New GAO Report on Contingent Workforce Shows 85% of Independent Contractors Are “Content with Their Employment Type”

A comprehensive government report on the contingent workforce made public two days ago revealed surprising data about independent contractors, finding that 85% of independent contractors “appeared content with their employment type.” Perhaps even more unexpected is that significantly more independent contractors (57%) were “very satisfied” with their jobs than those who held standard full-time employment (45%).  These and other statistical conclusions, which seem to counter viewpoints expressed by many legislators, government regulators, and commentators that wish to curtail the use of independent contractor arrangements in favor of employment relationships, were contained in a report released to the public two days ago by the U.S. Government Accountability Office (GAO), an independent, non-partisan governmental agency.

The report, entitled “Contingent Workforce: Size, Characteristics, Earnings, and Benefits”, was issued on April 20, 2014 and made public 30 days later on May 20, 2015.  It analyzes all types of contingent workers, from employees who work for temporary agencies to independent contractors and self-employed workers.  The report includes a number of specific empirical conclusions that focus on independent contractors, as discussed below.

The GAO’s Principal Findings Regarding Independent Contractors

1.  Independent contractors may comprise as much as 10% of the entire U.S. workforce. The report notes that according to the U.S. Bureau of Labor Statistics (BLS), 31% of the entire U.S. workforce worked in alternative employment arrangements, which are oftentimes referred to as the “contingent workforce.”  (Table 3)  The report described the “contingent workforce” as a mixed group of (1) agency temps, (2) direct-hire temps, (3) on-call workers and day laborers, (4) contract company workers, (5) independent contractors, (6) self-employed workers, and (7) standard part-time workers.  The first four categories comprise what the report refers to as “core contingent workers” – all four of those categories totaled 5.6% of the workforce.  Independent contractors were found to comprise 7.4% of the total U.S. workforce while self-employed workers amounted to 4.4%. Both of these categories of workers, who are typically issued Form 1099s, comprised  slightly under 12% of the workforce.

The report acknowledged that “Labor experts have not reached consensus on which arrangements represent contingent work.”  The GAO Report therefore reports on data not only from the BLS study but also from other reliable sources of information about the contingent workforce.  One such source, as noted in the GAO Report, is the General Social Survey (GSS), a study that was conducted by the University of Chicago and released in March 2015. The GSS found that just over 16% of the workforce was comprised of independent contractors and self-employed workers. Thus, extrapolating from these two studies suggests that independent contractors alone may account for as much as 10% of the entire American workforce.

2.  Independent Contractors are more satisfied with their work arrangements than regular full-time employees. Four types of contingent workers were asked “Would you prefer a different type of employment?”  (Table 12) Approximately 50% of agency temps and on-call/day workers said they wanted a different type of work.  In contrast, under 10% of independent contractors and self-employed workers responded that they preferred a different type of work.  Conversely, whereas less than half of all temps and on-call/day workers said they would not prefer a different type of working arrangement, the GAO found that “more than 85% of independent contractors and self-employed persons appeared content with their employment type.”

In perhaps the most revealing statistic in the entire report, the GAO compared job satisfaction among non-contingent (traditional) employees and selected types of contingent workers.  It found that 45% of regular full-time workers were “very satisfied” with their jobs, whereas 57% of independent contractors were “very satisfied” with their working arrangement – a 25% higher job satisfaction rate for independent contractors. (Table 13) Likewise, fewer independent contractors said they were “Not at all satisfied” or “Not too satisfied” with their jobs than did regular full-time workers (8% vs. 9.5%).

These conclusions seem to undercut the popular notion by most commentators and many state and federal legislators and regulators that independent contractor status is contrary to the welfare and best interest of most 1099 workers including on-demand workers in the sharing or “gig” economy.  This presumption is based on the fact that workers in non-traditional working arrangements do not have job protections enjoyed by traditional employees, such as workers compensation and unemployment benefits, overtime pay and minimum wage, eligibility for employee benefits, the right to unionize, and the right to be free from discrimination in the workplace.  Nonetheless, the GAO Report seems to empirically rebut this presumption and the notion that workplace dissatisfaction is rampant among contingent workers.  Even the four types of working arrangements that comprise the category labeled as “core contingency workers” had a relatively low job dissatisfaction rate of under 20%.

