Should Your Business Require Independent Contractors to Sign Coronavirus Waivers and Releases of Liability?

Many companies are asking, should we require independent contractors to sign advance waivers and releases of liability for contracting the Coronavirus?  Most commentators have urged companies to refrain from requiring employees to sign such waivers and releases, but there is little reason not to require independent contractors to sign well-drafted Covid-19 liability waivers.

Unlike employees, who may be covered by workers’ compensation and other laws that prohibit employers from using employee waivers for work-related injuries and illnesses, independent contractors are typically not covered by such laws.

Some states preclude the use of advance waivers in selected industries such as amusement parks, recreational activities, parking lots, and caterers, but those laws generally apply to customers and not to independent contractors.

Advance waivers and releases, however, are usually ineffective to protect against gross negligence, recklessness, or intentional acts. And typically they need to expressly cover the specific negligent acts that may cause an injury or illness. Generalized waivers of negligence are oftentimes stricken by courts in many states. Courts also require waivers to be written in clear and unambiguous language.

These types of limitations require the drafting party to closely examine applicable state laws regarding advance waivers.

What You May Wish to Include in a Coronavirus Waiver

A company drafting a Covid-19 waiver and release for independent contractors may wish to include language whereby the contractor acknowledges the inherent risk of contracting Covid-19 in providing services on an in-person basis to a company or its customers. Such assumption of the risk provisions oftentimes have some legal value even if a waiver and release is not enforced.

A company may also consider including in a Covid-19 waiver a provision whereby independent contractors represent and warrant that they agree to follow guidelines issued by the Centers for Disease Control and Prevention (CDC) and any state or local Covid-19 laws, including those regarding the use of masks and social distancing.

Companies may also wish to include an agreement by the contractor not to engage in in-person activities with employees or customers of the company if the independent contractor has a fever or any Covid-19 symptoms, recently has been in contact with another individual who has been diagnosed with Covid-19 or has exhibited such symptoms, or not long ago traveled to a state or country that is on a list of jurisdictions requiring the individual to self-quarantine upon return.

Three-Party Agreement

When a business contracts with independent contractors to provide services to its customers, the company may wish to create a three-party waiver and release agreement between it, the customer, and the contractor. In such an agreement, all parties waive and release claims against the other parties from specific acts of negligence that may lead to one of the parties contracting Covid-19.

Companies may wish to include a provision in such three-party agreements that all signatories should follow CDC guidelines to the extent feasible as well as all state and local Covid-19 laws.

Some companies may contemplate including indemnification provisions and covenants not to sue in Covid-19 waivers with independent contractors and their customers. But the longer and more complex the waiver form, the more hesitant an independent contractor or a customer may be to sign the document, which ideally should be on a single page.

Consideration should be given, though, as to whether a waiver would impact your rights  under an insurance policy such as a commercial general liability (CGL) policy.

Need to Enhance Compliance with Independent Contractor Laws

A worker classified as an independent contractor who signs a Covid-19 waiver and later on acquires the illness may still claim the waiver is invalid. How? By asserting that he or she was misclassified and is actually an employee covered by workers’ compensation.

Such a claim is more likely to be made in states that have enacted laws creating a presumption that the illness was contracted at work. According to an article published by the National Conference of State Legislatures in June, six states by then had enacted legislation creating a presumption of coverage for various types of workers who claim they contracted Covid-19 in a work-related setting.

Thus, a company that chooses to use a Covid-19 waiver and release form with independent contractors would be wise to take steps to enhance their compliance with independent contractor (IC) laws. By elevating their level of compliance, Covid-19 waivers and releases are more likely to be enforced and contractors will have far less grounds to assert that they have been misclassified.

Companies wishing to minimize their exposure to IC misclassification claims may wish to use a process such as IC Diagnostics™ to restructure, re-document, and re-implement their IC relationships in a manner that maximizes IC compliance.

Another reason to enhance IC compliance is to avoid liability if a customer claims a contractor’s actions or inactions caused the one or more of the customer’s employees to contract Covid-19. Unlike employees whose negligence can create liability for their employers, companies are generally not liable for the acts of independent contractors who have been properly classified as such.

In sum, while Coronavirus waiver and release forms for independent contractors need to be artfully drafted to withstand strict scrutiny by the courts, there are compelling reasons to require contractors to sign them.

By Richard Reibstein and Janet Barsky

THIS BLOG POST WAS BASED ON AN ARTICLE BY RICHARD REIBSTEIN AND JANET BARSKY THAT  WAS PUBLISHED BY BLOOMBERG INDUSTRY GROUP ON JULY 21, 2020, ENTITLED, “INSIGHT: SHOULD INDEPENDENT CONTRACTORS SIGN COVID-19 LIABILITY WAIVERS?” Reproduced with permission from © 2020 The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com.

 

Posted in IC Compliance

Baked Goods Companies Targeted by Distributors in Independent Contractor Misclassification Class Actions: June 2020 News Update 

We highlight in this past month’s news update two class action settlements entered into by bakery companies alleged to have misclassified product distributors as independent contractors. One of those baked goods companies has now incurred over $47 million settling IC misclassification cases brought by distributors. We also comment below on a new class action lawsuit filed against one of those bakery product companies.

Selected companies in this industry have been targeted by class action lawyers representing independent distributors who claim that they are employees entitled to overtime and/or expense reimbursement.  Calling themselves “delivery drivers,” the distributors’ allegations tend to minimize their entrepreneurial independence and focus on alleged direction and control by the defendant companies.

There are ways by which companies in this and most other industries can minimize these types of lawsuits and maximize their compliance with independent contractor laws. Some food manufacturers that contract with distributors as well as a host of other companies that utilize independent contractors have used a process such as IC Diagnostics™ to structure, document, and implement their IC relationships in a manner that should satisfy independent contractor laws in virtually all states as well as under federal law.  Many companies that have not taken effective steps to meaningfully enhance their level of compliance have incurred considerable resources to defend cases they could have avoided or paid large amounts to settle such cases.

In the Courts (7 cases)

BAKERY GIANT SUED BY DISTRIBUTORS / DRIVERS IN IC MISCLASSIFICATION CLASS ACTION.  A distributor of baked goods produced by Bimbo Bakeries has commenced a proposed class and collective action on behalf of himself and all other similarly situated drivers, claiming wage and hour violations under the Fair Labor Standards Act and Vermont state law due to alleged misclassification as independent contractors and not employees. Bimbo Bakeries’ brands include Entenmann’s, Nature’s Harvest, Thomas’s, and Sara Lee.  According to the complaint, the company requires most distributors to form corporations as a condition of working for them, and allegedly exercises “virtually unlimited control” over the drivers, including dictating all prices, requiring the drivers to deliver to stores that are not profitable, employing supervisors who travel to stores in the drivers’ territories to review their work, and threatening to terminate distributors whose work does not meet the company’s standards. In addition, the complaint alleges that the company makes deductions from the drivers’ fees for items such as route loan repayments, their use of the company’s electronic equipment, lost or stolen product, insurance coverage, supplies, and truck lease payments, and directly employs delivery drivers who perform the same work for the company as the plaintiff and the putative class but are treated as W-2 employees. Harrington v. Bimbo Bakeries USA, Inc., No. 5:20-cv-84 (D. Vt. June 3, 2020).

