January 2019 Independent Contractor Misclassification and Compliance News Update

This past month may well be regarded as one of the more legally satisfying for businesses using independent contractors.  Courts issued three decisions in favor of companies on the issue as to whether certain workers are ICs or employees: the U.S. Court of Appeals for the Sixth Circuit found insurance agents to be ICs in an ERISA case; the Indiana Supreme Court held that a referral company met the state’s “ABC” test for IC status under the state’s unemployment compensation law; and the National Labor Relations Board reversed an Obama-era test for IC status and promulgated a new, more IC-friendly standard to be used when unions seek to represent workers classified as 1099ers or franchisees.

At the same time, however, two major decisions favored workers in class action IC misclassification cases arising in the transportation industry: one where the U.S. Court of Appeals for the Third Circuit held that the federal transportation deregulation law did not preempt New Jersey’s “ABC” test for wage and hour claims; and the other where the U.S. Supreme Court ruled that the federal arbitration statute, which exempts interstate transportation workers from arbitration under that law, applies not only to employees but also to ICs engaged in interstate transportation, and a court, not an arbitrator, is the appropriate decision-maker for determining if a worker is covered by the exemption – even in the face of an arbitration agreement between the business and the worker delegating all disputes to an arbitrator.

The news last month also provided a financial impetus to class action lawyers who represent workers in IC misclassification cases.  Two high-profile class action cases settlements were approved: one for $9.25 million and another for $1.3 million.

These cases, as more fully discussed below, send a clear message to companies using ICs:  while courts and administrative agencies are more willing to accept company arguments that certain workers have been properly classified as independent contractors, class action lawyers are unlikely to be deterred from challenging companies’ classification of workers as ICs because these types of cases often lead to sizable settlements, including payment of considerable legal fees.

Are companies nonetheless able to minimize their legal exposure to these types of class and collective action lawsuits, including the substantial costs associated with defending and settling them?  Yes.  As we noted in our blog post this past month about the Supreme Court case involving ICs, there are two actions businesses can take: (1) maximizing their level of compliance with IC laws, thereby reducing the likelihood they will be subject to a judicial or regulatory challenge to their IC relationships, using a process such as IC Diagnostics™; and (2) entering into IC agreements containing state-of-the-art arbitration provisions with class and collective action waivers, using the tips discussed in that blog post. Prudent businesses that use ICs to supplement their workforce or as part of a business model have taken these very types of steps to enhance the structure, documentation, and implementation of their IC relationships and upgrade the effectiveness of their arbitration agreements.

In the Courts (7 cases)

INSURANCE AGENTS ARE INDEPENDENT CONTRACTORS, NOT EMPLOYEES, FOR ERISA PURPOSES.  Many insurance companies have utilized independent contractor agents to sell policies to prospective and existing policyholders. So, it came as a shock to most insurance companies when a federal district court held in mid-2017, in an employee misclassification class action case brought under ERISA, that American Family Insurance had misclassified thousands of agents as ICs and consequently may owe hundreds of million dollars in allegedly unpaid pension, life, disability, and health insurance benefits. On January 29, 2019, the U.S. Court of Appeals for the Sixth Circuit reversed, holding that, under ERISA, some 7,200 current and former agents selling American Family policies has been properly classified by the company as independent contractors.

As more fully detailed in our comprehensive blog post published that day, the appellate court reviewed 12 factors under ERISA’s “common law” test for IC status, as set forth in the U.S. Supreme Court’s Nationwide Insurance Co. v. Darden, and found that “the district court incorrectly applied the standards relating to (1) the skill required of an agent and (2) the hiring and paying of assistants.”  The Sixth Circuit concluded that “[h]ad the court applied those standards properly, it would have found that those factors actually favored independent-contractor status” and tipped the balance in favor of an independent contractor determination.  In addition, the Sixth Circuit held that the district court failed to give sufficient weight to the parties’ written agreement, which expressly stated the parties’ intent was to create an independent contractor relationship and that the agent was “not an employee of the Company for any purpose” – and if it had done so, it “would have further swung the balance in favor of independent-contractor status.”   A dissenting judge submitted a dissent emphasizing American Family’s own internal writings characterizing its agents as employees and instructing managers to exercise direction and control over them.  Jammal v. American Family Insurance Co., No. 17-4125 (6th Cir. Jan. 29, 2019).

We note in our January 29 blog post that this is the type of internal documentation that insurance companies should eliminate in an undertaking to re-document and re-implement their IC relationships in a state-of-the-art manner. We also noted in our blog post that this decision, while important, is limited only to claims under ERISA, which has a far less challenging test for IC status than other federal and most state laws.

NEW JERSEY “ABC” TEST FOR IC STATUS NOT PREEMPTED BY FEDERAL TRANSPORTATION DEREGULATION LAW. The U.S. Court of Appeals for the Third Circuit has held that the Federal Aviation Authorization Administration Act of 1994 (FAAAA) does not pre-empt New Jersey’s “ABC” test for determining independent contractor/employee  status under the New Jersey wage and hour wage payment laws. In that case, three drivers filed a proposed class action against American Eagle Express (AEX), a logistics company providing delivery services to various medical organizations.  The drivers sought a judgment declaring them to be employees of AEX, rather than ICs, under those New Jersey laws.  AEX made a motion for judgment on the pleadings arguing the FAAAA pre-empted the “ABC” test because B prong impermissibly impacted the company’s rates, routes, and services.  On appeal, the Third Circuit affirmed the district court’s decision that FAAAA preemption does not preempt laws “where a law’s impact on carrier process, routes, or services is so indirect that the law affects them ‘in only a tenuous, remote, or peripheral … manner.’”  The court added, “preemption only occurs where a state law has a significant impact on carrier rates, routes, or services.”

In assessing the “ABC” test’s impact on prices, routes, or services, the court recognized the test does not mention carrier prices, routes, or services; does not single out carriers as opposed to all businesses; and does not regulate carrier-customer interactions or other product outputs; rather, it only concerns employer-worker relationships.  The opinion of the Third Circuit follows decisions by other federal appellate courts and distinguishes a contrary holding involving the “ABC” test in Massachusetts that is different than New Jersey’s “ABC” test.  As noted in a January 30, 2019 article by Linda Chiem in Law 360 entitled “3rd Circ. NJ Classification Ruling Curbs Scope of Preemption,” quoting the publisher of this legal blog, “the decision in this case is “not groundbreaking,” but by limiting the applicability of the FAAAA as has been done in similar cases, it “may nonetheless bury most arguments by transportation companies that state ABC independent contractor tests are preempted by the federal transportation deregulation laws.” Bedoya v. American Eagle Express Inc., No. 18-1641 (3d Cir. Jan. 29, 2019).

