New Federal Trade Secrets Law Applies to Independent Contractors, Too – Including the Notice Provisions!

Earlier today, President Obama signed into law the Defend Trade Secrets Act (DTSA), which the Senate and House passed with overwhelming bipartisan support. While the impetus for the new law has been trade secret theft by foreign and domestic interests in the form of economic espionage, the DTSA applies to the workplace as well. But instead of limiting the workplace provisions to employees, Congress specifically expanded the scope of the DTSA to cover independent contractors as well.

The DTSA will fill a huge hole in the law of trade secrets. In the past, U.S. companies that were victimized by a theft of trade secrets and confidential information were relegated to seeking relief under state laws. The new law now provides a federal civil remedy for trade secret misappropriation. However, two of the key federal remedies available under this law for workplace theft of a company’s trade secrets – exemplary (double) damages and attorneys’ fees – require employers to include in their employee and independent contractor agreements a special form of notice to those workers.

What protections does the DTSA provide for companies?

DTSA protection covers trade secrets that are related to a product or service used or intended to be used in interstate or foreign commerce. Because most companies operate across state lines or internationally, it is expected that only the most local of businesses will not be able to make use of the DTSA to protect their trade secrets and confidential information (collectively referred to as “trade secrets”) from misappropriation.

Here’s what the DTSA can do for companies that have been victimized by or are threatened with misappropriation of their trade secrets by their employees, independent contractors, and competitors:

  • provide a federal court forum for seeking relief;
  • facilitate discovery from third parties in other states who may be in receipt of misappropriated trade secrets;
  • obtain actual damages or restitution of unjust enrichment (i.e., disgorgement of ill-gotten gains) occasioned by misappropriation of trade secrets;
  • add “exemplary” damages of up to twice the amount of actual damages or restitution in the case of willful and malicious misappropriation;
  • provide a full range of injunctive relief, including enjoining actual or threatened misappropriation and ordering affirmative acts to protect a trade secret;
  • require the misappropriating party or parties to pay a royalty in lieu of an injunction where circumstances would render an injunction inequitable;
  • recover attorneys’ fees if the misappropriation was willful and malicious;
  • obtain a civil seizure order on an ex parte basis in extraordinary circumstances to preserve evidence or prevent dissemination of the trade secret;
  • impose penalties for a criminal violation of the Economic Espionage Act to the greater of $5 million or three times the value of the misappropriated trade secrets; and
  • allow for additional remedies that may be available under an applicable state trade secrets law.

What are the special workplace immunity provisions and notice requirements?

The DTSA provides for immunity from liability for the confidential disclosure of a trade secret to the government or an attorney. Recognizing that the mere reporting to a third party of a trade secret could violate the rights of the trade secret owner, Congress added a new provision that appears to provide for criminal and civil immunity for anyone that provides services in the workplace, including independent contractors, who disclose a trade secret under two circumstances: disclosures in confidence to a federal, state, or local government official, or to an attorney, for the purpose of reporting or investigating a suspected violation of the law. The immunity covers disclosure of the trade secret in a court complaint or other document filed under seal in a judicial proceeding.

This immunity also extends to a worker who files a lawsuit against a company for retaliation for reporting a suspected violation of the law. Such a worker may disclose the trade secret to his or her lawyer for use in the legal proceeding, provided the court document is filed under seal and does not disclose the actual trade secret other than pursuant to a court order.

Congressional lawmakers wanted to make sure that those who provide labor in the workplace learn about this immunity. Congress put the onus on companies by requiring them to give notice of the immunity to their “employees” in any contract that addresses the use of trade secrets. The term “employee” is defined to include “any individual performing work as a contractor or consultant for an employer.” To our knowledge, this is the first time Congress expanded the term “employee” to include independent contractors.

Businesses will be wise to include the immunity notice in all new and updated contractor and consultant agreements with their independent contractors. This provision may be of particular significance to government contractor firms that regularly use consultants and routinely update their independent contractor agreements from project to project.

The immunity notice requirement may well apply to standard, unilateral confidentiality agreements that companies typically require employees and contractors to sign. The notice requirements, however, only apply prospectively, covering contracts entered into or updated after the date of enactment of DTSA. Companies may also satisfy the notice requirement in an alternative, less burdensome manner. The House Committee Report states that “an employer may choose to provide such notice by reference to a policy document setting forth the employer’s reporting policy for a suspected violation of the law that provides notice of the immunity.” Such policy documents, though, are not typically provided to independent contractors. Indeed, in order to minimize direction and control over independent contractors that can result in a finding that they were misclassified, companies would be wise not to have their employee policies apply to contractors.

To induce employers to provide this “immunity notice” and encourage the reporting of trade secret misappropriation, Congress included an unusual takeaway provision in the DTSA: a company that does not provide the required notice loses the right to two of the most useful remedies in the new law: exemplary damages and attorneys’ fees against a worker who was not provided with such notice. For those companies that give contractors access to any of their trade secrets, it is plainly worthwhile to include an “immunity notice” in any newly-issued independent contractor agreements including any agreements that are modified or amended in any respect.

