevenson v. The Great American Dream, Inc., No. 1:12-cv-03359 (N.D. Ga. May 14, 2015).

On the Legislative Front (1 item)

  • NEW FEDERAL IC BILL WOULD ELIMINATE “SAFE HARBOR” PROSPECTIVELY. On May 20, 2015, Representative Erik Paulsen (R-Minnesota) introduced a bill (H.R. 2483) called the Independent Contractor Tax Fairness and Simplification Act of 2015. This new bill would eliminate prospectively the statutory “safe harbor” for employment tax liability that has been relied upon since 1978 by many businesses that may have misclassified employees as ICs. On the other hand, it would allow a business that has treated a worker as an IC to qualify for a form of retroactive safe harbor for purposes of past employment tax liability. H.R. 2483 would also codify a new form of “safe harbor” if the worker (1) incurs significant financial responsibility for providing and maintaining equipment and facilities; (2) incurs unreimbursed expenses or risks income fluctuations because remuneration is “directly related to sales or other output rather than solely to the number of hours actually worked or expenses incurred”; (3) is compensated on such factors as percentage of revenue or scheduled rates and not solely on the basis of hours or time expended; and (4) “substantially controls the means and manner of performing the services” in conformity with regulatory requirements, or “the specifications of the service recipient or payor and any additional requirements” in the parties’ written IC agreement. A full analysis of the bill and its comparison to the most recent bill on the subject of the tax “safe harbor” by Senate Democrats was the subject of our blog post on June 1, 2015.

Regulatory and Enforcement Initiatives (5 matters)

  • UBER DRIVER IN FLORIDA FOUND TO BE EMPLOYEE ENTITLED TO UNEMPLOYMENT BENEFITS. The Florida Department of Economic Opportunity, in conjunction with the state Department of Revenue, determines that a former Uber driver was misclassified as an independent contractor by the ride-sharing company and therefore is eligible for unemployment insurance benefits as an employee. The driver alleged that Uber “directs how, where, and when drivers work” and that “Uber drivers . . . are required to follow a litany of detailed requirements imposed on them by Uber and . . . are graded, and are subject to termination, based on their failure to adhere to these requirements.” As more fully discussed in our prior blog post dated March 12, 2015, Uber and other companies utilizing an on-demand model are currently under intense legal scrutiny as to whether the independent contractors in those businesses have been misclassified.
  • CONSENT JUDGMENT ENTERED REQUIRING $119,434 PAYMENT TO BE MADE BY SHIVAM HOSPITALITY TO HOTEL STAFF FOR IC MISCLASSIFICATION. A U.S. Department of Labor (DOL) investigation into illegal misclassification practices of Shivam Hospitality LLC (formerly d/b/a Super 8 Motel) in Kentucky results in a consent judgment requiring the company to pay $119,434 in back wages and liquidated damages to 43 housekeeping, laundry, front desk and maintenance staff workers. In a News Brief dated May 8, 2015, the Wage and Hour Division of the DOL also stated that a permanent injunction was issued to ensure future compliance with the Fair Labor Standards Act. Karen Garnett, district director of the Wage and Hour Division in Louisville, Kentucky stated: “ Shivam Hospitality deliberately misclassified these low-wage workers as independent contractors, denying them the pay and protections they rightfully earned. This consent judgment [approved by the U.S. District Court for the Eastern District of Kentucky] demonstrates that the agency will use every tool available to ensure that employees are properly classified and receive the wages they are due. . . .”
  • PUERTO RICO SECURITY COMPANY TO PAY $350,000 IN BACK PAY AND DAMAGES TO SECURITY GUARDS MISCLASSIFIED AS IC’S. A San Juan-based security company, Alpha Guards Management, is required to pay under a court consent judgment almost $350,000 in back wages and liquidated damages to 650 security guards who were misclassified as independent contractors and did not receive overtime compensation. In a Wage and Hour Division News Release dated May 11, 2015, Jose Vasquez, the division’s district director for Puerto Rico and the U.S. Virgin Islands, stated: “This case shows employers and workers that the Wage and Hour Division will use all available tools to enforce the law, especially in an industry where violations are too frequent and common. The practice of misclassifying employees as independent contractors and avoiding payment of required overtime – common in this industry – must cease. This unlawful practice not only harms these workers and their families, but puts businesses who obey the law at a competitive disadvantage.”
  • RHODE ISLAND BECOMES 21ST STATE TO ENTER INTO MEMORANDUM OF UNDERSTANDING WITH U.S. DEPARTMENT OF LABOR. The United States Department of Labor (US DOL ) and the Rhode Island Department of Labor and Training signed a memorandum of understanding on May 7, 2015 to work together to protect the rights of employees who have been subject to IC misclassification. Together they will share training materials, provide employees and employers with compliance assistance information, conduct coordinated law enforcement investigations, and ensure proper compliance with applicable tax and licensing laws. According to a US DOL Wage and Hour News Brief dated May 7, 2015, the Rhode Island Department of Labor and Training is the 21st state agency to partner with the US DOL. Scott Jensen, Director of the Rhode Island Department of Labor and Training, stated, “The misclassification of employees as independent contractors is workplace fraud. Rhode Island will not allow bad actors to take advantage of their employees by failing to provide them with necessary workplace protections like Workers’ Compensation insurance, unemployment benefits and overtime pay. Allowing this activity to persist is unfair to Rhode Island businesses that play by the rules.”
  • U. S. DEPARTMENT OF LABOR RELEASES SPRING 2015 AGENDA INCLUDING “RIGHT TO KNOW’ REGULATIONS AFFECTING INDEPENDENT CONTRACTORS. In May, the U.S. Department of Labor issued its Semi-Annual Regulatory Agenda for Spring 2015. The so-called “Right to Know” rule remains a “long-term action”. That rule, 1235-AA04, is described by the Department of Labor on page 57 of its 72-page agenda, as a means to “update the recordkeeping regulations under the Fair Labor Standards Act in order to enhance the transparency and disclosure to workers of their status as the employer’s employee or some other status, such as an independent contractor . . . .”