INDIANA SUPREME COURT HOLDS “ABC” INDEPENDENT CONTRACTOR TEST MET BY REFERRAL COMPANY. The Indiana Supreme Court has ruled that a driver for Q.D.-A., a company that matches drivers with businesses needing vehicles like RVs delivered to them, is an independent contractor and not an employee under the state’s unemployment insurance laws.  After filing for unemployment benefits, the state’s Department of Workforce Development concluded the driver was an employee.  After that decision was affirmed by an Administrative Law Judge, an intermediate appellate court reversed.  On further review, the Indiana Supreme Court affirmed, holding that all three prongs of the state’s ABC test for IC status under Indiana’s unemployment laws had been satisfied.  Under Prong A, the court found that the driver was not under the company’s control or direction, under either his contract or in fact. Under Prong B, the court determined that the driver performed a service outside of the company’s usual course of business: the driver provided “drive-away” services, while the company did not “regularly or continually provide such services.”  The court found that Prong C was satisfied because neither party disputed the agency’s initial finding that the company “provided sufficient evidence to demonstrate that [the driver] was customarily engaged in an independently established trade, occupation, profession, or business of transporting commodities.”  Q.D.-A. v. Indiana Department of Workforce Development, No. 19S-EX-43 (Sup. Ct. Ind. Jan. 23, 2019).

TRANSPORTATION COMPANY SETTLES IC MISCLASSIFICATION CLASS ACTION FOR $9.25 MILLION. A California federal court has granted final approval of a $9.25 million settlement between drayage transportation company, Roadrunner Intermodal Services LLC, and a class of 896 truck drivers claiming violations of state wage and hour laws due to their alleged misclassification by the company as independent contractors. The drivers also sought reimbursement of expenses including fuel, liability and property damage insurance, maintenance, and equipment repair. In approving the settlement, the court stated that “while plaintiffs potentially have meritorious claims, it is far from certain that they would have prevailed on those claims, given the uncertain nature of relevant case law.” The court also stated that, given the plaintiffs’ serious concerns regarding the impact of protracted class action litigation on the company’s financial condition and its related ability to pay a settlement, the proposed settlement “provides compensation that is available now, without the additional time and risk of a decision that would likely be subject to a lengthy appeals process.” The settlement provides for $5.8 million to the drivers (or approximately $6,550 on average to each class member), slightly over $3 million (one-third of the total) for class counsel, and $75,000 in payments under the California Private Attorneys General Act.  Singh v. Roadrunner Intermodal Services LLC, No. 15-cv-1497 (E.D. Cal. Jan. 24, 2019).

RIDE-SHARING COMPANY’S $1.3 MILLION SETTLEMENT APPROVED BY COURT IN IC MISCLASSIFICATION CASE.  A North Carolina federal district court has granted final approval of a $1.3 million settlement between Uber Technologies Inc. and class of 5,200 drivers who claim they were misclassified as independent contractors and not employees. The drivers, each of whom had opted out of their arbitration agreements, claimed that they were owed minimum wage and overtime compensation under the Fair Labor Standards Act because, they alleged, they were employees, not independent contractors. In approving the settlement, which reportedly is the first FLSA lawsuit the company has settled, the court concluded that in this collective action, the named plaintiff and class counsel had “authority to settle the case on behalf of the opt-in class and that the settlement was a fair and reasonable resolution of a bona fide dispute of FLSA provisions.”

Under the agreement, the company will pay a maximum gross settlement amount of $1,304,250 of which $734,294 will be paid to class plaintiffs who have opted in (or on average, under $150 per driver).  One-third of the settlement proceeds will be paid in attorneys’ fees and the remainder is earmarked for legal expenses, service awards, and the fees of the settlement administrator.  In their submission in support of settlement, the drivers acknowledged that the company had a “‘significant chance’ of either prevailing on the merits, by a finding that the drivers are independent contractors, or of achieving a reduction of liability if not required to compensate for drivers’ wait time.”  Hood v. Uber Techs., Inc., No. 1:16-cv-00998 (M.D.N.C. Jan. 3, 2019).

FEDERAL ARBITRATION ACT EXEMPTION FOR INTERSTATE TRANSPORTATION WORKERS COVERS INDEPENDENT CONTRACTORS AND BARS COMPANY’S MOTION TO COMPEL ARBITRATION. After an intermodal trucking company, New Prime Inc., was sued in a proposed class action by a truck driver whom New Prime classified as an independent contractor, the company filed a motion to compel arbitration under its independent contractor agreement containing a mandatory arbitration provision.  The district court denied the motion, holding it lacked authority to compel arbitration because Section 1 of the Federal Arbitration Act (FAA) exempts from arbitration all disputes involving “contracts of employment” with interstate transportation workers.  The U.S. Court of Appeals for the First Circuit affirmed.  The U. S. Supreme Court reviewed the decision and held that a court, not an arbitrator, should decide whether the transportation worker is excluded from the provisions of the FAA. In rejecting New Prime’s argument that the question should be determined by an arbitrator, the Supreme Court determined that the parties could not, by agreement, bypass the interstate transportation worker exclusion of Section 1 of the FAA.

The Court then addressed the question of whether the Section 1 exclusion refers only to contracts between employers and employees or also covers contracts between businesses and independent contractors.  In finding that “contracts of employment” extended to independent contractor agreements, the court considered, among other things, that “[a]t the time of the Act’s adoption in 1925, the phrase “contract of employment” was not a term of art and dictionaries tended to treat “employment” more or less as a synonym for “work.”

As more fully discussed in our blog post of January 15, 2019, the Supreme Court decision is of limited value because it only applies to the federal arbitration statute.  State arbitration laws generally do not include an exception for transportation workers.  As noted in a January 16, 2019 article entitled “Supreme Court Gives Truckers a Victory” by Margot Roosevelt in the Los Angeles Times, quoting the publisher of this legal blog:  “An argument can be made that this decision will have little or no effect on the right of employers to compel arbitration of any worker’s dispute. Those who suggest that this decision is momentous … may wish to reconsider their exuberance.”  New Prime Inc. v. Oliveira, No. 17-340 (U.S. Sup. Ct. Jan. 15, 2019).

BAKED GOODS COMPANY UNABLE TO DECERTIFY CLASS AND COLLECTION IC MISCLASSIFICATION LAWSUIT. Distributor/drivers in Maine have gained class certification in a class and collective IC misclassification lawsuit against Flowers Foods, Inc., one of the largest producers of packaged bakery foods in the United States.  The distributor/drivers allege violations of various state wage/hour and the federal Fair Labor Standards Act. Flowers Foods claimed that individual questions of fact preclude maintenance of the lawsuit as a class and collective action, but the court disagreed.  It held that questions of fact or law common to class members predominate over questions affecting only individual members and that a class action is superior to other available methods for fairly and efficiently adjudicating the misclassification controversy.  In addition, the court denied the company’s motion to decertify the FLSA collective action, concluding that the distributors are similarly situated to the named plaintiff and the maintenance of a collective action is preferable to potentially conducting many individual trials.  Noll v. Flowers Foods, Inc., No. 1-cv-493 (D. Me. Jan. 15, 2019).

Administrative Decisions (1 case)

NLRB REVERSES OBAMA-BOARD’S UNION-FRIENDLY TEST FOR INDEPENDENT CONTRACTOR STATUS IN FRANCHISEE CASE. The National Labor Relations Board has revived the “common law” test for determining independent contractor status and overturned the union-friendly test adopted during the Obama Administration.  An NLRB Regional Office found that shuttle drivers who owned and operated franchises of SuperShuttle DFW, Inc. were independent contractors and not employees eligible to be represented by a union under the National Labor Relations Act. In reaching its decision finding IC status, the NLRB Regional Office had applied the Board’s traditional common law agency test. That decision was reviewed at the behest of the union.  But instead of simply affirming the decision, the NLRB (in a 3-1 decision) overruled an earlier union-friendly NLRB decision issued during the Obama Administration. The NLRB reviewed eight factors under the common law test and found that five factors supported IC status; two factors supported employee status; and one factor was neutral. In concluding that the franchisees were ICs, the Board majority discounted the importance of two factors favoring employee status, finding them to be “relatively less significant” than those favoring IC status.

