April and May 2018 Independent Contractor Misclassification and Compliance News Update

The past two months were momentous for many companies that engage independent contractors in California to supplement their workforce or to interact with their customers. This applies not only to businesses based in California but also to those based in other states with ICs across the U.S., including in the Golden State.  The most important legal development, however, arose in a legal context that does not involve ICs – the U.S. Supreme Court’s decision addressing the legality of employer requirements that their employees to enter into mandatory arbitration agreements with class and collective action waivers.

The U.S. Supreme Court’s decision, by a narrow 5-4 majority, held that employers may lawfully require employees to sign mandatory arbitration agreements with class and collective action waivers. This decision undoubtedly will spur employers to double down on the use of such arbitration agreements, but it is also likely to prompt many businesses to incorporate such arrangements in their IC agreements.  While some companies may mistakenly regard the Supreme Court decision as protection from liability under the federal wage and hour laws, the Supreme Court’s decision only limits a litigant’s use of a class and collective action and does not protect companies from individual claims or from audits, investigations, or enforcement proceedings by administrative or regulatory agencies. The best way for companies using ICs to minimize IC misclassification liability is to follow one of the types of alternatives described in our White Paper: restructuring, re-documenting, and re-implementing; reclassifying; or redistributing. In addition, there are compelling reasons for companies to use “opt-outs” in the arbitration provisions of their IC agreements, separate from those reasons discussed in our blog post published last fall on the eve of the Supreme Court’s oral argument on the issue.

In California, the Dynamex case changed dramatically the test for IC status under certain California Labor Code provisions, making it far more challenging for businesses and individuals who wish to utilize independent contractor relationships to lawfully maintain an IC relationship. The new test makes unlawful many IC relationships that were perfectly lawful the day before the Dynamex decision was issued on April 30, 2018.  With careful planning in view of the new test for IC status, many companies can still maintain their IC relationships in California, as described in our blog post entitled: “Questions Left Open by Dynamex, and What Companies Can Do to Enhance Their IC Compliance.”

In the Courts (7 cases)

FLOOD OF NEW IC MISCLASSIFICATION LAWSUITS HAS BEGUN AFTER THE CALIFORNIA SUPREME COURT CHANGED ITS TEST FOR IC STATUS.  On April 30, 2018, the California Supreme Court, in the Dynamex case, curtailed the lawful use of independent contractors by making the test for IC status under several California laws far more “employee-friendly.” As more fully discussed in our blog post that day, the Court in its Dynamex decision abandoned its long-standing common law test for determining worker status under various sections of the California Labor Code.  Instead, it adopted a much stricter test that makes IC status far more challenging for businesses to maintain.

In its 82-page decision, the California Supreme Court rejected the continued use of the multi-factor test as set forth by the Court in its 1989 decision in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations.  Rather, it created a three-pronged so-called “ABC” test, each of which prongs a business must meet in order to establish a lawful IC relationship under various provisions of the California Labor Code.  As the Court stated: “The [new] ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” Dynamex Operations West Inc. v. Superior Court of Los Angeles County, case no. S222732 (Sup. Ct. Cal. Apr. 30, 2018).

In its wake, the Dynamex decision leaves many questions unanswered. Does the new ABC test apply to expense reimbursement claims or claims brought under the California Private Attorneys General Act? Will the new ABC test apply to matters under the jurisdiction of the California Employment Development Division (EDD) or to workers’ compensation matters? Should Dynamex be applied prospectively, retroactively or otherwise? As observed in our May 10 blog post, these and other questions may take years for the courts to decide.

The California Supreme Court said one of the reasons for this dramatic change in the law was simply to clarify the test and thus to reduce the number of IC misclassification lawsuits.  However, as we noted in our May 10 blog post, “what is most likely to follow in the wake of the Dynamex decision is a period of great uncertainty accompanied by a flood of class actions.” And that is precisely what has occurred.

The first two lawsuits were filed only eight days after the Dynamex decision was issued.  They were brought against companies that have previously defended themselves against IC misclassification lawsuits: Postmates and Lyft.  Both complaints assert claims by drivers / couriers for failure to pay business expenses, failure to pay minimum wage, and failure to pay overtime compensation. The lawsuits expressly rely on the Dynamex ABC test, alleging that neither company can establish that the drivers / couriers perform services outside each company’s usual course of business – the “B” prong of the ABC test.  Lee v. Postmates Inc., No: CGC-18-566394 (Super. Ct. San Francisco County May 8, 2018); Talbot v. Lyft, Inc., No. CGC-18-566392 (Super. Ct. San Francisco County May 8, 2018).

