Is the New Postmates Decision in New York a Blockbuster Case on Independent Contractor Misclassification or Not?

The New York Court of Appeals today issued a decision involving the independent contractor status of a Postmates courier.  The Court’s opinion supporting employee status may have very little impact from a judicial standpoint in New York and, indeed, may provide useful insights for savvy companies seeking to elevate their level of independent contractor compliance.  But it may also send shockwaves through the gig economy in New York and elsewhere for those who read more into the decision than is warranted.

The Majority Opinion in Postmates

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.”

The history of the case is a classic example of administrative and judicial ping-pong.  The Court of Appeals majority reversed the Appellate Division (Third Department), which had reversed a decision by the New York Unemployment Insurance Appeal Board, which had reversed a decision by an Administrative Law Judge, who had reversed a 2015 decision by the Labor Commissioner finding that a courier was misclassified as an independent contractor instead of an employee for unemployment insurance purposes.

A constant refrain by New York appellate courts reviewing administrative decisions by the Unemployment Appeal Board is that even if they may have reached a different decision on the merits based on all of the evidence introduced at the hearing before an ALJ, their limited role is not to decide the merits.  Rather, the role of appellate courts 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. As a result, appellate courts in unemployment cases typically focus on the factors that might have supported the Appeal Board’s decision – and that is what the Court of Appeals did here in its decision.

What were those factors that the majority found to support the Appeal Board’s decision?  The Court pointed to three key factors:

  • The workers were “low-paid” and unskilled.
  • The couriers had limited discretion over how to do their jobs.
  • The “nature of the work” (making deliveries) resulted in Postmates “dominat[ing] significant aspects of its couriers’ work” by dictating to which customers the couriers can deliver and where to deliver the requested items, “effectively limiting the time frame for delivery and controlling all aspects of pricing and payment.”

In 2016, the Court of Appeals issued a widely heralded decision in a case called Yoga Vida, concluding that the Appeal Board’s decision that yoga instructors were employees and not independent contractors was not supported by sufficient evidence.  The majority opinion in Postmates distinguished the instructors in Yoga Vida from the couriers here, pointing out that:  the yoga instructor in that case provided a service that is, “in some respects, unique to that instructor and his or her personal characteristics,” is free to create his or her own customer following and invite students to attend their classes at competing studios, and was afforded the opportunity to chose the manner in which Yoga Vida would calculate the instructor’s pay (either hourly or on a percentage basis). The majority summed up this comparison by noting the obvious: “yoga instructors are not couriers.”

The Dissenting Opinion

Judge Rowan Wilson filed a 24-page dissenting opinion, joined by Judge Michael Garcia. He criticized the majority for not undertaking a close review of the facts that were relied upon by the Commissioner of Labor to support the initial determination that the courier was an employee. The dissent also criticized the majority’s reliance on using the “nature of the work” as a new factor in determining independent contractor status.

Finally, Judge Wilson observed that the Appeal Board and Court majority had no legal basis on which to conclude that the decision by the Appeal Board applied not only to the claimant, Mr. Vega, but also to all other similarly situated couriers.  As the dissent pointed out, the ALJ himself stated on the record that the hearing was only about Mr. Vega and would not apply to other couriers providing services to Postmates.  Judge Wilson concluded:  “Whether other Postmates couriers are employees is not before us. Mr. Vega’s case is, and [in the dissent’s opinion] he is not.”

Analysis and Takeaways

The New York Attorney General called the decision “a huge victory for thousands of gig workers across New York.”  She added: “The courts have solidified what we all have known for a while — delivery drivers are employees and are entitled to the same unemployment benefits other employees can obtain.”  The “victory,” though, has no application to any other gig workers in the state.  Nor is it determinative of the status of independent contractors engaged by other companies.  It is also limited to the issue of independent contractor status under the unemployment insurance law in New York and does not apply to any other laws in the state, such as workers’ compensation or wage and hour laws.  Moreover, as the majority of the Court acknowledged, its decision was not on the merits but rather on the issue of whether there was enough evidence on the record to support the Appeal Board’s conclusion.  

There are even arguments that can be made by Postmates, besides those pointed out by the dissent, that the decision should have no binding effect on other couriers that provide services to Postmates.

In addition, the majority opinion is by no means a victory for couriers like the claimant, Mr. Vega, who would not have been eligible for unemployment benefits in any event.  He only worked intermittently for a week when Postmates blocked his access to its app after he repeatedly failed to deliver all of the products ordered by customers.  Further, when couriers like Mr. Vega have their access to a company’s app suspended or terminated by a company like Postmates, the couriers can usually gain immediate work opportunities with other competing companies, thereby eliminating their eligibility for unemployment benefits.

It appears that the majority sought to convey its view that low-paid and unskilled workers are less compatible with independent contractor status under the New York unemployment insurance law than those who earn receive higher fees for their services or are retained because of a skill they possess.  Plainly, higher levels of skill and compensation have always been factors that are taken into consideration in cases alleging independent contractor misclassification; that is hardly an earth-shattering pronouncement by the Court’s majority.