FLOWERS FOODS SETTLES VERMONT CLASS ACTION IC MISCLASSIFICATION CASE FOR $7.6 MILLION.  A Vermont federal district court has granted preliminary approval to a $7.6 million settlement reached between leading baked goods producer, Flowers Foods Inc., and class of food product distributors in an IC misclassification class and collective action under the FLSA and Vermont state law. Flowers Foods is the second-largest commercial bakery in the United States whose brands include Wonder Bread, Tastykake, Sunbeam, and Nature’s Own. The company acquired Lepage, a wholly-owned subsidiary that bakes and produces various baked products; Lepage then contracted with independent distributors who purchased distribution rights to sell and distribute products to customers in defined territories.

In December 2015, the distributors filed a class and collective action complaint against Flowers Foods and Lepage claiming defendants misclassified them as independent contractors and not employees. In their complaint, the distributors alleged that they were required to arrive at specified warehouses at specified times to stock their delivery vehicles with product; were responsible for delivering products to customers at times and locations specified by the company; and had no entrepreneurial influence over their day-to-day activities, including sale prices, shelf space within stores, orders, product selection, schedules, and delivery locations. After three years of discovery, the parties agreed to settle the lawsuit for $7.6 million and a number of non-monetary terms, including a Buy Back Option where Settlement Class Members who are current distributors are eligible to have their territories repurchased by Lepage, and creation and implementation of a Distributor Advocate position and Distributor Review Panel to oversee an alternate dispute resolution process and for resolution of contract-related disputes for independent distributors. Neff v. Flowers Foods Inc., No. 5:15-cv-00254 (D. Vt. June 4, 2020).

In the prior two months, the same company settled two IC misclassification cases for a combined total of $21.6 million. One of those settlements was for $8.3 million covering distributors in North Carolina, and the other was for $13.3 million for distributors in Pennsylvania, Maryland, and New Jersey.  That same company settled similar lawsuits in the past for another $18 million: $9 million covering distributors in Alabama, Kentucky, Texas, Mississippi, Tennessee, Virginia, and Missouri, and before that for $9 million in yet another case involving North Carolina distributors.

FLOWERS FOODS ALSO FACES NEW CLASS ACTION FOR IC MISCLASSIFICATION IN CALIFORNIA. Less than a week after it settled the Vermont case, Flowers Foods was sued by distributors in California in another class and collective action lawsuit filed in federal court alleging violations under the FLSA and state Unfair Competition Law due to their alleged misclassification as independent contractors. The allegations in the California case are similar to those in the Vermont case with regard to claims that Flowers exercises control and direction over the distributors. The plaintiff alleges: “In short, Flowers sells the notion that these ‘independent contractors’ will run and control their own sales-related business for their own profit and gain. But Flowers never actually operates its business under these terms, despite Deliver Employees’ heavy investment and reliance on the promises Flowers makes.” Maciel v. Flowers Foods Inc., No. 3:20-cv-03814 (N. D. Cal. June 10, 2020).

DOORDASH SUED BY LOCAL DISTRICT ATTORNEY FOR ALLEGED IC MISCLASSIFICATION.  The San Francisco District Attorney has filed a misclassification lawsuit on behalf of the People of the State of California against DoorDash, Inc. alleging violations of the state Unfair Competition Law due to alleged misclassification of delivery persons as independent contractors and not employees. The complaint alleges that DoorDash, Inc., a technology company that facilitates food delivery through its on-line platform that connects customers, local restaurants/stores, and delivery drivers who are called “Dashers,” cannot satisfy the newly-enacted three-pronged ABC test now in use in California to establish independent contractor status.

According to the complaint, DoorDash fails to meet Prong A requiring that the Dashers are free from control and direction by DoorDash because DoorDash allegedly requires usage of its App and compliance with its company policies; determines the eligibility requirements before a Dasher may begin making deliveries; dictates when and whether any Dasher is assigned to pick up and deliver a customer order; decides when, whether, and how many deliveries it will route to the Dashers; tracks and collects significant amounts of data regarding each Dasher’s deliveries, including number of acceptances and rejections of engagements, the amount of time each delivery takes, tip amounts, customer ratings, and number of deliveries per shift; and sets forth instructions as to how to handle food pick-ups, how long to wait at a customer location, and how to communicate with customers. The complaint also alleges that DoorDash cannot meet Prong B requiring that the work performed by Dashers is outside of DoorDash’s usual course of business because the Dashers and DoorDash are in the same business, which the complaint alleges is providing deliveries. Finally, the complaint also alleges that DoorDash cannot satify Prong C, which requires a showing that Dashers are engaged in an independently established trade or business because the Dashers are not customarily engaged in their own business, do not typically operate their own independent delivery companies while working for DoorDash, do not market themselves as professional delivery persons, and are not considered to be performing skilled work.  People of the State of California v. DoorDash, Inc., No. CGC-20-584789 (Super. Ct. San Francisco County June 16, 2020).

U.S. DEPARTMENT OF LABOR SUES AUTO TRANSPORT COMPANY FOR IC MISCLASSIFICATION.  The United States Department of Labor has filed an FLSA suit against a transport company, ProCorp, LLC, in Michigan federal court seeking an injunction and unpaid overtime compensation and liquidated damages for 700 drivers due to alleged misclassification as independent contractors. In a News Release issued June 16, 2020 by the Labor Department, its Wage and Hour Division conducted an investigation determining that ProCorp violated the FLSA by misclassifying drivers, who move new vehicles throughout the metro-Detroit area, as independent contractors and not employees. In support of its misclassification claim, the DOL alleges that the drivers were economically dependent on ProCorp because ProCorp controlled the drivers’ work, set the rates of pay without negotiation, and required them to sign broad non-compete agreements, and the drivers performed work integral to ProCorp’s business, had limited investment in the business, lacked the opportunity for profit or loss, and performed work requiring limited skill and initiative.  Scalia v. ProCorp, LLC, No. 2:20-cv-11447 (E.D. Mich. June 3, 2020).