Other Noteworthy News (2 items)  

  • GOVERNMENT ACCOUNTABILITY OFFICE RELEASES REPORT ABOUT THE CONTINGENT WORKFORCE, INCLUDING INDEPENDENT CONTRACTORS. The U.S. Government Accountability Office (GAO) publicly releases a report on May 20, 2015 entitled “Contingent Workforce: Size, Characteristics, Earnings and Benefits” containing surprising statistical conclusions about independent contractors. Among the study’s findings were that 85% of independent contractors “appeared content with their employment type;” significantly more independent contractors (57%) were “very satisfied” with their jobs than those who held standard full-time employment (45%); independent contractors may comprise as much as 10% of the entire U.S. workforce; and that independent contractors are more likely to be older, male, White non-Hispanic and college-educated than those who hold standard full-time jobs. See our blog post of May 22, 2015 for a more in-depth analysis of the GAO report.
  • SPEAKERS AT AMERICAN BAR ASSOCIATION WEBINAR ADDRESS IC MISCLASSIFICATION ISSUES IN THE SHARING ECONOMY INCLUDING RECENT UBER AND LYFT COURT DECISIONS. On May 19, 2015, the American Bar Association (ABA) presented a webinar entitled “Independent Contractors and the Sharing Economy: Uber, Lyft, and other ‘Tech’ Business Models.” The speakers included the principal attorney for the drivers challenging Uber and Lyft’s classification of drivers as ICs, Shannon Liss-Riordan; one of the publishers of this blog, Richard Reibstein of Pepper Hamilton LLP; and Evan Spelfogel of EpsteinBeckerGreen, P.C. The webinar was moderated by Professor Benjamin Sachs of the Harvard Law School. Professor Sachs first gave several descriptions of the sharing economy and invited comment from Ms. Liss-Riordan about the litigations she was handling.  She explained that she had been involved in litigation involving cleaning companies, trucking companies (FedEx), adult entertainment, call center workers, and more recently ride-sharing companies who are “trying to shift the costs and risks of running a business to the workers and saving on all types of labor costs such as wage protections, unemployment, workers comp, [and] the right to form a union.” Ms. Liss-Riordan noted that because Uber and Lyft terminate drivers who do not receive a high customer ratings, they are treating them as employees.  Mr. Spelfogel commented that, like franchises, requiring an independent contractor to maintain a high customer rating “should not convert someone . . . from an independent contractor status to an employee status.” Ms. Liss-Riordan also mentioned how important it was to play by the rules.  In response, Mr. Reibstein noted that while plaintiffs’ class action lawyers and regulators talk about “playing by the rules,” there are two sets of rules: those governing employees and those governing independent contractors, and the Secretary of Labor and the Wage and Hour Administrator have both gone on record as saying that independent contractors play an important role in the U.S. economy. He also stated: “So the overarching takeaway that I see from the Uber and Lyft decisions is that independent contractor relationships between companies in the sharing economy and those who provide on-demand services can be structured, can be documented, and can be implemented in compliance with federal and most state laws. The best time to do that, of course, is before you get a summons or court complaint from someone such as [Ms. Liss-Riordan] or before a regulatory challenge is commenced. And even for those companies that are in the midst of legal challenges, it’s not too late to minimize or avoid future independent contractor misclassification exposure. We’ve used a proprietary process called IC Diagnostics that has worked very well for companies that are trying to fit their business model into existing laws, both at the federal and state level.” The webinar closed with questions from the audience.  The entire webinar is available directly from the ABA.