U.S. SUPREME COURT UPHOLDS THE USE OF MANDATORY ARBITRATION AGREEMENTS WITH CLASS AND COLLECTIVE ACTION WAIVERS.  Although the trio of cases decided May 21, 2018 by the U.S. Supreme Court regarding the legality of mandatory arbitration agreements containing class and collective action waivers did not arise in the context of an IC misclassification case, the decision by the Supreme Court is equally applicable to that type of case as well. Just as many employers in recent years have included such clauses in their employment agreements, many businesses have included such clauses in their IC agreements. In a closely-watched 5-4 decision, Justice Neil Gorsuch delivered the majority opinion that class and collective action waivers that are part of arbitration agreements are governed by the Federal Arbitration Act and are not rendered illegal by the National Labor Relations Act.  Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP, et al. v. Morris, et al., No. 16-300, National Labor Relations Board v. Murphy Oil USA. Inc. et al., No. 16-307 (U.S. Sup. Ct. May 21, 2018).

As noted in a prior blog post published just before the Supreme Court heard oral argument on these three cases, many companies have concluded that an arbitration clause with a class and collective action waiver is all they need in order to protect themselves from workplace liability.  Those companies are mistaken.  Such clauses can only protect against a claim being asserted as a class or collective action (assuming the arbitration agreement is properly drafted). As stated in the blog post: “They don’t provide any defense to a claim that employees were properly paid or that workers classified as independent contractors are not misclassified employees who allegedly are owed overtime, minimum wages, employee benefits, expense reimbursement, or other workplace benefits available to employees.” The blog post also noted that arbitration agreements with class and collective action waivers are not binding on governmental regulators; therefore, they are “wholly ineffective at forestalling federal and state regulatory agencies from conducting audits or initiating and maintaining enforcement proceedings under employment and independent contractor laws.” Therefore, the importance of enhancing compliance with employment and independent contractor laws and not relying on an arbitration clause with a class and collective action waiver “cannot be overstated.”

RIDE-SHARING GIANT PREVAILS IN IC MISCLASSIFICATION CLAIM BY DRIVERS UNDER FEDERAL AND PENNSYLVANIA LAW.  On April 11, 2018, a Pennsylvania federal district court judge granted summary judgment in favor of Uber Technologies and against UberBLACK limousine drivers, concluding that, as a matter of law, the drivers are not employees covered by the federal minimum wage and overtime laws or by Pennsylvania’s minimum wage and wage payment laws. In reaching his decision that the drivers were ICs, Judge Michael Baylson considered six factors.  He found that four favored IC status (right to control, opportunity for profit and loss, investment, and permanence of relationship) and two that favored employee status, although the court stated that one of the two factors (the absence of special skills) did not carry much weight and the other (integration of the services with the company’s business) only slightly favored employee status. Razak v. Uber Technologies, Inc., No. 16-cv-573 (E.D. Pa. Apr. 11, 2018). As noted in our blog post of April 12, this decision, if upheld on appeal, could become a seminal determination allowing Uber and other ride-sharing companies to rest comfortably knowing that their IC business models satisfy the federal Fair Labor Standards Act (FLSA) and similar state IC tests.

ON-DEMAND APP-BASED FOOD DELIVERY SERVICE SUCCEEDS IN COMPELLING ARBITRATION OF IC MISCLASSIFICATION CLAIMS.  The United States Court of Appeals for the Fifth Circuit has affirmed a lower court’s decision granting DoorDash’s motion to compel arbitration of the claims of dashers (drivers who make deliveries from certain restaurants to customers of DoorDash), without addressing their class certification motion. This suit was filed by a dasher against DoorDash alleging violations of the FLSA due to their alleged misclassification as ICs. Additionally, the dasher moved for collective certification of a nationwide class of similarly situated individuals. The district granted the motion to compel without first deciding the collective certification issue.  On appeal, the Fifth Circuit affirmed, stating: “We continue to hold that arbitrability is a ‘threshold question’ to be determined ‘at the outset,’ a holding consistent with the ‘national policy favoring arbitration.’” The appellate court found there was a valid agreement to arbitrate , rejecting the dasher’s arguments that the contract was illusory because DoorDash never signed the agreement, never delivered it, and retained the ability to unilaterally modify it. Edwards v. DoorDash, Inc., No. 17-20082 (5th Cir. Apr. 25, 2018).

MASSACHUSETTS RIGID IC MISCLASSIFICATION STATUTE DOES NOT APPLY TO WORKERS’ COMPENSATION CLAIMS.  The Massachusetts Supreme Judicial Court held that the proper test for determining independent contractor / employee status for purposes of determining eligibility under the state’s workers’ compensation law is the 12-factor MacTavish-Whitman test and not the more restrictive three-factor “ABC” test under the Massachusetts Independent Contractor Statute. The workers’ compensation claimant was a newspaper delivery agent for Publishers Circulation Fulfillment, Inc., a company that provides home delivery services for newspaper publishers and pays agents to deliver newspapers to subscribers. While providing services to the company, the claimant suffered injuries and filed a claim for workers’ compensation benefits.