BOB’S DISCOUNT FURNITURE SUED BY DELIVERY DRIVERS IN CLASS ACTION ALLEGING INDEPENDENT CONTRACTOR MISCLASSIFICATION.  Delivery drivers have commenced a class action in Connecticut federal court against Bob’s Discount Furniture, LLC and a logistics company, NEHDS Logistics, LLC, claiming defendants, as joint employers, violated the minimum wage and overtime provisions under the FLSA and Connecticut wage and hour law due to the misclassification of the delivery drivers as independent contractors and not employees. According to the complaint, the delivery drivers delivered Bob’s furniture to Bob’s customers, wearing Bob’s apparel and sometimes using Bob’s trucks. NEHDS Logistics is a provider of delivery and logistics services for Bob’s and other companies, and is alleged to maintain a warehouse where it stored its own vehicles, Bob’s vehicles and vehicles belonging to another entity, all of which were used interchangeably to deliver Bob’s furniture by delivery drivers who claim they were jointly employed by the defendants. The delivery drivers further claim that they received their delivery instructions from Bob’s and NEHDS employees, were expected to report each morning at the NEHDS facility, communicated with Bob’s and NEHDS employees throughout the workday, handled paperwork and invoices with Bob’s customers and NEHDS, and were subject to reprimand and termination by Bob’s and NEHDS. The complaint also alleges that the three-pronged ABC test applied under Connecticut law to determine independent contractor/employee status does not establish IC status. However, it appears that plaintiff’s counsel used the test for independent contractor status under the state’s unemployment insurance law.  A motion to dismiss presumably will be filed by defendants, although plaintiffs will likely be able to amend the complaint to plead the correct legal standard. Mendez v. Bob’s Discount Furniture, LLC, No. 3:20-cv-00849 (D. Conn. June 19, 2020).

IC MISCLASSIFICATION CLASS ACTION CERTIFIED IN NEW YORK AGAINST LOGISTICS COMPANY.  A federal district court in New York has certified as a class action an independent contractor misclassification claim brought by drivers against logistics provider, HomeDeliveryLink, Inc. (HDL).  The plaintiffs brought claims for illegal wage deductions and recordkeeping violations under the New York Labor Law (NYLL) due to alleged misclassification as independent contractors. According to court papers filed by the plaintiffs, HDL is a third-party logistics company that operates as a “freight-forward broker” for Innovel Solutions, Inc., a company that warehouses merchandise for retailers. The drivers, through their own business entities, enter independent contractor agreements with HDL and deliver merchandise from the Innovel warehouses to ‎ customers’ homes throughout New York State. ‎Among the allegations supporting the IC misclassification claim, HDL allegedly required all drivers to create a business entity; deducted from the drivers’ pay certain expenses such as the cost of truck rental, fuel, workers’ compensation, and liability insurance; provided training during an orientation period; supervised and directed the drivers; observed the drivers loading their trucks; monitored the drivers’ appearance; performed ride-alongs to evaluate the drivers’ performance; determined which drivers would work each day; prepared the routes; and required the drivers to download an app allowing customers to acknowledge receipt of delivery and provide a means for HDL to monitor driver status.  Kloppel v. HomeDeliveryLink, Inc., No. 6:17-cv-06296 (W.D.N.Y. June 3, 2020).

Legislative Initiatives (1 item)

IOWA LAW PROTECTS INDEPENDENT CONTRACTOR OWNER-OPERATOR TRUCKERS.  Iowa Governor Kim Reynolds signed into law on June 18, 2020 a bill (SF2296) that protects the independent contractor status of owner-operator truckers by defining the meaning of the term “owns” to include those with the right to purchase their truck.  Iowa State Representative Gary Worthan (R-Storm Lake), who has a family trucking business, sponsored the bill and stated: “It will include anyone who owns their truck, truck tractor, or tractor-tractor combination. It will also include those who are in a purchase agreement, or a lease-to-purchase agreement….” The passage of this bill is seen by many as a backlash against what has transpired in California following the enactment of AB5, where owner-operator truckers and scores of other workers in other industries are now required to meet a test that could eliminate the ability of truckers to maintain an independent business.

Other Noteworthy Developments (1 item)

CALIFORNIA EARMARKS $20 MILLION TO ENFORCE AB5 LAW.  On June 29, 2020, California Governor Newsom signed the 2020 Budget Act earmarking $20 million for enforcement of AB5 in the 2020-2021 budget year.  AB5 took effect January 1, 2020 and established a strict statutory test for determining independent contractor status, as we have commented in several of our blog posts.  The Budget provides resources to implement AB5, including $17.5 million to the Department of Industrial Relations, $3.4 million for the Employment Development Department, and $780,000 for the Department of Justice. According to the Budget summary, “These resources will allow these state entities to train employees on the application of the ABC test and to conduct more hearings, investigations, and litigation related to AB5.”  Despite the views by many that AB5 essentially eliminates all independent contractors in the state except for a select few who were carved out with exemptions, we commented in our blog post of September 11, 2019 that many companies using ICs may be able to comply with the law without a change in their business model.

By Richard Reibstein

Posted in IC Compliance

May 2020 Independent Contractor Misclassification and Compliance Law News Update

May 2020 was not a busy month for the filing of new independent contractor misclassification lawsuits, as some courts were closed for new filings and many lawyers were working remotely. But five cases came to our attention that provide meaningful lessons for companies seeking to comply with laws impacting independent contractors or defending against class or collective actions brought under such laws.

The first lesson is to anticipate new types of independent contractor claims, such as the type of lawsuit reported below against FedEx.  That company, which was the subject of dozens of class actions alleging that drivers for its Ground and Home Delivery divisions had been misclassified as ICs, sought to insulate itself by changing its business model for deliveries.  Instead of engaging individual drivers who had claimed FedEx misclassified them as ICs, FedEx embarked on a new business approach by only contracting with corporations that operated multiple route businesses. In that fashion, each owner that drove a vehicle and made deliveries presumably became a business owner and employer of other drivers who operated the other routes. But what if the multi-route corporate business owner in turn engages drivers to cover the other routes and classifies them as ICs and not as employees? Is FedEx free from IC misclassification exposure?  Not according to an IC misclassification lawsuit filed against FedEx as the alleged joint employer of the drivers that are being engaged by multi-route corporate business owners and classified as ICs.

The second lesson is that while some settlements of class or collective action IC misclassification lawsuits can be settled in the high six-figure or low seven-figure range, many of these cases have a lot more at stake, even when the number of proposed class or collective members are in the hundreds and not thousands.  As reported below, one baking goods manufacturer has now paid close to $40 million in settling IC misclassification cases.