As discussed in our blog post of January 25, 2019, this decision, while perhaps noteworthy politically, has limited application to most companies for two reasons:  First, it is only applicable to union efforts to organize and represent workers classified as independent contractors.  It has no application under any other laws, including federal and state wage and hour laws, state wage payment laws, unemployment insurance and workers’ compensation laws, and the federal law governing retirement and employee welfare benefits.  Second, the NLRB adopted the common law test used by the U.S. Court of Appeals for the District of Columbia, which had rejected the NLRB’s prior test.  As noted in a January 25, 2019 article in the Los Angeles Times by Margot Roosevelt entitled “NLRB Empowers Companies to Treat More Workers as Independent Contractors,” quoting the publisher of this legal blog, “The NLRB’s decision is . . . limited to determining only if certain individuals are employees that can be represented by a union. It has no application to state or federal wage and hour laws.”  SuperShuttle  DFW, Inc., 367 NLRB No. 75 (Jan. 25, 2019).

Written by Richard Reibstein

Posted in IC Compliance

Insurance Agents Not Misclassified As Independent Contractors; Sixth Circuit Rules in Favor of Insurance Company in ERISA Class Action Seeking Pension, Life, and Health Benefits

For the past 18 months, insurance companies have been holding their collective breath to see if an appellate court would affirm or reverse an Ohio federal district court decision concluding that thousands of current and former agents for American Family Insurance Company were employees and not independent contractors under ERISA, the federal law governing pensions and other employee benefits.  Historically, agents have been treated by most insurance companies as independent contractors and have not been covered under their employee pension and welfare benefit plans.  The plaintiffs’ lawyers had estimated that if the district court’s decision was upheld on appeal, the company’s liability would exceed a billion dollars.

Insurance companies are now breathing easier because earlier today the U.S. Court of Appeals for the Sixth Circuit, based in Cincinnati, Ohio, reversed the district court and held that insurance agents serving American Family policyholders were properly classified as independent contractors under ERISA and are not eligible for pension and other employee benefits.

In many ways, this is a monumental independent contractor misclassification decision for the insurance industry, at least for the moment, allowing insurance companies to be confident that their business models had not been up-ended by the federal courts.

Most insurance companies, though, will not likely be tempted to regard this decision as a conclusive determination that insurance agents are independent contractors under all federal and state laws.

As noted above, the federal law – ERISA – that was in question in this case only covers pension and employee benefits.  It is not a determination that insurance agents are independent contractors under all other federal laws, including the federal wage and hour and discrimination laws.  It is also not a determination that agents are independent contractors under a host of state labor and employment laws, including wage payment, unemployment, and workers’ compensation laws.

The test under ERISA for IC status is the so-called “common law” test, which is regarded as considerably more friendly to independent contractor status than the tests for IC status under the federal Fair Labor Standards Act and almost all state wage and hour and unemployment laws.  Current or former agents may well bring new class actions alleging independent contractor misclassification under such laws.  Their lawyers will undoubtedly argue that the decision in the American Family Insurance case is inapplicable under those laws, which have more employee-friendly tests for IC status.

Some class action lawyers may also take another shot under ERISA.  The Sixth Circuit’s opinion recognized that the independent contractor status of American Family agents was a close question.  It pointed out the district court had concluded that the common law factors were “almost evenly split between favoring employee status and favoring independent contractor status.”

The Sixth Circuit chose to reverse in large measure because, in its view, the district court had mistakenly regarded one of the 12 common law factors as favoring employee status instead of independent contractor status and another factor as “neutral” when it should have treated that factor as favoring independent contractor status.  This view of the facts and law suggests that a slight change in some of the key facts might influence another court as a matter of law to side with agents in a future “close case” brought under ERISA against a different insurance company – either in a stand-alone ERISA lawsuit or one brought, for example, alongside a claim under the federal wage and hour law for unpaid overtime or minimum wages.

In reaching its decision, the Sixth Circuit also gave great weight to the agreement between American Family and the agents, finding that it fully supported the parties’ independent contractor relationship. The appellate court concluded that the district court “apparently did not weigh this important component when reaching its conclusion” and, had it done so, “it would have further swung the balance in favor of independent-contractor status.”

Thus, perhaps the biggest takeaway from the American Family Insurance decision is that insurance companies, like businesses in virtually every industry, can and should re-document their independent contractor agreements in a state-of-the-art manner, ensuring that their agreements reflect the actual practices of the parties.  We provide insights to our readers as to how they can accomplish this objective in the final paragraphs of this blog post.

The Sixth Circuit Decision

The appellate court first traced the history of this case, including the 12-day jury trial, the jury’s “advisory” verdict that the agents were employees and not independent contractors, and the district court’s adoption of the jury’s verdict.

The Sixth Circuit decision noted that the U.S. Supreme Court had issued a decision in 1992 in Nationwide Mutual Insurance Co. v. Darden stating:  “In determining whether [an individual] is an employee [or independent contractor] under the general common law of agency, we consider the hiring party’s right to control the manner and means by which the [performance of services] is accomplished.”  The Sixth Circuit then set forth a dozen factors that the Darden court stated are among those that are relevant, noting that “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.”

The key portion of the Sixth Circuit decision was brief: “Here, the district court incorrectly applied the legal standards in determining the existence of the Darden factors relating to (1) the skill required of an agent and (2) the hiring and paying of assistants. Had the court applied those standards properly, it would have found that those factors actually favored independent-contractor status. We analyze each of those [two] factors below.”

In analyzing the skill factor, the Sixth Circuit rejected the district court’s conclusion that the amount of skill under Darden weighs “slightly in favor of employee status” because American Family “sought out agents who were unskilled” and then trained them. Instead, the appellate court found the sale of insurance is a “highly specialized field” that requires “considerable training, education, and skill.”  Accordingly, the Sixth Circuit concluded that the district court should have weighed the skill factor in favor or independent contractor status.

As to the factor involving the hiring and paying of assistants, the Sixth Circuit concluded that the district court mistakenly weighed this factor as “neutral” because American Family provided “pre-approved” candidates whom the agents could select as their staff, even though the agents could hire their own staff.  The appellate court rejected that analysis, holding that where an agent has the “primary authority over hiring and paying assistants,” this factor weighs in favor of independent contractor status.

Finally, the Sixth Circuit held that the district court failed to give sufficient weight to the parties’ written agreement, which expressly stated that their intent was to create an independent contractor relationship and that the agent was “not an employee of the Company for any purpose.” Although the district court had recognized the agreement favored IC status, the Sixth Circuit said the lower court should have given the contract even greater weight, which “would have further swung the balance in favor of independent-contractor status.”

The Dissenting Opinion

The Sixth Circuit decision was issued by a three-member panel of judges, with one judge filing a dissent – Judge Eric Clay. He concluded that the district court judge had properly analyzed the skill factor and correctly concluded that it favored employee status – noting that American Family “almost always hired untrained, and often unlicensed, agents and provided all the training they needed to be an American Family agent.”