Most companies that engage lesser skilled workers as independent contractors and compensate them commensurate with their skill level have sought to minimize the potential for independent contractor misclassification.  Many have used a process such as IC Diagnostics™, which enhances independent contractor compliance by restructuring, re-documenting, and/or re-implementing independent contractor relationships in a sustainable and customized manner consistent with existing business strategies. Companies like Postmates can also effectively utilize this type of process to minimize the future impact of an unfavorable decision by administrative agencies or the courts. 

Numerous companies will likely become alarmed that the highest court of a state has affirmed an administrative decision that a gig economy worker paid on a 1099 basis is eligible for unemployment benefits.  But a process such as IC Diagnostics™ can actually utilize the Postmates decision as a tool to enhance a company’s independent contractor compliance to a heightened level.

Written by Richard Reibstein

 

 

 

 

 

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Federal CARES Act to Provide Unemployment Assistance to Independent Contractors; Paid Leave Now Also Available to ICs

The Senate passed last night an 883-page Coronavirus stimulus bill, which is expected to be passed by the House and signed into law by the end of this week.  It contains unemployment assistance provisions that expand coverage to individuals not ordinarily covered by unemployment insurance laws:  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 addition, Congress recently passed and the President signed into law the Families First Coronavirus Response Act, which also covered independent contractors, providing for paid sick and paid family leave to self-employed individuals.

The Federal CARES Act – Unemployment Benefits for Independent Contractors

Unemployment assistance will be available to self-employed individuals under Section 2102 of the CARES Act if the individual certifies that he or she:

  • is diagnosed with COVID-19 or experienced symptoms or is seeking a diagnosis,
  • has a member of his or her household that 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 due to COVID-19,
  • cannot reach his or her place of work because of a quarantine or advice of a health care provider to self-quarantine,
  • has become a breadwinner after the head of household has died from COVID-19,
  • has had to quit his or her work as a result of Coronavirus, or
  • has a work location that is closed as a direct result of a 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 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.

The Families First Coronavirus Response Act (“FFCRA”) Affords Paid Sick and Family Leave Benefits to Independent Contractors As Well   

The FFCRA, enacted on March 18, 2020, 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.  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).”

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.

The amount of daily sick leave available to an eligible independent contractor for these reasons is the lesser of (a) $511 per day up to a maximum of $5,110 for ten days’ paid sick leave, or (b) 100% of the individual’s average daily self-employment income for the taxable year.  If the leave is occasioned by the independent contractor’s need to care for another individual subject to an order of quarantine or isolation or advised to self-quarantine, or to care for his or her child whose school had been closed or whose childcare provider is unavailable due to COVID-19 precautions, then the lesser of (a) $200 per day up to a maximum of $2,000 for ten days’ paid sick leave, or (b) 67% of the average daily self-employment income for the taxable year.

Paid family leave is available to an eligible independent contractor who is unable to work or telework because of a need to care for a family member subject to a government order of quarantine or isolation or advice by a health care provider to self-quarantine, or to care for a son or daughter whose school has been closed or whose childcare provider is unavailable due to COVID-19.  The maximum number of days of such paid family leave is 50, and the paid benefit available is the lesser of $200 per day or 67% of the 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.

The FFCRA is effective April 1, 2020.

Significance of These Pandemic Benefits for Independent Contractors

The COVID-19 pandemic has hit hard many independent contractors including a host of gig workers and freelancers.  Congress is providing unprecedented relief to a class of workers who have chosen to be their own bosses and, as a result, have excluded themselves from the benefits associated with employment.  By so doing, Congress has not only eased the financial stress placed upon a key component of the U.S. economy, including millions of workers not engaged in the gig economy, but recognized the importance of preserving the landscape on which independent contractor relationships are based.  The issue of independent contractor misclassification was politically charged prior to this pandemic (and will likely return to that environment once the Coronavirus crisis has ended).  Congress avoided the political issues on this subject and maintained an even-handed approach that favored neither those who are defenders nor those who are critics of the prevalence of independent contractors in the U.S.

Some state workforce agencies may at some later point use this temporary pandemic relief legislation to create a record of independent contractors operating in such states and seek to re-characterize such self-employed individuals as employees under an array of state laws such as those related to unemployment, workers’ compensation, and wage and hour.  Companies that have used independent contractors in the past and plan to continue doing so in the future should consider enhancing their compliance with virtually all applicable independent contractor laws.  Many businesses have already done so by using a process such as IC Diagnostics™, which can serve to minimize exposure to independent contractor misclassification claims by creating sustainable independent contractor relationships.

