New Jersey Supreme Court Sets Low Bar for Workers Who Sue for Independent Contractor Misclassification

More than a year and a half ago, the U.S. Court of Appeals for the Third Circuit, in a class action independent contractor misclassification case, asked the New Jersey Supreme Court to articulate the test that judges should apply in state law wage and hour claims being heard in federal court. The case involved drivers that delivered mattresses for Sleepy’s.  After extensive briefing by the parties and submissions by “friends of the court” organizations, the New Jersey Supreme Court issued its decision yesterday. The ruling: New Jersey will now apply the most challenging test for companies seeking to establish independent contractor status – the so-called “ABC” test found in New Jersey’s unemployment compensation law.  This test is, correspondingly, the most favorable test for workers who sue businesses for independent contractor misclassification.  Hargrove v. Sleepy’s, LLC, No.  A-70-12(072742) (N.J. Jan. 14, 2015).

While some commentators already have begun to suggest that companies operating on a nationwide basis may have to conduct business differently in New Jersey, the decision by the New Jersey Supreme Court imparts a standard no different than what is currently used in New Jersey and many other states for unemployment purposes and in states that use the “ABC” test for unemployment and wage and hour claims, such as Illinois.

What is the ABC Test?

The ABC test is the statutory definition of employee under the New Jersey Unemployment Compensation Act. It presumes an individual is an employee unless the employer can show that:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

Under the ABC test, the New Jersey Supreme Court noted, “[T]he failure to satisfy any one of the three criteria results in an ‘employment’ classification.”

The ABC and other statutory tests for independent contractor status exist in one form or another in more than 20 states in the U.S.  Most of these statutes only govern unemployment and workers’ compensation laws, but (as noted above) some states, including Illinois, use an ABC test for wage and hour claims as well.  (Massachusetts has a form of ABC test for its wage and hour laws also, but the “B” prong substitutes “and” for “or,” which dramatically changes the results in many situations.)

What Tests Were Not Accepted by the New Jersey Supreme Court?

The federal district court judge in this case issued a decision that used the common law test applied by the U.S. Supreme Court in ERISA and tax cases to determine independent contractor status. That lower court decision, which awarded summary judgment to Sleepy’s, was appealed to the U.S. Court of Appeals for the Third Circuit. The Third Circuit, however, asked New Jersey’s highest state court to consider the issue of what test should be applied to determine independent contractor status because, it concluded, “there are at least four distinct employment tests that have been applied under New Jersey law in other contexts (including unemployment, whistleblowing and tort claims) to determine independent contractor/employee status.”

Those tests included the common law test, also called the “right to control” test; the “economic realities” test, which is used in wage and hour cases arising under the federal Fair Labor Standards Act (FLSA); and the so-called “hybrid” test, which was used in a New Jersey Supreme Court case arising under the state’s whistleblower law and has been used in discrimination cases in that state. The fourth test was the ABC test found in New Jersey’s unemployment law.

Why Did the New Jersey Supreme Court Choose the ABC Test?

The New Jersey Supreme Court first noted that the state’s wage and hour laws are remedial statutes and should be liberally construed. Next, the court also noted that the New Jersey Department of Labor had long ago promulgated regulations for use under the state’s wage and hour laws that mirror the criteria identified in the ABC test found in the New Jersey Unemployment Compensation Act.  The New Jersey Supreme Court observed that while such regulations were not binding on a court, they are generally entitled to “great deference.”

The Court concluded that the briefs in the case had advanced no good reason to either depart from the standard adopted by the New Jersey Department of Labor in its regulations to guide employment status determinations or to disregard the long-standing practice of treating both the unemployment and wage/hour laws in tandem.  The Court then held that any employment-status dispute arising under the state’s wage and hour laws should be resolved by utilizing the ABC test set forth in the Unemployment Compensation Act.