Written by Richard Reibstein.

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

Posted in IC Compliance

April 2016 Independent Contractor Misclassification and Compliance News Update

This past month involved the settlement of a number of high profile IC misclassification cases. In one case, a federal court gave conditional approval to a $226 million settlement between FedEx and its Ground Division drivers, whereby each of over 2,000 drivers would receive on average over $110,000 before deductions for attorneys’ fees. In contrast, another federal court rejected a proposed settlement agreement between Lyft and its 155,000 California drivers where the average driver, in stark contrast to the FedEx case, would receive under $100 after deductions for attorneys’ fees. Meanwhile, Uber entered into a proposed $84 million settlement agreement covering 385,000 Uber drivers in California and Massachusetts where the average recovery per driver would be under $200 per driver after legal fees. The federal court judge in the Lyft case in California has already rejected the proposed agreement as inadequate, while the presiding judge in the Uber case in California has yet to rule on that proposed agreement.

[Publishers’ Note: On May 11, Lyft increased the amount of its offer from $12.5 million to $27 million to settle the class action lawsuit by drivers in California.]

While the gross amounts of the proposed settlements with FedEx and Uber are astronomical, they are relatively “affordable” expenses for both companies. However, as we have stated in prior blog posts addressing both proposed settlements, both companies likely could have avoided these results if they had structured, documented, and implemented their IC relationships in a manner that enhanced their IC compliance, without compromising their business models.

In the Courts (7 cases)

$226 MILLION IC MISCLASSIFICATION SETTLEMENT BY FEDEX IS CONDITIONALLY APPROVED BY THE COURT.  A federal district court granted conditional approval of a proposed $226 million settlement of the IC misclassification class action lawsuit brought by a class of slightly over 2,000 drivers for the Ground Division of FedEx. As discussed more fully in our blog post of June 13, 2015, this settlement covers the class action claims of FedEx Ground drivers in California who alleged a variety of violations under federal and state law, including claims for reimbursement of business expenses, unpaid overtime, failure to provide meal and rest periods, reimbursement of deductions in pay, and non-payment of termination pay, plus attorneys’ fees and litigation costs. According to calculations done by the settlement administrator, the average pay-out to claiming class members will be approximately $112,000, with awards ranging from  $250 up to over $440,000. As of April 5, 2016, the settlement administrator had received over 1,500 claim forms, or approximately 77% of all drivers covered under the proposed settlement. Judge Edward Chen stated that, at this juncture, he was only granting conditional approval so that (1) the Plaintiffs can undertake additional outreach to non-claiming class members, and (2) the court can consider supplemental briefs related to the amount of attorneys’ fees he will award. Alexander v. FedEx Ground Package System, No. 3:05-cv-00038-EMC (N.D. Calif. Apr. 12, 2016).

JUDGE REJECTS LYFT’S $12.5 MILLION PROPOSED SETTLEMENT AS GROSSLY INADEQUATE. Lyft’s proposed $12.5 million settlement with class of California drivers was rejected by a federal judge, who stated that “[t]he modest nonmonetary relief set forth in the agreement does not come close to making up for…serious defects in the monetary aspect of the settlement.” Most importantly, the judge concluded that “[t]he drivers were…shortchanged by half on their reimbursement claim alone.” As we discussed in our blog post of March 15, 2016, the average payment to the drivers would be modest, well under $1,000 per driver, to cover their out-of-pocket car expenses, allegedly unpaid tips, and any unpaid overtime and minimum wages. It is expected that Lyft will substantially increase its settlement offer in view of the fact that the proposed agreement did not require it to abandon its IC model with the drivers. Cotter v. Lyft Inc., No. 13-cv-04065 (N.D. Cal. Apr. 7, 2016). [Publishers’ Note: On May 11, Lyft increased its offer to settle to $27 million.]

UBER AGREES TO SETTLE ITS IC MISCLASSIFICATION CASE WITH DRIVERS IN TWO STATES FOR $84 MILLION; NEW LAWSUITS FILED BY DRIVERS IN OTHER STATES. This past month Uber made headlines for its proposed settlement with Uber drivers for $84 million in two IC misclassification class actions – one in California and the other in Massachusetts – while new class action lawsuits were brought against Uber in Florida and Michigan.

