August 2015 Independent Contractor Compliance and Misclassification News Update

August 2015 was not a vacation month for independent contractor cases. No less than seven major litigation events transpired this past month, highlighted by more of the same as well as some new developments. Several companies in different industries were subjected to judgments ranging as high as $5 million for IC misclassification, including cases involving a courier company, logging company, restaurant business, and cab company. New IC misclassification class actions were brought against another tech start-up company and a home improvement company. But the highlights of this month were the NLRB’s joint employer decision that could impact IC misclassification cases, Uber’s effort to deny drivers class action status, and FedEx Ground battling through yet another protracted litigation. Meanwhile, on the administrative initiatives front, the U.S. Department of Labor has secured the agreement of two more states’ workforce agencies to coordinate enforcement against companies that misclassify employees as ICs. What is the upshot of this month’s IC compliance and misclassification news? That enhancing IC compliance remains paramount for any company that uses ICs; only by doing so can other businesses that make use of 1099ers minimize or avoid IC misclassification liability. As noted in our White Paper on how to minimize or avoid such exposure, use of IC Diagnostics™ can serve those companies that proactively seek to avoid being the next case study in our monthly news updates.

In the Courts (8 cases)

  • NATIONWIDE COURIER COMPANY SADDLED WITH $5 MILLION JUDGMENT FOR IC MISCLASSIFICATION. The U.S. Department of Labor obtained a $5 million consent judgment against National Consolidated Couriers, Inc., a nationwide courier company headquartered in the Bay area, in an independent contractor misclassification case brought in a California federal district court. Among other things, the DOL had alleged that the drivers were subject to discipline by the company. The $5 million consent judgment consisted of $2.5 million for unpaid minimum wage and overtime compensation and an additional $2.5 million as statutorily authorized liquidated damages payable to 600 drivers nationwide. Perez v. National Consolidated Couriers, Inc., Case 3:15-cv-03224 (N.D. Cal. July 15, 2015).
  • NLRB ISSUES NEW JOINT EMPLOYER RULING AFFECTING COMPANIES THAT OUTSOURCE WORK; RULING CAN BE APPLIED IN THE IC ARENA. On August 27, 2015, the National Labor Relations Board held in a watershed decision issued that rights reserved by a company in an agreement with a third party supplier of labor services to set specific terms or conditions over workers who provide services can be sufficient control to establish a joint employer relationship with the third party labor supplier – and thereby expose the company to being swept into a union organizing campaign over the workers providing services – even if such rights are not exercised. As noted in our August 30, 2015 blog post, this new NLRB decision, which focuses not merely on the exercise of direction and control but also on the right to exercise control, may be used by unions to seek to target companies that outsource work to staffing companies that use ICs – unless the staffing company properly structures, documents, and implements the IC relationships in a manner that complies with applicable IC laws. That can oftentimes be accomplished, but only by the use of state-of-the-art IC agreements in situations where there is little practical need to retain or exercise other than minimal direction and control over the workers’ performance. Brown-Ferris Industries of California, Inc., d/b/a BFI Newby Island Recyclery, 362 NLRB No. 186 (2015).
  • HOME IMPROVEMENT COMPANY SUED UNDER CONSTRUCTION INDUSTRY IC MISCLASSIFICATION LAW IN NEW JERSEY BY INSTALLERS. Lowe’s Home Centers, a nationwide home improvement retailer, is sued by installers in a class action filed in New Jersey state court alleging employee misclassification under the New Jersey Construction Industry Independent Contractor Act. Lowe’s offers installation services to its customers for certain products and engages independent contractor installers to perform the services. The complaint alleges that Lowe’s retained the power to direct and control the installer’s performance by requiring them to follow Lowe’s Installer Standards of Courtesy and Professionalism, which set forth, among other things, specific instructions and rules regarding how installers are to perform their services, what to wear, the timing of the completion of installation projects, and the amounts of commercial, workers’ compensation, and employers’ liability insurance each installer had to maintain in order to perform services for customers of Lowe’s. Mittl v. Lowe’s Home Centers, LLC, No. L2142-15 (Super. Ct. N.J. August 3, 2015).