Written by Richard Reibstein

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February 2020 Independent Contractor Misclassification and Compliance Law News Update 

This past month was the first month we can recall where there were no legal developments of note involving class action independent contractor misclassification lawsuits, which have become increasingly prevalent.  Instead, the two top cases reported below are decisions by federal appellate courts in single plaintiff IC misclassification lawsuits: one where the U.S. Court of Appeals for the Third Circuit concluded that sales marketers for roofing companies had been misclassified under a Pennsylvania wage payment law, and the other where the Fifth Circuit held that a highly paid legal consultant seeking overtime pay under the federal wage and hour law had been properly classified as an IC.

It is not uncommon for companies to classify highly paid workers as ICs even when the legal basis to support such classification is marginal. Highly paid workers classified as ICs who work a considerable number of hours each week may be motivated to seek overtime under federal or state wage and hour laws because of the potential for recovering a very substantial amount of overtime pay and penalties. Federal law and most state wage laws allow for recovery of 1-1/2  times the regular rate of pay for all hours over 40 in a workweek, going back three, four, or six years (depending on the state), oftentimes with liquidated damages of an additional 100% or more.

Thus, a worker earning $52,000 per year as an IC for a company that claims to work 50 hours a week can argue that he or she is owed 10 hours at time-and-one-half, or $375 per week in additional compensation, times 52 weeks a year, or $19,500 per year, times three (or more) years of unpaid overtime, or $58,500, with 100% liquidated damages, for a total of $117,000, which is more than two years’ compensation. The numbers multiply exponentially for workers who earn more money, claim to work up to 60 hours a week, are in a state with a 4-year or 6-year statute of limitations for wage claims, or are in a state (like Massachusetts) that has a liquidated damages penalty of treble damages.  For example, a worker classified as an IC that earns $75,000 per year as an IC, claims to regularly work 55 hours a week, and is in a state (like New York) with a 6-year statute of limitations for wage claims and a 100% penalty, arguably would claim damages of $506,000. If there is more than one highly compensated individual in that situation, the exposure can quickly amount to a very significant 7-figure number.

Savvy businesses that wish to minimize their misclassification liability exposure to highly-compensated workers whom they classify as ICs have utilized the same type of process as do prudent companies that wish to minimize such exposure to large groups of workers they have classified as ICs. One such process is IC Diagnostics™, which focuses on restructuring, re-documenting, and/or re-implementing IC relationships to enhance compliance with applicable IC laws. This type of process creates a highly customized and sustainable means to reduce an otherwise costly liability risk for IC misclassification for groups of workers classified by companies as ICs as well as highly paid workers that work considerable amounts of overtime.

In the Courts (3 cases)

ROOFING COMPANIES FOUND TO HAVE MISCLASSIFIED SALES MARKETER AS INDEPENDENT CONTRACTOR.  The U.S. Court of Appeals for the Third Circuit has ruled that a sales marketer for three related roofing companies had been misclassified as an independent contractor instead of an employee covered by a Pennsylvania state wage payment law. Plaintiff was engaged by the roofing companies to market and sell their roofing services within a set territory. The companies eventually terminated the sales marketer for allegedly diverting business opportunities away from the companies. Plaintiff sued the companies and their owners for violation of the Pennsylvania Wage Payment and Collection Law due to his alleged misclassification as an independent contractor and for other causes of action. While a federal district court dismissed some of plaintiff’s claims, it concluded that, as a matter of law, the plaintiff was an employee of the companies and not an independent contractor. On appeal, the Third Circuit affirmed the district court’s ruling, concluding that “the economic realities outweigh the terms of the [parties’] agreement” that designated him as an independent contractor.  The Third Circuit based its decision on the facts that the companies exercised control over the plaintiff’s work by assigning tasks to him and communicating the way in which the tasks were to be completed; the companies determined the plaintiff’s work schedule and directed his movements; plaintiff had to give notice before he could take vacation; the plaintiff’s work did not require specialized skills; and the companies provided him with necessary materials and an office. Accurso v. Infra-Red Services, Inc., No. 18-01583 (3d Cir. Feb. 20, 2020).

HIGHLY PAID LEGAL CONSULTANT FOR OIL AND GAS COMPANY FOUND TO BE INDEPENDENT CONTRACTOR.  The United States Court of Appeals for the Fifth Circuit has affirmed a federal district court’s grant of summary judgment in favor of an oil and gas services company, U.S. Shale Solutions LLC, in an action brought by a former $1,000 per day legal consultant alleging that he was not paid overtime in violation of the Fair Labor Standards Act. The company filed a motion for summary judgment with the district court arguing that plaintiff was an independent contractor who was not subject to the FLSA or, alternatively, that he was an exempt employee under either the “practice of law” or the “highly compensated employee” overtime exemptions in the FLSA. In granting the company’s motion, the district court held that although genuine issues of material fact existed with regard to the independent contractor status and practice of law exemption, plaintiff, a former attorney, was exempt from the FLSA’s overtime requirements as a “highly ‎compensated employee.”