3.  Most independent contractors and other contingent workers regard their fringe benefits as “good.” The relatively low job dissatisfaction rate among independent contractors and even among the four types of core contingency workers seems to be influenced in large part by yet another finding that runs counter to popular thinking: that contingent workers are unhappy about their level of fringe benefits.  The GAO Report finds that while fewer contingent workers than full-time standard employees “agreed that their fringe benefits were good,” 61% of independent contractors said their fringe benefits were good and 63% of the core contingency workers were satisfied with their fringe benefits.  (Table 11).  This result suggests that the definition of “fringe benefits” may be elusive and depend on the respondents’ point of view.  Contingent workers as a whole, including independent contractors, may well regard a flexible work schedule and the ability to choose or reject work engagements to be as valuable a fringe benefit as regular full-time workers regard paid vacation and sick days.

4.  Independent contractors are more likely to be older, male, White non-Hispanic, and college-educated than those who hold standard full-time jobs. The GAO provides an extensive statistical analysis of the demographics of the contingent workforce including independent contractors and compares them to traditional full-time workers.  (Enclosure IV)  Here are a few notable demographic findings:

  • Whereas the average age of full-time regular employees is 41, the average age of independent contractors is 46.
  • While only 2% of regular full-time workers are over 65 years of age, over 8% of independent contractors are of over 65; similarly, over 27% of independent contractors are age 55 and above, whereas just over 14% of regular full-time workers are over 55.
  • Men are far more likely to be independent contractors than women.
  • White, non-Hispanics are far more likely to be independent contractors than Blacks, Hispanics, and “Other non-Hispanics.”
  • Educational levels of independent contractors roughly mirror the educational levels of full-time regular employees.

5.  Contingent workers including independent contractors are found in virtually all industries, but some industries have more contingent workers than traditional employees. According to the GAO Report, the following industries were found to have more contingent workers than traditional employees:  construction; administrative services; educational services; arts, entertainment, and recreation; building and grounds cleaning and maintenance; construction; and transportation and moving of commercial goods. (Table 22)  These industries where contingent workers are more prevalent are among those that the U.S. Department of Labor and state workforce agencies have targeted for investigations of workplace misclassification.

The GAO Report Does Not Address Misclassification of Independent Contractor as Employees, But the Need for Independent Contractor Compliance Is More Pressing Than Ever

Unlike past GAO reports that have dealt with the contingent workforce including independent contractors, this report barely mentions misclassification.  Yet, it has been our experience during the years we have been publishing this blog that many independent contractor relationships are not structured, documented, and implemented in compliance with federal and state independent contractor laws.

Those companies, governmental bodies, and non-profits that use independent contractors to supplement their workforce, and especially those ever-increasing number of on-demand companies in the sharing economy that are based on an independent contractor business model, all too often overlook the need to stay well ahead of curve when it comes to independent contractor compliance.  Even the most sophisticated and well-known enterprises have been caught in the ongoing crack-down on companies that have allegedly  failed to comply with an array of different independent contractor laws.  Such companies as FedEx, Uber, Lyft, Macy’s, Microsoft, Google, and Lowe’s are just a few of the many businesses that have been targeted by class action lawyers and government regulators for having allegedly failed to structure, document, and implement their independent contractor relationships in compliance with independent contractor laws.

As more fully described in the 2015 Update to our White Paper, those businesses that are reliant on independent contractors can meaningfully enhance their independent contractor compliance or minimize or eliminate independent contractor misclassification liability.  One methodology is IC Diagnostics™, a comprehensive proprietary process for companies seeking sustainable, practical, customized solutions to the risk of misclassification exposure. While this new GAO Report indicates that an overwhelming number of those individuals in independent contractor positions are content with that type of work arrangement, that does not mean that a company’s independent contractor relationships will pass legal scrutiny.  To achieve that result oftentimes requires a dedicated corporate resolve to restructure, re-document, and/or re-implement a company’s independent contractor relationships in a state-of-the-art manner consistent with applicable state and federal laws.

Authored by Richard Reibstein.   

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

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April 2015 Independent Contractor Compliance and Misclassification News Update

The leading news in the area of independent contractor compliance and misclassification in April 2015 is the settlement by Macy’s and its logistics company in New Jersey with the delivery drivers and their helpers used by Macy’s to deliver furniture, bedding, and other home furnishings and goods to its customers.  This is the second of two IC misclassification cases that Macy and its logistics companies settled in the past two months. Collectively, these cases were settled for $6.8 million. A review of the facts alleged in those cases indicates that the drivers and their helpers may well have been capable of being properly classified as independent contractors, but the structure, documentation, and implementation of the relationship between the logistics company and the drivers was severely wanting.  Companies retaining drivers directly, or retaining logistics companies that in turn retain drivers, to deliver their merchandise can comply with federal and most state IC laws. Many such companies have utilized IC Diagnostics™ to minimize their IC misclassification exposure. This type of diagnostic tool can also be used in some situations to defend against IC misclassification claims.  Going forward, companies such as Macy’s and/or its logistics companies need not reclassify drivers; instead, they can generally restructure, re-document, and re-implement their independent contractor relationships in a manner that enhances their IC compliance.