The Massachusetts high court stated that although the Independent Contractor Statute contains a cross-reference to the workers’ compensation statute, “the language does not supplant the MacTavish-Whitman analysis, but merely notes that when the facts of a given case demonstrate a misclassification of a worker as an independent contractor under [the Independent Contractor Statute], the penalties of the [workers’ compensation law] are applicable.”  The Court continued: “[The Independent Contractor Statute does not apply to a determination whether an individual is eligible for workers’ compensation benefits.”  In affirming the reviewing board’s substantive decision that the claimant was an independent contractor, the court agreed that “[i]n working for [the company], the claimant was allowed to expand her business to deliver newspapers and other items for other companies; supplied all necessary instruments to complete her job at [the company], including using her own vehicle to make deliveries; hired substitutes to complete the job; purchased her own independent contractor work insurance; and filed taxes as an independent contractor.” Camargo’s Case, No. 12368, 479 Mass. 492 (Sup. Jud. Ct. May 10, 2018).

Administrative and Regulatory Actions (2 matters)

NLRB TO DECIDE IF IC MISCLASSIFICATION IS AN UNFAIR LABOR PRACTICE.  The NLRB has received numerous Amici Curiae (Friends of the Court) briefs regarding under what circumstances, if any, the Board deem an employer’s act of misclassifying employees as independent contractors to be a violation of Section 8(a)(1) of the National Labor Relations Act (NLRA). As we noted in our September monthly news update, the Administrative Law Judge (ALJ) in Velox Express, Inc., 15-CA-184006 (Sept. 25, 2017), decided that misclassification alone can constitute an unfair labor practice under the NLRA. In Velox, an unfair labor practice charge was filed by a courier / driver against Velox, a medical courier service, alleging IC misclassification. The ALJ determined that the drivers were employees and not independent contractors because Velox controlled how its drivers carried specimens, directed how they should ensure that pickups were complete and prompt, and prevented drivers from finding their own substitutes. The ALJ also concluded that Velox committed an unfair labor practice in violation of Section 8(a)(1) due to the misclassification of the workers as ICs, and restrained and interfered with their ability to engage in protected activity under Section 7 of the NLRA.

The Board issued a Notice and Invitation on February 15, 2018 for interest groups to share their views with the NLRB on the above misclassification issue. In response to the NLRB’s invitation, a joint brief was filed by Massachusetts, Pennsylvania, Connecticut, Illinois, Maryland, Minnesota, New Jersey, New Mexico, New York, Oregon, Virginia, and Washington in support of the General Counsel’s request to affirm the ALJ’s decision that IC misclassification alone constituted an unfair labor practice. The States “urge[d] the Board to consider the threat misclassification poses to the States, their treasuries, and their residents.” They also argued that IC misclassification not only results in the denial of the most basic statutory protections, such as the right to be paid a minimum wage and to be paid on time, but it also denies workers the right “to form unions, collectively bargain and engage in concerted activity in the workplace for mutual aid and protection without fear of reprisal.”

A joint Amicus Curiae brief was also filed by the Coalition for a Democratic Workplace and U.S. Chamber of Commerce, taking the position that the Board should decline to revisit or revise the existing standard – that both misclassification and some additional unfair labor practice are required before finding a violation of the Act – and it should reject the “novel theory” that IC misclassification alone is enough. They also argued that “the concept of an unfair labor practice requires that an employer take some additional steps beyond simply taking a legal position regarding the classification of a worker in order for liability to attach under the Act.” They further noted that in December 2017, current NLRB General Counsel Peter Robb formally rescinded a previously-issued guidance in support of a “misclassification-as-violation” theory. Velox Express, Inc., 15-CA-184006 (Sept. 25, 2017).

In our August 30, 2016 blog post entitled NLRB General Counsel Creates a “Misclassification-Plus” Unfair Labor Practice, we commented that the NLRB’s General Counsel not only was seeking to expand the law by alleging that IC misclassification alone would violate the NLRA, but in the process seemed to be overlooking Section 8(c) of the NLRA. That time-honored “free speech” section provides: “The expressing of any views, argument, or opinion, or the dissemination thereof, whether in written, printed, graphic, or visual form, shall not constitute or be evidence of an unfair labor practice under any of the provisions of this Act, if such expression contains no threat of reprisal or force or promise of benefit.” It is likely, given the current composition of the NLRB, that the Board will rule that the mere misclassification of an individual as an IC is not an unfair labor practice.

NEW JERSEY CREATES IC MISCLASSICATION TASK FORCE.  New Jersey Governor Phil Murphy signed an Executive Order on May 3, 2018, establishing the Employee Misclassification Task Force to address independent contractor/employee misclassification. Executive Order No. 25 provides for the establishment of a Task Force charged with providing advice and recommendations to the Governor’s office on strategies and actions to combat employee misclassification, which the Governor says  has deprived the State of New Jersey of over $500 million in tax revenue every year. The Task Force will examine and evaluate existing IC misclassification enforcement efforts by executive departments and agencies; develop best practices to increase coordination of information and enforcement; develop recommendations to foster compliance with the law, including by educating employers, workers, and the public about misclassification; and review existing laws and procedures related to misclassification. As posted on his website, Governor Murphy stated, “The exploitation of workers is not only unethical – it is illegal. In New Jersey, we promote fairness, fight against discrimination, and work to end unfair labor practices. I am proud to take this step forward to end a practice that creates an unfair advantage over companies that play by the rules and hurts our working families.”