On appeal, the Fifth Circuit concluded that it need not determine whether plaintiff fit within the “practice of law” or “highly compensated employee” exemptions because he was an independent contractor as a matter of law.  The company argued that plaintiff worked independently and managed his own workload and schedule; no performance evaluations were conducted; plaintiff invested in his business by providing his own phone and computer, he paid for his own continuing education expenses and purchased home office equipment; plaintiff controlled his opportunity for profit and loss by choosing to accept or reject projects; plaintiff possessed specific skill and initiative due to his legal training; and there was no permanency because plaintiff was free to leave upon 15 days’ notice. Plaintiff claimed that the company controlled his schedule, that he was reimbursed for expenses and travel, that he had no risk of loss, that he had no other source of income as he worked exclusively for the company, and that he was subject to a non-compete restriction. The Fifth Circuit concluded that while some of the factors favored employee status, the factors as a whole weighed in favor of independent contractor status.  In reaching its decision, the court noted that the existence of the non-compete clause in plaintiff’s independent contractor agreement, while supporting employee status, “does not automatically negate independent contractor status.” Faludi v. U.S. Shale Solutions LLC, No. 17-20808 (5th Cir. Feb. 14, 2020).

CALIFORNIA STATE COURT ENJOINS INSTACART FROM “MISCLASSIFYING” ITS SHOPPERS AS INDEPENDENT CONTRACTORS.  A California state court judge has issued a preliminary injunction requiring Maplebear, Inc. d/b/a Instacart from continuing to misclassify its “Shoppers” as independent contractors and not employees.  Instacart has appealed the ruling. According to the complaint filed in September 2019 by the City Attorney of San Diego on behalf of the People of the State of California, Instacart “maintains an unfair competitive advantage by misclassifying its Shoppers and evading long-established worker protections under California law.” By the alleged misclassification, Instacart “avoids paying its Shoppers a lawful wage and unlawfully defers substantial expenses to its Shoppers, including the cost of equipment, car registration, insurance, gas, maintenance, parking fees, and cell phone data usage.”  In granting the preliminary injunction, the Court found that the City Attorney had made a “very plausible” showing of improper classification under the new ABC test for independent contractor status in California, even though the matter was not free from doubt and there was some evidence to the contrary. The court explained that “it is more likely than not that the People will establish at trial that the ‘Shoppers’ perform a core function of defendant’s business; that they are not free from defendant’s control; and that they are not engaged in an independently established trade, occupation or business.” Establishing any one of those would prevent Instacart from satisfying the ABC test.

Instacart argued it would be irreparably harmed if a preliminary injunction were issued because, among other things, it would be required to hire tens of thousands of Shoppers in California; would have to develop rules, protocols, and management teams to monitor the employees’ performance and control their work; and invest in infrastructure such as software and supervisory staff. The court discounted the company’s arguments finding that Instacart had already taken steps to bring itself into compliance with the new Dynamex ABC test and that it seemed that relatively minor additional steps were needed to be in full compliance. Instead, the court agreed that the harms alleged by the People such as unpaid wages, overtime, rest breaks, missed meals and unpaid expenses reimbursements might take months to sort out, and if Instacart’s business survival were truly in jeopardy, the Shoppers might never recoup their monetary losses. California v. Maplebear Inc., No. 2019-00048731 (Cal. Super. Ct. County of San Diego Feb. 24, 2020).

Administrative and Regulatory Initiatives (2 items)

MASSACHUSETTS STAFFING COMPANY ASSESSED PENALTIES FOR MISCLASSIFYING TEMPORARY SCHOOL WORKERS.  Massachusetts Attorney General Maura Healy has assessed penalties against a national staffing and referral agency, Delta-T Group Massachusetts Inc., for misclassifying education workers placed in temporary positions in public and private schools. According to a press release issued by the Attorney General’s Fair Labor Division on February 24, 2020, the Attorney General’s Office began investigating Delta-T after receiving information indicating the company ‎was operating in violation of the state independent contractor statute, and ultimately concluded that the workers were misclassified as independent contractors and not employees. The Attorney General rejected the company’s claim that it was “merely connecting workers to jobs as part of the gig economy.” In addition to agreeing to pay the monetary assessment, the company has agreed to modify its practices to require all school workers who use its services ‎to be treated as employees going forward.‎ The Attorney General commented: “The gig economy can offer workers more flexibility, but it also presents real risks when workers are misclassified and denied important job protections. As a result of our investigation, Delta-T changed its practices and came into compliance with our state laws that protect workers.”

NLRB ISSUES NEW JOINT EMPLOYER RULE, BUT IMPACT ON IC’S IS NEGLIGIBLE.  The National Labor Relations Board has issued a Final Rule on joint employer status under the National Labor Relations Act.  On February 26, 2020, the Board issued an explanation of its final rule, noting that “that the common-law factors relative to determining employee or independent-contractor status are instructive but of limited utility in the joint-employer context.”  The rule’s explanation continues:  “The  Application of those [common-law] factors is appropriate to determine whether a putative employer has the ‘right to control the manner and means by which the product is accomplished,’ and therefore independent-contractor principles assist in determining whether a putative employer has such a ‘right to control.’ But they do not assist in answering the key questions in the joint-employer inquiry: who is exercising that control, when and how.”

