March 2015 Independent Contractor Compliance and Misclassification News Update

This past month’s headline developments involve three major developments in the area of independent contractor (IC) misclassification. The first case involves a large department store that agreed to pay most of the costs of an IC misclassification settlement of a class action brought by drivers that signed IC agreements not with the department store but rather with the department store’s delivery and logistics partner. The second case involves two of the leading tech start-ups in the car service arena which were unable to convince federal court judges that the drivers who operate vehicles in their network are ICs as a matter of law. The third case involves the use of franchise arrangements in the commercial cleaning industry, where a federal appeals court concluded that individuals who signed franchise agreements were not independent contractors as a matter of law, notwithstanding the fact that they were LLCs or corporations, and that the franchisees could present their IC misclassification claims to a jury.

In the Courts (9 cases) 

  • MACY’S AND LOGISTICS COMPANY TO PAY $4 MILLION TO SETTLE MISCLASSIFICATION CASE BY DRIVERS AND HELPERS. Macy’s West Stores, Inc. and the department store’s logistics management company, Joseph Eletto Transfer Inc. have agreed to pay $4 million to settle a class action misclassification lawsuit brought in California by over 600 truck drivers and their helpers. Of that amount, Macy’s agreed to pay $3 million and the logistics company $1 million in settlement of the claims by drivers and helpers that the department store and its delivery company misclassified them as independent contractors in violation of the California Labor Code. According to the plaintiffs, although the drivers signed IC agreements with the logistics management company, the relationship was heavily regulated by Macy’s and the logistics company through work-related directives and restrictions, including allegations that the drivers/helpers were required to display Macy’s logo on their trucks and had to wear Macy’s uniforms, could not set their own delivery schedules, had to leave the trucks at Macy’s site at the end of the day, and had to go through the process of role-playing where Macy’s employees evaluated whether the drivers/helpers met Macy’s standards and expectations of delivery and customer service. Fuentes v. Macy’s West Stores Inc., No. 2:14-cv-00790 (C. D. Cal. Mar. 16, 2015).
  • UBER AND LYFT FACE SETBACKS IN DEFENSE OF IC MISCLASSIFICATION LAWSUITS. Ride-sharing companies Uber and Lyft each lose motions for summary judgment in two California federal court class action independent contractor misclassification lawsuits. Both companies sought dismissal of the claims as a matter of law, but neither succeeded. The judges in both cases found sufficient evidence of direction and control by Uber and Lyft to create material factual issues that can only be resolved by a jury. For a detailed analysis of both cases and a discussion of how not to become the next Uber or Lyft in the area of independent contractor misclassification, see our blog post dated March 12, 2015. O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal. Mar. 11, 2015); Cotter v. Lyft, Inc., No. 3:13-cv-04065-VC (N.D. Cal. Mar. 11, 2015).
  • JANITORIAL FRANCHISEES OBTAIN CLASS CERTIFICATION IN MISCLASSIFICATION LAWSUIT AGAINST LARGEST COMMERICAL CLEANING FRANCHISOR. A Pennsylvania federal district court granted class certification in a lawsuit alleging that Jani-King, Inc., the world’s largest commercial cleaning franchisor, misclassified over 150 cleaning franchisees as independent contractors. The plaintiff franchisees claim that as a result of their misclassification, Jani-King took improper deductions from their wages in violation of the Pennsylvania Wage Payment and Collection Law. The plaintiffs alleged that Jani-King sold them rights to its cleaning services franchise, but the franchise agreements that secured those rights were, in reality, illegal employment agreements. Myers v. Jani-King of Philadelphia, Inc., No. 09-1738 (E.D. Pa. Mar. 11, 2015).
  • SATELLITE TV-INTERNET INSTALLATION TECHNICIANS MAY PRESENT IC MISCLASSIFICATION CLAIM TO JURY. The U.S. Court of Appeals for the Sixth Circuit reversed a federal district court’s grant of summary judgment in favor of Miri Microsystems LLC and directed that a jury decide the IC misclassification claim for unpaid overtime under the Fair Labor Standards Act. Applying the six-factor economic realities test, the federal appeals court found that there were disputed issues of facts that could not be decided as a matter of law in favor of the company, including whether the parties had a de facto permanent, exclusive working relationship because the technician did not have time to work for any other company; whether the degree of skill needed to perform the technician’s assignments indicated that he was an employee; whether the technician’s investments demonstrated that he was economically independent; whether the technician could have increased his profitability had he improved his efficiency or requested more assignments; and whether the company exercised control over the manner in which the technician performed his work. Keller v. Miri Microsystems LLC, No. 14-1430 (6th Cir. Mar. 26, 2015). 
  • MISCLASSIFICATION CASES INVOLVING STRIP CLUBS CONTINUE TO MAKE HEADLINES. The operators of Rick’s Cabaret in New York City have settled its misclassification case brought by exotic dancers for $15 million. Hart v. Rick’s Cabaret International, Inc., No. 09 Civ. 3043 (PAE)  (S.D.N.Y. Mar. 31, 2015). A Texas jury awards exotic dancers $126,000 in a collective action against strip club, Tiffany’s Cabaret (formerly known as KHG), due to the club’s misclassification of the dancers as independent contractors and failure to pay minimum wage and overtime compensation in violation of the Fair Labor Standards Act. Alex v. KHG of San Antonio LLC, Case No. 5:13-cv-00728 (W.D. Tex. Mar. 12, 2015) The Supreme Court of South Carolina holds that an exotic dancer who sustained gunshot wounds while working at the Boom Boom Room Studio 54 was an employee, not an independent contractor, and should receive workers’ compensation for her injuries. Lewis v. L.B. Dynasty d/b/a/ Boom Boom Room Studio 54, No. 2012-213376 (S. Ct. S.C. Mar. 18, 2015).
  • TAX COURT FINDS APARTMENT MAINTENANCE MANAGERS, WORKERS, AND APARTMENT MANAGERS ARE US Tax Court finds maintenance supervisor, maintenance workers, and apartment managers of apartment complex owned by TFT Galveston Portfolio, Ltd. to be employees and not independent contractors resulting in employment tax liabilities for the owner. Applying the definition set forth in the Employment Tax Regulations and the seven factors enumerated in Weber v. Commissioner, 103 T.C. 378 (1994), aff’d per curiam, 60 F.3d 1104(4th Cir. 1995), the Court found that the workers in question had been misclassified as 1099ers instead of W-2 employees and that the taxpayer business was liable for unpaid employment taxes, interest and penalties for failure to file Form W-2s for the workers in question. In reaching its misclassification holding, the Tax Court found, among other facts, that TFT controlled nearly every aspect of the work performed by the apartment managers and maintenance supervisor; that TFT set the maintenance workers were subject to supervision by TFT; that managers were provided with on-site housing paid by THT; that all incidental expenses were paid by TFT; that either party could end the relationship at any time; and that there were no independent contractor agreements or any written contracts defining the workers’ relationship with THT. TFT Galveston Portfolio, Ltd. v. Commissioner of Internal Revenue, 144 T.C. No.7 (Feb. 26, 2015).