The Court observed that although the wage and hour laws in New Jersey use similar language in its relevant definitions to the definition of “employ” under the FLSA, there was no reason to depart from the test adopted by the New Jersey Department of Labor in its implementing regulations. The Court also found that the ABC test provided more predictability and may cast a wider net than the FLSA “economic realities” test. This, the Court noted, “fosters the provision of greater income security for workers, which is the express purpose” of the wage and hours laws in New Jersey. For the same reasons, the Court rejected the common law “right to control” test, which it found originally arose in different contexts unrelated to wage and hour protections.


The new test that now governs New Jersey wage and hour claims is by no means a new standard in that state.  Companies that operate in New Jersey using independent contractors have, for a long time, needed to comply with the New Jersey unemployment law, which has historically used an ABC test for most workers covered by that law.  (There are a number of exceptions in that law for specialized occupations, such as certified court reporters.)

Some early commentators on the decision yesterday by the New Jersey Supreme Court already have begun to suggest that companies operating on a nationwide basis may need to conduct business differently in New Jersey than anywhere else in the nation.  However, the decision by the New Jersey Supreme Court imparts a definitional standard of independent contractors for wage and hour claims that is no more challenging than the current test in a number of other states.

Many states already use an ABC test for their unemployment laws and their workers’ compensation laws. For years, Illinois has had an ABC law used to determine independent contractor status in both the unemployment and wage and hour arenas. Thus, the independent contractor test now being applied in New Jersey for wage and hour laws is no different than the current test under the state’s unemployment statute, and is similar to the laws in many other states for workers being paid on a 1099 basis as independent contractors.


The New Jersey Supreme Court’s decision is not the “game-changer” many commentators have begun to suggest.  New Jersey does not prohibit companies from using independent contractors, nor do any states, although a few states make it extremely challenging.  Instead of shying away from using independent contractors, businesses that rely on independent contractors to supplement their workforces or that use  independent contractor business models need only ensure that they structure, document, and implement their independent contractor relationships in a manner that is compliant with the laws in each state in which they operate as well as under federal law.

While such efforts to enhance compliance are by no means self-evident and require commitment and rigorous adherence to the laws governing a company’s operations, independent contractor compliance is readily attainable in most instances.

Companies seeking to enhance their independent contractor compliance can use IC Diagnostics™ to determine if their independent contractor/1099 relationships in New Jersey and other states are likely to satisfy the applicable federal and state tests for independent contractor status – either as presently structured, documented, and implemented, or as restructured, re-documented, or re-implemented going forward, using the proprietary tools available with IC Diagnostics™.

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

Posted in IC Compliance

$6.5 Million Class Action Settlement Imparts Four Lessons for Companies Seeking to Minimize Independent Contractor Misclassification Liability

A $6.5 million settlement between Lowe’s Home Centers and a class of its home improvement contractors was approved by a federal court judge in California earlier this week. The contractors claim that they had been misclassified as independent contractors instead of employees. The maximum settlement amount, depending on the number of contractors who file claims, is $6,500,000. In addition, the court awarded plaintiffs’ class counsel $1,625,000 in legal fees. Shepard v. Lowe’s HIW, Inc., No. 12-CV-03893-JSW (N.D. Cal. Jan. 12, 2015).  The settlement of this lawsuit permits us to focus on four takeaways (i.e., lessons) for other businesses that rely upon the use of independent contractors to supplement their workforce or that utilize an independent contractor or 1099 model.  Those lessons can be best addressed following a brief description of the lawsuit and its settlement.

The Lawsuit and Settlement

As first reported in our May 28, 2014 blog post, the plaintiffs in this case were home improvement contractors comprised of both individuals and businesses. They alleged that Lowe’s Home Centers offered its customers the opportunity to hire contractors to install products purchased from Lowe’s. Such products included appliances, kitchens, bath and plumbing fixtures, flooring, doors and windows, garage doors, lighting, outdoor fixtures, and insulation. The complaint, which was originally filed in state court, alleged that Lowe’s had the right to control, and did in fact control, all aspects of installation jobs by, including requiring that the installers to identify themselves as “installers for Lowe’s” or by saying “I work for Lowe’s”; wear Lowe’s hats and shirts at work sites; use signs stating “Lowe’s Installation”; attend training by Lowe’s; and comply with Lowe’s production requirements.