The third lesson is to shore up your IC agreements including arbitration provisions with class action waivers. As we informed our readers in a post based on an article published in Bloomberg Law’s Daily Labor Report, some arbitration clauses in IC agreements may not be sufficient to forestall a class or collective action lawsuit.  They need to be drafted effectively to resist anticipated challenges by plaintiffs’ class action lawyers, who typically challenge virtually every arbitration agreement that contains a class action waiver.  But, even if drafted effectively, arbitration agreements cannot insulate companies from IC misclassification liability including exposure to proceedings and audits brought by administrative or regulatory agencies, which are not bound by arbitration agreements. The starting point to minimize IC misclassification exposure to is to focus on structuring, documenting, and implementing IC relationships in a manner that enhances compliance with IC laws, as many companies have done using a process such as IC Diagnostics.™

Finally, we report below on New Jersey’s issuance of a new IC misclassification notice that all employers in that state are now required to post conspicuously. The poster, however, would not likely reach independent contractors that work off-site.  Further, ICs do not have access to company intranets, if companies decide to post the notice electronically as well as at their workplaces. The law creating this paperwork obligation therefore appears to be of marginal value in trying to curtail IC misclassification.

In the Courts (5 cases)

FEDEX UNABLE TO DISQUALIFY PLAINTIFFS’ CLASS ACTION COUNSEL IN NEW TYPE OF IC MISCLASSIFICATION CLAIM.  After protracted litigation, FedEx began to implement in the 2010’s a business model that it hoped would forestall future class action lawsuits for independent contractor misclassification by drivers providing services for its Ground and Home Delivery divisions.  The business model relies on what FedEx calls Independent Service Providers (ISPs).  FedEx enters into contracts with ISPs as independent corporations serving multiple routes with their own vehicles, drivers, and other employed personnel.  According to FedEx, the ISPs agree to treat all of their drivers and helpers as employees of the ISP; agree to comply with applicable law; and retain the sole and complete discretion staffing, hiring, assignment, and all other terms and conditions of employment.

The new complaint filed in federal court in Pennsylvania alleges that the drivers and other personnel making deliveries for the ISP are actually employed by FedEx through intermediary employers – the ISPs – to perform delivery services for FedEx and that FedEx is the joint employer of the drivers along with the ISP companies. Because the drivers’ counsel, Lichten & Liss-Riordan, P.C., also represent a group of ISPs claiming that they are employees who have been misclassified as ICs by FedEx, the company brought a motion to disqualify the law firm. FedEx argued that the law firm’s representation of the drivers in this case against the company and its representation of a class of ISPs against FedEx in another pending federal court case has created a conflict of interest for the law firm under the applicable Rules of Professional Conduct because the new lawsuit asserts that FedEx is a joint employer with the ISPs of the drivers and helpers.

The Pennsylvania federal court denied FedEx’s motion to disqualify the drivers’ counsel. The court concluded that although the plaintiffs will attempt to prove that FedEx is a joint employer under the FLSA, the ISPs are not a party to the action and “there is no circumstance wherein this Court or a jury will be required to find that [Independent] Service Providers are Plaintiffs’ employers.” It further found that “[w]hile FedEx may pursue indemnification and contract termination following the conclusion of the action, a finding of liability on FedEx’s part in no way establishes FedEx’s right to recover from [Independent] Service Providers,” and that the court would not be required to determine whether the ISPs, who are not parties to the action, are liable for FLSA violations in order for the drivers to recover. Sullivan-Blake v. FedEx Ground Package System, Inc., No. 18-cv-01698 (W. D. Pa. May 21, 2020).

BAKING COMPANY’S SECOND SETTLEMENT WITH DISTRIBUTORS IN TWO MONTHS IN IC MISCLASSIFICATION CASES COST $21.6 MILLION.  Flowers Foods, Inc., which makes Wonder Bread, Tastykake, and other brands of baked goods, has settled yet another independent contractor misclassification case with distributors that purchase distribution rights to sell and distribute such bakery products to retail stores. The settlement in this case was for $8.3 million covering distributors in North Carolina, and the one in April was for $13.3 million for distributors in Pennsylvania, Maryland, and New Jersey.  Flowers Foods has settled similar lawsuits in the past for another $18 million: $9 million covering distributors in Alabama, Kentucky, Texas, Mississippi, Tennessee, Virginia, and Missouri, and before that for $9 million in yet another case involving North Carolina distributors.

According to the complaint in the most recent case that Flowers Foods has settled, the distributors alleged that they were required to arrive at specified warehouses at specified times to stock their vehicles with the company’s products; delivery was expected to be made to customers at the times and places determined by the company; and the distributors had no ownership or entrepreneurial influence over their day-to-day activities, including sale prices, shelf space at retail locations, orders, product selection, and work schedules. The company denied the allegations and contended that the distributors are responsible for controlling the manner, method, and means of performance of their distributorship services. The most recent settlement not only includes payments to settlement class members, service awards to each of the named plaintiffs, and attorneys’ fees and costs, but also additional payments to each of the current distributors who elect to arbitrate applicable disputes; a Buy Back Option where settlement class members who are current distributors may be eligible to have their territories repurchased by the company; creation and staffing of a Distributor Advocate position to oversee an internal, alternative dispute resolution process for independent distributors; and the creation of a distributor review panel regarding contract-related disputes. Rosinbaum v. Flowers Foods Inc., No. 16-cv-00233 (E.D.N.C. May 12, 2020).

CLEANING FRANCHISOR PREVAILS IN PART ON MOTION TO COMPEL ARBITRATION OF IC MISCLASSIFICATION CASES BY FRANCHISEE CLEANERS. In a case that came to our attention in early May, the United States Court of Appeals for the Third Circuit partially reversed a federal district court judge in an IC misclassification case by franchisees against a large commercial cleaning franchisor, Coverall North America, and one of its master franchisors, both of which sought to compel arbitration of the franchisees’ claims. The Third Circuit disagreed with the lower court judge, who had found that the terms of the arbitration provisions, which incorporated the rules of the American Arbitration Association, in the agreement between the master franchisor and the cleaning franchisees, were unclear to “unsophisticated parties” such as the cleaning contractors. The district court had also concluded that Coverall North America was not a third-party beneficiary of the master franchisor’s agreement with the franchisees, but the Third Circuit remanded that issue to the lower court for further consideration. Richardson v. Coverall North America Inc., Nos. 18-3393 and 18-3399 (3d Cir. Apr. 28, 2020).

HOME HEALTH FRANCHISOR’S MOTION TO COMPEL ARBITRATION OF CAREGIVERS’ IC MISCLASSICATION CLASS ACTION CLAIMS IS DENIED.  A home health franchisor was unable to short-circuit a class and collective action lawsuit for independent contractor misclassification under Connecticut wage laws and the federal Fair Labor Standards Act by a home health aide.  The franchisor made a motion to compel arbitration of the claims but its motion was denied because the arbitration agreement did not clearly cover the franchisor.  The facts indicated that the parties signing the Caregiver Agreement on behalf of the defendant franchisors were less than precise as to who was signing on behalf of whom, and the agreement left blank the name of the franchising entity covered by the agreement. In denying the motion to compel and ordering litigation of the claims, the federal court concluded that there was no meeting of the minds between the defendants and the plaintiff regarding the parties to the Caregiver Agreement. The court found that the plaintiff’s argument that she was not reasonably certain about with whom she was contracting was supported by the record and that the defendants failed to demonstrate that they entered into an enforceable agreement to arbitrate with the plaintiff. Scott v. Griswold Home Care, No. 19-cv-00527 (D. Conn. May 26, 2020).