Legislative Developments (1 item)

U.S. HOUSE PASSES BILL WITH ABC TEST FOR INDEPENDENT CONTRACTOR STATUS.  On February 6, 2020, the United States House of Representatives passed H.R. 2474, a bill entitled Protecting the Right to Organize Act of 2019 (the “PRO Act”), which would amend the National Labor Relations Act and related labor laws to extend protections to union workers. One of the objectives of the PRO Act is to reduce misclassification of employees as independent contractors, and the bill would seek to serve that interest by adopting a stringent ABC test for determining independent contractor/employee status. The bill would also expand unfair labor practices to include prohibitions against replacement of or discrimination toward workers who participate in strikes; make it an unfair labor practice to require or coerce employees to attend employer meetings designed to discourage union membership; permit workers to participate in collective or class action litigation; allow injunctions against employers engaging in unfair labor practices involving discharge or serious economic harm to an employee; expand penalties for labor law violations; and allow any person to bring a civil action for harm caused by labor law violations or unfair labor practices. The bill is unlikely to pass the Republican-controlled Senate.

This bill, like those in states that are seeking to copy the ABC test that recently became law in California, is yet another ill-conceived effort to minimizing IC misclassification. As noted in our commentary entitled “A Solution to the ‘Five Degrees of Independent Contractor Misclassification,” the preferred means to minimize misclassification, according to the two top Obama Administration labor officials when they were at the U.S. Department of Labor, is increased enforcement of existing laws, not enactment of laws with new tests for IC status.  Laws like AB5, which effectively outlaw otherwise legitimate independent contractors, remove “an important part of our economy,” as the former Administrator of the Wage and Hour Division, David Weil, stated in a press release on November 18, 2013 when he announced a partnership with New York State for increased enforcement efforts of existing laws governing the classification of workers as ICs.

Written by Richard Reibstein

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Posted in IC Compliance

January 2020 Independent Contractor Misclassification and Compliance Law News Update 

While selected states are in the midst of trying to crack down on independent contractor misclassification, the federal government is trying to clear a path and clarify the tests for independent contractor status under various federal laws.  As reported below, New Jersey last month enacted a series of laws that, among other things, increases the penalties for IC misclassification under that state’s current “ABC” test for IC status. The existing “ABC” test in New Jersey was not amended by the Legislature, despite a strong push by some legislators in New Jersey to do so, but it remains a challenging test to meet for some companies using ICs in that state.  Meanwhile, the U.S. Labor Department issued its new joint employer regulation in January 2020, explaining and clarifying that some of the factors previously used by courts and administrative agencies to establish joint employer status are irrelevant to that issue but highly relevant to determinations of IC status.

As we noted in our commentary addressing what we have referred to as the “Five Degrees of Independent Contractor Misclassification,” the New Jersey “ABC” test is not as challenging as the “ABC” test under California’s new AB5 law.  Businesses operating with ICs in New Jersey, however, are now subject to harsher penalties in that state if they do not considerably elevate their level of IC compliance.  Many companies that have committed to enhancing their compliance with state and federal laws governing ICs have used a process such as IC Diagnostics™ to restructure, re-document, and/or re-implement their IC relationships in a customized and sustainable manner to minimize their risks of IC misclassification liability.

Part of a process such as IC Diagnostics™ includes the use of an effective arbitration agreement with a class and collective action waiver that will stand up to attacks from plaintiffs’ class action lawyers. As reported in the first case below, a large nationwide courier company effectively obtained a court order shutting down a class action based on an effective arbitration agreement requiring individual arbitrations instead of a class action.  Plaintiffs’ class action counsel have sought to raise a host of arguments in the recent past seeking to invalidate such clauses. In an article republished on this blog entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in Independent Contractor Agreements,” we provide ten tips as to how to craft such agreements in a manner that overcomes arguments by plaintiffs’ class action lawyers seeking to keep their lawsuits in court.  

In the Courts (3 cases)

COURIER COMPANY SUCCESSFULLY COMPELS ARBITRATION WHERE AGREEMENT DELEGATES ARBITRABILITY TO THE ARBITRATOR TO DECIDE. A Georgia federal court granted a motion to compel individual arbitration of DoorDash drivers’ proposed class action claims where they did not elect to opt out of the arbitration provision in their independent contractor agreements, which contained a provision delegating the issue of arbitrability to the arbitrator. According to the class action complaint, the drivers alleged breach of contract by DoorDash, fraudulent inducement, and unjust enrichment because the company retained monies that were allegedly intended as tips for the plaintiffs. DoorDash moved to compel arbitration of the drivers’ individual claims under the Federal Arbitration Act. The drivers conceded that the independent contractor agreements were valid contracts, but argued that the FAA was inapplicable because the drivers fall within the exemption for transportation workers engaged in interstate commerce. The court granted the motion, noting that the independent contractor agreement expressly provided that the issue of exemption from the FAA was to be decided by the arbitrator. The class action waiver was enforceable, according to the court, because its terms were “clearly and comprehensibly written;” enforcement of the waiver would “not have the effect of immunizing” DoorDash from claims for unlawful behavior; the drivers had the opportunity to opt out of the arbitration provision including the class action waiver; and there was no claim by the drivers that the arbitration clause was unconscionable or in any manner limited the remedies that would be available in court. Webb v. DoorDash Inc., No. 19-cv-00665 (N. D. Ga. Jan. 9, 2020).