The complaint also alleged that:

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

The installers further alleged that Lowe’s failed to provide the installation contractors with an array of benefits that were available to employees, including comprehensive group medical insurance, prescription drug coverage, vision care, group life insurance, paid sick leave, paid vacation, tuition reimbursement, employee discounts for purchases, short and long term disability coverage, a stock purchase plan, and a matching 401(k) savings plan. They also claimed they were entitled to reimbursement, as employees, for all necessary expenses incurred in performing their services.

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

Had the case gone to trial, the maximum amount recoverable for the class would be approximately $33 million. Plaintiffs’ counsel acknowledged, though, that the case presented “complex legal and factual issues” including the risk that class certification would be denied. Those issues, the plaintiffs’ counsel claim, make the maximum settlement amount of $6.5 million for class members a fair and reasonable compromise that is in the best interests of the class members.

Four Takeaways (i.e., Lessons)

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

A common misconception by many businesses is that contracting with an LLC, corporation, or other form of business entity eliminates the likelihood of misclassification liability. Here, the class members covered by the $6.5 million settlement by Lowe’s Home Centers include installation contractors that operate in the form of business entities. Recently, the U.S. Court of Appeals for the Ninth Circuit and the Kansas Supreme Court both held that FedEx Ground had misclassified employees as independent contractors who were operating as business entities or subcontracted additional routes to other drivers.

Some state laws expressly carve out from their definitions of “employee” status a business entity where the hiring party does not exercise direction or control over the performance of the services and meets other requirements. Thus, companies that wish to minimize independent contractor misclassification liability wisely do not rely solely on the fact that the independent contractor is a business entity.

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

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

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

This and similar class action lawsuits illustrate the value of using, in advance of a legal challenge, a methodology such as IC Diagnostics™ to evaluate whether an existing or proposed independent contractor relationship can be legitimately structured as such, and if so, whether it needs to be restructured, re-documented, and re-implemented to maximize the likelihood that those workers will be regarded by the courts and government regulators as independent contractors and not employees.

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

While Lowe’s itself continues to deny any wrongdoing, the cost of the lawsuit, when the company’s own legal fees are included, is likely to exceed $10 million, and Lowe’s is reportedly involved in other independent contractor misclassification lawsuits as well.

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

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

Lowe’s Home Centers reportedly is involved in other independent contractor misclassification litigation.  So, perhaps it is not ideal for a company facing other legal challenges to its classification of workers as independent contractors to restructure, re-document, and re-implement their independent contractor relationships immediately after a class action settlement is approved.

Many companies, however, treat the termination of a class action lawsuit or an adverse determination by a regulatory agency as imparting upon them an obligation to treat the workers in question as employees on a going-forward basis. This overlooks the fact that many businesses can adopt an independent contractor model, even after  the termination of a class action lawsuit or an adverse regulatory ruling, that may well survive future scrutiny under federal and most state laws – provided the business properly engages in bona fide restructuring, conducts proper re-documentation, and implements and follows new, state-of-the-art independent contractor practices. This is one of the reasons some businesses have resorted to methodologies such as IC Diagnostics™ and its proprietary tools such as 48 Factors-Plus™ and the IC Compliance Scale.™

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

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


Posted in IC Compliance

Florida is 19th State to Partner with U.S. Department of Labor to Combat Unlawful Independent Contractor Misclassification

The Florida Department of Revenue is the latest state agency to sign a memorandum of understanding with the U.S. Department of Labor seeking to prevent employees from being misclassified as independent contractors (ICs). This latest federal-state partnership was announced earlier today by David Weil, the new Administrator of the Wage and Hour Division of the U.S. Department of Labor. Dr. Weil re-stated the oft-articulated message from governmental leaders that misclassification of employees as ICs “deprives workers of rightfully earned wages and undercuts law-abiding businesses.” But he also reiterated that 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 . . . .” This is a welcome message to businesses that rely upon the use of bona fide ICs to supplement their workforce and for those companies that are built almost entirely on an IC model.

According to the press release, the memorandum of understanding will “coordinate compliance with both federal and state laws alike” by the Florida and federal governments. The agreement, though, was not made available to the public yet.