  • UBER LOSES MOTION SEEKING TO DEFEAT CLASS ACTION STATUS OF LAWSUIT AGAINST IT BY 160,000 DRIVERS. As reported in our August 6, 2015 blog post, Uber and its drivers argued on that date to a federal court judge in the Northern District of California whether the drivers’ lawsuit should be certified by the court as a class action. The publishers of this blog post predicted that Uber would have a difficult time in its effort to convince the court not to grant the drivers’ motion for conditional class action status. The court’s decision was issued in September and will be included in our September update. Readers may review our comprehensive blog post on the decision by clicking here.
  • CAB COMPANY TO PAY $3 MILLION IN DAMAGES IN IC MISCLASSFICATION SUIT FILED BY U.S. DOL. The U.S. Department of Labor announced in a news release on August 18, 2015 that a federal judge ruled in California that drivers for Stanford Yellow Taxi Cab had been misclassified as independent contractors. Stanford reportedly has business relationships with corporate account holders such as Google and the Four Seasons and Rosewood hotels. The Labor Department’s lawsuit had sought to enjoin Stanford Cab, who claimed the drivers were ICs, from threatening and intimidating its drivers who were cooperating with federal investigators, including an instance where Stanford allegedly fired a worker just days before trial to discourage his witness testimony. The judgment issued by the court requires the company to pay nearly $3 million in back wages and damages to dozens of drivers.
  • FEDEX GROUND WINS RIGHT TO RE-TRY IC MISCLASSIFICATION CASE TO A JURY. After a federal court in Missouri awarded partial summary judgment in favor of FedEx Ground drivers, the huge courier company appealed to the U.S. Court of Appeals for the Eighth Circuit. The appellate court agreed with FedEx that summary judgment was improperly granted in favor of the drivers because it was up to a jury, not a judge, to decide as a factual matter if the drivers are ICs or employees where Missouri law provides that a worker’s employment status is an issue of fact. In this case, where FedEx introduced evidence that the drivers could hire others to do their jobs and could sell their territories, the federal appeals court determined that a genuine factual dispute existed as to whether the drivers were ICs employees, and that issue should have been submitted to a jury. Gray v. FedEx Ground Package System, No.14-3232 (8th Cir. August 21, 2015).
  • ON DEMAND TECH START UP SUED FOR IC MISCLASSICATION BY ITS “NINJA” DRIVERS. Washio Inc., an on-demand dry cleaning and laundry service, has been sued in an IC misclassification class action by drivers referred to by Washio as “ninjas.” The ninjas, who are requested through a mobile app, pick up Washio customers’ dirty laundry, bring it to the Washio cleaning facilities, and deliver the clean items back to the customers. In seeking damages for, among other things, unpaid overtime compensation, meal and rest periods, and unreimbursed work expenses under state law, the proposed class representatives allege that they were required to follow company policies, were sometimes required to work more than 8 hours in a day and/or more than 40 hours in a week; were not usually in business for themselves; and they did not have a substantial investment in the business. Luqman v. Washio Inc., No. BC592428 (Cal. Super. Ct. Los Angeles County, August 25, 2015).
  • GEORGIA RESTAURANT TO PAY $2 MILLION FOR MISCLASSIFYIING ITS RESTAURANT EMPLOYEES AS IC’S. Wang’s Partner Inc. (doing business as Hibachi Grill and Supreme Buffet) was ordered by a Georgia federal district court to pay nearly $2 million in back wages and liquidated damages to 84 restaurant employees who were misclassified as ICs. As reported in our December 2013 monthly update, a complaint had been filed in federal court for the Northern District of Georgia by the U.S. Department of Labor on December 16, 2013 alleging that by misclassifying the servers and kitchen staff as ICs, Wang’s failed to pay them at least the minimum wage, failed to pay overtime compensation, and did not maintain accurate records of hours worked and wages paid. Perez v. Wang, No. 1:13-04162 (N.D. Ga. Aug. 11, 2015).