Other Newsworthy Developments

TWO INDUSTRIES – OIL AND GAS, INSURANCE – HAVE BECOME PRIME TARGETS FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION CLASS ACTION LAWSUITS.  

In our blog post of May 4, 2018, we highlighted four recent cases within the oil and gas industry: a Colorado rig welder brought a class action for IC misclassification against a modest-sized oil exploration and production company, Whiting Petroleum; California well site drilling managers sued a large energy company, Chevron Corp., for misclassifying them as ICs; oil field workers monitoring wells settled their IC misclassification case against J&A Services LLC, an Oklahoma oil patch company, for $2 million; and Texas welders for a Chinese oil rig company, Honghua America LLC, sued the company for IC misclassification in violation of the Fair Labor Standards Act and settled for an undisclosed amount.

In our blog post of April 11, 2018, we noted that class action lawyers have also been targeting  insurance companies. In one case, a Texas judge denied a motion to dismiss an independent contractor misclassification class action brought against Texas Farm Bureau Casualty Insurance Company and other insurers by insurance agents claiming unpaid overtime compensation under the FLSA. In another case, which is currently on expedited appeal to the U.S. Court of Appeals for the Sixth Circuit, the district court decided in favor of an insurance sales agent’s class action seeking pension and other employee benefits. The decision being appealed held that insurance sales agents of American Family Insurance Company (AFIC) are employees and not independent contractors for purposes of ERISA.

Written by Richard Reibstein

 

Compiled by Janet Barsky

 

Your comments are invited.

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Questions Left Open by Dymamex, And What Companies Can Do To Enhance Their IC Compliance

When the California Supreme Court issued its groundbreaking decision in the Dynamex case on April 30, announcing a new test to be used in determining independent contractor status under certain California laws, it left open a host of questions that are likely to vex lawyers, businesses and workers. It may take years until the lower courts in the state develop a comprehensive body of law to provide sufficient guidance to stakeholders so that they can conform their actions to the contours of the new court decision.

In Dynamex Operations West v. Superior Court of Los Angeles County, the court created a new test for independent contractor status that is modeled after the so-called “ABC” test used in Massachusetts, which is widely viewed as the toughest test in the country for establishing independent contractor status. In its 82-page decision in Dynamex, the California Supreme Court rejected the exclusive use of the independent contractor test that derived from a 1989 case entitled S.G. Borello & Sons Inc. v. Department of Industrial Relations for claims brought under the Industrial Wage Commission wage orders. That case had established a multifactor test where no one factor was determinative of independent contractor status. Instead, the California Supreme Court endorsed in Dynamex a rigid three-pronged ABC test for the California lower courts to use when determining independent contractor status under various sections of the California Labor Code.

Here’s the court’s articulation of its new test for independent contractor status — all of 115 words:

“The [new] ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

We address four of the most important questions left open by the California Supreme Court’s decision in Dynamex: the first two involving the three prongs of the ABC test, the third involving retroactivity, and the fourth addressing the impacts of Dynamex on other labor and employment laws in California besides those that were on appeal in that case.

 

Unanswered Questions

1. Prong A 

In Borello, the principal factor in determining if an individual was an employee or independent contractor is whether the business retained or exercised the “right to control” the manner and means of how the individual performs his or her services. In applying Borello, most courts have distinguished between control over “how” the services are performed and “what” services the individual is being paid to perform. Courts have traditionally noted that the “hiring party” retains control over what services are to be performed with both employees and independent contractors, but only employees are subject to control by the “hiring party” as to how the services are to be performed.

In the discussion of prong A, the Dynamex court referred in a favorable manner to Borello, yet also made reference to judicial decisions from Vermont and Washington state. Is prong A’s requirement that the individual be “free from the control and direction of the hirer in connection with the performance of the work” the same as Borello’s “right to control,” similar to it, or different? And if different, in what way?

2. Prongs B and C

Prong B of the ABC test is similar to one of the secondary factors in Borello: whether the work was part of the “hiring party’s” regular business. The court in Dynamex provided two examples — one where the work was not part of the company’s “usual course of … business” and another example where it was: an electrician hired by the retail clothing store to install a new electrical line, and a homeworking seamstress making dresses for a retail clothing store from cloth and patterns supplied by the store. Yet, under even the most employee-friendly test for independent contractor status, the electrician would be an independent contractor, while the homeworker would be an employee under even the most independent contractor-friendly test.

Almost all cases litigated in this area of the law are in the “gray area” — somewhere between the electrician and homeworking seamstress. While the court did not cite to Borello in its discussion of prong B but rather to cases arising under the federal Fair Labor Standards Act and other states (Maine, Vermont, New Hampshire and Connecticut), does that mean that decisions about a company’s “regular business,” decided by the California courts under Borello, have no precedential value under the new ABC test? Or are they also good law when examining the B prong under Dynamex?

In the court’s discussion of prong C, which requires than the business show that “the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed,” it quoted favorably from Borello — but it also cited favorably to prong C cases from Connecticut, North Dakota, Utah, Vermont, Virginia and Massachusetts.