Judge Clay then addressed the factor involving the agents’ role in hiring and paying assistants. Rather than finding that factor was “neutral,” as the district court judge had held, the dissent concluded this factor actually favored employee status. In support of his view, Judge Clay relied on evidence that American Family imposed qualification standards on the agents’ assistants, required assistants to sign non-solicitation agreements, and retained the right to approve or disapprove of agency staff selections above and beyond the setting of qualification standards.

Finally, the dissent took issue with the majority’s reliance on the agents’ agreements with American Family.  Judge Clay referred to court decisions holding that agreements labeling agents as ICs, “while certainly relevant,” are “less important.”  He also highlighted other internal American Family documents, one of which “indicate[d] that [American Family] expected [their] sales managers to exercise control over agents’ methods and manner of performing their services,” and another of which referred to agents as “employees.”

The dissenting opinion may propel the plaintiffs to request a re-hearing of the appeal by the all of the judges in the Sixth Circuit sitting en banc.  Such en banc re-hearings are generally “not favored” and will not ordinarily be ordered unless the proceeding involves a “question of exceptional importance.” Any such request must be filed within 14 days from the date the appellate court’s opinion is entered as a judgment.

The full name of the case and a link to the opinion is:  Jammal v. American Family Insurance Co., No. 17-4125 (6th Cir. January 29, 2019).

Takeaways

The majority’s focus on the importance of the independent contractor agreement between the agents and American Family Insurance is hardly surprising.  Independent contractor misclassification cases have been decided – both for and against employee status – on the basis of such agreements, which often set forth the company’s right, if any, to control the manner and means of the other party’s performance of services.

Perhaps the most well-known case in which the courts have relied on the language of an independent contractor agreement involves two opinions regarding FedEx Ground that were the subject of prior blog posts – one dealing with a decision by the Seventh Circuit located in Chicago, and the other addressing a decision by the Ninth Circuit located in San Francisco. The courts in both cases found that the drivers were employees as a matter of law, holding they were misclassified as ICs based on language in the FedEx Ground operating agreements with the drivers. In the Ninth Circuit case, the appellate court found that, under the agreement drafted by FedEx for use with the drivers, FedEx:

  • had the right to control the drivers’ appearance,
  • retained the right to control the type of vehicle used by the drivers,
  • reserved the right to control the times the drivers could work,
  • had the right to control aspects of how and when the drivers delivered their packages, and
  • required drivers to conduct all business activities in compliance with FedEx Ground’s “standard of service” requirements.

Like most Fortune 500 companies, FedEx has and retains talented lawyers, but drafting independent contractor agreements that promote IC status is a process that can be counter-intuitive and, if not drafted in a state-of-the-art manner, can result in decisions where the courts use a company’s own contract language against it to support a finding of employee status.

For that  reason, many companies resort to a process such as IC Diagnostics™ to re-document and re-implement their IC relationships in a customized and sustainable manner that maximizes compliance with IC laws and minimizes IC misclassification liability. Companies that have opted for one-size-fits-all agreements have often  concluded that such form agreements are ill-fitting and cannot be reconciled with a business’s actual practices.  Further, many companies still rely on IC agreements that may have sufficed years ago but have not been updated to conform to the holdings in hundreds of newly reported independent contractor cases.

This case involving American Family agents also highlights the importance of implementing the IC relationship in a manner consistent with the terms of an IC agreement. Careless wording in internal documentation, such as the types noted by the dissent, should be eliminated, and internal documentation should instead be drafted with a keen eye on IC compliance.

Written by Richard Reibstein

 

Posted in IC Compliance

NLRB Issues Franchise-Friendly, Pro-Independent Contractor Ruling; New Test for IC Status Raises Bar for Unions Alleging IC Misclassification

Earlier today, the National Labor Relations Board issued a decision overturning a union-friendly test for independent contractor status that had been adopted by the Board during the Obama Administration. In its decision in SuperShuttle DFW Inc., the NLRB, which is now controlled by a majority of Board members appointed by President Trump, has reverted to the common law test for IC status that was articulated by the U.S. Supreme Court 50 years ago.  According to the Board majority, those common law factors must be examined “through the prism of entrepreneurial opportunity.”  What does this mean?  Unions that seek to organize and represent drivers and other workers who provide services as independent contractors or franchisees will have a far more challenging time obtaining a ruling from the current NLRB that the workers have been misclassified as ICs – and are therefore eligible to be unionized as employees under the National Labor Relations Act.

This decision, while perhaps noteworthy politically, has limited application.  It only applies to the classification of workers as independent contractors or employees under federal labor laws.  It has no application under any other laws including federal and state wage and hour laws, state wage payment laws, unemployment insurance and workers’ compensation laws, or the federal law governing retirement and employee welfare benefits.

Analysis of the SuperShuttle Decision

This case involved a decision by an NLRB Regional Office finding that shuttle drivers who owned and operated franchises of SuperShuttle DFW, Inc. were independent contractors and not employees eligible to be represented by a union under the National Labor Relations Act. In reaching its decision, the NLRB Regional Office had applied the Board’s traditional common law agency test. That decision was reviewed at the behest of the union.  But instead of simply affirming the decision, the NLRB (in a 3-1 decision, with Member McFerran dissenting) used the occasion to overrule an earlier NLRB decision issued during the Obama Administration that was union-friendly.

As a practical matter, though, and as explained in an earlier blog post, the NLRB’s prior test was of limited value to unions anyway because it had been rejected by the United States Court of Appeal for the District of Columbia in a case involving FedEx Ground.  When the NLRB later disregarded the D.C. Circuit’s decision in a second FedEx Ground case, the D.C. Circuit reversed the NLRB once again, stating: “It is as clear as clear can be that ‘the same issue presented in a later case in the same court should lead to the same result.”  The appeals court then stated emphatically: “Doubly so when the parties are the same.” After observing that the NLRB was simply seeking to “nullify this court’s [prior FedEx] decision,” the court remarked: “This case is the poster child for our law-of-the-circuit doctrine, which ensures stability, consistency, and evenhandedness in circuit law.”

Both the majority and dissenting opinions in the SuperShuttle DFW case  – the majority in a 14-page decision and Member McFerran in a 15-page dissent – spent a great deal of time rebutting the other’s arguments .  But the actual holding of the case is rather straightforward:  based on the Supreme Court’s decision in 1968 in NLRB v. United Insurance Co. of America, which adopted the test for independent contractor status set forth in the 1958 edition of the Restatement (Second) of Agency, the Board will henceforth apply a “non-exhaustive” list of common law factors (described below). The Board majority cautioned, though, that those factors are not a “shorthand formula” for determining IC status; rather, “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.”  Those factors will then be examined in view of the “total factual context” of the business and industry, and evaluated “through the prism of entrepreneurial opportunity.”

Those last two words were at the crux of extensive counterpunching between the majority and dissent.  The majority opinion stated that entrepreneurial opportunity is not a separate common law factor or a “super-factor,” as it says the dissent claims, and the dissent claimed that the majority opinion essentially makes entrepreneurial opportunity a “trump card” in the independent contractor analysis.