Regulatory and Enforcement Initiatives (2 items)

  • HALF OF ALL STATES HAVE NOW SIGNED JOINT ENFORCEMENT AGREEMENTS WITH THE U.S. DEPARTMENT OF LABOR. Idaho and Alaska became 24th and 25th states to sign a Memoranda of Understanding with the U.S. Department of Labor to coordinate efforts to crack down on employee misclassification. According to a News Brief dated August 6, 2015 by Secretary Perez of the DOL, the Idaho Department of Labor entered into a three-year Memorandum of Understanding with the U.S. DOL to protect the rights of employees by preventing their misclassification as independent contractors or in other non-employee classifications. Likewise, a News Brief dated August 13, 2015 announced that the Alaska Department of Labor and Workforce Development signed a similar agreement with the U.S. DOL on that date.
  • LOGGING AND TRUCKING COMPANY FOUND TO HAVE MISCLASSIFIED DOZENS OF ITS WORKERS AS IC’S. An investigation by the U.S. Department of Labor of Fitzhugh Contracting LLC, an Alabama logging and trucking company, uncovered that the company was misclassifying workers as ICs instead of employees and had unlawfully denied overtime wages to 46 workers under the Fair Labor Standards Act (FLSA). As reported in a U.S. DOL News Release dated August 18, 2015 by Secretary of Labor Perez, the company had misclassified 70% of its workers as independent contractors and agreed to pay the workers a total of $112,735 in damages.

Written by Richard Reibstein.

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

Compiled by Janet Barsky. 

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Posted in IC Compliance

Why Did Uber Lose In Court Today? And How It Can Still Avoid Future Misclassification Liability

Today was not a good day for Uber. It suffered its second setback from the federal district court judge hearing the independent contractor misclassification class action case brought by Uber drivers against the giant ride-sharing company in its own backyard in Northern California.

Why did Uber lose today?

Because the odds were stacked against it on the motion for “conditional” class certification, which has a rather low legal burden for plaintiffs.

As we noted in our blog post the day the court heard the motion, Uber did not realistically have a great chance at defeating the initial motion for class certification. Indeed, an Uber spokesperson was quoted as saying “we are not surprised by this Court’s ruling.”

The 68-page ruling by the Judge Edward M. Chen did not decide the merits of the case. Rather, it decided that one of the two claims asserted by the drivers could be maintained, at least initially, as a class action. The claim proceeding as a class claim is the “tip claim,” where the drivers argue that they are entitled to the full amount of all tips received and that Uber is not permitted to retain any portion of the tips. The claim that was not permitted to proceed as a class action, at least for the time being, is the expense reimbursement claim, where drivers argue that Uber, as their employer, must reimburse them for all necessary expenses such as car maintenance and fuel.

The court also limited the drivers who may be part of the class. The class will only include drivers for UberX, a ride-sharing service where drivers use their own cars, UberBlack, a high-end car service, and Uber SUV.  Further, the court ruled that the class will only include drivers who began working for Uber before June 2014 and those who work for and are paid by Uber or an Uber subsidiary – not drivers who work and are paid by so-called intermediary transportation companies.

An article published earlier today in the New York Times by tech reporter Mike Isaac quoted the author of this blog post commenting about the significance of the court decision today:

“‘The certification is a prelude to a bigger battle,’ said Richard J. Reibstein, a partner in the labor and employment practice at the law firm Pepper Hamilton. ‘This motion is only a legal skirmish,’ he said. ‘The real issue is whether the drivers are independent contractors or employees. If they are employees, then Uber will be hard-pressed to deliver profits for its investors.’”

Now the real fight starts. Once the class members are notified, there will be a year or two of intensive and costly pre-trial discovery including document demands and depositions of drivers and Uber officials. Uber will likely then try, for a second time, to defeat class certification; it will likely file a motion to decertify the class based on evidence obtained during the pre-trial discovery stage. At that point or earlier, the parties may try to settle the case. Settlements in class action independent contractor class actions are not uncommon.

The court previously ruled that the drivers will be able to present their claims to a jury – that was Uber’s first loss back on March 12 of this year.  After pre-trial discovery is completed, the case will be presented to a jury. There will be many drivers who will testify that Uber treats them like employees and controls almost everything they do once they decide to accept a ride. Likewise, there will be many drivers who say they are independent business owners, want to remain that way, and don’t feel they are employees.

As the court stated in its earlier ruling against Uber, there are some factors that favor independent contractor status and some that favor employee status. So this is not going to be an easy case for the plaintiffs to win, but they certainly have some decent facts to work with. They will likely try to use Uber’s own words against it. A good deal of the language in the contractor agreements that Uber drafted are not independent contractor friendly because, as the court said when it denied Uber’s motion for summary judgment, they give Uber the right to direct and control key aspects of its relationship with the drivers. Uber also created policies and procedures that the drivers claim to be further indications of direction and control over how the drivers do their work. Those may be the deciding factors with a jury – and as drafted and applied, a good deal of that language created by Uber doesn’t favor the ride-sharing firm.