CALIFORNIA COURT REJECTS IC MISCLASSIFICATION SETTLEMENT AS INEQUITABLE TO ONE SET OF INSURANCE INDUSTRY CLASS MEMBERS.  A California federal district court has denied granting final approval to a $5.75 million proposed class action settlement between an insurance company and a class of 6,500 insurance salesperson trainees and agents. In their class action complaint against a life insurance company, the trainees and agents alleged wage and hour violations under the California Wage Orders and the Labor Code, the Private Attorneys General Act (PAGA), and unlawful business practices including misclassification of the trainees/agents as independent contractors and not employees. Among other things, the trainees/agents allege that they underwent training that lasted a week or more during which time they did not earn a commission and were not otherwise paid, and did not receive the minimum wage, overtime compensation, reimbursement for business expenses, or statutory meal and rest breaks. The federal court found that certification of the class for settlement purposes was appropriate. In considering whether the proposed settlement was “fair, reasonable, and adequate,” the court concluded that there was adequacy of representation, arms-length negotiations, and adequacy of relief, but that the trainees were not being treated equitably relative to the agents in terms of the funds being allocated to that segment of the class, particularly where the court found that the trainees’ claims were stronger than the claims of the agents.  Joh v. Am. Income Life Ins. Co., 18-CV-06364 (N. D. Cal. Jan. 9, 2020).

TRUCKERS OBTAIN PRELIMINARY INJUNCTION AGAINST ENFORCEMENT OF CALIFORNIA’S NEW IC MISCLASSIFICATION LAW.  A California state court granted a motion for a preliminary injunction that enjoined the State from enforcing California’s new IC misclassification statute, AB5, against motor carriers in California.  The basis for the motion to enjoin enforcement of the new law is that AB5 and the so-called ABC test for IC status that is codified in the new statute is preempted by the Federal Aviation Administration Authorization Act when applied to motor carriers in the trucking industry.

The defendants who obtained the injunction in an enforcement action by the State of California are a group of motor carriers that operate trucking and drayage companies serving the ports of Los Angeles and Long Beach.  The motor carriers use the services of independent owner-operator truck drivers to transport cargo short distances to and from the ports. The Los Angeles City Attorney’s Office filed suit in January 2018 against the companies alleging that the truckers were misclassified as independent contractors and not employees. The court concluded that the new California ABC test for IC status is preempted when applied to motor carriers because Prong B of the test – that the worker performs work that is outside the usual course of the hiring entity’s business – essentially prohibits motor carriers from using independent owner-operator contractors for its core transportation-related services, and that prohibition would have an impermissible direct or indirect effect on motor carrier prices, routes, and services.  The court concluded that the requirements of the ABC test in the Dynamex court decision and AB5 that codified Dynamex into law “clearly run afoul of Congress’ 1994 determination in the [FAAAA] that a uniform rule endorsing use of non-employee independent contractors … should apply in all 50 states to increase competition and reduce the cost of trucking services.” State of California v. Cal Cartage Transportation Express LLC, No. BC689320 (Super. Ct. L.A. County Cal. Jan. 8, 2020)

Administrative and Regulatory Initiatives (1 item)

U.S DEPARTMENT OF LABOR’S NEW JOINT EMPLOYER RULE WILL IMPACT INDEPENDENT CONTRACTOR MISCLASSIFICATION CLAIMS. On January 13, 2020, the U.S. Department of Labor released a new regulation setting forth its test for determining joint employer status under the Fair Labor Standards Act (FLSA). While the new rule did not expressly focus on the test for IC status, it made many references to its IC status test and will undoubtedly have an impact on certain types of IC claims – those where a business, which contracts with a third party company to provide services that are performed by workers classified as ICs, will also be liable under the joint employer doctrine if the third party is found to have misclassified the workers. As more fully discussed in our blog post of January 13, 2020, the new regulation makes it clear that the “economic realities” test for IC status under the FLSA rests on a different foundation than the test for joint employer status. The new rule clarifies that economic dependence, while relevant to a determination of IC status, has no relevance as to whether two or more companies are a worker’s joint employer. Whereas IC status generally focuses on the actions of the worker, joint employment status under the new regulation focuses on the actions of the potential joint employer. Additionally, unlike IC tests that focus on the right to control (even if not actually exercised), the new joint employer test requires the actual exercise of a factor establishing control.