  • The Proposed California and Massachusetts Settlements: In our blog post of April 22, 2016, we noted the more significant terms of the proposed settlement, which is subject to review and approval of the judge presiding over the case in the federal court in San Francisco. The proposed agreement would allow Uber to retain its IC model. In exchange, the settlement guarantees payment of $84 million to the 385,000 Uber drivers covered under the cases in California and Massachusetts, although that amount is likely to decrease to around $60 million after accounting for legal fees, costs of administration of the settlement and payment to the State of California. The drivers would likely receive well under $200 each on average, although the amount would increase to at least $2,000 for those drivers who drove more than 25,000 miles. In addition, Uber will agree to change certain of its business practices such as “deactivation,” the functional equivalent of termination of a driver. Further, Uber will fund and facilitate the creation of a non-union driver association comprised of elected driver leaders. Uber will also clarify its messaging to riders about tipping, making clear that a tip, while not required or expected, is not included in the fare. Finally, an additional $16 million (of which the attorneys will be entitled to 25%) might be added (making the total as much as $100 million) in the event Uber goes public and valuation increases by a particular amount within a specified time period. There is no guarantee that the proposed settlement agreement will be approved by the court; indeed, it may well be rejected by the court if, like the proposed settlement agreement in the Lyft case, the judge in the Uber case regards the settlement amount as inadequate. O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal. Apr. 21, 2016).
  • New Proposed FLSA Class Action Brought in Florida Federal Court: In this filing on April 22, 2016, a current Uber driver has sued Uber on behalf of a nationwide class of drivers who were allegedly misclassified as ICs in violation of the federal Fair Labor Standards Act (FLSA) resulting in allegedly unpaid minimum wage and overtime compensation. Lamour v. Uber Technologies, Inc., No. 1:16-cv-21449 (S.D. Florida Apr. 22, 2016).
  • New Proposed FLSA Class Action Also Brought in Michigan. Ten days earlier, two former drivers filed suit seeking to represent themselves and others drivers similarly situated alleging that Uber violated Michigan and the FLSA law by failing to remit gratuities to the drivers and improperly retaining the tips for itself; misclassifying the drivers as ICs; depriving them of statutory benefits such as minimum wage and overtime compensation; failing to remit to the drivers their expenses for the use and maintenance of their cars; failing to offer insurance to drivers under the Affordable Care Act; and engaging in unfair methods of competition and unfair or deceptive acts or practices. Zawada v. Uber Technologies, Inc., No.: 16-cv-11334 (E.D. Michigan April 12, 2016).

COURT UPHOLDS NLRB RULING THAT MUSICIANS IN ORCHESTRA CAN BE UNIONIZED BECAUSE THEY ARE EMPLOYEES AND NOT IC’S. A federal appellate court has upheld a decision by the National Labor Relations Board that musicians in a Pennsylvania orchestra are employees and not ICs and, therefore, the union was properly certified by the NLRB as the representative of the musicians following an election conducted by the NLRB where the union prevailed. To determine whether the musicians were employees or not, the court applied the common law of agency and evaluated the ten factors contained in the Restatement (Second) of Agency as well as an additional factor: whether there is a significant entrepreneurial opportunity for gain or loss by the worker. In considering the orchestra’s petition for review, the Court analyzed those factors and found that “the relevant factors point in different directions.” Specifically, although some factors supported employee status, the court also found that there were a number of factors supporting IC status. The Court, however, decided to “defer to the Board,” stating that it “will…uphold the Board if at least it can be said to have made a choice between two fairly conflicting views.” Lancaster Symphony Orchestra v. National Labor Relations Board, No. 14-1247 (D.C. Cir. Apr. 19, 2016).

ONLINE PRODUCT ADVOCATES HELD TO BE EMPLOYEES, NOT IC’S. A Utah appellate court held that product advocates retained by an Internet chat-based customer service platform were correctly classified by the Utah unemployment compensation board as employees and not ICs. The product advocates chat in real time with customers of retailers about the retailer’s products. Under Utah state law, workers are regarded as employees for unemployment purposes unless they are (a) free from direction and control over the means of performance of services both under contract and in fact, and (b) customarily engaged in an independently established trade, occupation, profession, or business. The unemployment compensation board only addressed the second factor, finding that the product advocates were not independently established in business. The court affirmed the board’s determination. Needle Inc. v. Department of Workforce Services, Workforce Appeals Board, No. 20141157 (Ore. Ct. App. Apr. 28, 2016).

Regulatory and Enforcement Initiatives (2 items)

NLRB ISSUES COMPLAINT ALLEGING IC MISCLASSIFICATION IS AN UNFAIR LABOR PRACTICE. A Regional Director of National Labor Relations Board issued an unfair labor practice complaint against Intermodal Bridge Transport alleging that the company “has misclassified its employee-drivers as ICs, thereby inhibiting them from engaging in section 7 activity and depriving them of the protections of the [National Labor Relations] Act.” As more fully discussed in our blog post of April 21, 2016, this complaint relates to the intensive efforts of the Teamsters union to organize port truckers in California and elsewhere, including those truckers whom the union claims have been misclassified as ICs. The Teamsters filed an unfair labor practice charge with the NLRB’s Regional Director in Los Angeles in 2015; eight months later, an unfair labor practice complaint was issued. The allegations in the complaint are two-fold: (1) Those involving “classic” violations such as interrogation of a driver by his supervisor about his support for the union; promises of more work if a driver refrained from union organizing activities; threats by a supervisor to a driver of job loss and other reprisals if he continued to support the union; and threats by a supervisor to a driver that the company would close the facility if the union won or came in to the facility. (2) Those regarding misclassification of the drivers as ICs and not employees.  As noted in that blog post, it remains to be seen whether the General Counsel of the NLRB is taking the position that mere misclassification of workers as ICs is itself an unfair labor practice or that something more must be done in violation of the law to a worker whom the General Counsel believes should be classified as an employee. Intermodal Bridge Transport, Case 21-CA-157647 (Apr. 18, 2016).