LYFT PREVAILS IN EFFORT BY DRIVERS TO ENJOIN IT FROM CLASSIFYING THEM AS INDEPENDENT CONTRACTORS.  Lyft drivers suing the company in a class action claiming independent contractor misclassification under Massachusetts law were denied an emergency preliminary injunction that would have enjoined Lyft from continuing to classify the drivers as independent contractors. The drivers had filed a proposed class action alleging that, based on their misclassification as independent contractors and not employees, Lyft has unlawfully required drives to pay business expenses such as the cost of maintaining their vehicles, gas insurance, cell phone and data expenses, in violation of the Massachusetts state independent contractor law.  Additionally, the drivers alleged that Lyft violated the state wage and hour laws through its failure to pay minimum wages, overtime compensation, and sick leave. According to the motion for an emergency preliminary injunction, “Faced with the choice of staying home [during the coronavirus pandemic] without pay and risking losing their access to their livelihood, including housing, food, and other necessities of living, Lyft drivers across Massachusetts will continue working and risk exposing hundreds of riders who enter their car on a weekly basis to the deadly disease.” The drivers viewed their purported misclassification by Lyft as creating an immediate danger, not only to the drivers, but the general public as well.

The court disagreed with the drivers, and concluded that although they demonstrated that there is a substantial likelihood of success on the merits of their underlying misclassification claim, the drivers failed to establish that they would face irreparable harm if they were not immediately reclassified as employees.  Among other things, the court pointed out that the drivers did not establish that Lyft was the cause of any irreparable harm to the drivers’ own health where because Lyft actually instructed drivers not to drive if they felt their health was endangered. In a ruling that may suggest that the court will eventually rule in favor of the drivers on their underlying claim, the court focused on Prong B of the Massachusetts Independent Contractor Law’s ABC test for determining worker status and found, under a narrow interpretation, that Lyft would likely not be able to establish that the drivers’ services are performed outside of Lyft’s usual course of business. Although Lyft argued that its core business is as a “platform service,” connecting drivers and riders and that it does not provide transportation services, the court did not agree. It stated that “despite Lyft’s careful self-labeling, the realities of Lyft’s business – where riders pay Lyft for rides – encompasses the transportation of riders.” In an analogy that seems rather far-afield and inapposite, the court stated: “The ‘realities’ of Lyft’s business are no more ‘connecting’ riders and drivers than a grocery store’s business is merely connecting shoppers and food producers….” Cunningham v. Lyft, Inc., No. 19-cv-11974 (D. Mass. May 22, 2020).

Administrative Initiatives (1 item)

In an undated publication issued in late May, the New Jersey Department of Labor and Workforce Development issued a poster for employers to post conspicuously in each of the ‎employer’s workplaces.  This bill was one of a number of new laws that was part of a package of legislative initiatives signed by the Governor of New Jersey in January 2020 addressing independent contractor misclassification, as we noted in a prior blog post. The poster, entitled “New Jersey Law Prohibits Worker Misclassification: Notice of Employee Rights and Employer Responsibilities,” provides answers to seven questions: (1) What is misclassification? (2) Am I an employee or an independent contractor? (3) Do I have to prove that I am an employee? (4) Does it matter if I received an IRS form 1099, as opposed to IRS form W-2? (5) If my employer had me sign an independent contractor agreement before hiring me, does that make me an independent contractor? (6) What happens when it is found by a state agency or court that an employer misclassified an employee as an independent contractor? (7) Am I protected from retaliation by my employer for reporting misclassification?

The poster, which is required to be posted immediately, includes a reference to the three-prong test for independent contractor status in New Jersey. This standard is commonly referred to as an ABC test.  New Jersey is one of four states that use a form of the ABC test not only for unemployment insurance benefit eligibility but also for compliance with wage and hour laws. The ABC test for independent contractor status has had a great deal of media attention due in large part to enactment of the AB5 law in California that established a different  version of that test, which is more challenging for companies to  meet than the version used in New Jersey.  The poster also advises readers that they should go to www.myworkrights.nj.gov for information about the factors considered for each of the three prongs of the New Jersey ABC test, but that link does not actually address the ABC test. Presumably, the link will be fixed or a new link will be provided. 

While the notice requires posting “in a place or places accessible to all employees in the employer’s workplaces,” it is unclear if the notice needs to be posted not only at all fixed company worksites but also on a company’s intranet site to inform employees that are working remotely.  Of course, like any poster addressing independent contractor misclassification, the workers whom the legislature was presumably seeking to inform – those who are classified as independent contractors – are not always working on site and do not (and should not) have access to a company’s intranet. This may therefore  be one of those laws intended to curtail misclassification that does little more than impose additional paperwork obligations on employers.

By Richard Reibstein

Posted in IC Compliance

March and April 2020 Independent Contractor Misclassification and Compliance News Update   

The last two months have consumed all of us with matters related to COVID-19. This public health emergency has created an anomalous situation virtually no one could have foreseen: legislation being passed at the federal level that treats independent contractors in a similar fashion to employees for purposes of unemployment benefits and paid sick and family leave benefits. Since the inception of this blog almost ten years ago, we have reported on over a dozen bills introduced in Congress addressing independent contractors – and not a single one was seriously considered due to a lack of bipartisanship on Capitol Hill. Yet, in a legislative effort almost as swift as the spread of the Coronavirus itself, two key pieces of federal legislation were passed by Congress and signed into law by the President in the course of only nine days that provided pandemic benefits not only to employees but also to self-employed individuals including gig workers and freelancers.

Many companies that utilize self-employed individuals as part of their business model are concerned that state workforce agencies will eventually use the federal pandemic unemployment assistance law to initiate audits of businesses to determine if such workers who apply for benefits have been misclassified in the past as independent contractors.  For that reason, concerned companies that use independent contractors are treating each notice of a claim for unemployment benefits by any such worker as a potentially problematic legal challenge. Savvy businesses are responding to such claims with comprehensive submissions showing that such workers have been properly classified as independent contractors under the applicable state unemployment law, as we described in our April 7, 2020 blog post.   

Over the past two months, there were relatively few court cases involving independent contractor status, yet two were by the highest state courts in New York and Pennsylvania under each state’s unemployment insurance law. The New York case involved a well-known company in the gig economy and, as a result, the decision attracted national attention. The Pennsylvania case clarified one of the factors in that state’s statutory test for independent contractor status.  Those cases are addressed below.