Legislative Developments (2 items)

NEW JERSEY ENACTS SERIES OF NEW LAWS CRACKING DOWN FURTHER ON IC MISCLASSIFICATION.  New Jersey Governor Phil Murphy signed into law six bills that aim to crack down on IC misclassification by employers in that state. The six-bill legislative package, an outgrowth of the Governor’s misclassification task force, includes new laws that: permit the Department of Labor and Workforce Development to post to a list on its website of those persons found to be in violation of any State wage, benefit, or tax law and prohibit them from contracting with a public body until the liability for violations have been resolved to the satisfaction of the commissioner ‎(S.4226)‎; allow the State Treasury to share with the state Labor Department any information such as tax returns, audit files, or other reports to assist in the investigation of New Jersey wage, benefit, or tax law violations ‎(S.4228)‎; allow stop work orders to be issued against violators of wage and hour laws, including misclassification of employees as ICs (A.5838); provide an administrative “misclassification penalty” of up to a maximum of $250 per misclassified employee for a first violation and up to a maximum of $1,000 per misclassified employee for each subsequent violation (A.5839); impose joint liability for client employers and labor contractors, who violate any provision of New Jersey wage, hour, or tax laws including those concerning the misclassification of workers as ICs ‎(A.5840)‎; and require employers to post notices for employees about employee misclassification, including the prohibition against employers misclassifying employees as ICs and the standard that is applied by the state Labor Department to determine whether a worker is an employee or an independent contractor. In a press release issued on January 20, 2020, the Governor stated: “We cannot build a stronger and fairer economy without strong workplace protections that ensure fairness for employees. I am proud to sign these bills today to curb this unethical and illegal practice that hurts our working families and exploits New Jersey’s workers.” Notably, the package of bills did not include a controversial Senate bill (S.4204) intended to codify the New Jersey Supreme Court’s 2015 decision establishing an ABC test for determining IC status in that state.

NEW YORK CITY LAW PROTECTING INDEPENDENT CONTRACTORS FROM DISCRIMINATION AND HARASSMENT GOES INTO EFFECT.  The protections for employees in New York City from employment discrimination and workplace harassment that are set forth in the New York City Human Rights Law now extend to independent contractors and freelancers effective January 11, 2020. An amendment to the New York City Human Rights Law provides that ICs and freelancers are not only protected from discrimination and harassment under that law, but also have the right to receive reasonable accommodations for needs related to disabilities, pregnancy, lactation, religious observances, and status as victims of domestic violence, sexual offenses, or stalking. In a 2-page Guidance issued by the NYC Commission of Human Rights on January 13, 2020, the Commission answers questions related to the amendment. Specifically addressed are the requirement that certain employers must provide sexual harassment prevention training to ICs who work more than 80 hours in a calendar year and for at least 90 days; that employers will be liable for discriminatory acts committed by ICs and freelancers under certain circumstances; and that apps and platforms may be liable if they engage in discrimination against an IC who uses the platform. Prior to the passage of the amendment, the publisher of this blog was quoted on the new law in a September 12, 2019 article by John Herzfeld in Bloomberg Law’s Daily Labor Report, stating: “The Council bill, by ensuring that freelancers shouldn’t be subject to discrimination by a company that utilizes them to further its business, is consistent with a growing trend in the city and the state to give additional protections to freelancers and independent contractors.” Finding the bill to be vastly “overbroad,” this blog’s publisher added: “It goes [well] beyond only a company’s decisions to retain or let go an independent contractor, and encompasses everything in between: their compensation, promotion, benefits, and other terms and conditions or privileges of employment.”

Other Noteworthy Matters (1 item)

A REVIEW OF INDEPENDENT CONTRACTOR MISCLASSIFICATION AND COMPLIANCE LAW OVER THE PAST DECADE. In our January 2, 2020 blog post entitled “The Past Decade of Independent Contractor Misclassification and Compliance Law,” the publisher of this blog reviewed the last ten years of legal developments in this area of the law.  The article addressed (1) the progression of legislative developments over the past ten years, culminating with the recent enactment of the AB5 law in California; (2) the now commonplace occurrence of eight-figure settlements of IC misclassification cases; (3) the successes by some companies defending against IC misclassification class actions and regulatory challenges; (4) the dramatic impact of the key court decisions in Dynamex, Epic Systems, and New Prime on the litigation of claims against companies utilizing an IC business model; and (5) administrative and regulatory developments and how they have been changed from the Obama to Trump Administrations in Washington, D.C.  The blog post was based on an article by the publisher that was published in Bloomberg Law Reports on January 2, 2020.

Written by Richard Reibstein

Posted in IC Compliance

New Joint Employer Rule Will Impact Independent Contractor Misclassification Claims

Many companies that operate their businesses on an independent contractor model or supplement their workforce with ICs may be wondering if they will be impacted by the U.S. Department of Labor’s final rule on joint employer status, which was informally released today.  They are likely asking, “Does this final rule have any bearing on independent contractors?”  The answer is yes.