But far more important than this exchange over “entrepreneurial opportunity” is the majority and dissenting opinions’ views of the facts and whether such facts support IC or employee status.

The factors considered by the NLRB majority and its conclusion

The NLRB reviewed eight factors, finding that five favored IC status, two favored employee status, and one factor was neutral.

The first factor was the “extent of control by the [business]” over the “manner and means by which drivers conduct business.”  In assessing this element, the Board majority focused on SuperShuttle’s business context and concluded that, as part of the shared ride industry, it and its drivers are highly regulated, just as are drivers in the taxicab industry. The Board majority made clear that governmental regulation is not to be regarded as a form of control by a business over the manner and means by which drivers perform their services.

The Board majority then found the factor of whether the SuperShuttle franchisees are “free from control in most significant respects in the day-to-day performance of their work.”  They set their own schedule, decide if they want to accept a trip opportunity as offered on their Nextel devices, take breaks and stop working at any time, are free to choose where they work in the Dallas-Fort Worth area, and have no set routes. The Board majority determined that this item weighs heavily in favor of IC status.

The second factor examined was the method of payment. The franchisees pay a flat fee to SuperShuttle and are entitled to all fares they collect from riders, without having to share with SuperShuttle. The majority found this factor also favored IC status.

The third factor examined the instrumentalities of work, the workers’ tools, and their place of work.  The Board majority noted that the franchisees own or lease their own vans, pay a fee for the use of their Nextel devices, incur their own driving expenses (gas, tolls, repairs, etc.), and may work wherever they choose in the Dallas-Fort Worth area. This factor favors IC status as well, according to the Board majority.

The fourth factor reviewed was supervision.  The Board majority noted that the only daily communication between franchisees and SuperShuttle is via the Nextel dispatch system and that drivers may accept or reject a trip. While drivers are subject to a $50 fine for accepting a trip and then later declining it, the $50 is given to the franchisee that picks up the declined trip. In the assessment of the Board majority, the few minor and isolated fines do not diminish the drivers’ “near-absolute” autonomy, which the Board majority found to support IC status.

The fifth factor involves the relationship the parties believe they created. The Board majority relied on the franchise agreement, which states that the franchisee is not an employee of SuperShuttle and is an independent owner of its own business, and noted that SuperShuttle does not withhold taxes and provides no fringe benefits to the franchisees.  These facts, in the view of the Board majority, also favor IC status.

The sixth factor involves the issues of whether the franchisees work in a distinct business and whether they are part of the employer’s regular business. The Board majority found that driving is “not considered a distinct occupation,” SuperShuttle is involved in the business of transporting customers, and it is part of the employer’s regular business inasmuch as revenues for SuperShuttle are derived from the franchisees’ monthly payment for providing this service. The Board majority found that this set of factors favors employee status.

The seventh factor is length of employment. Although the franchise agreement is a one-year contract, which the Board concluded favored IC status, most franchisees renew their agreements yearly, so the Board determined this factor was neutral.

The eighth and last factor considered was skills required.  The Board majority determined that the franchisees do not have any particular skill set or require any special training; it held this factor favored employee status.

In assessing these eight factors, the Board majority stated that three factors – ownership and control of their vans, nearly complete control of their daily work schedules, and the method of payment where they pay a monthly fee and keep all of their fares collected – strongly favor IC status.  Those three factors, according to the Board majority, provide franchisees with “significant entrepreneurial opportunity.” The Board majority also discounted the importance of the two factors favoring employee status, finding them to be “relatively less significant” than the others favoring IC status.

The dissenting opinion

Member McFerran took issue with almost all of the conclusions of the Board majority, starting with her view that the Board overlooked the fact that, under the franchise agreement, franchisees are prohibited from working for other transportation companies and must obtain approval for any substitute drivers, and are also “subject to a uniform agreement imposed by the company on each of them” – all factors that weigh in favor of employee status.

She also disagreed with the majority’s view of factors involving the length of employment.  Opposed to the majority, which regarded this factor as neutral, Member McFerran found that it favored employee status because most franchisees renew their agreements.

The dissenting opinion then examined the language in the franchise agreement where drivers may “not . . . deviate from the standards, specifications and operating procedures as specified in this Agreement,” rhetorically concluding that “[i]f this is not control ‘by the agreement . . . over the details of the work . . . , then it is hard to grasp what control could be . . . .”

Member McFerran also took issue with the majority’s conclusions regarding the “instrumentalities, tools, and place of work” (viewing that that factor as neutral), the parties’ belief that they had created an IC relationship (stating that the non-negotiable agreement should be disregarded), the method of payment factor (suggesting that factor  should be given little weight), and the supervision factor (concluding this factor strongly favors employee status).

Takeaways

The majority and dissenting opinions are diametrically different; as such, they afford little guidance to new ventures that are contemplating whether to create a business model on an independent contractor or franchise model, on the one hand, or an employee model, on the other hand.  Both opinions examine the same facts yet reach almost opposite conclusions. It is fair to assume that if the majority of the NLRB’s members is nominated in the future by a future Democrat, Member McFerran’s views may once again reflect the majority.

Many businesses currently based on an independent contractor or franchise model will undoubtedly view this NLRB decision as confirmation that they are in compliance with the law.  But, decisions involving IC status are very fact-dependent. Not all companies deploying an IC or franchise business model will prevail, even before the current Board majority, and under a different set of facts, Member McFerran may well  find some workers to be independent contractors.

In addition, the decision by the NLRB only addresses the test for IC status under the National Labor Relations Act. It has no application whatsoever to the test for IC status under the federal Fair Labor Standards Act (FLSA), governing minimum wage and overtime; the federal non-discrimination laws (such as Title VII, the Americans with Disabilities Act, and the Age Discrimination in Employment Act), and the federal law governing pensions and employee benefits (ERISA) – each of which have their own tests for IC status.  Likewise, this decision by the NLRB has no application to any state laws, including those involving minimum wage and overtime, wage payments, unemployment, and workers’ compensation.

Perhaps the most compelling takeaway is that businesses using an IC or franchise business model that wish to avoid a union drive, a regulatory proceeding initiated by a federal or state workforce or tax agency, or a class action under a federal or state law should enhance their level of compliance with the IC tests under all of those laws – and not just the new test under the National Labor Relations Act. Many businesses have chosen to use a process such as IC Diagnostics™, which is designed to minimize IC misclassification exposure by restructuring, re-documenting, and re-implementing IC relationships under applicable IC tests in a customized and sustainable manner. Utilizing this type of process will maximize the likelihood a business will be able to avoid an IC misclassification challenge – and prevail in one if brought.

Written by Richard Reibstein

Posted in IC Compliance

Supreme Court Decision in “New Prime” May Have Limited Impact on Independent Contractor Misclassification Claims, Despite Some Commentators’ Exuberance and Others’ Despair

Shortly after the issuance of the Supreme Court’s decision earlier today in New Prime Inc. v. Oliveira, some commentators have referred to it as a watershed opinion preserving the right of workers including independent contractors to have their class action cases heard in court instead of before an arbitrator. Others have lamented the decision, worried that the Supreme Court has now foreclosed the right of companies to compel employees and independent contractor to arbitrate their workplace disputes under arbitration agreements the workers have signed.  But the Supreme Court’s decision may have little or no impact as to whether workers classified as independent contractors can be compelled to arbitrate their IC misclassification claims.