What can Uber do to enhance its independent contractor compliance? 

Savvy companies don’t stand still – even while in the midst of lawsuits. As an example, even though FedEx Ground has suffered many legal setbacks in its decades-old defense of dozens of class action misclassification cases filed against it, the giant courier company sought to restructure its relationships with drivers during the same time the company was seeking to defend itself. It did this to change the facts that were not particularly favorable to FedEx so that it did not perpetuate the factual scenario that was effectively being used against it.

Can a company like Uber restart with a clean slate? Obviously, no company can change the past, but it can and should make changes going forward that reduce the direction and control over the drivers’ work that arguably has been retained by Uber by virtue of its contracts with drivers and then implemented by Uber on a day-to-day basis. Those types of changes can be done through restructuring, re-documenting and re-implementing the independent contractor relationship in the near future.

Some companies have used IC Diagnostics™ to accomplish this restructuring and re-documentation. IC Diagnostics is a process that takes into account the factors set forth in all relevant federal and state statutes governing independent contractors, weighs the factors according to governing court decisions, structures the business consistent with the law, and culminates with a state-of-the-art independent contractor agreement that substantially enhances the workers’ independent contractor status.

Those companies reliant on independent contractors, including many on-demand companies in the sharing or gig economy that use 1099 contractors, would be wise not to wait until they are sued or the subject of regulatory enforcement actions or audits. Restructuring, re-documenting, and re-implementing independent contractor relationships before becoming a defendant makes the most sense.  Although Uber did not appear to take that route, it is not too late for it to enhance its independent contractor compliance.  The same can be said for other companies that have yet to reassess their level of compliance with independent contractor laws.

Written by Richard Reibstein.

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance

Impact of NLRB’s Joint Employer Decision on Independent Contractors: State-of-the-Art IC Agreements Can Protect from Misclassification Liability

Few independent contractor agreements we have reviewed, even those of Fortune 500 companies, are relatively free from clauses that undermine the IC relationship because such agreements typically contain clauses that retain the company’s right to direct or control the manner and means of performing services. As discussed in our blog posts on the recent court decisions affecting FedEx and Uber, IC agreements that retain sufficient elements of direction and control can be used effectively by class action lawyers to demonstrate that an IC arrangement is nothing more than a misclassified employment relationship. Now, the National Labor Relations Board has followed suit. It just held in a watershed decision issued on August 27 that rights reserved by a company in an agreement with a third party supplier of labor services to set specific terms or conditions over workers who provide services can be sufficient control to establish a joint employer relationship with the third party labor supplier – and thereby expose the company to being swept into a union organizing campaign over the workers providing services – even if such rights are not exercised. Brown-Ferris Industries of California, Inc., d/b/a BFI Newby Island Recyclery, 362 NLRB No. 186 (2015).

As noted below in the “Takeaway” of this blog post, most businesses that use independent contractors to supplement their workforce or as an essential component of their business model can still protect themselves from IC misclassification liability as well as exposure to union organizing. How? By documenting their IC relationships in a state-of-the-art agreement that effectively enhances – rather than undermines – their compliance with federal and state IC laws.

Impact of the NLRB decision

The new NLRB decision is rather lengthy and includes a strong dissent by two of the five NLRB members. One of the key passages from the majority decision is that the NLRB “will no longer require that a joint employer not only possess the authority to control employees’ terms and conditions of employment, but . . . also exercise that authority, and do so directly, immediately, and not in a ‘limited and routine’ manner.” Rather, the NLRB stated, from this point on “[t]he right to control [alone], in the common-law sense, is [just as] probative of joint-employer status as is the actual exercise of control, whether direct or indirect.”

The facts in the NLRB’s new Brown-Ferris decision do not involve independent contractors, inasmuch as the third party provider of labor services, Leadpoint Business Services, retained the workers as W-2 employees. But the decision might well have been the same even if Leadpoint had retained the workers as 1099 contractors. In other words, while the Brown-Ferris decision is one step removed from independent contractor misclassification cases, its holding may well apply equally to cases where the issues are two-fold: (a) are the workers are ICs (who are not eligible for unionization under federal law) or employees (who are eligible for union representation), and (b) if employees, are they employed by only one entity or is there is another company who will be treated as a joint employer of the workers?