Notably, each of the agreements with the other 18 states has been signed by one or more workforce agencies, such as the state labor department or workforce division. Curiously, the only Florida agency that signed this agreement was the state’s revenue department. Although it has responsibility for collecting state unemployment insurance, the Florida Department of Revenue has no role in matters such as violations of the state’s minimum wage and overtime laws, which are often implicated when businesses are found to have misclassified employees as ICs. If we are able to determine why the Florida Department of Labor is not a party to the state’s agreement with the U.S. Department of Labor, we will provide an update to this blog post.

Thirteen of the 19 states that have signed a memorandum of understanding with the U.S. Department of Labor either signed in 2014 or renewed their agreements last year. (California’s and Hawaii’s agreements expired in the second half of 2014 and have yet to be renewed.) In addition to Florida, the states with a memorandum of understanding that is currently in effect are Alabama, Colorado, Connecticut, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Utah, Washington, and Wyoming.

Three Takeaways

1.  The crackdown on IC misclassification has expanded into the Southeast.

Florida is the first state to sign a partnership with the federal Labor Department in 2015, but it signifies a growing crackdown on illegitimate IC misclassification by states in the Southeast, as it joined Louisiana and Alabama as signatories to these types of federal -state partnerships. Companies that conduct business in that region of the country should expect those states that have signed partnership agreements with the federal government to more closely scrutinize IC relationships to determine if they involve “legitimate independent contractors,” to use Dr. Weil’s phrase.

2.  An oft-overlooked form of IC misclassification exposure: unemployment claims

The Florida Department of Revenue’s signature on the memorandum of understanding focuses attention on one type of IC misclassification exposure that many businesses tend to overlook – liability for state unemployment insurance taxes. As we have noted in prior blog posts, unemployment claims create more legal challenges to a company’s use of ICs than any other types of administrative or judicial claims. In our February 5, 2013 blog post entitled “Unemployment Benefit Claims and Independent Contractor Misclassification Liability: A Single Claim by One Worker Can Lead to Disastrous Results,” we outlined how “a single claim won by a misclassified employee for unemployment benefits can lead to the beginning of an array of IC misclassification claims dealing with the company’s other ICs – unless the company engages in best practices.”

We have also noted in our White Paper, which details how companies can minimize the risks of IC misclassification, that “If a business has not paid unemployment contributions to a state fund on behalf of that worker, the initial determination can have the same effect as an adverse audit.” In addition, we noted that once a single worker is found to have been misclassified, the business is then normally charged for unpaid contributions for “all similarly situated” workers, along with costly penalties and fines.

An adverse unemployment determination can also be followed by class action claims for unpaid overtime or minimum wages and/or unpaid employee benefits, as shown by the infamous “Massachusetts Franchise Case” – one of the cases we covered in our February 3, 2013 blog post. That case began as a claim for unemployment benefits by a single janitorial worker who merely claimed he should be eligible for unemployment because he was misclassified as an IC, yet eventually spurred costly litigation lasting over five years against a cleaning company that required him and other custodians to sign franchise agreements.

3.  How to minimize IC misclassification liability

Businesses that wish to minimize IC misclassification liability and legitimize their use of independent contractors can use IC Diagnostics™ to achieve such results. This can start with an assessment of the company’s current level of IC compliance as measured on the IC Compliance Scale™. Depending on the level of IC compliance, alternatives to enhance compliance with IC laws may include restructuring, re-documentation, reclassification, or redistribution.

Where restructuring is suitable, some businesses may need only a little while others may benefit from moderate to substantial restructuring to enhance the likelihood of a successful defense to an unemployment proceeding and other IC misclassification challenges.

Regardless of whether a business’s IC relationships need restructuring or not, documentation of the IC relationship can be critical under most state and federal laws governing the status of workers. Many IC agreements have not been updated since the crackdown on IC misclassification began in 2007 or were never drafted in a manner that minimizes IC misclassification liability. Thus, re-documentation of the IC agreement, including use of state-of-the-art provisions keyed to the relevant legal tests for IC status and the 48 Factors-Plus™ is an essential aspect of IC Diagnostics™.