On the Legislative Front (4 items)

  • GEORGIA: Employment security bill (HB500) passes the state House of Representatives on March 9, 2015 and awaits action in the state Senate. HB500 proposes that services performed by an individual for wages shall be deemed to be employment unless (1) the Department of Labor makes a contrary determination that the individual has been and will continue to be free from control or direction over the performance of services, in contract and in fact, based on an analysis of the totality of a series of factors such as non-exclusivity of the relationship, freedom to accept or reject assignments without consequence, no set minimum amount of hours or orders to be obtained, no direct oversight or supervision regarding the services to be performed, and whether the worker sets own schedule; and (2) the individual is customarily engaged in an independently established trade, occupation, profession or business, or the IRS has issued an SS-8 determination finding non-employee status. The bill also proposes that a web-based reporting system be created by the Department of Labor for instances of worker misclassification and that the Department investigate all credible reports of IC misclassification.
  • NEVADA: Bill (SB224) introduced in state Senate on March 6, 2015 seeks, among other things, to create a uniform definition of the term “independent contractor” and addresses eight specific factors that must be considered to determine whether an individual is an independent contractor or employee. Some of those factors include the whether the individual: is free to establish days and hours of his/her schedule and to be substantially free from the control and direction of the principal; is customarily engaged in a trade or business of the work being performed and is established independently of the principal; is exclusively engaged in providing services to the business; holds a current state business license issued by the Nevada Secretary of State; and leases space or equipment from the principal.
  • NEW HAMPSHIRE: Bill (HB450) that passed the House on March 12, 2015 is introduced in the state Senate on March 19, 2015. The bill would create a uniform definition of the term “employee” with a comprehensive set of factors to consider when determining independent contractor versus employee status. The proposed definitions and factors would be the same across the contexts of wage/hour, whistleblower, workers’ compensation and unemployment laws.
  • TEXAS: Bill (SB927) introduced in the state Senate on March 9, 2015 that proposes penalties for failure to properly classify workers as independent contractors or employees. The bill would also create a rebuttable presumption that “An individual performing a service for wages or under an express or implied contract of hire is presumed to be an employee of the person for whom the service is performed.” That presumption may be rebutted by showing “to the satisfaction of the commission that the individual’s performance of the service has been and will continue to be free from control or direction under the contract and in fact.”

Regulatory and Enforcement Initiatives (1 item)

  • LABOR SECRETARY ACKNOWLEDGES IMPORTANT ROLE OF BONA FIDE INDEPENDENT CONTRACTOR RELATIONSHIPS IN THE U.S. ECONOMY, BUT NOT WHEN THE IC RELATIONSHIP IS ABUSED BY BUSINESSES. The U.S. Secretary of Labor Thomas Perez testified at a March 18, 2015 House Education and the Workforce Committee hearing on “Reviewing the President’s FY2016 Budget Proposal for the Department of Labor.” In response to Congressman Polis’ question asking how more can be done to deter worker misclassification, Secretary Perez stated: “One thing we’ve been doing is work very closely with states, and we’ve entered into MOUs with 20 states, ranging from Utah and Alabama to Massachusetts, because this problem’s not a red or blue problem, it’s a problem — a national problem that has three sets of victims: the worker him or herself; the employers who play by the rules — they can’t compete for contracts, they can’t compete for businesses because they pay their taxes; and then the tax collector, because when a business is cheating, they’re not paying their workers’ comp taxes, my U.I. taxes go up because the pool has gotten smaller. And so those three types of victims are why we’re working with states across the country on this issue. It’s a very significant problem. I believe that there’s an important place for independent contractors, but I also believe that there’s ample evidence that that’s been abused.” 