The NLRB’s most well-publicized recent decision involving independent contractor status is its September 30, 2014 decision in FedEx Ground, which was the subject of our blog post on October 6, 2014. In that decision, the NLRB held that FedEx Ground’s Home Delivery drivers in Connecticut were “employees” under the National Labor Relations Act and, therefore, could be represented by a Teamsters Union local that had petitioned to represent the drivers. 361 NLRB No. 55 (2014). In that decision by the NLRB, the agency’s opinion made multiple references to provisions in the independent contractor agreement, which the NLRB said “weigh heavily in favor of employee status.”

The appellate courts have been equally intolerant of the direction and control that FedEx retained in its standard IC agreements. As noted in one of our blog posts addressing the setbacks that FedEx Ground has recently experienced in the courts, one appellate court characterized the FedEx Ground independent contractor agreement as a “‘brilliantly drafted contract creating the constraints of an employment relationship with [the drivers] in the guise of an independent contractor model—because FedEx not only has the right to control, but has close to absolute actual control over [the drivers] based upon interpretation and obfuscation.’”

So, what does this new NLRB decision, which focuses not on the exercise of direction and control but rather on the right to exercise control, mean to those businesses that use independent contractors, including many tech start-up companies in the sharing, on-demand, or gig economy?


For companies that would like to continue their current workforce strategies using independent contractors, there is every incentive to re-document and re-implement their IC relationships in a way that does not retain contractual control over the performance of the services. This can be accomplished in most instances.

While some view the drafting of IC agreements as nothing more than dotting i’s and crossing t’s, FedEx Ground, Uber, and many other companies caught in the crosshairs of class action lawsuits can now relate to the fact that the IC laws are varied both at the federal and state levels and are often counter-intuitive. In other words, knowing where to find all of the i’s and t’s is not self-evident and has escaped in-house and outside counsel for many of the country’s largest corporations.

As we have stated previously, businesses that are concerned about the potential for misclassification liability often recognize that, at best, their independent contractors probably fall within a legal gray area, where some facts favor contractor status while others indicate employee status. Companies using IC Diagnostics™, a process that examines whether the position would likely pass the applicable independent contractor tests under governing state and federal laws, are able to examine a wide range of factors, duly weighted to reflect their relative importance in assessing compliance with applicable laws.

Regardless of whether an IC relationship needs to be substantially restructured, slightly restructured, or not restructured at all, the IC relationship must be documented in a manner as free from direction and control as feasible, consistent with the company’s business model and applicable IC laws.

While many independent contractors work without an agreement, it can sometimes be worse from the standpoint of IC compliance if ICs provide services under agreements that do not reflect the true relationship between the contractor and company. A contract that misstates the true relationship between the parties, such as one that states that a worker is not subject to the supervision of the company even though he or she is regularly supervised by a superior at the company or given regular evaluations, is generally of little or no benefit – and can be used to show that the IC agreement is little more than a sham.

Similarly, a contract that recites that a worker is an independent contractor offers no protection if the factors used by a court or government agency to determine the worker’s status demonstrate sufficient direction and control to create an employment relationship. Even agreements drafted for companies by otherwise talented lawyers include language that plaintiffs’ class action lawyers may use to support their arguments that the business has retained a right to direct and control the manner and means by which the workers perform the agreed-upon services. As noted above, that is exactly what the courts stated in the recent FedEx Ground appellate court decisions. IC Diagnostics™ takes into account those and hundreds of other court decisions as well as applicable state and federal statutes in the documentation process.

After the restructured relationship is memorialized in a written independent contractor agreement, the final step is implementing the restructured relationship. Companies must ensure that what is set forth in the contractor agreement will be implemented in the field and do not include empty recitals or misstatements of the relationship. Equally important, businesses must avoid exercising needless direction and control, which is often unintended yet has the potential to undermine an otherwise enhanced state of independent contractor compliance.

Other aspects of the re-implementation process may include reviewing and revising company operating manuals and procedures, documenting the implementation of certain provisions in the updated contractor agreement, and putting safeguards in place to ensure conformity with the independent contractor relationship.