Does the court’s citation to cases arising under these eight states mean that any decisions from those jurisdictions regarding prongs B or C may be relied upon? Can the decisions under prong B from states other than those eight be relied upon as well? Not surprisingly, a nationwide review of cases decided under prongs B and C of a state’s ABC statute reveals that those prongs have been interpreted in vastly different ways from one state to another. Does that mean that lawyers advising their clients about these prongs should canvass the laws in every state with an ABC test?

3. Retroactivity 

Another open question is whether Dynamex should be applied prospectively, retroactively or otherwise. Retroactive application would likely invite due process challenges by employers which had long understood Borello as the law. The question of retroactivity depends upon considerations of fairness and public policy.

Public policy considerations may include the purpose to be served by the new rule and the effect on the administration of justice of retroactive application. Considerations of fairness may involve the public’s reliance on the old standards by the parties or others similarly affected, as well as the ability of litigants to foresee the coming change in the law. Given that Borello has long been understood as the applicable test by both businesses and individuals as well as California agencies such as the Division of Labor Standards Enforcement, there are compelling grounds for stakeholders to argue that they reasonably relied upon Borello as good law and that this change in the law was not foreseeable.

Meanwhile, one can rest assured that lawyers representing plaintiffs in pending independent contractor misclassification cases will vigorously assert that Dynamex’s ABC test should apply retroactively. So too will lawyers who file new independent contractor misclassification claims. It would have been very helpful to all stakeholders if the court had addressed this issue of retroactivity. That question may well revert to the California Supreme Court if there are conflicting decisions on this key matter in two or more of the four districts of the California Court of Appeal.

4. Application to Other California Labor Laws

The decision in Dynamex addressed only the test to be applied for determining employee status under wage orders promulgated by the Industrial Welfare Commissioner. Although the plaintiffs in the case also brought claims for expense reimbursement under California Labor Code Section 2802, the court expressly stated in footnote 5 of the opinion that it was not deciding whether the new test would apply to such claims for expense reimbursement because the plaintiffs did not seek appellate review of that aspect of the lower court decision.

Does Borello continue to apply to expense reimbursement claims? Will the lower courts on their own apply the ABC test to such claims? Or will they wait until the California Supreme Court specifically addresses that issue, particularly where Section 2802 has a different legislative/regulatory history than the wage orders?

Similarly, will the new ABC test apply to matters under the jurisdiction of the Employment Development Division or to workers’ compensation matters? Plainly, the Dynamex decision did not address those laws, which have their own legislative history. Will the EDD and the lower courts continue to apply the current tests for independent contractor status for such matters? Will they seek to apply the new Dynamex ABC test or will they wait for the California Supreme Court to decide this matter?

Finally, does the new ABC test apply to any claims brought under the California Private Attorneys General Act?

What Lies Ahead?

While the court stated that its new decision would provide greater clarity and consistency, what is most likely to follow in the wake of the Dynamex decision is a period of great uncertainty accompanied by a flood of class actions.

This new decision not only impacts companies that have a business model using independent contractors, but also impacts workers who have chosen to be their own bosses, are seeking to grow a business, or wish to supplement income from their primary occupation with fees earned from a 1099 gig during evenings and weekends. As revealed in a comprehensive government report on the contingent workforce released in May 2015 by the Government Accountability Office, 85 percent of independent contractors “appeared content with their employment type.” Following the passage of the 2018 tax law, which affords most independent contractors a deduction equal to 20 percent of qualified business income, that number is likely to increase.

Many companies that were or believed they were in compliance with the California wage orders on April 29, 2018, the day before the Dynamex opinion was released, may now be out of compliance with those wage orders.

While many commentators have characterized California as a state where independent contractor relationships can no longer exist, many businesses can establish or maintain such relationships even after Dynamex. Instead of reclassifying, such companies can restructure and re-document their independent contractor relationships, using a process such as IC Diagnostics.™ While the legal landscape has certainly changed following Dynamex, many businesses and individuals that wish to enter into or maintain a sustainable independent contractor relationship can still do so.

Written by Richard Reibstein and Nina Huerta

This article was published in Law360.com on May 4, 2018. © Copyright 2018, Portfolio Media, Inc., publisher of Law360. It is republished here with permission.

Posted in IC Compliance

Oil & Gas Industry Is Next Target for Independent Contractor Misclassification Lawsuits

A cottage industry for plaintiffs’ class action lawyers has been independent contractor (IC) misclassification lawsuits, and one of the industries taking the brunt of those types of legal proceedings is energy, particularly companies that operate in the oil patch.

In the oil and gas industry, companies have recently been making use of ICs to provide specialized talent for limited project needs, reduce their reliance on a static workforce, and shrink their payroll costs.  IC misclassification is not more prevalent in the oil and gas fields than it is in other industries; it just seems as though class action lawyers have been targeting this area of the energy arena in the last few years.

What can large and small companies that use ICs in the oil fields do to minimize any such IC misclassification liability and, correspondingly, maximize their compliance with federal and state IC laws?

Before answering those questions, we will review some recent cases affecting companies in the oil and gas industry to give you an idea of the types of IC misclassification challenges that are afflicting companies in this industry.