Other compliance alternatives – reclassification or redistribution of ICs – are more fully described in our White Paper.

Many companies utilizing ICs are well aware that they may not be in full compliance with laws affecting ICs, but find themselves in a form of corporate paralysis, unaware that there are a number of ways they can minimize or avoid IC misclassification liability. For most of those businesses, IC compliance – not only in the areas of labor and tax laws, but also in the area of employee benefits law – is readily attainable under IC Diagnostics™.

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

Posted in IC Compliance

December 2014 Independent Contractor Compliance and Misclassification Update

In the Courts (4 cases)

  • SUPPLIER OF INSTALLATION SERVICES FOR LARGE SATELLITE TV COMPANY CANNOT DISMISS IC MISCLASSIFICATION CLAIM BY INSTALLER. A federal district court in Mississippi last month denied cross-motions for summary judgment in an FLSA class action IC misclassification suit brought against Media Net, a supplier of technical and installation services to DirecTV. The lawsuit was commenced by an installer on behalf of himself and others similarly situated, who alleged that, among other things, Media Net improperly classified installers as ICs instead of employees and thereby failed to pay overtime compensation for all hours worked beyond 40 in a workweek. The court, applying the “economic realities” test, considered: (1) the degree of control exercised by the employer; (2) the relative investments of the worker and the alleged employer; (3) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer; (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship. It held that there were genuine issues of fact regarding the nature and degree of control that Media Net maintained over the installer’s work, including whether the installer could operate as a separate business entity and whether he could perform extra services for his own benefit or needed prior approval from Media Net, as well as the permanency of the relationship. Eberline v. Media Net LLC, No. 1:13-cv-00100 (S.D. Miss. Dec.18, 2014).
  • CLIENT OF STAFFING AGENCY SUCCEEDS IN DEFENSE THAT IT WAS NOT AN EMPLOYER OF CONSULTANT HIRED THROUGH A STAFFING COMPANY AS AN IC. The U.S. Court of Appeals for the Third Circuit affirmed a district court’s grant of summary judgment that an Asian market research consultant was an IC and not an employee of Bristol-Myers Squibb (“BMS”), the company for whom services were being performed. BMS had contacted GfK Healthcare, LP (“GfK”) for help in locating a consultant. GfK in turn contacted a staffing agency, Scientific Search, who identified Yu as a suitable candidate. BMS contracted with GfK for Yu’s consulting services. GfK entered into contracts with Scientific Search and with Yu, stating that Yu would provide consulting services to BMS and report to McGrath. The court found that although some factors supported an employment relationship between Yu and BMS to some extent, “no reasonable jury could conclude that [she] was an employee of BMS.” The court noted that while BMS had some discretion in determining the assignments that the consultant would work on and provided her with office space and equipment during the contract period, it did not set the consultant’s compensation, benefits, or rate and method of payment, and did not have the authority to hire or fire her. The appeals court further found that BMS had no control over payroll, insurance, or tax records for the consultant. Yu v. McGrath, No. 14-1842 (unpublished opinion) (3d Cir. Dec. 30, 2014)
  • 300 DRYWALL INSTALLERS FOUND TO BE MISCLASSIFIED BY U.S. DEPARTMENT OF LABOR, WHO SECURES CONSENT JUDGMENT AGAINST INTERIOR CONSTRUCTION COMPANY. The U.S. Department of Labor announced that, following an investigation against a construction contracting company, General Interior Systems, for misclassifying over 300 drywall installers as independent contractors for failure to pay overtime in violation of the FLSA, the company agreed to settle the matter and enter into a consent judgment filed in federal court. The consent judgment includes a requirement that the company pay $380,000 to drywall installers who regularly worked as many as 60 to 70 hours per week but did not receive overtime compensation. Perez v. General Interior Systems Inc., No. 5:08-cv-00823 (N.D.N.Y. Dec. 2014).
  • STRIP CLUB IN TEXAS AGREES TO SETTLE IC MISCLASSIFICATION SUIT BROUGHT BY EXOTIC DANCERS FOR $2.3 MILLION. A Texas federal district court approved a $2.3 million settlement of FLSA claims by class of exotic dancers that sued Jaguar Gold Clubs in a collective action for failing to pay them minimum wages and overtime compensation. The dancers claimed that the clubs required them to share tips with DJs, house moms, and managers; that the dancers had to pay fees for the shifts that they danced; and that the dancers did not receive any compensation from the Clubs. Although the Clubs argued that the dancers were not employees, but rather “licensees, lessees or independent contractors who worked for their advantage on the premises of another,” the Clubs agreed to settle the case to avoid litigation. Jones v. JGC Dallas, LLC, No.3:11-cv-2743-O (N.D. Tx. Dec. 24, 2014).