There are no “quick and dirty” ways to enhance independent contractor compliance. The use of form or model independent contractor agreements, sometimes called templates, tends to cause businesses to overlook the need to restructure and to implement a sustainable independent contractor model that will withstand legal scrutiny and serve a company’s unique business model.

On the other hand, bona fide restructuring, re-documentation and re-implementation need not be a prohibitive undertaking and, once completed within a reasonably short period of time, can place a business in an enhanced and sustained state of compliance. That itself may substantially minimize the likelihood that a governmental agency or class action lawyer will seek to challenge a company’s compliance with independent contractor laws.

Many companies assume that if they experience an adverse legal determination, they have no choice but to reclassify the affected workers and make them employees. However, restructuring and re-documentation is also a valuable means for companies that are subject to legal challenge to revamp their independent contractor relationships in order to maximize compliance and minimize future misclassification liability.

Written by Richard Reibstein.

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

and Andrew Rudolph.

Posted in IC Compliance

Even if Uber Loses Class Certification Motion Being Heard Today, All Is Not Lost for Ride-Sharing Tech Giant

On August 6, 2015, Uber drivers in California sought preliminary approval of their motion for class certification in their independent contractor misclassification lawsuit. A hearing was scheduled in the U.S. District Court for the Northern District of California before Judge Edward M. Chen on the drivers’ motion for class certification. The parties argued their positions to the court but no decision is expected for a few weeks. There is a high likelihood that the court will permit the drivers to proceed in a class action instead of through individual claims. The legal burden to secure preliminary approval of class certification is not particularly high. Even if, as expected, the court grants such approval, Uber has at least three ways that it can still succeed in the lawsuit and ultimately maintain its independent contractor classification of drivers providing services to Uber’s customers: decertifying the drivers’ class action status at the final class certification proceeding; winning at trial; or restructuring and re-documenting its independent contractor relationships in a manner that enhances its compliance with state and federal laws governing independent contractors. The latter means for Uber to succeed is the subject of this blog post.

What already transpired in this case?

On March 11, 2015, Judge Chen denied Uber’s motion for summary judgment and ruled that a jury would have to decide whether the drivers are either independent contractors (who are paid on a 1099 basis and have no rights under state or federal wage or labor laws) or employees (who are paid on a W-2 basis and have rights under those laws protecting employees).

What evidence did the court focus on in deciding that a jury would have to determine if the drivers are employees and not independent contractors? Uber showed that drivers have the right to make themselves available for work whenever they want and that they are not required to accept available engagements – which is commonplace in the gig economy. The drivers showed that Uber expressly reserved the right to terminate the drivers’ relationship or terminate the use the company app if a driver’s customer ratings are deemed unacceptably low or for any reason at all.  The court noted that this factor is a key one favoring employee status.

The court stated that while there are numerous factors that bear on whether a worker is an employee or contractor, 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 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.”

The judge also found evidence that Uber monitored their drivers’ performance 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.”

Although Uber argued that the Driver Handbook merely contained “suggestions,” Judge Chen dismissed that argument by referring to the mandatory language of the document and evidence that failure to follow the “suggestions” could be enforced by disciplinary action or termination.


As we stated in our blog post on March 12, 2015, that decision by the court does not mean that companies cannot prevail on independent contractor misclassification claims. In fact, the decision by Judge Chen 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 independent contractor status when “all of the factors weighed and considered as a whole establish that [an individual] was an independent contractor and not an employee.”

Is it too late for companies already operating in a less than ideal level of compliance to restructure and re-document a company’s independent contractor relationships in order to minimize the risk of misclassification liability?  No. As we noted in our September 18, 2014 blog post entitled “Silicon Valley Misclassification,” tech companies that use the 1099 “on demand” business model are 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.”  Likewise, as I commented on a May 19, 2015 webinar that also featured one of the lead attorneys for Uber, Shannon Liss-Riordan: “[T]he best time to [enhance independent contractor compliance], of course, is before you get a summons or court complaint from someone such as [Ms. Liss-Riordan] or before a regulatory challenge is commenced. And even for those companies that are in the midst of legal challenges, it’s not too late to minimize or avoid future independent contractor misclassification exposure. We’ve used a proprietary process called IC Diagnostics that has worked very well for companies that are trying to fit their business model into existing laws, both at the federal and state level.”