OREGON BECOMES 29TH STATE TO SIGN JOINT ENFORCEMENT MEMO WITH U.S. DEPARTMENT OF LABOR. The Oregon Bureau of Labor and Industries (“BOLI”) has signed a Memorandum of Understanding with the U.S. Department of Labor’s Wage and Hour Division (“WHD”) – the 29th state to do so. The three-year agreement commencing April 4, 2016 between the WHD and BOLI sets forth specific and mutual goals of providing clear, accurate, and easy-to-access outreach to employers, employees, and other stakeholders, and of sharing resources and enhancing enforcement by conducting joint investigations and sharing information consistent with applicable law. In a News Release dated April 4, 2016 by the WHD, Commissioner of BOLI Brad Avakian stated: “When corporations misclassify their workforce, they make it much more difficult for workers facing wage theft, civil rights abuse or other unfair treatment on the job. This agreement will create a new tool to help protect the rights of Oregon workers cheated on the job.”

Written by Richard Reibstein.

Compiled by Janet Barsky, Managing Editor. 

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

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Posted in IC Compliance

Uber Tries to “Lyft” Itself Out of Two Independent Contractor Misclassification Lawsuits By Settling for Up To $100 Million – But Will The Settlement Withstand Judicial Scrutiny?

Only two weeks after a federal court judge in California rejected a proposed $12.25 million independent contractor misclassification settlement between Lyft and its drivers in California because it “shortchanged” the drivers and the State of California, Uber announced late yesterday, April 21, that it had reached a proposed settlement with its drivers in two IC misclassification lawsuits in California and Massachusetts. Facing a potential trial this summer over whether its drivers are independent contractors or employees under California and Massachusetts law, Uber agreed to settle both lawsuits for a combined $84 million. Will it be approved by the judges presiding over those cases?

The lead counsel representing the Uber drivers are the same attorneys who represent the 155,000 Lyft drivers in California. The judge presiding over that case referred to the proposed settlement negotiated on their behalf by counsel for the drivers as “unreasonable” and “arbitrary.”  One would expect, however, that those same lawyers, in negotiating a settlement with Uber, have now plugged the holes exposed in the proposed Lyft settlement.  Nonetheless, it is expected that the judge overseeing the Uber case will be no less judicious than the judge who rejected the Lyft settlement. In other words, approval of the proposed settlement agreement is anything but certain.  O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal. Apr. 21, 2016).

[Publishers’ Note: On May 10, papers were filed in court by the drivers’ counsel estimating that the drivers’ damages in the California and Massachusetts cases could add up to as much as $852 million if the drivers prevailed. Inasmuch as the $84 million settlement proposal amounts to less than 10% of the damages being sought, there is a substantial likelihood that the court will not approve the proposed settlement, unless the amount is substantially enhanced by Uber.]

What are the key details of the proposed settlement?

The proposed settlement agreement, if approved by the court overseeing the case, offers the same inducement to Uber that Lyft was offered by class counsel – the opportunity to retain its   independent contractor model. Presumably, Uber would not have even considered settlement without that key feature. In addition, of course, Uber will receive waivers and releases of the drivers’ claims. What did the drivers obtain in return?

First, money.  There are reportedly 385,000 Uber drivers covered by the California and Massachusetts cases. The settlement guarantees them $84 million; that number must be reduced by the legal fees that could amount to up to $21 million (25%), leaving the drivers $63 million less the costs of administering the settlement and a small payment to the State of California, leaving the drivers around $60 million to split up among them.  That amounts to an average of well under $200 per driver. The papers filed in court by the lawyers for the drivers indicate that drivers who drove more than 25,000 miles will receive at least $2,000.

An additional $16 million may be added to the settlement if Uber goes public and its valuation increases one-and-a-half times from its December 2015 financing valuation within the first year of an initial public offering.  The lawyers will be entitled to up to 25% of this extra contingent amount.

Second, protection from “deactivation”. Like the proposed Lyft settlement, Uber agrees to make a number of changes to its business practices including deactivation – the functional equivalent of a driver being terminated.  Specifically, Uber will only be able to deactivate drivers from the Uber platform for sufficient cause, and drivers will be provided with at least two warnings prior to many types of deactivations, will be given a written explanation of the reasons for any deactivation, and will be afforded an appeals process overseen by fellow drivers for certain types of deactivations. Should a driver not be satisfied with the result of the appeals process, the driver may arbitrate his or her claim at Uber’s expense

Third, the establishment of a “non-union” association of drivers.  Uber will fund and facilitate the creation of a Driver Association, comprised of elected driver leaders. Uber agrees to meet quarterly with the elected leaders of this association to discuss and, in good faith, try to address driver concerns. This is not a union but rather a “non-union” association of drivers.

Fourth, clarified tipping literature.  Uber will clarify its messaging with respect to tipping, specifically the fact that a tip (while not required or expected) is not included in the fare.  Drivers will, however, be able to post a sign in their vehicle that tips are nonetheless appreciated.