In the Courts (5 Cases)

POSTMATES COURIER FOUND TO BE ELIGIBLE FOR UNEMPLOYMENT BENEFITS AS AN EMPLOYEE BY NEW YORK’S HIGHEST COURT.  The New York Court of Appeals issued a highly-anticipated decision involving the independent contractor status of a Postmates courier under New York’s unemployment insurance statute.  As we discussed in detail in our March 26, 2020 blog post, while the Court’s opinion is of limited import legally, as a practical matter it may send shockwaves through the gig economy in New York and elsewhere for those who read more into the decision than is warranted.

The Court of Appeals majority did not find that the courier was an employee; rather, it ruled only that there was “substantial evidence in the record to support the [Appeal] Board’s determination” that the courier was entitled to unemployment benefits as an employee of the company.  The history of the case is a classic example of administrative and judicial ping-pong, involving four administrative and judicial reversals. The role of appellate courts in cases of this nature is simply to determine if there was enough evidence in the record to support the Appeal Board’s decision, even if the countervailing evidence was greater. In reversing a lower court’s decision that the New York Unemployment Insurance Appeal Board erred when it concluded that there was substantial evidence in the record supporting employee status of the courier, the Court of Appeals relied upon the three key factors that it felt supported the Appeal Board’s decision: (1) the workers were “low-paid” and unskilled; (2) the couriers had limited discretion over how to do their jobs; and (3) the “nature of the work” (making deliveries) resulted in Postmates “dominat[ing] significant aspects of its couriers’ work” by dictating which customers and where the couriers  deliver to, “effectively limiting the time frame for delivery and controlling all aspects of pricing and payment.”

Judge Rowan Wilson filed a 24-page dissenting opinion, joined by Judge Michael Garcia, criticizing the majority for not undertaking a closer review of the facts and for its reliance on using the “nature of the work” as a new factor in determining independent contractor status. Vega v. Postmates Inc., No. 14, 2020 N.Y. Slip Op. 02094 ( Mar.‎ 26, 2020).

PENNSYLVANIA HIGH COURT CLARIFIES ITS TEST FOR INDEPENDENT CONTRACTOR STATUS UNDER THE STATE’S UNEMPLOYMENT COMPENSATION LAW.  The Pennsylvania Supreme Court has interpreted the second prong of the state’s two-pronged test for independent contractor status under Pennsylvania Unemployment Compensation Law.  The second prong requires a company to establish that the service provider is “customarily engaged in an independently established trade, occupation, profession ‎or business.” ‎ The lower court had held that various individuals working in a salon as nail technicians, babysitters, and cleaners were independent contractors and not employees because they had the right to work for more than one entity; were not limited by the nature of their work for the salon or by their hours to provide services to a single employer; were not dependent on the salon’s existence for ongoing work; and could refuse engagements. In reversing the decision of the lower court, the Supreme Court concluded that the words “customarily engaged” in the second prong requires that an individual be actually involved in an independent trade, occupation, profession, or business in order to establish self-employment.

In the Court’s mind, it is not enough that the individual has a right to engage in an independent business or trade.  The Court stated, “Having determined that the phrase ‘customarily engaged’ requires actual, rather than hypothetical, involvement in an independent trade or business, we are careful to emphasize that our interpretation does not equate ‘actual involvement’ to a requirement that an individual ‘actually perform his or her services’ for third parties during a given time period.” The Court further stated that “an individual can be an independent contractor who ‘is simply satisfied working for a single client or at a single location’ depending on the circumstances.”  But in that instance, the words “customarily engaged” requires that the individual be shown “in some way [to be] actually involved in an independently established trade or business.” The Court then gave some examples, such as where an individual actively holds himself out as an independent business through the use of business cards or other forms of advertising.  It concluded by holding that the record contained insufficient evidence that the individuals performing nail or cleaning services “were holding themselves out as having their own businesses or otherwise indicated that they were actually involved in an independently established business.”  A Special Touch v. Commonwealth of Pennsylvania, No. 30 MAP 2019 (Sup. Ct. Pa. Apr. 22, 2020)‎.

Publisher’s note:  Pennsylvania’s test for independent contractor status under its unemployment compensation law is an abbreviated form of the so-called ABC test, where the B prong is missing.  Thus, we typically refer to Pennsylvania as having an AC test for unemployment compensation purposes.  The C prong is oftentimes interpreted differently from one state to another, and the interpretation by the Pennsylvania Supreme Court of the language in that prong is a bit different than the manner in which other states construe such words.

HEALTH CARE COMPANY UNABLE TO DISMISS INDEPENDENT CONTRACTOR MISCLASSIFICATION CASE.  A Pennsylvania federal court has denied a health care company’s motion to dismiss a proposed collective and class action complaint brought by prison therapists under the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act due to the alleged misclassification of the therapists as independent contractors and not employees. PrimeCare Medical, Inc. provides services to inmates in correctional facilities throughout Pennsylvania. According to the allegations in the complaint, all of the therapists provide the same mental health services such as conducting mental health assessments of inmates, determining risks of inmate suicide, facilitating admissions, and developing educational programs. The complaint further alleges that the company maintains control, oversight and discretion over the operation of the medical services within the correctional facilities. The company made a motion to dismiss the complaint, arguing that the allegations lacked requisite factual specificity and were impermissibly vague. In rejecting the company’s argument, the court concluded that the complaint adequately defined the class of employees the plaintiff seeks to represent; the complaint specified how the therapists are similarly situated by describing their job duties; and the complaint sufficiently alleged that the company misclassified the therapists as independent contractors and improperly exempted them from overtime compensation. Moore v. PrimeCare Medical, Inc., No.19-cv-106 (W. D. Pa. Mar. 16, 2020).

COMMERCIAL CLEANING COMPANY GETS SECOND CHANCE TO COMPEL ARBITRATION OF INDEPENDENT CONTRACTOR MISCLASSIFICATION CLASS ACTION.  The United States Court of Appeals for the Third Circuit has remanded back to the district court for further consideration a motion to compel arbitration of a class action lawsuit brought by two named plaintiffs that each purchased their own commercial cleaning franchise from Coverall North America, Inc. (CNA) through a “master franchisee,” Sujol, LLC d/b/a Coverall of Southern New Jersey. Both plaintiffs entered into agreements with Sujol, but CNA was not a party to either agreement. The plaintiffs commenced a proposed class action against CNA and Sujol in New Jersey state court, alleging that the companies violated the New Jersey Wage Payment Law (NJWPL) by misclassifying them as independent contractors and making unlawful deductions from their wages.