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

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Posted in IC Compliance

Uber and Lyft Both Lose Key Motions in Independent Contractor Misclassification Class Action Lawsuits; Decisions Have Far-Reaching Implications for Companies That Fail to Properly Structure and Document Their Independent Contractor Relationships

March 11, 2015 was a tough day for ride-sharing start-ups Uber and Lyft, as federal court judges in California issued separate decisions yesterday in class action lawsuits brought by drivers of both companies.  The drivers allege that Uber and Lyft misclassified them as independent contractors (ICs) instead of employees – thereby depriving the drivers of many employee rights and benefits. Both Uber and Lyft had filed motions with the court seeking summary judgment on the grounds that they had properly classified the drivers as ICs. The courts in both cases denied their motions and ruled that juries would have to decide in each case whether the drivers are employees or ICs. O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal. Mar. 11, 2015); Cotter v. Lyft, Inc., No. 3:13-cv-04065-VC (N.D. Cal. Mar. 11, 2015).

These cases will likely to have far-reaching implications for Uber, Lyft and other companies in the “on demand” economy.  Companies that use a 1099 business model or that have  failed to properly structure, document, and implement their IC relationships in a manner that complies with applicable laws should take steps such as those discussed below in the “Takeaways” to avoid being the next Uber or Lyft in an IC misclassification lawsuit.

Analysis

The Uber case was decided by Judge Edward M. Chen and the Lyft case by Judge Vince Chhabria, both from the U.S. District Court for the Northern District of California located in San Francisco.  The decisions are very similar, with both judges concluding that some of the facts favored employee status and some favored IC status.  Although both judges identified more factors favoring employee status than IC status, Judge Chhabria put it best when he wrote that “Lyft drivers don’t seem much like employees,” but then again “Lyft drivers don’t seem much like independent contractors either.”  In these circumstances, both judges concluded that because neither of the defendant companies could establish that their drivers were ICs as a matter of law, that decision could only be made by a jury after weighing all of the facts and circumstances.  (In the Lyft case, Judge Chhabria also denied the drivers’ cross-motion for summary judgment that they were employees as a matter of law.)

The facts in both cases have a number of similarities. Both Uber and Lyft allow drivers to make themselves available for work whenever they want and allow them to accept or reject rides once they have been selected – both factors that favor IC status. On the other hand, both companies expressly reserve the right to terminate the drivers’ relationship or to terminate the use the company app if a driver’s customer ratings are deemed unacceptably low or for any reason at all.  Both courts noted that this factor is a key one favoring employee status.

Both judges stated that while there are numerous factors that bear on whether a worker is an employee or IC, the “principal” test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired. To that end, the court in the Uber case identified other factors favoring employee status, including Uber’s “Driver Handbook,” which instructs drivers, among other things, to “dress professionally,” send the client a text message 1-2 minutes from the pick-up location, “make sure the radio is off or on soft jazz or NPR,” to “make sure to open the door for your client,” and to “have an umbrella in [their] car for clients to be dry until they get in your car or after they get out.”

Similarly, the court in the Lyft case pointed to the Lyft Rules of the Road, which gave drivers a list of “rules to live by.” These included “No talking on the phone (unless it’s the passenger)”; “Greet every passenger with a big smile and fist bump”; “Do not request tips”; and “Go above and beyond with good service such as helping passengers with luggage or holding an umbrella for passengers when it’s raining”.  Judge Chhabria noted that in July 2013 Lyft replaced the Rules of the Road with FAQs, but they still instructed drivers about such things as the cleanliness of their vehicles, the use of GPS navigation while driving, not smoking in their vehicles, and not asking passengers for their telephone numbers.

The judges also found evidence that Uber and Lyft monitored their drivers’ performance. Judge Chen noted that there is evidence that Uber monitors its drivers to ensure compliance with Uber’s many quality control standards by requesting that passengers give drivers a star rating on a scale from 1 to 5 after each completed trip based on the driver’s performance.  He found evidence that Uber uses these ratings “to monitor drivers and to discipline or terminate them.”  Uber’s contract with drivers provides that it may terminate any driver whose star rating “falls below the applicable minimum star-rating.”

Similarly, Judge Chhabria found evidence that Lyft reserved the right to penalize or even terminate drivers who did not follow the instructions in its Rules of the Road or FAQs.  He also noted that Lyft solicited ratings from passengers about the drivers and, pursuant to its contract with the drivers, Lyft reserved the right to investigate and terminate drivers who have “behaved in a way which could be regarded as inappropriate” or whose passenger ratings fall below a certain threshold.

Although both Uber and Lyft argued that their respective Driver Handbook and Rules of the Road/ FAQs were “suggestions,” both judges dismissed that argument by referring to the mandatory language of the documents and evidence that failure to follow the “suggestions” could be enforced by disciplinary action or termination.

In our September 18, 2014 blog post entitled “Silicon Valley Misclassification,” we observed that tech companies that use the 1099 “on demand” business model were at risk if they “do not take care to structure, document, and implement their independent contractor relationships in a manner consistent with federal and state IC laws.” Based on the two decisions issued yesterday, it Uber and Lyft may be found by juries to have failed to structure, document, or implement their IC relationships to comply with California legal test for IC status – which is roughly similar to the prevailing federal law and the law followed by most states in employment related lawsuits.

That does not mean, however, that companies cannot prevail on IC misclassification claims.  In fact, the decision in Uber pointed to two recent cases where courts in California found workers to be independent contractors as a matter of law.  As the court noted, even though some factors may have “cut in favor of employee status,” courts will still find IC status when “all of the factors weighed and considered as a whole establish that [an individual] was an independent contractor and not an employee.”

So, how does a company avoid class action IC misclassification cases or, if ever sued, prevail in the lawsuit and secure a judgment that its 1099ers are legitimate ICs? And is it too late to restructure and re-document a company’s IC relationships in order to maximize its IC compliance and minimize their risk of IC misclassification liability?