Analysis

While Uber certainly had a decent chance of succeeding at trial, settling this lawsuit for up to $100 million (if the additional $16 million contingency arises) is plainly a sound financial decision for a company whose latest valuation in December 2015 was $62.5 billion – especially where it gets to retain its independent contractor business model.  While $84 million is undoubtedly a large amount, it pales in comparison to the $228 million settlement between FedEx and its Ground Division drivers in California.

Whether it is a good deal for the drivers, though, remains to be seen.  It is expected that there will be some drivers that will file objections. It is also expected that the Teamsters union, which filed objections in the Lyft case, will file objections to the proposed Uber settlement as well – especially because of the establishment of the Drivers Association, which is likely to be regarded as an affront to the union. The Teamsters’ principal objections, though, were not given much weight by the judge in the Lyft case.

Takeaways

As we noted when commenting on the proposed Lyft settlement, we previously stated in a prior blog post that most companies using ICs to service customers, including those in the sharing or gig economy, have not structured, documented, and implemented their IC relationships in a manner that maximizes compliance with state and federal IC laws – and those businesses would be wise to restructure, re-document, and re-implement such relationships to meaningfully enhance their compliance. As part of the proposed settlement reached between Uber and the lawyers representing the drivers, that is precisely what Uber appears willing to do to a limited extent – assuming the court approves the proposed settlement.

Yet, even if these changes are implemented in California, Massachusetts, and all of the  other states where Uber operates, they may not, by themselves, be sufficient to forestall new lawsuits or insulate the company from IC misclassification liability in similar cases pending against Uber in Florida, Arizona, and Pennsylvania.

In the court’s decision to deny summary judgment to Uber, the Judge Edward M. Chen, the presiding judge, not only focused on Uber’s unbridled right to terminate or deactivate drivers, but also on a number of other facts that favored employee status.  For example, he pointed to the Uber “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.”  Judge Chen also noted that there is evidence that Uber monitors its 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.

As we noted in connection with the proposed Lyft settlement, the changes Uber will make under the terms of the settlement agreement will move the drivers closer to independent contractor status. This view was echoed in an article in The New York Times by Mike Isaac and Noam Scheiber, who quoted a former U.S. Labor Department official calling the changes by Uber a “tweaking” of the relationship. It would be prudent for Uber to address the other concerns expressed by Judge Chen as well as dozens of other factors bearing on the issue of independent contractor status. Moving the needle in the right direction may not be sufficient. As the co-publisher of this blog, Richard Reibstein, was quoted in a Los Angeles Times article by Tracey Lien when commenting on the Lyft settlement, while the settlement may put to rest one or more lawsuits, “it doesn’t mean [the company] is in the clear. In fact, many states have more stringent tests for independent contractor status than California, and there’s nothing stopping another lawyer from filing a similar lawsuit in [the future in] California”. The article continued: “‘[The company] would be well-served to reevaluate its structure and documentation,’ Reibstein said, ‘because just because you exit one lawsuit does not mean that there won’t be another coming right down the pipe tomorrow.’”

How can companies stress-test their level of IC compliance? One way is through IC Diagnostics™, a process that examines the level of compliance with applicable IC laws and then restructures, re-documents, and re-implements IC relationships in a manner that minimizes IC misclassification exposure. This process can be applied in a customized fashion consistent with a company’s business model. Whether Uber takes steps to voluntarily undertake further structural changes may determine whether IC misclassification cases will only be a thing of the past, or whether it will see class action IC misclassification lawyers once again on its doorstep.

Written by Richard Reibstein.

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

 

Posted in IC Compliance

Is the NLRB Trying to Make Independent Contractor Misclassification an Unfair Labor Practice?

A Regional Director for the NLRB issued an unfair labor practice complaint on April 18, 2016 alleging that a transportation company “has misclassified its employee-drivers as independent contractors, thereby inhibiting them from engaging in Section 7 activity and depriving them of the protections of the [National Labor Relations] Act.” While Regional Directors are merely prosecutors in the unfair labor practice context, they serve as a form of gatekeeper because no unfair labor practice charge can reach the NLRB in Washington, D.C. unless a Regional Director first issues a complaint. Therefore, this allegation – that mere misclassification is an unfair labor practice – has the potential to be a far-reaching development in the area of independent contractor law. What the NLRB eventually does in this case, however, would have little or no impact on businesses that structure, document, and implement their independent contractor relationships in a manner that complies with applicable laws, as more fully noted in the “Takeaway” below.

Background

The NLRB does not issue complaints on its own initiative. Rather, the law provides that any person may file an unfair labor practice charge with a Regional Director of the NLRB. If a Regional Director, who is a designee of the NLRB’s General Counsel, determines that there is reason to believe that there is merit to the charge, the Regional Director may issue a complaint.

In this case, the International Brotherhood of Teamsters filed a charge with the Regional Director for Region 21 of the NLRB in Los Angeles in August 2015 against Intermodal Bridge Transport. The Teamsters union has been trying to organize port drivers in California and at other ports around the nation, including groups of truckers whom the union claims have been misclassified as independent contractors. Eight months later, the Regional Director issued the unfair labor practice complaint.  Intermodal Bridge Transport, Case 21-CA-157647 (Apr. 18, 2016).