Why? Because the decision by the Supreme Court is limited to the Federal Arbitration Act (FAA) and turned on language found in Section 1 of the FAA that excludes from its coverage several types of transportation workers that are involved in interstate commerce.  In contrast to the FAA, state arbitration laws generally do not exclude those workers.  Thus, the New Prime decision may have little or no impact on the rights of companies to compel arbitration of any other workers’ disputes – whether the workers are classified as employees or independent contractors or whether they are involved in interstate transportation – if the company seeks to compel arbitration under a state arbitration law, instead of or in addition to the FAA.

Some lawyers representing workers – both employees and independent contractors – may argue that the federal arbitration law preempts these state laws.  But the courts generally have found state arbitration laws to be preempted by the FAA, which is intended to promote arbitration, only in instances where a state law places limits on arbitration – and it is likely that few if any state arbitration laws exclude transportation workers engaged in interstate commerce.

The Two Issues Decided By the Supreme Court  

The precise issue decided first by the Supreme Court in New Prime was whether a court or arbitrator should decide whether a transportation worker is excluded from the provisions of the FAA.  Justice Neil Gorsuch, who authored the decision, concluded that the courts, not an arbitrator, must decide the exclusion issue – even if the arbitration agreement directs this issue to the arbitrator to decide.  According to the Court’s opinion, before a court considers invoking its power to compel arbitration and “stay” litigation under the applicable sections of the FAA, it must determine if a worker is excluded under Section 1 of the FAA as an interstate transportation worker.  If the exclusion applies, the court cannot compel arbitration under the FAA.

New Prime, an intermodal trucking company, had argued that the threshold question of whether the exclusion applied should be determined by an arbitrator.  In rejecting that argument, the Supreme Court stated that the parties could not, by agreement, bypass the interstate transportation worker exclusion in Section 1 of the FAA.  According to Justice Gorsuch:  “The parties’ private agreement may be crystal clear and require arbitration of every question under the sun, but that does not necessarily mean the Act authorizes a court to stay litigation and send the parties to an arbitral forum.”

The second issue decided was whether the exclusion for “contracts of employment of . . . [transportation] workers engaged in . . . interstate commerce refers only to contracts between employers and employees or also covers contracts between companies and independent contractors.” The Court examined the meaning of the term “contract of employment” at the time the FAA was enacted in 1925.  It concluded that dictionaries at the time “tended to treat ‘employment’ more or less as a synonym for ‘work.’”  The Court also found that Supreme Court cases in the early 20th century used the phrase “contract of employment” to describe “work arrangements involving independent contractors.”

The Supreme Court did not decide, though, whether Mr. Oliveira or any a particular worker – either an independent contractor or an employee – would be excluded under Section 1 of the FAA.  Mr. Oliveira and New Prime agreed that he was an interstate transportation worker.  That issue was not before the Supreme Court and now is left for the lower courts to decide in cases where the parties are in disagreement over the application of the exclusion to a particular worker or class of workers.  It is likely  plaintiffs’ class action lawyers will attempt to expand the reach of the exclusion by  characterizing a host of workers as being involved in the interstate commerce transportation industry. However, even if an individual or group of workers is excluded under the federal arbitration law, state arbitration laws may cover them and provide a statutory basis for compelling arbitration.

Takeaways and Tips

Many companies utilizing independent contractors have included arbitration clauses with class action waivers in their IC agreements. More have done so following last year’s decision by the U.S. Supreme Court in Epic Systems Corp., which upheld mandatory arbitration provisions for workplace claims.

Plaintiffs’ class action lawyers regularly challenge arbitration clauses with class action waivers; they regard them as a huge impediment to their ability to vindicate worker rights, including claims asserted by workers who allege they are employees misclassified as independent contractors.  In contrast, businesses using arbitration agreements view them as a means to curtail the misuse of class actions used to exact costly settlements in circumstances where only a few members of the class truly feel aggrieved.

The effort by the plaintiff in the New Prime case was successful, but only because the worker and the company both agreed that Mr. Oliveira was an independent contractor and was engaged in an interstate transportation industry.  That invoked the exclusion in Section 1 of the FAA, which forecloses arbitration under that federal law. If New Prime had instead sought to compel arbitration under a state arbitration law instead of or in addition to the FAA, it might have secured a court order compelling arbitration of the worker’s claims.

Thus, the first practice pointer for lawyers to consider is predicating a motion to compel arbitration on the applicable state arbitration law, if the worker is unquestionably a transportation worker involved in interstate commerce.  If, however, an argument might be advanced by the worker’s counsel that the plaintiff may be excluded under the FAA (or if it is indisputable that the worker is not involved in an interstate transportation industry), a company may wish to base a motion to compel not only on the FAA but also on an applicable state arbitration statute.

Of course, this strategy assumes the arbitration clause in issue is free from other challenges.  As noted in our blog post of November 14, 2018 entitled “How to Effectively Draft Arbitration Clauses With Class Action Waivers in Independent Contractor Agreements,” plaintiffs’ class action lawyers have been very creative in their efforts to undermine efforts by companies to arbitrate cases and limit class actions.

In that blog post, we discussed in detail ten tips to be utilized in appropriate circumstances to minimize challenges to arbitration clauses with class action waivers.  Those suggestions can be summarized as follows:

1. Any arbitration agreement with a class action waiver should specifically recite that the arbitrator is not given authority to conduct class arbitration.

2. Make sure the arbitration clauses can withstand unconscionability arguments.

3. Don’t bury arbitration clauses deep within independent contractor agreements.

4.  Place jury trial waivers in ALL CAPITAL LETTERS, or bold type, or larger size typeface, and state that the arbitration clause means that disputes will not be decided by a court or jury.

5. Avoid selecting a particular state’s law as the parties’ contractual “choice of law” if that state’s law contains an unfavorable test for independent contractor status.

6. Make sure the arbitration clause in an IC agreement specifically designates as third-party beneficiaries all of the clients and customers of the business.

7. Draft a state-of-the-art “delegation” of authority provision. The so-called “delegation” clause confers upon arbitrators the authority to decide certain issues – but as we learned in the New Prime decision, not whether a worker is excluded by Section 1 of the FAA.

8. Keep tabs on changing laws and modify any choice of law provision in IC agreements when there has been an unfavorable change in the independent contractor laws of the state selected as the choice of law.

9. Ensure your arbitration provisions are up to date, taking advantage of the newest legal developments in this area of the law.

10. Keep abreast of new statutes affecting arbitration of independent contractor and wage and hour disputes.

There are dozens of other tips that practitioners should consider to increase the odds of compelling arbitration of class action claims by workers claiming they have been misclassified as 1099ers. But perhaps the most important suggestion is one intended to minimize the likelihood of an IC misclassification lawsuit being brought in the first place: enhance the company’s level of compliance with applicable IC laws.

One way that many companies have enhanced their IC compliance is through a process such as IC Diagnostics™, which evaluates a company’s level of compliance and, to the extent feasible, restructures, re-documents, and re-implements the independent contractor relationship, without altering the company’s business model – all in an effort to minimize independent contractor misclassification exposure by means of a customizable and sustainable solution.