Takeaways

Many new and existing companies have resorted to IC Diagnostics™ to enhance their level of IC compliance and determine whether a group of 1099ers would pass the applicable tests for IC status under governing state and federal law.  That proprietary process also offers a number of practical, alternative solutions to enhance compliance with those laws, including: restructuring, re-documenting and re-implementing the IC relationship; reclassifying 1099ers as W-2 employees; and redistributing 1099ers – as more fully described in our White Paper on the subject.

Companies that wish to retain an IC business model generally opt for restructuring, re-documenting, and re-implementing their IC relationships. While not all companies can eliminate most control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their IC relationships to comply with federal and most state IC laws. The IC Diagnostics™  process provides the means to stress-test the IC relationship. If it can be effectively restructured to comply with IC laws, the next step in the process is re-documentation.  What seems like a simple act of dotting your i’s and crossing your t’s, though, is anything but; indeed, many IC statutes and most judicial and administrative decisions in this area are often counter-intuitive.

As we noted in our August 29, 2014 blog post entitled “Earthquake in the Independent Contractor Misclassification Field,” we concluded that FedEx Ground lost a key case because of its misplaced reliance on an IC agreement and its policies and procedures that were good, but not good enough.  Plainly, FedEx is a savvy company, but close scrutiny by a court found one fallacy after another in the very documents FedEx created – sufficient in degree to lead the court to rule against FedEx. As we noted, “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.”

Lastly, the implementation of a legitimate IC relationship is essential. As shown in the Uber and Lyft cases, even when those companies’ contractual provisions were drafted in a manner intended to be consistent with IC laws, Uber and Lyft failed to strictly follow the contractual limitations on direction and control when they put their IC relationships into effect.  There is no reason, however, why a company committed to complying with IC laws cannot, when exercising both rigor and restraint, implement and carry out in practice an enhanced IC relationship.

Written by Richard Reibstein.

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance

February 2015 Independent Contractor Compliance and Misclassification Update

This month’s headline developments are a set of cases reported in February dealing with class action IC misclassification claims: the highest court in a key state agreeing to decide whether a worker-friendly test should be used in determining the IC status of a group of workers asserting minimum wage and overtime claims; a new class action IC misclassification claim brought under the federal wage and hour law by a group of on-demand security-clearance investigators; and three more cases involving exotic dancers who allege they were misclassified as ICs. These cases demonstrate the wisdom of companies that have enhanced their IC compliance to avoid these types of lawsuits, instead of having to expend considerable financial resources to defend claims based on factual allegations that are difficult to overcome – and may be more challenging if courts choose more worker-friendly legal standards for class action liability. Companies that wish to minimize exposure to IC misclassification liability, including firms using an on-demand business model and those that simply wish to supplement their workforce with 1099ers, may wish to examine our White Paper on the subject. It discusses three alternative means to minimize IC misclassification risk: restructuring, re-documenting, and re-implementing IC relationships; re-distributing workers using staffing and workforce management firms; and reclassifying workers currently treated as 1099ers.

Another noteworthy development is a blog post in the Huffington Post by former Labor Secretary Robert Reich, who advocates a simple numerical test for determining independent contractor status under federal law. The test, however, would effectively overturn most court cases and administrative determinations in favor of companies found to have properly classified individuals as 1099ers, requiring them to abandon their lawful enterprises or face IC misclassification liability. The proposed test also seems to have overlooked the array of state law tests for IC status that differ from current federal laws and cannot be preempted by federal legislation.

In the Courts (4 cases)