Regulatory and Enforcement Initiatives (3 matters)

  • COLORADO RENEWS ITS MEMORANDUM OF UNDERSTANDING WITH THE U.S. LABOR DEPARTMENT TO COMBAT IC MISCLASSIFICATION. The Colorado Department of Labor and Employment renews its partnership with the Wage and Hour Division of the U.S. Department of Labor on December 5 in an effort to more effectively share information and conduct joint compliance activities to combat worker misclassification. Dr. David Weil, the Wage and Hour Administrator, stated in a DOL News Brief that, “This memorandum of understanding sends a clear message that we are standing together with the state of Colorado to protect workers and responsible employers and ensure everyone has the opportunity to succeed.”
  • U.S. LABOR DEPARTMENT SECRETARY FOCUSES ON IC MISCLASSIFICATION IN RECENT PRESENTATION ON WORKPLACE LAW. Independent contractor misclassification was among the topics addressed in a presentation entitled “Enforcement Matters: How Workplace Law Enforcement Can Boost Americans’ Wages and Strengthen the Economy,” presented on December 4 by Secretary of Labor Thomas E. Perez. In his remarks, Secretary Perez singled out cable installers, truck drivers, and information technology workers as “the kinds of folks to face the abusive and growing practice of worker misclassification [as independent contractors].” Although Secretary Perez noted that there are individuals who are legitimately classified as independent contractors and that they play an important role in the economy, he expressed his concern that many companies that “call . . . employees independent contractors [are] stripping them of rights and benefits in the process [and] dodging [their] own tax obligations as an employer.” Secretary Perez described misclassification as a “triple whammy.” He stated, “It rips off the workers, of course; it cheats all the employers who are playing by the rules; and it also undermines the treasury.”
  • RHODE ISLAND ESTABLISHES TELEPHONE TIPLINE TO REPORT IC MISCLASSIFICATION. The Rhode Island multi-agency task force charged with eliminating IC misclassification has created an anonymous telephone tipline to allow workers and others to report employers who may be misclassifying employees as ICs. Established in June 2014, the Task Force is comprised of members of the Rhode Island Department of Labor and Training, the Division of Taxation, the Department of Business Regulation, the Attorney General’s Office, the Public Safety Commission, and the Workers’ Compensation Division. Informational seminars and flyers have been provided by some of the Task Force members, including materials mailed in September 2014 by the Department of Labor and Training to 32,000 employers in Rhode Island.

On the Legislative Front (1 matter) 

  • TEXAS BILL SEEKS TO CRACK DOWN ON IC MISCLASSIFICATION IN THE CONSTRUCTION INDUSTRY BY PENALIZING NON-REPORTING OF EMPLOYEES MISCLASSIFIED AS IC’S. Texas state Representative Senfronia Thompson (D-Houston) introduced a bill (HB 434) on December 3 seeking to curtail misclassification of workers in the construction industry by requiring construction businesses to report the classification status of all construction employees. The bill creates graduated penalties to construction employers for failing to report workers who have been misclassified as ICs. The proposed legislation would impose penalties for a first offense of $100, and for a second offense $1,000, for each employee not reported to the Texas Workforce Commission.


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

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Posted in IC Compliance

November 2014 Independent Contractor Compliance and Misclassification Update

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

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

In the Courts (6 cases)

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

Regulatory and Enforcement Initiatives (1 matter)

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

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

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