Written by Richard Reibstein

Posted in IC Compliance

Is Your Company on an Independent Contractor Misclassification “Hit List”?

As reported six months ago in an article in the E&P Journal, the oil and gas industry is one of those that is under attack by plaintiffs’ class action lawyers filing independent contractor misclassification lawsuits. My colleagues Bill Swanstrom and Mike Rose joined me then in commenting on some of the more notable lawsuits against energy companies that use independent contractors to perform specialty services in the areas of exploration and production.

While on the lookout for additional IC misclassification cases in the oil and gas industry, we came across a website page for a plaintiffs’ class action law firm that focuses on  several industries and includes “hit lists” of companies as potential defendants in claims alleging independent contractor misclassification.  In the oil and gas industry, the list names more than 130 companies, and the site suggests that workers “may have claims” if they are performing any of the following types of services:  Base Operators, Flow Back Operators, Pipeline Inspectors, Drillers, Field Specialists, Field Engineers, Field Operators, Field Coordinators, and Tool Pushers.

Other industries with “hit lists” on that website page include trucking and transportation, chain restaurants, banking and financial services, and retail sales – each with a list of company names.

This type of advertising by plaintiffs’ class action lawyers is increasingly common.  What can companies do to minimize the risk that they will become a defendant in a class action IC misclassification lawsuit?  After summarizing some of the new cases affecting the oil and gas industry, we provide an in-depth analysis and then discuss on our “Takeaways” some steps that companies in all industries can take not only to maximize compliance with federal and state IC laws but also to reduce the likelihood of becoming a defendant in those types of class actions.

Recent IC Misclassification Cases in the Oil and Gas Industry

While we report below on three recent cases in one industry, these sorts of IC misclassification lawsuits are similar to those affecting companies in almost every other sector of the economy.

OIL AND NATURAL GAS COMPANY AGREES TO PAY OILFIELD WORKERS $2.9 MILLION IN SETTLEMENT OF IC MISCLASSIFICATION CLASS ACTION

Less than two weeks ago, a Pennsylvania federal court granted final approval of a $2.9 million settlement of a class and collective action brought by oilfield workers against Rice Energy, Inc., an oil and natural gas company. The plaintiff, a drilling fluid engineer, provided specialty services in Ohio and Pennsylvania in the Marcellus, Utica, and Upper Devonian Shales for six months beginning in August 2016.  The plaintiff asserted that Rice Energy engaged in violations of the federal Fair Labor Standards Act (FLSA) and state wage and hour laws as a result of its alleged misclassification of him and other oilfield workers as independent contractors and not employees.

According to the complaint, the plaintiff’s primary job duties included monitoring fluid activities at jobsites, operating oilfield equipment, coordinating transfer of fluids between rigs, controlling fluid within defined specifications, and building and maintaining various fluid systems associated with drilling and completion of wells. In support of his misclassification claims, the complaint alleged that: Rice Energy directed the hours and locations where the plaintiff worked, the tools he used, and the rates of pay he received; the plaintiff did not provide his own equipment or incur operating expenses like rent, payroll, marketing, and insurance; no real investment was required of the plaintiff; the plaintiff was economically dependent on the company and was prohibited from working other jobs while working on jobs for the defendant; Rice Energy directly determined the plaintiff’s opportunity for profit and loss; and that very little skill, training, or initiative was required of plaintiff to perform work for the company.

The defendant’s answer denied these allegations and focused on the fact that the plaintiff “independently contracted with Patriot Drilling Fluids, a company with which [Rice Energy] contracted to perform services at well sites.”  The answer also contained more than a dozen defenses, including: the plaintiff and proposed class and collective members were properly classified as independent contractors; they were engaged by a third party, Patriot Drilling Fluids, and not by the defendant; and any alleged damages were the sole responsibility of the third party and not the defendant. The court’s order approving the settlement expressly stated that it “makes no finding or judgment as to the validity of any claims released under the Settlement or whether Rice Energy is liable under the Fair Labor Standards Act or any other applicable law.” Williford v. Rice Energy, Inc., No. 2:17-cv-00945-DSC (W. D. Pa. Dec. 19, 2018).

ENERGY AND PETROCHEMICAL SERVICES COMPANY IS NOT ENTITLED TO SUMMARY JUDGMENT IN IC MISCLASSIFICATION COLLECTIVE ACTION BY CONSULTING “COACHES”, BUT SECURES DE-CERTIFICATION ORDER FROM THE COURT

Two months ago, an Oklahoma federal court denied the summary judgment motion of Check-6, Inc., a company in the business of providing consulting services in the energy, manufacturing, mining, petrochemical and transportation industries brought against it by consulting “coaches” who provided services at the work sites of Check-6’s clients. A collective group of coaches, consisting of the named plaintiff and 18 opt-ins, claimed that they were denied overtime compensation under the FLSA due to their alleged misclassification as independent contractors and not employees.  In its decision, the court stated that the Court of Appeals for the Tenth Circuit has “repeatedly denied summary judgment motions where there remained disputed facts material to the classification of workers as employees or independent contractors.” Applying the six-factor “economic realities” test, the court found that a reasonable trier of fact could find that the facts supported a determination that the coaches were employees and not independent contractors; therefore, the court held, summary judgment must be denied. Specifically, the court found that there was disputed evidence as to four of the six factors: the company’s degree of control over the services performed by the coaches; their opportunity for profit and loss; the coaches’ investment in their individual business; and the permanence of the parties’ working relationship. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N.D. Okla. Oct. 18, 2018).

Although the court denied summary judgment in favor of the company, less than two weeks later the court “de-certified” the class/collective action.  It stated: “[D]ecertification is warranted by individualized issues, which include, but are not limited to, . . . the determination of each plaintiff’s status as an independent contractor or employee.”  With regard to the issue of whether the “coaches” were properly classified as independent contractors, the court utilized the fact-intensive economic realities test and concluded that any such determination would require individualized analysis of each of the opt-in plaintiffs especially because they worked at different Check-6 client sites and had different responsibilities depending on the site. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N. D. Okla. Nov. 1, 2018).

DRILLING/WELL SITE CONSULTANT FILES IC MISCLASSIFICATION CLASS ACTION IN PENNSYLVANIA

This past September, a drilling consultant/well site supervisor filed a proposed class and collective action on behalf of himself and other oil field personnel against EdgeMarc Energy Holdings, LLC, an oil and natural gas company primarily doing business in Pennsylvania, Ohio, and West Virginia. The lawsuit is aimed at recovering unpaid overtime compensation under the FLSA and wage and hour laws of Pennsylvania and Ohio that the plaintiff claims is due because he and the other oil field workers were classified as independent contractors and not employees.

According to the complaint, the workers operate oilfield machinery; perform manual labor and work long hours in the field, and are paid a day-rate with no overtime compensation.  The complaint further alleged, among other things, that the daily activities of the workers were mostly governed by EdgeMarc’s or its clients’ standardized plans, procedures, and checklists; virtually every job function was pre-determined by EdgeMarc or its clients, including what tools to use, what data to compile, the schedule of work and related duties; and the workers were prohibited from varying their job duties outside pre-determined parameters. The plaintiff also alleges that no substantial investment was required of him; that EdgeMarc, or the company with which it contracted, exercised control over all aspects of the plaintiff’s job, including the hours and locations of work, tools used, and rates of pay received; he did not incur operating expenses like rent, payroll, marketing and insurance; he was prohibited from working other jobs for other companies; and his work required little skill, training or initiative.  Larsen v. EdgeMarc Energy Holdings LLC, No. 2:18-cv-01221 (W.D. Pa. Sept. 13, 2018).