  • CALIFORNIA TO DECIDE WHETHER TO USE A MORE WORKER-FRIENDLY TEST FOR BRINGING IC MISCLASSIFICATION CLAIMS SEEKING UNPAID OVERTIME AND MINIMUM WAGES. The California Supreme Court agreed to decide which test should be applied to certify a class of delivery drivers who alleged they were misclassified as ICs by their employer, Dynamex Operations West Inc., a nationwide courier and delivery service. The specific question to be considered is: in a wage and hour class action involving state law claims that the plaintiffs were misclassified as independent contractors, may a class be certified based on the California Industrial Welfare Commission (IWC) definition of “employee” as construed in Martinez v. Combs, 49 Cal.4th 35 (2010), or must the court apply the common law test for distinguishing between employees and independent contractors, as set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989)? The common law test is the standard that the courts have generally applied in the past in California. The IWC test is far less challenging for workers to satisfy, and would likely result in far more IC misclassification claims being brought – and won – in California. Dynamex Operations West Inc. v. S.C., No. S222732 (Cal. Sup. Ct.).
  • INVESTIGATORS CONDUCTING SECURITY CLEARANCE BACKGROUND CHECKS SUE GOVERNMENT CONTRACTOR FOR IC MISCLASSIFICATION. A collective action brought under the federal Fair Labor Standards Act was filed in California federal court on behalf of a class of investigators for KeyPoint Government Solutions, Inc., a company that provides security-clearance background checks and screening services to the United States government. The complaint alleges, among other things, that KeyPoint classified some investigators as employees yet misclassified others as ICs, even though all investigators were subject to the same rules, procedures, responsibilities and level of control; that KeyPoint failed to pay investigators allegedly misclassified as ICs the same overtime wages and other benefits paid to employee investigators; that the ICs were required to attend training sessions on how to perform background checks, had to obtain preapproval before delegating work, could not negotiate their fees, and were required to perform their services according to the instructions provided by KeyPoint. Smith v. KeyPoint Government Solutions, Inc., No. 3:15-cv-00429 (N.D. Cal.).
  • STRIP CLUBS REMAIN AN EASY TARGET FOR IC MISCLASSIFICATION CLAIMS. Class actions involving exotic dancers suing strip clubs remain a prevalent type of IC misclassification lawsuit. As discussed in our blog post of February 8, 2015, a class action complaint was filed in federal court in New York against Cheetah’s Gentlemen’s Club & Restaurant alleging that the club violated the federal Fair Labor Standards Act by failing to pay minimum wages and overtime, and violated the New York Labor Law by, among other things, misappropriating tips, making unlawful deductions from the dancers’ pay, requiring them to purchase and wear uniforms, and failing to reimburse them for laundering their outfits. Similarly, a proposed class action was filed against the Hustler Club in the same New York federal court, also alleging that the club misclassified its exotic dancers resulting in a denial of minimum wage and overtime. Additionally, a jury in a Maryland federal court lawsuit awarded just under $200,000 to a class of six misclassified exotic dancers who worked at Fuego’s Exotic Dance Club and Club Extasy. The judge also added an award of liquidated damages under federal law. Rodriguez v. Three Amigos SJL Inc., No. 15 CV 823 (S.D.N.Y. Feb. 5, 2015); Rodriguez v. Larry Flynt’s Hustler Club, No.1:15-cv-01181 (S.D.N.Y. Feb. 18, 2105); McFeeley v. Jackson Street Entertainment LLC, No. 8:12-cv-01019 (D. Md. Feb. 9, 2015).
  • U.S. SUPREME COURT CHOOSES NOT TO HEAR DEFENSE THAT FEDERAL TRANSPORTATION LAW PREEMPTS STATE LAW RELIED UPON IN IC MISCLASSIFICATION CLASS ACTION. The U.S. Supreme Court declined to review a California Supreme Court’s holding that a federal transportation law, the Federal Aviation Administration Authorization Act of 1994 (FAAAA), does not preempt a class action lawsuit under the California Unfair Competition Law alleging that Pac Anchor Transportation Inc., a trucking company, misclassified its drivers as ICs and violated the state’s labor, unemployment, and unfair competition laws. The complaint alleged that because of the IC misclassification, the company illegally lowered their costs of doing business by engaging in acts of unfair competition including, but not limited to, failing to take certain statutorily mandated actions such as paying unemployment insurance and employment training taxes, withholding state disability insurance and income taxes, providing worker’s compensation, and ensuring payment of California’s minimum wage. The California high court had upheld an appellate court’s finding that the unfair competition law was not preempted by the FAAAA because the claim was not related to Pac Anchor’s price, routing, or service as a motor carrier. Pac Anchor Transportation v. California ex rel. Harris, No. 14-491 (Feb. 23, 2015).

Regulatory and Enforcement Initiatives (4 matters)

  • THE PRESIDENT’S 2016 BUDGET REQUEST FOR THE U.S. DEPARTMENT OF LABOR SEEKS TO TARGET THE “FISSURED WORKPLACE.” President Obama’s proposed 2016 budget targets independent contractor misclassification as part of the “fissured workplace.” As more fully discussed in our blog post of February 2, 2015, the Labor Department’s Wage and Hour Division (WHD) submitted a lengthy budget justification to Congress focusing on its continued goal of detecting and penalizing instances of misclassification. The budget justification noted that workplaces are becoming “fissured” because some IC relationships and other business models “function to obscure, or eliminate entirely, the link between the worker and the business.”
  • TELEMARKETING FIRM ORDERED TO PAY $560,000 FOR MISCLASSIFYING TELEMARKETERS AS IC’S. The Wage and Hour Division of the U.S. Department of Labor secured a consent judgment in a Nevada federal court in favor or 398 telemarketers whom the WHD found to be misclassified as ICs by a telemarketing company, Intelliconnect Communications LLC. Intelliconnect was ordered to pay $560,000 in unpaid minimum wages, overtime compensation and liquidated damages. In its press release dated February 2, 2015, the WHD in Las Vegas reported that the company had paid the telemarketers based on a percentage of individual sales, resulting in many of them working for days and weeks for little or no pay. Among other things, the court ordered that the company be independently monitored for three years to ensure future compliance with the labor laws; that members of the company attend compliance training sessions for a period of three years; and that the company not engage in any retaliation against those employees who accept back wages or exercise their FLSA rights.
  • U.S. LABOR DEPARTMENT TARGETS JANITORIAL FIRMS MISCLASSIFYING CUSTODIANS AS INDEPENDENT CONTRACTORS. The U.S. Department of Labor’s Wage and Hour Division in Seattle undertakes a multi-year enforcement and outreach initiative within the janitorial industry regarding employee misclassification. According to a press release issued on February 5, 2015 by the WHD: “Of the division’s 1,221 janitorial industry investigations [conducted nationwide], 76 percent resulted in violations and to the recovery of $7.9 million in unpaid wages for nearly10,000 workers.” Under the initiative, the Seattle WHD will audit local janitorial businesses to ensure workers are paid in compliance with federal labor laws and “encourage employer engagement with key industry, government and community stakeholders to inform them of the initiative and to increase awareness about labor law compliance obligations.”
  • NEW YORK TASK FORCE REPORTS 12,000 IC MISCLASSIFICATION AUDITS CONDUCTED LAST YEAR. The New York Joint Enforcement Task Force on Employee Misclassification reported that its audits discovered over 133,000 workers were misclassified in 2014. As noted in our blog post of February 5, 2015, over 12,000 audits were conducted by the task force in New York in 2014, resulting in the discovery of $316 million in unreported wages, leading to assessments of $40.4 million in unemployment insurance contributions. (This did not include recovery of unpaid overtime and minimum wages.) The Task Force Report listed the “top dozen” industries and businesses that it found had the highest incidence of worker misclassification in New York in 2014, including: professional, scientific and technical services; construction of buildings; food services and drinking places; publishing industries; administrative and support services; specialty trade contractors; ambulatory health care services; personal and laundry services; performing arts, spectator sports and related industries; educational services; motion picture and sound recording industries; and merchant wholesalers and nondurable goods.