Also in April, the publishers of this blog released the 2015 Update of their White Paper on minimizing the risks of independent contractor misclassification.  The White Paper can be found on this site by clicking here or by accessing our “Resources/Links” on the side and/or the top of this page.

In the Courts (5 cases)

  • MACY’S AND ITS NEW JERSEY LOGISTICS COMPANY TO PAY $2.8 MILLION TO SETTLE MISCLASSIFICATION CASE BY DRIVERS. Macy’s and its New Jersey logistics company, HomeDeliveryLink (HDL), have agreed to settle for $2.8 million the independent contractor misclassification claims brought under New Jersey state law by a class of 300 furniture delivery drivers and helpers. This follows a settlement the prior month by Macy’s West Stores, Inc. and its logistics management company, which agreed to pay $4 million to settle a class action misclassification lawsuit brought in California by over 600 truck drivers and their helpers. The NJ drivers alleged, among other things, that they were required to use delivery helpers that HDL approved, were given delivery lists by HDL, had no input over and were required to adhere to rigid schedules or risk facing discipline, and that their appearance including shaving requirements was regulated and they were required to use uniforms bearing the retailer’s logo. The complaint also alleged that the drivers and helpers were jointly employed by Macy’s and HDL and that the companies violated New Jersey laws including the unlawful pay deductions and failure to pay overtime compensation. Under the proposed settlement, which is subject to court approval, class counsel will receive 33% of the settlement amount. Badia v. HomeDeliveryLink, Inc., No. 2:12-cv-06920 (D.N.J. April 15, 2015).
  • BOSTON TAXICAB DRIVERS QUALIFY AS IC’S UNDER MASSACHUSETTS IC LAW.   On April 21, 2015, the Massachusetts Supreme Judicial Court held that Boston licensed taxicab drivers are independent contractors and were not misclassified as ICs or deprived of minimum wages, overtime pay, tips and protections afforded under the state wage laws. The court determined that the Boston Police Department Rule 403, which is a comprehensive set of regulations for the Boston taxicab industry that was promulgated by the police commissioner pursuant to a delegation of authority by the Legislature, “neither precludes taxicab owners from entering into employer-employee relationships with drivers nor recasts drivers as independent contractors where they would otherwise be considered employees.” Rule 403 was viewed by the court as creating a “regulatory regime over an industry in which taxicab owners, radio associations and drivers may operate as separate businesses.” The court rejected the cab owners’ argument that the Massachusetts state independent contractor statute does not apply to the taxicab industry because the industry is separately regulated by the City of Boston as a public utility. Instead, the court found that the statute applied. However, the court found that under the Massachusetts statute, referred to as an “ABC” test for independent contractor status, the defendants satisfied all three prongs of the test: (A) the drivers were only subject to minimal control and direction by the medallion owners and radio associations which engaged them; (B) the transportation of passengers for fares was not in the ordinary course of the medallion owners’ or radio associations’ businesses; and (C) the drivers were engaged in independently established businesses. Sebago v. Boston Cab Dispatch, Inc., No. SJC-117579 (Sup. Jud. Ct. Mass. April 21, 2015).
  • WORKFORCE AGENCY MAY HAVE MISCLASSIFIED GOVERNMENT CONTRACTOR PROVIDING JOB DEVELOPMENT AND COACHING SERVICES. A Wisconsin federal judge has denied summary judgment to the Wisconsin Department of Workforce Development in a misclassification case brought under the federal Fair Labor Standards Act for allegedly unpaid minimum wages and overtime by a government vendor classified as an independent contractor who provided job development and job coaching services to the Department. In response to the Department’s motion for summary judgment, the plaintiff submitted evidence that the Department had issued a 7-page document called “technical specifications” setting forth numerous requirements and guidelines for vendors in conducting their work, some of which were quite specific, explaining everything the vendor should allegedly do when she meets with a client and the information she needs to gather and report to the department. The plaintiff also submitted another document called “agreement for services,” which imposed a number of additional requirements related to reporting and “performance outcomes.” In addition, the document states that the Department “will review performance outcomes and require appropriate action as needed.” Another part of the document required plaintiff to “accept all referrals made for all consumers authorized.” Further, the plaintiff submitted evidence that the department supplied her the computer, printer and software necessary to do her job, provided trainings and annual performance reviews, and limited her ability to do other work by restricting the potential clients she could solicit. Finally, the plaintiff submitted a document in which the Department’s own Division of Unemployment Insurance concluded that the vendor was an employee under Wisconsin law for unemployment purposes because of the amount of control the Department had over the way she performed her job. The court stated that, although the Division’s conclusion is not binding on the court, it is “telling that even the department itself has classified plaintiff as an employee for some purposes.” In the court’s view, this evidence submitted by the vendor created genuine issues of material fact that need to be decided at trial with respect to whether she was an independent contractor or employee. Williams v. Wisconsin Department of Workforce Development, No. 13-CV-794-BBC (W.D. Wisc. April 3, 2015).
  • IC MISCLASSIFICATION CASES CONTINUE TO PROLIFERATE ACROSS THE COUNTRY. In California, a state judge tentatively agreed to grant class action certification to a class of up to 800 exotic dancers claiming they were misclassified by Plan B Strip Club as independent contractors and that the club thereby engaged in wage/hour violations under the California Labor Code. Similarly, a New York federal district judge granted certification in a collective action under the Fair Labor Standards Act and New York Labor Law where three disc jockeys and 113 dancers who provided services at the VIP Club alleged they were improperly classified as independent contractors, not paid any wages at all, and were compensated only in tips. Sprunk v. Plan B Club, No. BC471171 (Super. Ct. Cal. Apr. 15, 2015); Romero v. ABCZ Corp, Sushi Fun Dining, Pacific Club Holdings, 20 West Enterprises Corp., and Selim “Sam” Zherka, No. 14 Civ. 3653 (AT)(HB) (S.D.N.Y. Apr. 28, 2015).