The language from the complaint quoted in the first paragraph of this blog post is enough to cause experienced labor law practitioners to express a quizzical look. However, the complaint needs to be viewed in context. It does not solely allege that misclassification is an unfair labor practice; rather, there are many other allegations in the complaint, including claims that a supervisor:

  • interrogated a driver about his support for the Union;
  • promised more work to a driver if he refrained from union organizational activities;
  • threatened a driver with job loss and unspecified reprisals by stating that there would be consequences and drivers would regret it if they continued supporting the Union; and
  • threatened a driver that Respondent would close the facility if the union won or came in to the facility.

In the very next paragraph of the complaint, the Regional Director alleged that Intermodal has misclassified its drivers as independent contractors and that, by so doing, it has inhibited them from engaging in activities to support a union, thereby depriving them of the protections of the law, in violation of the National Labor Relations Act.

Analysis

This newly-issued NLRB complaint by the Regional Director in Los Angeles has likely been issued with the approval of Richard Griffin, the General Counsel of the NLRB.  Only a month ago, on March 22, 2016, General Counsel Griffin issued a memorandum to all Regional Directors listing the types of cases that are required to be submitted to his Division of Advice where they “involve the General Counsel’s initiatives or policy concerns.”  One of the types of cases he listed are those “involving the employment status of workers in the on-demand economy.”  Thus, it appears likely that the issuance of the complaint was at the specific direction of the General Counsel.

The allegations in the complaint about interrogation, promises, and threats are, of course, classic types of unfair labor practice allegations.  In contrast, misclassification alone is typically regarded as nothing more than a legal status that a company places on a worker – no different than if an employer misclassifies a rank-and-file worker as a supervisor as that term is defined under NLRB law, or misclassifies a worker as exempt from overtime under the FLSA, or misclassifies an individual as ineligible for some ERISA benefit. Something more is typically required under these federal laws in order to violate those laws – such as denying the rank-and-file worker the right to discuss union organizing, or failing to pay overtime to a non-exempt employee who works over 40 hours in a work week, or refusing to pay benefits to an employee covered by the eligibility provisions of an employee benefit plan.

Because the Intermodal case included allegations of other “classic” violations of the law (threats, interrogations, and promises), it is too early to tell if the General Counsel of the NLRB is taking the position that mere misclassification of workers as independent contractors violates the National Labor Relations Act – or that something more must be done to a worker whom the General Counsel believes should be classified as an “employee” under NLRB and court decisions defining that term.

After Intermodal files an answer to the complaint, a hearing will be held before an administrative law judge, who will decide if Intermodal violated the law. The ALJ’s decision will be subject to appeal to the NLRB in Washington, and the NLRB’s decision is then subject to review by a federal court of appeals.

Statements and threats of the nature alleged in the complaint can sometimes be unfair labor practices even if they are made to non-employees.  But, if there are no employee-drivers – that is, if all of the drivers are valid independent contractors under the NLRA – then there might not be any violation of the law. Thus, the threshold question to be decided is whether the truckers are independent contractors under current NLRB decisions on the subject. Some of the NLRB’s decisions in this area of the law, however, have not been enforced by the courts.

Takeaway

Regardless of the eventual result in the Intermodal case, businesses that utilize independent contractors would be wise to focus on enhancing their compliance with applicable IC laws instead of concerning themselves about an agency that may be expanding its notion of what constitutes an unfair labor practice in the area of IC misclassification. The Regional Director’s allegations in the Intermodal complaint would have little or no impact on a company that properly classifies its workers under NLRB law.

Businesses interested in enhancing their compliance with IC laws can do so in a variety of ways, as detailed in our White Paper on minimizing IC misclassification risks, including the use of IC Diagnostics,™ which assesses IC compliance under applicable law, restructures and re-documents the IC relationship in a more compliant manner, and then implements the IC relationship in a customized and sustainable fashion.

Written by Richard Reibstein.

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

Posted in IC Compliance

March 2016 Independent Contractor Misclassification and Compliance News Update

The cases reported in this update continue to reflect the fact that IC misclassification cases cut across virtually all industries. Below are IC misclassification cases from such diverse industries as insurance, ride-sharing, restaurant, and the home heating and alarm industries. A Forbes article entitled “Is Your Company on the Independent Contractor Hit List,” written by a co-publisher of this blog and posted last June by Daniel Fisher, a senior editor at Forbes, lists 13 industries as being “in the crosshairs of [federal] regulatory agencies” and another nine industries being specifically targeted by one state, New York, which published a list of industries with the “highest incidence of worker misclassification.”  The Forbes article also lists 22 industries “hit” by class action lawsuits.