Rig Welder Brings Class Action for IC Misclassification.  This case involves a modest-size oil exploration and production company, Whiting Petroleum, which was sued last year in Colorado in a proposed class action by a rig welder who claims he and other similarly situated workers were misclassified as independent contractors.  He alleged that the welders should have been paid overtime as employees when they worked over 40 hours in a workweek, allegedly in violation of the federal Fair Labor Standards Act (FLSA).

The welder claims that he worked exclusively for Whiting Petroleum and the company’s clients/customers; was prohibited from working for other companies while “employed” on the company’s jobs; and was “supervised” by the company, which allegedly controlled his work schedule or other “conditions of employment,” even though he often worked off company premises.  He also alleged that Whiting enforced  compliance with the company’s or its clients’ policies and procedures and unilaterally determined the rate and method of payment for all of the welders.

The company filed a motion to dismiss the case, arguing that the complaint did not sufficiently plead that Whiting Petroleum was the plaintiff’s employer under the FLSA, but a federal court denied the motion.  It found that the allegations were sufficient to allow the case to proceed to the discovery stage. Whiting has denied the claims and the case is currently scheduled for mediation in an effort to settle the case.

Well Site Managers Sue Large Energy Company for Misclassifying Them as ICs.  This case against Chevron Corp. was brought last year in California by oil and well site drilling managers who were paid on a 1099 basis but claim they were misclassified as ICs and denied minimum wage and overtime under the FLSA.  The plaintiffs allege that they were “supervised” by Chevron; that the company determined their work schedules and set their rates of pay without negotiation; that Chevron provided all of the equipment including laptops, email addresses, printers, internet access, and uniforms; that it required the managers to follow instructions, processes, and policies regarding how to complete their work; that the workers were required to submit daily reports with details outlining their work; and that Chevron required them to attend meetings and trainings.  Chevron disputed those claims.

The drill site managers made a motion to have the case certified by the court as a class action –  and they prevailed, over the strenuous opposition of Chevron.

 Oil Field Workers Monitoring Wells Settle Their IC Misclassification Case for $2 Million.  Flow testers who monitored oil and gas wells brought a lawsuit against J & A Services LLC, an Oklahoma oil patch company, alleging that they were misclassified as ICs in violation of the FLSA. Specifically, the plaintiffs claimed that J & A supervised and directed the flow testers; scheduled and disciplined them; required them to attend meetings; instructed them when, where, and how to perform their work; provided safety training to the workers; and mandated that they follow rules when performing services.  The plaintiffs  sought to represent all current and former hourly paid workers treated by J & A as independent contractors who monitored and maintained oil and gas wells for the company.

J & A maintained throughout the litigation that the flow testers were ICs; nonetheless, the company agreed to conditional certification of the workers as a collective class.  After substantial pre-trial discovery, the parties consented to enter into mediation, where J & A agreed to settle the case with 71 workers for $2 million.  A number of the plaintiffs have received over $40,000 each, and 40% is being paid to the plaintiffs’ class action lawyers.

Welders for Chinese Oil Rig Company Sue for IC Misclassification. Honghua America LLC was sued in Texas by two welders who claimed they were misclassified as independent contractors in violation of the FLSA. The company tried to dismiss the case on summary judgment but the court denied its motion and set the case down for trial.  The court found that a number of key factual issues would have to be decided at trial: the extent to which Honghua America retained or exercised  control  over the welders; whether the welders provided their own tools and equipment; whether the welders had an opportunity to control their own profits and losses; the level of skill and initiative needed to perform the services; and the permanency of the relationship between the welders and the company.

Two months after the court denied Honghua’s motion for summary judgment, the company  settled the case for an undisclosed amount.

What Can A Company in the Oil and Gas Industry Do To Minimize IC Misclassification Liability?

Although the U.S. Department of Labor has dialed down its crackdown on IC misclassification and leveled the playing field under a new Administration, class action lawyers have not diminished their focus on these types of lawsuits against companies in the oil and gas industry. For example, in January 2018, another proposed class action lawsuit was filed against a company by Measurement While Drilling (MWD) operators paid on a 1099 basis. They allege that they and other similarly situated MWD operators have been misclassified as ICs and not paid overtime for all hours worked over 40 in a workweek, in violation of the federal wage and hour laws.

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 between 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 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 constant in every test: is the individual told “how” to perform his or her services? Plainly, every IC and every employee are directed as to “what” work they are expected to do.  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 workers themselves decide the manner and means by which they render services, consistent of course with industry standards and any legal or client requirements.

Even if the workers in question may qualify as ICs, companies all too often create their own exposure to IC misclassification if they 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 it is already in existence, determining how it can be restructured, re-documented, and re-implemented to minimize IC misclassification exposure.

The tests for IC status have plagued legal practitioners and companies for years.  Although the laws oftentimes require companies to dot many i’s and cross many t’s, 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 that enhances compliance? 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, FedEx was forced to settle several dozen IC misclassification cases for nearly $500 million in the past several years.