On the Legislative Front (1 matter)

  • NORTH CAROLINA. North Carolina House of Representatives introduces bill (HB482) on April 1, 2015 seeking to establish the “Employee Fair Classification Act.” The proposed law provides for the creation of an employee misclassification task force to, among other things, investigate reports of employee misclassification and coordinate with and assist all relevant North Carolina agencies in recovering any back taxes, wages, benefits, penalties, or other monies owed as a result of misclassification of employees as independent contractors. The bill would also provide for additional civil penalties for repeated violations. In addition, the bill includes a list of 8 specific factors to be considered when determining independent contractor/employee status, although other factors could also be considered.

Regulatory and Enforcement Initiatives (1 matter)

  • A U.S. Department of Labor (DOL) investigation into illegal misclassification practices of 16 employers in Arizona and Utah results in consent judgments requiring the companies to pay $600,000 in back wages and liquidated damages to 1,000 construction workers, as well as $100,000 in civil penalties. In a News Release dated April 2, 2015, the Wage and Hour Division of the DOL explained that “CSG Workforce Partners, Universal Contracting LLC and Arizona Tract/Arizona CLA required the construction workers to become ‘member/owners’ of limited liability companies, stripping them of federal and state protections that come with employee status.” A joint effort was made among the DOL, U.S. Department of Justice, and the state of Utah, as well as Utah’s Worker Classification Coordinated Enforcement Council. Secretary of Labor Thomas E. Perez stated in an article in the Huffington Post on April 23, 2015: “[T]he state [of Utah] ultimately outlawed the defendants’ business model by requiring workers compensation and unemployment insurance for members of LLCs. In response, the companies packed up, headed to Arizona, and set up shop under a new name, but with the same scheme. But employers can’t just run to another state or change their name. When we find business models that violate the law, we will hold them accountable no matter where they go.”

Other Noteworthy Matters (2 matters)