Takeaways:  How Companies Can Minimize IC Misclassification Exposure and Maximize Compliance with IC Laws

Regardless of whether your company is on “hit list” created by a plaintiffs’ class action law firm, there are a number of steps you can take to reduce the likelihood of IC misclassification liability and to enhance your compliance with federal and state IC laws.  Here are three:

  1.  Restructuring, re-documenting, and re-implementing your IC relationships

While the U.S. Department of Labor may have dialed down its crackdown on IC misclassification and leveled the playing field under the Trump administration, class action lawyers have increased their focus on these types of lawsuits.

The threshold inquiry by any company using ICs should be whether the workers in question are suitable candidates for payment on a 1099 basis.  Not all workers are.  Although the tests for IC status vary dramatically among the states and there are different tests under various federal statutes, it is not particularly challenging to determine, as an initial matter, whether any particular group of workers might validly qualify as valid ICs.

While most tests for IC status consist of several factors, some as many as 20 or more, there is one factor that is crucial in every test: is the individual directed “how” to perform his or her services? Plainly, every business directs every IC and every employee as to “what” work they are expected to perform.  But unlike employees, who are subject to being told “how” to do their work, the most important factor in determining IC status is whether the service providers decide the manner and means by which they render services, consistent with industry standards and any legal or client requirements.

Even if the workers in question may qualify as valid ICs, companies all too often create their own exposure to IC misclassification if they, or a party they contract with, fail to properly structure, document, and implement their IC relationships in a manner that complies with IC laws.  This is where a comprehensive process, such as IC Diagnostics™, can be effectively deployed, assessing well over 48 factors bearing on workers’ IC status before an IC relationship is established – or, if one already exists, determining how it can be restructured, re-documented, and re-implemented to minimize any IC misclassification exposure.

The tests for IC status have vexed legal practitioners and companies for years, and a great number of the factors bearing on IC status are counter-intuitive.

What can happen to a company that does not structure or document its IC relationships in a manner is found by a court or regulatory agency to be non-compliant? The results can be costly, such as what happened to one of the country’s Fortune 500 companies, FedEx. The wording of its independent contractor agreement covering its Ground Division drivers was held by two federal appellate courts as creating an employment relationship as a matter of law.  As a result, over the past several years, FedEx has chosen to settle several dozen IC misclassification cases for nearly $500 million.

In the Larson v. EdgeMarc Energy case reported above, if the allegations are true that the company prepared standardized plans, procedures, and checklists for the oilfield workers treated as independent contractors, it would be far more challenging for the company to defend the case than if its documentation was free from direction and control.

Solid documentation alone will not always protect a company; it is not uncommon for companies with decent IC agreements to fail to carry out or implement their IC relationships in a way that is consistent with IC laws and their IC agreements.

What is a company to do, whether they are in the oil and gas industry or, for that matter, any other sector of the economy?  There are no shortcuts or “quick fixes” when seeking to enhance IC compliance, and “one size fits all” solutions are likely to be ill-fitting.  Companies that rely on ICs should seek out sustainable solutions that offer state-of-the-art approaches to enhancing IC compliance. While such an approach is more time-intensive, a customized approach is far more likely to effectively minimize IC misclassification exposure, without changing a company’s business model.

  1.  Avoid treating all those classified as independent contractors in the same fashion

In the Goodly v. Check-6 case, the court de-certified the class/collective.  This is likely to require the plaintiff and each of the 18 opt-ins to litigate their cases on an individual basis.  De-certification can sometimes lead to settlement on a far less costly basis. But de-certification can usually only be obtained where there are meaningful differences in treatment or circumstances between the plaintiff and many of the proposed class or collective members. While uniformity and consistency may create efficiencies, businesses that treat some contractors differently can lead to a court to put an end to a class or collective action at the preliminary or final stages of a lawsuit.

  1.  Adding a state-of-the-art arbitration clause to IC agreements

In addition, companies should consider adding to their IC agreements arbitration provisions with class action waivers.  While such provisions are not applicable to governmental agencies conducting audits, investigations, or administrative proceedings, their inclusion in IC agreements has served the interests of many employers.

For example, many of our monthly news updates include cases where companies have successfully compelled individual arbitration in response to the filing of a proposed class action.  For example, in one of those blog posts, we reported that a California federal court had granted Chevron Corporation’s motions to compel arbitration of collective action claims brought by well site/drill site managers who alleged that Chevron had violated the wage and overtime provisions of the FLSA due to alleged misclassification of the managers as independent contractors. Each of the four managers who were the subject of the motion to compel arbitration had entered into arbitration agreements with different consulting firms that provided services to Chevron. In granting the motion to compel arbitration, the court ruled that Chevron was entitled, as a third-party beneficiary, to enforce the arbitration provisions in the managers’ contracts with the consulting companies. Each consultancy agreement contained similar arbitration language: “All claims, disputes or controversies arising out of, in connection with or in relation to this Agreement or the Services, including any and all issues of arbitration of such claim, dispute or controversy…shall be submitted to a mandatory and binding arbitration….”  McQueen v. Chevron Corp., No. C 16-02089 (N.D. Cal. Dec. 18, 2017).

When arbitration agreements are in place, class action lawyers oftentimes take a closer look at whether they wish to invest the time and resources necessary to litigate a class or collective action case.  The lawyers in the Williford v. Rice Energy case, which we summarized above, are located in Texas, but they were retained by a drilling fluid engineer who worked in Pennsylvania and Ohio.  That law firm has a robust internet presence and advertises its services by asking “Have you been misclassified as an independent contractor?”  While those lawyers don’t have a “hit list” of oil and gas companies, they do have a “hit list” of 14 industries they say on their website have “independent contractor issues,” and they list “oil and gas – both service companies and operators,” at the very top.

Other industries listed on that law firm’s independent contractor hit list are: staffing companies; commercial construction; retailers; financial services; home care; IT, software and computer technology; accounting; marijuana products; insurance; entertainment; real estate; delivery services and short-haul transportation; and telemarketing.

If the third-party contractor that had contracted with Rice Energy had included a Chevron-type arbitration clause with a class action waiver in its IC agreement with its independent contractors, the lawyers engaged by Williford may have chosen not to accept the case.  Or, even if they chose to pursue the matter, Check-6 may have been able to accomplish what Chevron did – compel arbitration and forestall the class action lawsuit.

Of course, it is imperative that an arbitration clause with a class action waiver be well drafted and anticipate the types of arguments that plaintiffs’ class action lawyer typically raise in response to a motion to compel arbitration – as we pointed out in our blog post entitled “How to Effectively Draft Arbitration Clauses With Class Action Waivers in Independent Contractor Agreements.”

Ideally, companies that make use of ICs in the oil and gas industry – and in virtually every other industry – will consider adopting all three of the above steps to minimize class action IC misclassification lawsuits while enhancing their compliance with IC laws.

Written by Richard Reibstein

Posted in IC Compliance