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 its IC relationships in a way that is consistent with IC laws and the IC agreement.

What is a company in the oil patch to do?  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.

One final note:  IC agreements containing arbitration provisions with class action waivers can provide some level of protection against most class actions brought by private litigants.  While such provisions are not applicable to governmental agencies conducting audits, investigations, or administrative proceedings, their inclusion in IC agreements is favored by many employers. For example, in the Chevron case discussed above, that company was able to obtain an order from the court compelling arbitration of the plaintiffs’ claims.  There is, however, a question about the enforceability of mandatory arbitration agreements with class action waivers.  That issue is currently pending before the U.S. Supreme Court, but there are ways to draft such arbitration provisions to increase their enforceability.

By Richard Reibstein, Michael Rose, and Bill Swanstrom

This article was published in abbreviated form on the E&P website (May 2, 2018), which can be found by clicking here. Those portions are reprinted here with permission from E&P Copyright 2018 (800.372.1033).

Posted in IC Compliance

Independent Contractor Bombshell for California Businesses: California Supreme Court Curtails the Lawful Use of ICs

Earlier today, the California Supreme Court established the Golden State as one of the least hospitable jurisdictions in the nation toward independent contractor status. Abandoning its decades-old common law test used to determine IC status, the California Supreme Court in Dynamex Operations West v. Superior Court (No. S222732), created a new test that is modeled after the so-called ”ABC” test used in Massachusetts, widely viewed as the toughest test in the country for ICs.  This result is particularly surprising in light of recent legislative efforts across the country to regulate, instead of curtail, the increasing use of freelancers and on-demand workers including those in the gig economy.

Many companies that yesterday were in compliance with the IC laws in California may today be out of compliance.  As a result, those companies in both traditional and gig economy industries that lawfully created IC relationships in that state may need to restructure or reclassify their 1099ers in order to remain compliant with California law, as more fully noted in the “Takeaway” section below.

The Court’s Opinion

In its 82-page decision in Dynamex, the California Supreme Court rejected the continued use of its IC test that derived from a 1989 case entitled S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations. That case had established a multi-factor test where no one factor was determinative of IC status. Instead, the California Supreme Court today endorsed in Dynamex a rigid ABC test for the California lower courts to use when determining IC status under various section of the California Labor Code.

The test established today in California reads as follows:

The [new] ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The Court stated that this new Dynamex test will be easier to apply than the Borello multi-factor test, is less susceptible to being circumvented, and will provide an array of statutory labor and employment benefits to more workers in the state than ever before.  The Court did not, however, address whether the new test would apply to claims for expense reimbursement under the California Labor Code, noting in footnote 5 that the plaintiff drivers did not seek appellate review of that aspect of the lower court decision.

Over two dozen states have ABC tests, but almost all of those states’ ABC tests apply only to claims for unemployment or workers’ compensation benefits.  Massachusetts, New Jersey, and Illinois are key exceptions; their ABC tests also apply to wage claims.  Moreover, Massachusetts’ IC test varies from other states’ ABC tests in a critical way: the “B” prong in almost all other states requires the business to establish either that the worker performs work that is outside the usual course of the hiring entity’s business or that the worker performs work “outside of all the places of business of the enterprise for which such service is performed.”

In adopting the Massachusetts test, the Supreme Court of California stated in footnote 23 of its opinion that “In light of contemporary work practices, in which many employees telecommute or work from their homes, we conclude that the Massachusetts version of part B provides the alternative that is more consistent with the broad reach of the … California wage orders.”

Takeaway

While the federal wage and hour law (the Fair Labor Standards Act) and almost all state wage laws continue to adhere to a multi-factor test for IC status, with no one factor determinative, California has today joined Massachusetts as being far more employee-friendly and far less IC-friendly to freelancers and other contingent and gig economy workers who have been paid on a 1099 basis.

A few businesses may seek legislation in California to regulate the use of ICs in their industry rather than have their use of ICs curtailed, as the Dynamex decision is likely to do.  But many other businesses operating in that state will need to reevaluate their use of workers classified as ICs in California and, where necessary, restructure their businesses to comply with this new judicial decision.

While some companies built on an IC model may now wish to reevaluate plans to expand into California, those currently operating in that state as well as other states may wish to use a process such as IC Diagnostics™ to evaluate, structure, document, and implement their IC relationships in a manner that maximizes compliance with IC laws in California and across the country.  That process has become more challenging by today’s decision by the California Supreme Court.

Written by Richard Reibstein

Posted in IC Compliance

Prediction: California Supreme Court Will Re-Affirm Existing Test for Independent Contractor Status

This blog post has been superseded by the post on April 30 entitled “Independent Contractor Bombshell for California Businesses” 

Tomorrow, April 30, 2018, the California Supreme Court is expected to issue a decision in a case that could change the legal test as to whether an individual is an independent contractor or an employee under California’s wage and hour laws. But, as noted below, the Court is most likely to simply re-affirm the test currently used by the California courts in independent contractor misclassification cases.