While it is ideal to structure and document independent contractor relationships properly from the start, many companies, especially tech start-ups in the on-demand sharing economy, have not done so. As noted in the May 10 webinar, many new and existing companies have resorted to IC Diagnostics™ to enhance their level of independent contractor compliance under the applicable tests for independent contractor 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 independent contractor business model generally opt for restructuring, re-documenting, and re-implementing their contractor relationships. While not all companies can eliminate most control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their contractor relationships to comply with federal and most state laws. The IC Diagnostics™  process provides the means to stress-test the relationship. If it can be effectively restructured to comply with contractor 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 independent contractor statutes and most judicial and administrative decisions in this area are often counter-intuitive.

As we observed 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 independent contractor 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 independent contractor relationship is just as essential as the structuring and documentation. As shown by the court’s decision in this case in March, even when contractual provisions were drafted in a manner intended to be consistent with governing laws, it was argued that Uber failed to strictly follow the contractual limitations on direction and control when they put their contractor relationships into effect.  There is no reason, however, why a company committed to complying with independent contractor laws cannot, when exercising both rigor and restraint, implement and carry out in practice an enhanced contractor relationship. Uber can take this step even if it loses at trial or (if it wishes to place itself in a better position sooner), before the trial and all appeals are completed.

Written by Richard Reibstein.

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance

Senate Democrats Re-Introduce the Payroll Fraud Prevention Act of 2015 Soon After Hillary Clinton Seeks to Insert IC Misclassification as an Election Issue in 2016

Shortly after Presidential candidate Hillary Clinton placed independent contractor misclassification in the national spotlight in mid-July 2015 when she prominently commented in a campaign speech upon the expanding use of ICs in the “gig economy,” it has been reported that Senators Bob Casey (D-PA) and Al Franken (D-MN) have introduced the Payroll Fraud Prevention Act of 2015, a bill that would outlaw IC misclassification. Candidate Clinton raised the issue of IC classification in a speech on July 13, 2015, when she acknowledged that the on-demand economy is creating exciting opportunities and unleashing innovation but noted that it is also raising hard questions about workplace protections and what a good job will look like in the future. Even though this new bill has virtually no chance to pass Congress in 2015, it is likely that a new Democratic administration, if elected, would highly endorse this bill once re-introduced in a subsequent session of Congress.

The new bill, which is yet to have a number assigned to it, is not actually new at all, having been introduced in 2013 and re-introduced in 2014 with the exact same language.  The 2015 edition of the bill would expand the federal Fair Labor Standards Act (which currently addresses minimum wage, overtime, and child labor laws) to cover misclassification of employees as ICs. It would also create a new definition of workers called “non-employees,” impose upon businesses the obligation to provide a classification notice for both “non-employees” and “employees,” would make the misclassification of “employees” as “non-employees” a new labor law offense, and would expose businesses to fines of up to $5,000 per worker for each violation of the law.  Those provisions were included in the 2013 and 2014 versions of the bill.

The new bill would, like the 203 and 2014 bills, also impose recordkeeping requirements on businesses.  This type of requirement is reminiscent of the 2010 and 2011 versions of the Employee Misclassification Prevention Act (EMPA), both of which would have added new recordkeeping obligations on all businesses – not just on those that used ICs or other categories of non-employee workers.

The bill is yet another effort to introduce legislation at the federal level to curtail the misclassification of independent contractors (ICs), which the sponsors equate with “payroll fraud” – a term seeing increasing usage by legislatures.

Detailed Analysis of the Main Provisions of the New Bill

If enacted, the Payroll Fraud Prevention Act of 2015 would make misclassification of employees as ICs a new federal labor offense. It would expand the federal Fair Labor Standards Act (which currently addresses minimum wage, overtime, and child labor laws) to cover a new category of workers – non-employees – and make it a special prohibited act to “wrongly classify an employee as a non-employee.”

The bill has a number of other key provisions, but the one most likely to receive attention is the obligation for every employer and enterprise to provide a classification notice for both “non-employees” and “employees”.  This notice would require every business to provide a written notice to all workers performing labor or services (a) stating that they have been classified by the business either “as an employee or non-employee,” (b) directing them to a U.S. Department of Labor website for further information about the rights of employees under the law, and (c) informing them to contact the Labor Department if they “suspect [they] have been misclassified.”