What’s the takeaway from these industry-wide regulatory and class action proceedings? As one of our co-publishers was quoted in a March 28, 2016 article reported at the end of this update: “A business acts at its peril if it fails to properly structure and document the independent contractor relationship. That may seem like it’s just dotting your ‘i’s and crossing your ‘t’s, but many of the factors looked at by the courts are counter-intuitive. Most companies don’t even get close to doing it right. Even large companies like FedEx and Uber have had trouble getting it right, and their own documents have been used against them in misclassification lawsuits, sometimes at great expense.” While there is no simple answer, the co-publishers of this blog suggest how to do so in our White Paper on how to minimize the risks of independent contractor misclassification. 

In the Courts (5 cases)

  • INSURANCE AGENTS GAIN CLASS CERTIFICATION IN ERISA IC MISCLASSIFICATION CASE. An Ohio federal district court granted class certification in a class action lawsuit by insurance agents alleging that as a result of being misclassified as independent contractors by American Family Insurance Group, the agents were denied benefits to which they were allegedly entitled to as employees under the company’s ERISA-governed insurance and retirement plans. There were three proposed classes that were certified in this case, two relating to termination benefits and one relating to health, dental, life, and disability benefits. Jammal v. American Family Insurance Group, No. 13-cv-00437-DCN (N.D. Ohio Mar. 2, 2016).
  • SEATTLE ORDINANCE PERMITTING RIDE-SHARING DRIVERS TO UNIONIZE IS CHALLENGED BY BUSINESS GROUP. The U.S. Chamber of Commerce sued the City of Seattle in federal district court in Washington for allegedly violating federal antitrust laws by issuing an ordinance allowing for collective bargaining and unionization of for-hire taxi and limousine drivers and drivers for app-based companies such as Lyft and Uber, who are providing services as independent contractors. According to its complaint, the Chamber of Commerce alleged that the ordinance will burden innovation, increase prices, and reduce quality and service for consumers. It claims: “Absent judicial intervention, the City of Seattle and thousands of other municipalities would be free to adopt their own disparate regulatory regimes, which would balkanize the market for independent-contractor services and inhibit the free flow of commerce among private service providers around the nation.” Addressing this issue, Richard Reibstein, a co-author of this blog, was quoted in a Reuters News Service article by Heather Somerville and Dan Levine on March 4, 2016: “If a municipality could pass an ordinance of this nature addressed to the ride-sharing industry, it could pass an ordinance of this nature against any industry and all industries. The law is a threat to all businesses the Chamber represents.” Chamber of Commerce of the United States of America v. City of Seattle, No. 16-cv-00322 (W.D. Wash. Mar. 3, 2016).
  • RESTAURANT DELIVERY DRIVERS FOUND TO BE MISCLASSIFIED AS IC’S AS A MATTER OF LAW UNDER FEDERAL AND ILLINOIS LAW. A federal district court in Illinois granted summary judgment as a matter of law in favor of restaurant delivery drivers in their IC misclassification class action against two restaurants, Butterfly Sushi and Butterfly Thai Restaurant. The lawsuit sought recovery for minimum wage and overtime pay under the federal Fair Labor Standards Act (FLSA) and the Illinois Minimum Wage Law. The court applied the “economic realities” test for both the FLSA and state wage law claims, examining six factors: (1) the degree of control exerted by the company over the manner in which work was performed; (2) the workers’ opportunity for profit and loss; (3) the workers’ investment in equipment and materials needed for the task; (4) the specialized skill of the workers; (5) the degree of permanency of the relationship; and (6) the extent to which the services rendered were an integral part of the companies’ businesses. In concluding that the drivers were employees and not ICs, the court found that the restaurants retained significant control over the drivers’ work by setting the shift schedules, determining the delivery fees, and directing the drivers to more efficient routes; no profit or loss was dependent on the drivers’ initiative, judgment or energy, and any reduction in earnings due to fewer orders resulted in a loss of tips, not a loss of investment; there was no evidence that the drivers in fact made any investments in specialized equipment; no special skills were required; the drivers were hired to perform the work indefinitely; and food delivery was an integral part of the restaurants’ business. While the court expressed a willingness to consider other factors besides those six, it awarded judgment in favor of the drivers. Arunin v. Oasis Chicago Inc. d/b/a Butterfly Sushi and Butterfly Thai Restaurant, No. 14-cv-6870 (N. D. Ill. Mar. 4, 2016).
  • CONNECTICUT SUPREME COURT CLARIFIES STATE “ABC” TEST FOR IC’S IN UNEMPLOYMENT PROCEEDING INVOLVING HOME HEATING OIL INSTALLERS AND TECHNICIANS. The Connecticut Supreme Court reverses a lower court and holds that installers/technicians that provide services to home heating and alarm system customers of Standard Oil of Connecticut are ICs and not employees under the state’s three-pronged ABC test for purposes of unemployment insurance contributions. In analyzing Prong A, which requires the company to show that the worker is free from control and direction in connection with the performance of services both in contract and in fact, the court concluded that Prong A was met because, among other things: the installers/technicians were free to accept or reject engagements without adverse consequences by the company; they owned and operated their own tools, machinery, and heavy duty vehicles; they were licensed and certified under state law; they entered into IC agreements with the company expressly providing that each would use his/her independent judgment and control in the execution of services; they were not supervised by the company and their work was not inspected; they chose when they wanted to work; they had and advertised their own independent businesses; they realized a profit or loss; and they were not required to undertake any training or wear specific uniforms. As to Prong B, the company was required to show that the services performed by the installers/technicians was “performed outside of all the places of business of the enterprise for which the service is performed.” Connecticut courts and administrative agencies had previously held that the term “places of business of the enterprise” included the homes of the business’s customers, but the Connecticut Supreme Court disagreed, stating: “‘[P]laces of business’ in the present context should not be extended to the homes in which the installers/technicians worked, unaccompanied by the [company’s] employees and without the [company’s] supervision. The homes of the plaintiff’s customers, unlike the plaintiff’s business offices, warehouses and other facilities, were under the homeowners’ control.” The court noted that it was not the company, but rather the homeowners, that determined when access to their homes was convenient, brought the installers/technicians to locations within their homes where equipment was to be installed; and identified problems with the installation process or equipment during the warranty period. Because Prong C (requiring the business to show that the workers were customarily engaged in an independently established business, occupation, trade, or profession) had already been met in prior proceedings, it was not addressed by the Connecticut Supreme Court, which held that the company met each of the three prongs of the ABC test. Standard Oil of Connecticut, Inc. v. Administrator, Unemployment Compensation Act, No. SC 19493 (Sup. Ct. Conn. Mar. 15, 2016).
  • LYFT’S $12.25 MILLION PROPOSED SETTLEMENT WITH DRIVERS MAY BE IN JEOPARDY. On March 24, 2016, the federal district court judge overseeing the class action lawsuit brought by over 100,000 drivers for Lyft in California conducted a “fairness hearing” on the proposed $12,250,000 IC misclassification settlement between Lyft and the lawyers representing the drivers. As more fully discussed in our blog post of March 15, 2016, which was updated on March 24 following the hearing, five Lyft drivers and two Teamsters union councils objected to the terms of the proposed class action settlement, arguing that the proposed settlement does not require Lyft to reclassify the drivers as employees and allows Lyft to maintain its current IC business model. Both prior to and at the hearing, the judge expressed concern about a number of issues including the very modest amount of recovery, relatively speaking, for each driver in view of the amount of damages ($126,000,000) that the drivers would recover if they prevailed. Cotter v. Lyft, Inc., No. 3:13-cv-04065-VC (N.D. Cal. Mar. 24, 2016).