On the Legislative Front (5 matters)

  • HAWAII. Proposed bill (HB1213) was introduced in state House of Representatives would allow the state Department of Labor and Industrial Relations (DLIR) to set criteria for determining independent contractor status and when that status is presumed in the unemployment compensation context. The bill would establish certification procedures to be followed by the DLIR after identifying those individuals meeting the definition of an IC under Hawaii law.
  • KENTUCKY. A bill (15 RS BR 819) was introduced in state House of Representatives on February 3, 2015 addressing misclassification of employees in the construction industry. The General Assembly declared that Kentucky’s unemployment insurance system lost an average of $1,750,000 each year in the construction sector for the period 2007-2010 in unemployment insurance taxes not levied due to IC misclassification, and that construction employers that misclassify employees as ICs could reduce payroll costs by about 30%, creating a significant unfair competitive advantage over construction employers that comply with the law. The proposed bill would create a presumption that a worker is an employee of the construction contractor and not an IC unless the person is a separate business entity and meets a series of seven criteria, including freedom from direction and control; the right to perform similar services and make those services available to the general public/business community; an investment of capital by the worker beyond ordinary tools, equipment and a personal vehicle; and furnishing the tools and equipment necessary to perform the services. Proposed penalties would include a civil penalty of up to $1,000 for a first violation, up to $5,000 per occurrence for each subsequent violation within a five year period, and a doubling of fines for willful violations.
  • OHIO. Senate bill (SB25) was introduced on February 2, 2015 that seeks to create a uniform standard for determining IC/employee status under the wage and hour, unemployment compensation and workers’ compensation statutes. The bill would require a showing of all of the following seven factors: (a) the individual is free from control and direction in connection with the performance of the service; (b) the individual customarily is engaged in an independently established trade, occupation, profession, or business; the individual is a separate and distinct business entity from the entity for which the service is being performed or, if the individual is providing construction services and is a sole proprietorship or a partner in a partnership, the individual is a legitimate sole proprietorship or a partner in a legitimate partnership; (d) the individual incurs the main expenses and has continuing or recurring business liabilities related to the service performed; (e) the individual is liable for breach of contract for failure to complete the service; (f) an agreement, written or oral, express or implied, exists describing the service to be performed, the payment the individual will receive for performance of the service, and the time frame for completion of the service; and (g) the service performed by the individual is outside of the usual course of business of the employer.
  • VERMONT. Senate bill (SB82) was introduced on February 12, 2015 seeking to establish an interagency commission to investigate and evaluate the problem of employee misclassification in Vermont with respect to payroll taxes, occupational safety, unemployment insurance, and workers’ compensation. As proposed, the Vermont Commission on Employee Misclassification would be composed of the following individuals or their designees: Commissioner of Labor, Commissioner of Financial Regulation, Commissioner of Taxes, Commissioner of Buildings and General, Attorney General, Secretary of Transportation, Secretary of Human Services, Secretary of Commerce, Commissioner of Liquor Control, a member of the Hose of Representatives and a member of the Senate. 
  • WASHINGTON, D.C. The District of Columbia’s Wage Theft Prevention Amendment Act of 2014 became effective February 26, 2015. According to the Department of Employment Services (“DOES”), the Act makes broad changes to D.C.’s wage and hour laws, which include the Minimum Wage Act Revision Act, the Living Wage Act, the Wage Payment and Wage Collection Law, and the Accrued Sick and Safe Leave Act. The Act enhances remedies, fines, administrative penalties, and enforcement of wage payment and collection laws by increasing the accountability of employers and strengthening worker protection laws.  From the standpoint of IC misclassification liability, the WPTAA makes general contractors jointly and severally liable for violations of the D.C. wage and hour laws by their subcontractors, including the failure to pay wages properly. Generally, subcontractors must indemnify their general contractors for any penalties for the subcontractor’s violations. In addition, employers that use temporary staffing agencies may be held jointly and severally liable for violations by those agencies. However, the temporary staffing agency must indemnify the employer, unless the employer and temporary staffing agency agreed to a different arrangement before the effective date of the Act. The DOES also advised on its website that the Act increases penalties for employers who commit wage/hour violations; provides anti-retaliation protections for workers who hold employers accountable for failing to pay wages owed; establishes a formal hearing process with enforceable judgments; and provides for better access to legal representation for victims of wage payment violations, while making it easier for workers to collect awards from businesses who fail to pay, either in whole or in part, an employee’s regular wages.