After the case was removed to federal court, both CNA and Sujol made a motion to compel arbitration under the Federal Arbitration Act.  The district court concluded that the incorporation of the American Arbitration Act’s Rules in Silva’s agreement did not satisfy the clarity needed for delegation of questions of arbitrability to an arbitrator because the rules were not clear, at least to an “unsophisticated parties” such as the plaintiffs.  The district court also found that the arbitration agreement did not cover NJWPL claims and that CNA could not invoke the arbitration clause because it was not a third-party beneficiary of the agreement with Sujol. On appeal by CNA and Sujol, the Third Circuit disagreed with the district court and found that the incorporation of the AAA Rules in Silva’s arbitration clause constituted clear and unmistakable evidence that the parties agreed to delegate arbitrability. The Third Circuit also vacated the district court’s order that CNA was not a third-party beneficiary of the contract’s arbitration clause, concluding that further discovery was needed as to CNA’s rights in both plaintiffs’ agreements. Richardson v. Coverall North America, Inc., Nos. 18-3393 & 18-3399 (3d Cir. Apr. 28, 2020)‎.

RIDE-SHARING COMPANY’S VICTORY IN INDEPENDENT CONTRACTOR MISCLASSIFCATION CASE VACATED.  UberBlack drivers claiming they had been misclassified as independent contractors succeed before the United States Court of Appeals for the Third Circuit in vacating summary judgment previously issued against them by a federal district court in their collective and class action lawsuit under the federal Fair Labor Standards Act and Pennsylvania wage and hour law. Each of the named plaintiffs owned and operated independent transportation companies and entered into a Technology Services Agreement with Uber. Uber filed a motion for summary judgment, arguing that the plaintiffs were independent contractors and not employees under the FLSA and Pennsylvania law. Applying the six-part test utilized by the Third Circuit in Donovan v. DialAmerica Marketing, Inc., the district court agreed with Uber, concluding that, on balance, because four of the six factors favored IC status, the drivers were independent contractors and not employees.

On appeal, a three-judge panel of the Third Circuit vacated the lower court’s decision, finding that there are genuine issues of material fact regarding a number of the six factors that the lower court found to be in favor of independent contractor status. Regarding the “right to control” factor, which the district court found had favored the company, the Third Circuit found that, among other things, the evidence was not conclusive as to whether Uber exercises control over drivers. As to the factor concerning opportunity for profit or loss depending on managerial skill, the district court found in favor of the company, concluding that the drivers can drive for competitors and their own private clients and can ‎determine when, where, and how to use the Driver App to generate more profits.  The Third Circuit, however, found there were other material facts indicating a genuine dispute over that factor, including that the company decides the fare, whether to refund or cancel a passenger’s fare, which driver receives a trip request, and determines the driver’s territory, which is subject to change without notice. Finally, the Third Circuit held that there were genuine issues of material fact over the factor that examines the degree of permanence of the working relationship. As a result, the case may now proceed to the trial phase. Razak v. Uber Technologies Inc., No. 18-1944 (3d Cir. Mar. 3, 2020).

Legislative Initiatives

FEDERAL COVID-19 LEGISLATION AFFECTING INDEPENDENT CONTRACTORS.  Both of the two major bills passed by Congress and signed into law by the President included benefits typically limited to employees but expanded to also include self-employed individuals. As discussed more fully in our blog post of March 26, 2020, pandemic unemployment assistance has been made available to independent contractors under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, and paid sick and family leave has been made available to independent contractors under the Families First Coronavirus Response Act (“FFCRA”).  Under the CARES Act, enacted into law on March 27, 2020, self-employed individuals will be entitled to pandemic unemployment assistance if they are able and willing to work or telework for pay, but are unable to do so due to a broad range of reasons related to the COVID-19 pandemic.  Pandemic unemployment assistance is available not only if such independent contractors are “unemployed” but also if “partially unemployed,” and are available retroactive from January 27, 2020 through December 31, 2020. ‎

Under the FFCRA, enacted on March 18, 2020 and effective April 1, 2020, both paid sick time under the Emergency Paid Sick Time Act, and expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act is available not only to employees, but also to eligible self-employed individuals.  The FFCRA defines such individuals in Section 7002(b) and 7004(b) of the law as a person who “regularly carries on a trade or business . . . and would be entitled to receive paid leave . . . if the individual were an employee of an employer (other than himself or herself).” Paid sick leave is available to independent contractors for up to ten days where unable to work or telework because the individual is subject to a government quarantine or order of isolation related to COVID-19; has been advised by a health care provider to self-quarantine; or is experiencing symptoms of Coronavirus and is seeking medical attention.

Although the federal government has provided a much needed form of “unemployment” relief for freelancers, gig workers, and other independent contractors, state agencies have for the most part failed to conform their online processes to expedite such benefits to “self-employed individuals.” Instead, most state workforce agencies require independent contractors to apply for unemployment benefits as employees, and then, only when denied after they are determined to be non-employees, are they able to proceed with the process to submit documentation that they are self-employed and have suffered a loss of income.

As a result, companies are receiving requests for information from state workforce agencies about individuals they regard as independent contractors but have no choice but to apply for benefits as if they are employees. Businesses must be mindful that not responding in an effective manner to an unemployment claim notice about a worker regarded by the company as an independent contractor will likely lead to a finding that the claimant is an employee of that business.  Such a finding can create enormous potential legal risks and liabilities for companies that have not been paying unemployment and payroll taxes on the fees paid to individuals treated as independent contractors.  As we remark in our blog post of April 7, 2020, businesses should take a six-step approach to responding to such claims.

VIRGINIA ENACTS FOUR LAWS INTENDED TO COMBAT INDEPENDENT CONTRACTOR MISCLASSIFICATION.  Virginia Governor Ralph Northam signed into law four sets of bills intended to combat worker misclassification. A 2012 report of the Joint Legislative Audit and Review Commission estimated that at least ‎‎214,000 Virginians were misclassified as independent contractors by their employers. ‎ A news release issued by the Office of the Governor on April 12, 2020 described the following new laws.

  • House Bill 984 and Senate Bill 894 (signed into law on March 10 and effective July 1, 2020) create a private cause of action for a misclassified worker to bring a civil action for damages against his or her employer for failing to properly classify the worker if the employer had knowledge of the individual’s ‎misclassification. Damages may be awarded for wages, salary, employment benefits ‎(including expenses incurred by the employee that would otherwise have been covered by ‎insurance or other compensation lost to the individual), and reasonable attorneys’ fees and costs ‎incurred in bringing the action. The law also provides that an individual who ‎performs services for a person for remuneration shall be presumed to be an employee unless it is ‎shown that the individual is an independent contractor as determined under the Internal Revenue ‎Service guidelines.
  • ‎House Bill 1199 and Senate Bill 662 (also signed into law on March 10 and effective July 1, 2020) protect employees or independent contractors from employer retaliation. Retaliation would include discharging, disciplining, threatening, discriminating against, or penalizing an employee or ‎independent contractor or taking other retaliatory action regarding an employee or independent contractor’s compensation, terms, conditions, location, or privileges of employment, because the employee or independent contractor reported misclassification or is requested or subpoenaed to participate in an investigation, hearing, or inquiry. Companies found to have engaged in retaliatory action will be subject to a civil penalty up to the value of the employee’s lost wages.
  • House Bill 1407 and Senate Bill 744 (signed into law on April 6 and effective January 2, 2021) authorize the Department of Taxation to oversee ‎investigations into suspected cases of worker misclassification and levy penalties as ‎appropriate. The law provides that ‎if an individual performs services for an employer for ‎remuneration, that individual shall be ‎considered an employee of the party that pays that ‎remuneration unless such individual or his ‎employer demonstrates that such individual is ‎an independent contractor. The Department shall ‎determine whether an individual is an ‎independent contractor by applying Internal Revenue ‎Service guidelines.‎ Failure of an ‎employer to properly classify an ‎individual as an employee may result in civil penalties of ‎up to $1,000 per misclassified individual for a first offense, up to ‎‎$2,500 per ‎misclassified individual for a second offense, and up to $5,000 per misclassified ‎‎individual for a third or subsequent offense.‎
  • House Bill 1646 (also signed into law on April 6 and effective July 1, 2020) requires contractors to properly classify all workers as employees or independent contractors. This law gives the Board of Contractors the ability to sanction contractors who are found to have intentionally misclassified workers.