The Labor Department’s final joint employer rule issued earlier today does not set forth a new test for independent contractor status under the Fair Labor Standards Act. Nevertheless, it will have an important impact on one aspect of IC law:  whether a business that contracts with another company, which is found to have engaged in IC misclassification, will also be liable under the joint employer doctrine.  Under the final rule, the likelihood of such exposure will be considerably reduced.

Different Tests for IC Status and Joint Employer Status

The test for independent contractor status under the FLSA has been well established by U.S. Supreme Court decisions.  That test is commonly referred to as the “economic realities” test and it focuses on factors that relate to the worker’s economic dependence on the purported employer.  The final regulation makes it abundantly clear that the test for IC status is different than the test for joint employer status.  In particular, the final rule clarifies that economic dependence, while relevant to a determination as to whether a worker is an employee or IC, has no relevance as to whether two or more employers are the worker’s joint employer.  In one of the key pronouncements of the final rule, the Labor Department states: “Whether the employer is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability under the [FLSA].”

The proposed rule had identified three example of factors related to economic dependence that some courts had used in determining joint employer status.  The new rule makes is clear that while those factors may be relevant to determining IC status, they are wholly irrelevant in determining joint employer status.  The final rule identified a fourth factor that may be pertinent to IC status but should not be used in determining joint employer status.  Those four factors are:

(1) where the worker performs a specialty job or a job that otherwise requires special skill, initiative, judgment, or foresight;

(2) where the worker has the opportunity for profit or loss based on his or her managerial skill;

(3) where the worker invests in the equipment or materials required to perform the work or the employment of helpers; and

(4) the number of contractual relationships, other than with the potential joint employer, that the potential joint employer has entered into to receive similar services.

Whereas IC status generally focuses on the actions of  the worker, joint employer status under the final rule focuses on the actions of the potential joint employer.

New Test for Joint Employer Status

For joint employer determinations, the final new rule establishes a four-factor balancing test.  The rule focuses on whether the potential joint employer exercises or controls one or more of the following four “control factors” –

  • hires or fires the workers found to be employees;
  • supervises and controls their work schedules or conditions of employment to a substantial degree;
  • determines their rates of pay and methods of payment; and
  • maintains their employment records.

Unlike IC tests that focus on the right to control – which can be established through contractual provisions, even those that are unexercised – the final joint employer test depends on the actual exercise of at least one of the above ”control factors.”   This is one of the underlying principles of the final rule – and is a meaningful change.

Many federal courts had determined a company’s joint employer status under the FLSA based on the rights it reserved – even if it never exercised such rights.

If the courts give deference to this final regulation, no longer will they give the same weight to unexercised rights under a contract.  This will result in fewer findings of joint employer status under the FLSA.

As the final rule states: “The potential joint employer’s ability, power, or reserved right to act in relation to the employee may be relevant for determining joint employer status, but such ability, power, or right alone does not demonstrate joint employer status without some actual exercise of control.”

Under the standard articulated today by the U.S. Department of Labor, joint employer status is a far less likely result for companies that utilize the services of workers under a contractual relationship with a third party.    

Types of Situations in Which Joint Employer Liability Can Arise in an IC Misclassification Case

As mentioned in many of our monthly blog posts about new and pending cases, it is commonplace for plaintiffs’ class action lawyers to sue multiple parties when filing class and collective actions asserting independent contractor misclassification.

For example, retailers have been sued as joint employers under the FLSA when they contract with delivery companies that in turn retain drivers and installers as ICs to deliver and/or install the retailer’s purchases.  Similarly, companies providing cable or telephone services have been sued as joint employers when they use a third party to engage personnel classified as 1099ers to sell services or install equipment.  Even the federal government has been sued as a joint employer, most recently by a dental hygienist retained as a 1099er by a government contractor that provides dental services at a federal prison.

In contrast, joint employer liability generally should not be an issue where workers classified as ICs provide services directly to the business that engages them or to customers of the business. In that instance, there is generally no “second company” involved that may be jointly liable together with the company that has retained the workers.  For those businesses, the final rule on joint employer liability would not be applicable.

Takeaways

The final joint employer regulation only applies to lawsuits brought under the FLSA; it has no impact on independent contractor misclassification liability under state wage and hour laws.  While this final rule will minimize the likelihood of joint employer liability for IC misclassification under the FLSA, companies would be wise to minimize their exposure under that law and state wage laws by enhancing their level of independent contractor compliance.

How can businesses do so? Many have resorted to a process such as IC Diagnostics™, whereby companies are able to restructure, re-document, and re-implement their IC and business relationships in a manner that considerably enhances their compliance with federal and state IC laws.  Those companies that have already undergone a process such as IC Diagnostics are more likely to avoid joint employer liability, as the process includes re-documenting contracts with any other company that engages ICs directly.

Written by Richard Reibstein

Posted in IC Compliance