Other Noteworthy News
(1 matter)

  • Robert Reich, former Secretary of Labor under President Bill Clinton from 1993 to 1997, authored a blog post in the Huffington Post on February 22, 2015 sharing his viewpoint that “The rise of ‘independent contractors’ is the most significant legal trend in the American workforce –contributing directly to low pay, irregular hours and job insecurity.” In his mind, “It’s become a race to the bottom; once abusiness cuts costs by making its workers ‘independent contractors, every other business in that industry has to do the same — or face shrinking profits and a dwindling share of the market.”  He continued: “The law is still up in the air. . . . It’s absurd to wait for the courts to decide all this case-by-case. We need a simpler test for determining who’s an employer and employee. I suggest this one: Any corporation that accounts for at least 80 percent or more of the pay someone gets, or receives from that worker at least 20 percent of his or her earnings, should be presumed to be that person’s ‘employer.’ Congress doesn’t have to pass a new law to make this the test of employment. Federal agencies such as the Labor Department and the IRS have the power to do this on their own, through their rule making authority. They should do so. Now.” As noted in the introduction to this month’s update, this proposed new law would effectively overturn most court cases and administrative determinations in favor of companies found to have properly classified individuals as 1099ers, requiring them to abandon their lawful enterprises after years of being in full compliance, or face IC misclassification liability if they wished to continue their business. This proposal also addresses federal law only; many state IC laws vary from those in other states, and many vary widely from current federal laws.

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

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Posted in IC Compliance

Even an Exotic Dance Club (a.k.a. Strip Joint) Can Comply with Independent Contractor Laws – And Avoid or Defend Against Class Actions

A number of our blog posts since October 2010, including our monthly updates beginning in November 2012, have included reports on hundreds of class action lawsuits including those by exotic dancers against strip clubs.  This industry has, by far, the most reported  lawsuits involving allegations and findings of independent contractor misclassification.

In the last year alone, we reported in our December 2014 update that Jaguar Gold Clubs in Texas agreed to settle an independent contractor misclassification class action in Texas for $2.3 million; in our November 2014 update that Rick’s Cabaret in New York was ordered to pay $10.9 million for misclassifying exotic dancers; in our September 2014 update that the Nevada Supreme Court reversed a lower state court decision that exotic dancers working at Sapphire Gentlemen’s Club were independent contractors and not employees, that three New York strip clubs (New York Dolls, Private Eyes, and Flashdancers) settled a misclassification case for $4.3 million, and that a Florida court granted class action status to a group of 500 dancers against the King of Diamonds club; in our June 2014 update that an Arkansas court ruled that exotic dancers classified as independent contractors by French Quarter Partners LLC were actually employees under the federal wage and hour laws; and in our January 2014 update that a Georgia court granted summary judgment in favor of a class of exotic dancers, concluding that they had been misclassified as independent contractors by The Great American Dream Inc., d/b/a Pin Ups.

As recently as this past Thursday, February 5, 2015, a 41-page, ten-count class action complaint was filed in federal court in New York against Cheetah’s Gentlemen’s Club & Restaurant in midtown Manhattan. The lawsuit alleged that the club misclassified exotic dancers as independent contractors and, in so doing, violated the federal Fair Labor Standards Act (FLSA) and the New York Labor Law (NYLL) by failing to pay minimum wages and failing to pay overtime; and further violated the NYLL by, among other things, misappropriating tips, making unlawful deductions from the dancers’ pay, and requiring them to purchase and wear uniforms and failing to reimburse for laundering their outfits. Evelyn Rodriguez, Janine Bonderenko, Jennifer Eller and Kayla Atkins v. Three Amigos SJL Inc., Times Square Restaurant No. 1, Selim “Sam” Zherka and Dominica O’Neill, No. 15 CV 823 (S.D.N.Y. Feb. 5, 2015).

Legitimate Independent Contractor Relationships Remain Lawful

All but a few industries are capable of operating in a manner consistent with independent contractor laws in general. As the Administrator of the Wage and Hour Division of the U.S. Department of Labor, Dr. David, Weil, has stated recently, while misclassification of employees as independent contractors “deprives workers of rightfully earned wages and undercuts law-abiding businesses,” business models that “attempt to change . . . the employment relationship through the use of independent contractors are not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy . . . .”

Exotic dancers who provide services as 1099ers, like other workers retained on an independent contractor basis, want to have flexibility in their choice of working hours or days, wish to be able to legitimately deduct business expenses, and prefer to decide how they will perform their services consistent with what is expected in their particular industry.

It is evident, however, that some businesses that use independent contractors to supplement their workforce or are built on a 1099 model, including many exotic dance clubs, have not structured, documented, and implemented their operations to comply with federal and state labor, employment, tax, and benefit laws governing independent contractors. The question arises: can those businesses, even exotic dance clubs, be operated in compliance with such laws?

Yes. Businesses Can Comply With Independent Contractor Laws and Effectively Avoid or Defend Against Class Actions – Even Exotic Dance Clubs.

The answer to that question, of course, depends on which federal and state laws govern and how the independent contractor relationship in a particular company is structured. As set forth in our White Paper, most laws governing independent contractors, including those recently enacted by many states, permit the continued use of independent contractors. Nonetheless, lawyers and legal commentators routinely advise businesses to cease using independent contractors if their current structure is inconsistent with such laws and to reclassify their independent contractors as employees going forward to avoid the potential for misclassification liability.

There are, however, a number of alternatives that permit companies to minimize or avoid future liability. Those alternatives include bona fide restructuring and re-documenting of the relationship between a business and its independent contractors; re-distribution of independent contractors through a reliable and knowledgeable workforce management or staffing company; or reclassification, either voluntarily or under a governmental program.

In deciding which alternatives are suitable for any particular business, an assessment of the specific business, its current structure, and the states in which it operates must first be conducted. “One size fits all” solutions are generally likely to be ill-fitting for most businesses and do not meaningfully minimize or eliminate independent contractor misclassification liability. Many businesses prefer a customized and sustainable approach   to enhance their independent contractor compliance, such as IC Diagnostics™.