The case is Dynamex Operations West v. Superior Court (No. S222732)which has been on appeal before the California Supreme Court since January 2015.  The issue in Dynamex is whether, in wage and hour cases in California, the courts in that state should (a) continue to follow the California Supreme Court’s time-honored holding from 1989 in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations; (b) apply the test set forth in the California Supreme Court’s 2010 holding in Martinez v. Combs; or (c) apply a new standard similar to the employee-friendly test set forth in 2015 by the New Jersey Supreme Court in a case called Hargrove v. Sleepy’s LLC.

What are the three tests under consideration?

The Borello test is a multi-factor standard where no one factor is determinative of the outcome as to whether an employee has been misclassified as an independent contractor.

The Martinez test, in contrast, focuses not on a worker’s status but rather on the converse: whether a business is the employer of the worker.

Hargrove uses a so-called “ABC” test that was formulated by the New Jersey legislature for IC status in unemployment cases but was also applied just over three years ago to wage and hour disputes by the New Jersey Supreme Court to determine IC status. As discussed in our blog post of January 15, 2015, Hargrove is regarded as employee-friendly because, unlike the Borello test, which looks at multiple factors without giving determinative weight to any, the ABC test presumes employee status unless a business is able to establish each and every one of the ABC factors, which are detailed in that blog post. Thus, all three factors are potentially determinative; even if a business establishes two of the three prongs of the ABC test, the worker is still deemed to be an employee.

Why the Court will likely re-affirm Borello as the test for IC status

The Court held oral argument in Dynamex on February 6, 2018. It is difficult for even the most experienced practitioners to predict how a court may rule based on oral argument. But one of the most important exchanges at the oral argument might be the answer to a question posed by one of the justices to the principal lawyer for the truck driver challenging his classification as an IC: under the Borello test, would the driver be an employee or an independent contractor?

The lawyer for the driver responded without any equivocation: his client, a truck driver providing services to Dynamex, a logistics and transportation company, would be an employee under Borello. This response signified that there would be no need for the California Supreme Court in this case to consider changing the test for IC status in California where a new test would not alter the result. Generally, courts are reluctant to alter long-standing legal standards unless the new standard would change the result.

Regardless of whether, in its upcoming opinion, the California Supreme Court refers  to this key question and answer at oral argument, this colloquy is likely to tilt the Court in the direction of re-affirming Borello as the test for IC status.

Another reason why the Court is likely to maintain the Borello test was also addressed during oral argument.  The lawyer for Dynamex told the Court that each of the factors set forth in the three prongs of the ABC test are already included under Borello.  The lawyer further noted that because the absence of any one of the factors would not be determinative under Borello, a court has the flexibility under that test to give whatever weight it deemed appropriate to each of those ABC factors. Retaining such flexibility may well be regarded by the Court as the most important reason to re-affirm Borello as the test for IC status. This is particularly poignant where the Court noted during oral argument that workers in the gig economy do not fall squarely into legal tests for determining IC status.

The argument that Borello already includes all of the ABC prongs may have been a slight overstatement because the second part of the “B” prong of the ABC test takes into account a factor not expressly considered in Borello.  Prong B provides that the “service is either outside the usual course of the business for which such service is performed [which is similar to one of the Borello factors], or … is performed outside of all the places of business of the enterprise for which such service is performed [which is not a Borello factor].”

While the California Department of Industrial Relations follows Borello, it does not, however, include the location where the services are performed as one of the eleven IC factors it considers in determining IC status.  (See its website page entitled “Independent contractor versus employee.”)  That California government regulators do not even consider the place where the services are performed as a factor in determining IC status may be another reason that may prompt the California Supreme Court not to adopt the ABC test in Hargrove.

It is also noteworthy that in the Dynamex case, the driver might well have performed some of his services at a Dynamex place of business, such as one of its warehouses or other facilities where commercial goods would be loaded onto or transferred to a different transportation vehicle. Under the ABC test, the driver would automatically be an employee if any part of his work was performed at any of those corporate locations (assuming that a court would find that the truck driver’s services were not “outside the usual course of [Dynamex’s] business enterprise” as a logistics and transportation company).

A final reason why the Court is not likely to import the Hargrove decision into California when determining IC status is that the ABC test was issued by a legislative body in New Jersey, not by the courts. To date, no court in any state has adopted an ABC test without a statutory or regulatory underpinning.

What does this mean for businesses using ICs in California and other states?

The tests for IC status differ considerably among various federal laws and even more so under a crazy quilt of state laws across the country. Other states that use an ABC test for wage and hour claims include Massachusetts, Illinois, and New Jersey. Thus, a one-size-fits-all approach to IC compliance may not be feasible for many businesses operating across the country or in several states.

Regardless of the ultimate outcome in Dynamex, companies that wish to enhance their compliance with whatever test is ultimately applied in California, or with the current tests in other states and under federal law, should consider using a process that maximizes their IC compliance. One such process is IC Diagnostics,™ as discussed in the latest White Paper on “How Companies Can Minimize the Risk of IC Misclassification Liability.” That type of process can lead to a customized and sustainable approach to maximizing IC compliance.

Written by Richard Reibstein

Posted in IC Compliance