By Richard Reibstein

Posted in IC Compliance

Businesses Concerned About COVID-19 Unemployment Benefit Rights for Independent Contractors

Federal and state laws have historically barred independent contractors and other non-employees from unemployment insurance benefits—until the COVID-19 crisis descended on the U.S. workforce. This pandemic, almost overnight, suspended almost all work opportunities for those who have operated as self-employed individuals and received a Form 1099 for their compensation, except for individuals whose work can be performed remotely or who provide an essential service.

Recognizing that the latest report from the U.S. Labor revealed that over 10 million workers – close to 7% of the entire “workforce” in the United States – are independent contractors, Congress understood that it needed to bolster unemployment benefits not only for W-2 workers but also make such benefits available to those ten million 1099ers.

As a result, the initial COVID-19 stimulus bill, passed by Congress and signed into law on March 27, contains unemployment assistance provisions that expand coverage to self-employed individuals, also known as independent contractors, freelancers, sole proprietors or gig workers. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, such individuals will be entitled to “pandemic unemployment assistance” if they are able and willing to work or telework for pay, but are unable to do so due to a broad range of reasons related to the COVID-19 pandemic.

In most industries, relatively little work that was performed by independent contractors can be performed remotely.  As a result, independent contractors have joined the ranks of those who have applied to state unemployment offices for out-of-work benefits.

The Congressional backstop for independent contractors may have unintended consequences for companies that make use of 1099ers. Indeed, as described below, this has created considerable concerns for many companies that have a business model that relies upon services provided by independent contractors.

What circumstances allow for independent contractor “unemployment” assistance?

Unemployment assistance will be available to such independent contractors who are unable to work or telework for pay under Section 2102 of the CARES Act, as further explained by guidance issued by the U.S. Department of Labor, if the individual certifies that he or she:

  • is diagnosed with COVID-19 or experienced symptoms or is seeking a diagnosis;
  • is a member of his or her household has been diagnosed with the illness;
  • is providing care to a family member with COVID-19;
  • has primary caregiving responsibility to a child that is unable to attend school that has been closed as a direct result of the COVID-19 public health emergency;
  • cannot reach his or her place of work as a direct result of the COVID-19 public health emergency or advice of a health care provider to self-quarantine due to concerns related to COVID-19;
  • has become a breadwinner or major support for a household because the head of household has died as a direct result of COVID-19;
  • has had to quit his or her work as a direct result of COVID-19; or
  • has a work location that is closed as a direct result of the COVID-19 public health emergency.

Pandemic unemployment assistance is available not only if such independent contractors are “unemployed” but also if “partially unemployed.” This benefit is not available, though, if and when such self-employed individuals are receiving paid sick leave, which is also available to independent contractors or other paid leave benefits, including such benefits available to independent contractors under the federal Families First Coronavirus Response Act or a state law providing such paid benefits to self-employed workers.

This financial assistance is available retroactively to January 27, 2020, through December 31, 2020, as long as the individual’s unemployment, partial unemployment or inability to work caused by COVID-19 continues, up to a maximum of 39 weeks, including any weeks when the independent contractor received any other paid benefits under federal or state law.

Paid Sick Leave and Expanded FMLA Leave Now Available to Independent Contractors  

The Families First Coronavirus Response Act (FFCRA), enacted on March 18, provides both paid sick time under the Emergency Paid Sick Time Act and expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act. As it did with unemployment assistance under the CARES Act, Congress extended the availability of such benefits not only to employees but also to “eligible self-employed individuals.” Such an individual is defined in Section 7002(b) and 7004(b) of the law as a person who “regularly carries on a trade or business … , and would be entitled to receive paid leave … if the individual were an employee of an employer (other than himself or herself).”  This definition of an eligible self-employed individual from the FFCRA was later incorporated by Congress into the CARES Act.

The amount of sick leave and paid family leave benefits available to an eligible independent contractor is based in part on the individual’s average daily self-employment income for the taxable year. The average daily self-employment income is defined in the FFCRA as the net earnings for the taxable year from self-employment of the individual divided by 260. The amount payable to the self-employed individual may be taken by the independent contractor as a 100% tax credit.

Concerns by Businesses Using an Abundance of Independent Contractors

In the weeks since enactment of the CARES Act, it is likely that hundreds of thousands, if not millions, of independent contractors in the United States have applied for unemployment assistance. Only a handful of state unemployment offices have created forms for self-employed individuals to file for pandemic unemployment assistance.

As a result, independent contractors must apply for unemployment benefits on the same form as W-2 workers, answering the same questions asked of employees. This has created considerable concerns for businesses using independent contractors. Many are concerned that if they do not dispute the claimant’s eligibility as an employee and assert in a persuasive manner that the claimant is entitled to benefits only as a self-employed individual, the company may run the risk that the state unemployment office will issue a determination that the claimant has been misclassified as an independent contractor.

A number of savvy businesses have adapted a process such as IC Diagnostics™ to create templates to respond to such claims quickly and effectively.

Another worry by some businesses that use independent contractors is that state workforce agencies may at some later point use this temporary pandemic relief legislation to create and maintain a list of independent contractors operating in such states, then conduct an audit to determine if any of the 1099ers were misclassified and whether the company owes years of unpaid unemployment taxes.

The best defense to an audit of a company’s independent contractor relationships is to proactively enhance compliance with independent contractor laws and minimize exposure to misclassification claims.  Many companies have used a process such as IC Diagnostics™ to restructure, re-document and/or re-implement their independent contractor relationships in a customized and sustainable manner.

Written by Richard Reibstein and Janet Barsky

Republished with permission from Construction Executive, April 29, 2020, a publication of Associated Builders and Contractors. Copyright 2020. All rights reserved.

Posted in IC Compliance