There is no question that some businesses are neither willing nor interested in any of the foregoing alternatives, preferring instead to maintain the status quo.  Such businesses, like those that have been sued in the exotic dance club industry, remain highly susceptible to becoming a target of a plaintiffs’ class action lawyer or some state or federal workforce agency. Although optimally designed to minimize the likelihood of future legal challenges, IC Diagnostics™ can also be useful in formulating comprehensive and effective defenses to new and existing court and administrative challenges to a company’s classification of certain workers as independent contractors.

Absent change among many businesses in industries where misclassification of employees as independent contractors has been and remains prevalent, state legislation may well be enacted to further curtail misclassification in those industries – such as the passage of recent independent contractor laws focused on the construction industry, the commercial goods transportation industry, the landscaping industry, and other industries that have drawn the attention of legislators.

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

Posted in IC Compliance

133,000 Misclassified Workers Detected in New York in the Course of 12,000 Audits and Investigations in 2014, According to the State’s Newest Task Force Report on Employee Misclassification

On February 1, 2015, the Joint Enforcement Task Force on Employee Misclassification issued its Annual Report. The Report noted that the New York Task Force members in 2014 conducted over 12,000 audits and investigations, resulting in detection of employee misclassification involving over 133,000 workers. Those and other enforcement efforts in 2014 in New York culminated in the discovery of $316 million in unreported wages, leading to assessments of $40.4 million in unemployment insurance contributions. Since 2007, joint enforcement activities in New York have identified made unemployment insurance assessments on nearly $2.1 billion in unreported wages.

The Task Force defines employee misclassification as comprising both misclassification of employees as independent contractors, and unreported employment or “off-the-books” work. The Report notes that independent contractor misclassification arises because employers believe that certain workers paid on a 1099 basis meet the standard for independent contractor status (i.e., unintentional misclassification) or they may deliberately misclassify their employees in order to evade regulations protecting employees and associated payroll and unemployment taxes (i.e., intentional or willful misclassification).

This is the first Annual Report of the Task Force since the enactment of the New York State Commercial Goods Transportation Industry Fair Play Act, which became effective April 10, 2014. That law was the subject of a number of our blog posts, the last one on April 30, 2014. The Task Force Report noted that since the effective date of the new law, the New York State Department of Labor completed 118 audits/investigations of employers in the commercial goods transportation industry, 25 of which were initiated based on tips and another 25 based on random selection of businesses.

The Task Force Report described the efforts by the Department of Transportation, the New York State Thruway Authority, and the Department of Labor to distribute the required posters across New York State including at warehouse locations. The required posters are available at http://www.labor.ny.gov/formsdocs/ui/IA998.pdf.

Of particular interest in this 2014 Task Force Report is the listing of the “top dozen” industries and businesses that the Task Force has found to have the “highest incidence of worker misclassification” in New York in 2014:

  • Professional, Scientific and Technical Services;
  • Construction of Buildings;
  • Food Services and Drinking Places;
  • Publishing Industries;
  • Administrative and Support Services;
  • Specialty Trade Contractors;
  • Ambulatory Health Care Services;
  • Personal and Laundry Services:
  • Performing Arts, Spectator Sports, and Related Industries;
  • Educational Services;
  • Motion Picture and Sound Recording Industries; and
  • Merchant Wholesalers and Nondurable Goods.

Analysis and Takeaways

New York has been at the forefront of independent contractor misclassification since 2007 when the Governor established the Joint Enforcement Task Force on Employee Misclassification. As reported in our blog post of September 16, 2014, New York was one of 19 states that received grants totaling $10.2 million in federal funds from the U.S. Department of Labor to increase the capabilities of state unemployment insurance tax programs to identify instances where employers improperly classify employees as independent contractors or fail to report wages paid to workers.

New York has also been active in passing legislation designed to curtail independent contractor misclassification in industries where it is perceived to be prevalent, enacting the Construction Industry Fair Play Act in 2010, as described in our blog post of September 2, 2010, and (as mentioned above) the Commercial Goods Transportation Industry Fair Play Act in 2014.

Legislatures around the country have looked to states such as New York in crafting state legislative bills to curtail independent contractor misclassification, and regulatory agencies in other states have sought to emulate regulatory misclassification enforcement initiatives that New York has conducted for years. The success in detecting misclassification in New York is likely to provide a greater impetus to other states in cracking down on intentional and unintentional independent contractor misclassification.

Businesses that are either built on a 1099 model or use independent contractors and other on-demand and contingent workers to supplement their workforce have at least three alternative courses of conduct to enhance their independent contractor compliance. As noted in our White Paper, businesses, non-profits, and governmental units can minimize their independent contractor misclassification liability by (a) restructuring, re-documenting, and re-implementing their independent contractor relationships; (b) reclassifying their 1099ers, either voluntarily or through an IRS program; or (c) redistributing their independent contractors through the use of reputable and knowledgeable contingent workforce management and staffing solution companies.

In deciding which alternative to choose, such organizations can make use of a program such as IC Diagnostics™.  None of those alternatives are painless, and each takes  dedicated commitment, resources, and considerable management time and attention. But, the process need not be daunting. The only alternative that is universally regarded as unwise is continuing the status quo.

For states like New York, organizations that use 1099ers but fail to do so in a manner compliant with state law represent a source of previously unreported wages and leads to assessments of unemployment and workers’ compensation contributions as well as tax penalties, interest, and assessments. Failing to enhance independent contractor compliance can also generate ancillary liabilities including exposure to class action lawsuits seeking unpaid overtime, minimum wages, and benefits.  These are detailed in hundreds of cases reported in our monthly updates of independent contractor compliance and misclassification.

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

Posted in IC Compliance