Regulatory and Enforcement Initiatives (2 items)

  • IRS NEARING COMPLETION OF ANALYSIS OF DATA COLLECTED FROM NATIONAL EMPLOYMENT TAX SURVEY. Over the past three years, the IRS conducted 6,000 comprehensive employment tax audits. One of the objectives was to determine which industries have higher incidences of noncompliance in areas including worker misclassification. At the American Payroll Association Capital Summit held on March 21, 2016, John Tuzynski, Chief of Employment Tax and Specialty Programs for the Small Business Self-Employed Division (SB/SE) of the IRS, reportedly explained that the results of the study, due in early 2017, will help the IRS more efficiently direct its limited resources to specific examination efforts and bolster its compliance programs.
  • U.S. LABOR DEPARTMENT TO UPDATE SURVEY MEASURING INCIDENCE OF CONTINGENT AND ALTERNATIVE WORK ARRANGEMENTS. The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor announced that it is updating a survey last conducted in 2005 measuring contingent and alternative work arrangements. According to a BLS blog post on March 3, 2016, the survey is to be conducted as part of the May 2017 Current Population Survey and will pose questions that will identify workers with contingent or alternative arrangements; measure workers’ satisfaction with their current arrangement; and measure earnings, health insurance coverage, and eligibility for employer-provided retirement plans. President Obama’s latest proposed budget requests funding for BLS to permanently conduct a supplement to the survey annually. The blog post noted that if Congress approves the requested funding, BLS’s goal is to ask the questions regarding contingent and alternative arrangements every two years, with questions on other topics in the alternating years.

Other Noteworthy Matters (1 item)

  •  “Contractor or New Hire?” In a March 28, 2016 article by Audrey Henderson in IE3 Media entitled “Contractor or New Hire?” Richard Reibstein, co-publisher of this blog, set forth his views on whether a company should engage ICs or hire employees. He stated that there should be a threshold analysis of a company’s structure and needs and that “[t]he key is whether the business [must] tell the individual how to do the job.” He continued: “If you only need to tell the person what to do and not how to do it, then hiring a contractor is a cost-saving option under most state and federal laws.” He also identified some of the pitfalls of not being proactive in identifying areas where IC compliance can be enhanced: “A business acts at its peril if it fails to properly structure and document the independent contractor relationship. That may seem like it’s just dotting your “i”s and crossing your “t”s, but many of the factors looked at by the courts are counter-intuitive. Most companies don’t even get close to doing it right. Even large companies like FedEx and Uber have had trouble getting it right, and their own documents have been used against them in misclassification lawsuits, sometimes at great expense.”

Written by Richard Reibstein.

Compiled by Janet Barsky, Managing Editor. 

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

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