All businesses would be affected by the Payroll Fraud Prevention Act of 2015, even those that did not use any ICs or other non-employees.  Each employer or enterprise would be required to issue such notices to all its employees within six months following passage of the law for incumbent workers and, with respect to new employees and ICs, at the commencement of the new worker’s employment or IC relationship.

Any business, even one not using any non-employees and even one whose ICs have been properly classified as “non-employees,” would be subject to heavy fines for violations of the new notice rule if it failed to provide the new notice.  The civil penalties for any failure to provide a notice is a specified amount “for each employee or other individual who was the subject of such a violation” in an amount of $1,100 for a first offense and up to $5,000 for a second offense or a “willful” violation.  The language of the bill may arguably suggest that if an employer or enterprise neglected to provide the required notice to a large number of workers, the penalty may be considerable – $1,100 (or up to $5,000 if a second offense) multiplied by the number of employees or non-employees who did not get the required notice or did not receive it in a timely manner.

Another significant penalty for failure to give the required notice is the creation of a presumption that a “non-employee” is an “employee” if the business fails to provide the worker with the prescribed notice or does so in an untimely fashion.  The bill further provides that the presumption of employment can only be rebutted by “clear and convincing evidence that a covered individual . . . is not an employee . . . .”

Other Provisions of the New Bill

The new bill would also:

pierce the so-called “corporate veil” by including in the definition of “non-employees” those who provide services through a corporation or LLC, if they are required to create or maintain such entities as a “condition for the provision of such labor or services”;

– impose triple damages for willful violations of the minimum wage or overtime laws where the employer has misclassified the worker;

– direct the Secretary of Labor to establish a misclassification website;

– authorize the Secretary of Labor to impose additional penalties upon employers that misclassify employees for unemployment compensation purposes;

– authorize the Department of Labor to report misclassification information to the IRS; and

– direct the Labor Department to conduct “targeted audits” of certain industries “with frequent incidence of misclassifying employees as non-employees.”

Notably, although the bill seeks to crack down on misclassification, nothing in the Payroll Fraud Prevention Act of 2015 would prohibit businesses from continuing to use ICs that are properly classified as such; it only prohibits companies from misclassifying workers as ICs when such workers are really “employees.”

What Businesses Can Do to Minimize IC Misclassification Liability

Regardless of whether the Payroll Fraud Prevention Act of 2015 gains traction in Congress, its introduction along with Hillary Clinton’s focus on IC classifications will further heighten the already high state of attention being given to the issue of IC misclassification by state legislatures, federal and state regulators, and class action lawyers.

Although Congress has not passed any IC misclassification legislation, state legislatures have been active in passing laws cracking down in this area. About half of the states have passed laws since July 2007 curtailing the use of ICs, increasing penalties for IC misclassification, creating IC misclassification task forces, and/or requiring state agencies to share information with other state agencies about companies that have been found to have misclassified employees as ICs.

The absence of federal legislation has not diminished the activities of the U.S. Department of Labor and the IRS, who have increasingly been cracking down on businesses that misclassify ICs. As noted in prior blog posts, the DOL has embarked on a Misclassification Initiative, which seeks to coordinate DOL enforcement with state workforce agencies and the IRS and promote the sharing of information with state workforce agencies about companies that misclassify employees as ICs.

Perhaps the most active regulatory enforcement comes from state workplace agencies.  Unemployment compensation claims have the potential to become “mini-class actions” with substantial penalties and the potential for being reported to other workforce agencies whose laws may also have been violated.

Finally, plaintiffs’ class action lawyers continue to target companies that have not “played by the rules” regarding the use of ICs.

Even companies that believe they have “followed the rules” in their classification of ICs have been surprised to realize that they have unwittingly failed to structure, document, and implement their IC relationships consistent with state and federal laws.

Many companies that use ICs or conduct business using an IC-business model have taken steps to minimize their exposure to IC misclassification liability by utilizing IC Diagnostics™.  This is a proprietary process used to evaluate their level of IC compliance, assess compliance alternatives, and guide the restructuring, re-documentation, and re-implementation of IC relationships.  These steps serve to enhance IC compliance and can minimize exposure for companies that wish to continue to use ICs – and do so without undue worries.

Written by Richard Reibstein

Published by Richard Reibstein, Lisa Petkun, and Andrew Rudolph

Posted in IC Compliance