  • WEST COAST PORT TRUCKERS CLASSIFIED AS IC’S GO ON STRIKE SEEKING UNION REPRESENTATION. Manifesting the ongoing labor unrest in the ports of Long Beach, San Diego, and Los Angeles, California by short-haul truckers against several drayage companies, hundreds of drivers go on strike on April 27, 2015. As reported in an article by Reuters, the port truckers work for Harbor Rail Transport, Intermodal Bridge Transport, Pacer Cartage, and Pacific 9 Transportation. They claim that they were misclassified as independent contractors instead of employees. The drivers, who are not currently represented by the Teamsters or other unions for purposes of collective bargaining, are reportedly striking as a means of pressuring the companies to voluntarily reclassify them as employees entitled to all of the protections of the wage/hour, unemployment, workers’ compensation, and federal labor laws and thereby enabling them without further governmental action to be represented by the Teamsters Union.
  • 2015 UPDATE OF WHITE PAPER ON “INDEPENDENT CONTRACTOR MISCLASSIFICATION: HOW TO MINIMIZE THE RISKS.” The publishers of this blog issued our 2015 Update of our White Paper, the most widely-viewed material prepared by lawyers representing companies in independent contractor compliance and misclassification matters. The 2015 Update is a comprehensive expansion of the White Paper – over 12,000 words including 115 endnotes providing over 100 links to content available on the Internet, including new laws, recent judicial decisions, academic studies, government reports, legal publications, and cross-references to many of our 125 blog posts on the subject of independent contractor compliance and misclassification. Our 2015 Update continues to detail three ways by which companies that use independent contractors can minimize or avoid future independent contractor misclassification exposure: bona fide restructuring and re-documentation, using IC Diagnostics™; reclassification, either under a government program or voluntarily; and redistribution of independent contractors, using a workforce management or staffing company. See blog post dated April 26, 2015.

Authored by Richard Reibstein.  Compiled by Janet Barsky. 

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

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2015 Update of the White Paper on “Independent Contractor Misclassification: How Companies Can Minimize the Risks”

Five years ago today, we issued a White Paper entitled “Independent Contractor Misclassification: How Companies Can Minimize the Risks,” which we updated in May 2012. During those five years, the White Paper has been the most widely viewed publication written by lawyers representing management on the subject of misclassification of employees as independent contractors.  This 2015 Update is a comprehensive expansion of the White Paper – over 12,000 words including 115 endnotes providing over 100 links to content available on the Internet, including new laws, recent judicial decisions, academic studies, government reports, legal publications and cross-references to many of our 125 blog posts on the subject of independent contractor compliance and misclassification. 

Our White Paper continues to detail three ways by which companies that use independent contractors can minimize or avoid future independent contractor misclassification exposure:

  • Bona fide restructuring and re-documentation, using IC Diagnostics™.
  • Reclassification, either under a government program or voluntarily.
  • Redistribution of independent contractors, using a workforce management or staffing company.

These alternatives work for virtually all companies that use independent contractors – whether to supplement their workforce or to refer or offer qualified service providers to customers or clients as part of their business model. The same proprietary tool used to minimize independent contractor misclassification liability – IC Diagnostics™ – can be used to defend against misclassification claims brought in the courts and before administrative agencies.

The three years since the last update of our White Paper coincides with the period when independent contractors have become an integral resource in the sharing economy, where organizations such as Uber and other tech start-ups have avoided or limited their use of employees in favor of on-demand contract workers.  While on the one hand, new companies may wish to emulate the most successful on-demand business models, on the other hand they do not want to become a defendant like Uber, which was recently unable to dismiss a class action challenge to the allegedly imperfect structure, documentation and implementation of its driver relationships and is now scheduled to face scrutiny by a jury.

The 2015 Update of the White Paper also provides detailed insights into six related topics:

  • How independent contractor misclassification has arisen, including the economic and business advantages of using independent contractors, a period of lax enforcement prior to the recent crackdown by federal and state regulators and legislators, and the difficulty experienced by companies trying to comply with various legal tests for independent contractor status – all of which has led to the increased use of independent contractors and a rise in intentional and unintentional misclassification.
  • The costly consequences of misclassification, including unpaid overtime, minimum wages, employee expenses and other employee payments, as well as claims for employee benefits and exposure under the Affordable Care Act (Obamacare).
  • Federal and state regulatory enforcement initiatives by the U.S. Department of Labor, the IRS, and state workforce agencies.
  • Legislative initiatives, including more than two dozen states that have passed laws designed to curtail independent contractor misclassification and a dozen federal bills that have not been enacted but have spurred state legislative actions.
  • The proliferation of class action lawsuits resulting in multi-million dollar settlements and judgments.
  • The impact unions have played in the crackdown on independent contractor misclassification and the potential for unionization of workers re-characterized as employees by the courts or administrative agencies.

The 2015 Update of our White Paper can be accessed here. The 2015 White Paper is also available in pdf format.

By Richard J. Reibstein, Lisa Petkun and Andrew Rudolph.

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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, Uber and Lyft are now at risk that they might be found by juries to have failed to structure, document, or implement their IC relationships in compliance with the 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