Authored by Richard Reibstein.  Compiled by Janet Barsky. 

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

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Posted in IC Compliance

Massachusetts High Court Holds that Restrictive Independent Contractor Statute Does Not Apply to Real Estate Salespersons in that State

In a long-awaited decision, the Supreme Judicial Court of Massachusetts ruled yesterday that the state independent contractor (IC) law, widely regarded as the most restrictive IC law in the nation, does not apply to licensed salespersons in the real estate industry.  Monell v. Boston Pads, LLC, No. SJC-11661 (Mass. Sup. Jud. Ct. June 2, 2015).  Rather, the Court held, the provisions of the real estate licensing and registration scheme, which governs real estate brokers and salespersons and permits real estate salespersons to be “affiliated with a broker either as an employee or as an independent contractor” trumps the state’s IC law.

The Court reached that decision in reliance on a canon of statutory construction that a specific statute (here, the real estate licensing and registration law) controls over the provisions of a general statute (such as the IC law). The Court noted that under the real estate law, brokers were required to exercise supervision and control over real estate salespersons, who cannot engage in a real estate transaction except where affiliated with a broker.  If it reached any other result, the Court stated, “we would be subjecting real estate brokerage firms to potential criminal penalties [under the Massachusetts IC law] for misclassifying its real estate salespersons in a manner expressly authorized by the real estate licensing statute.”

The Court concluded by noting that “we take no position on whether the plaintiffs [real estate salespersons] are employees or independent contractors, or on how, in the absence of the framework established by the independent contractor statute, it may be determined whether a real estate salesperson is properly classified as an independent contractor or employee.”

Impact of the Decision

This decision impacts licensed real estate companies doing business in Massachusetts as brokers that retain licensed real estate salespersons. It frees such companies from the IC test in that state – a restrictive type of “ABC” statute not found in any other state – that all too frequently leads courts in Massachusetts to conclude that ICs in other industries have been misclassified.

The Court’s decision, though, does not mean that all real estate salespersons in Massachusetts are ICs; rather, they may be ICs or employees. However, the Court noted that the test to be applied to determine whether the real estate salespersons in Monell are ICs or employees is being left to be determined “to another day.”

What is the significance of this decision moving forward for real estate companies operating in Massachusetts? Real estate broker companies doing business in that state will likely seek to examine their independent contractor relationships and, where suitable, enhance their structure, documentation, and implementation. The Court’s description of the facts in Monell suggests that the defendants may do precisely that. Some real estate companies operating in that state may turn to IC Diagnostics™ to accomplish that objective, as described in our 2015 White Paper on minimizing IC misclassification liability.

Does this decision impact other industries in Massachusetts? The answer is no.  Other industries remain governed by the restrictive IC law in that state.  That includes the taxicab industry which, in contrast to the real estate industry, was the subject of a recent decision by the Massachusetts Supreme Judicial Court that the state’s IC law was applicable to Boston licensed taxicab drivers, despite the fact that they were regulated by a Boston Police Department rule. Sebago v. Boston Cab Dispatch, Inc., No. SJC-117579 (Mass. Sup. Jud. Ct. April 21, 2015). See our April 2015 ICC News Update blog post.

By Richard ReibsteinLisa Petkun and Andrew Rudolph.

Posted in IC Compliance