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

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

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

What are the key details of the proposed settlement?

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

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

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

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

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

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

Analysis

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

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

Takeaways

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

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

In the court’s decision to deny summary judgment to Uber, the Judge Edward M. Chen, the presiding judge, not only focused on Uber’s unbridled right to terminate or deactivate drivers, but also on a number of other facts that favored employee status.  For example, he pointed to the Uber “Driver Handbook,” which instructs drivers, among other things, to “dress professionally,” send the client a text message 1-2 minutes from the pick-up location, “make sure the radio is off or on soft jazz or NPR,” to “make sure to open the door for your client,” and to “have an umbrella in [their] car for clients to be dry until they get in your car or after they get out.”  Judge Chen also noted that there is evidence that Uber monitors its drivers’ performance to ensure compliance with Uber’s many quality control standards by requesting that passengers give drivers a star rating on a scale from 1 to 5 after each completed trip based on the driver’s performance.

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

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

Written by Richard Reibstein.

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

 

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

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

Background

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

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

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

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

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

Analysis

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

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

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

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

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

Takeaway

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

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

Written by Richard Reibstein.

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

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March 2016 Independent Contractor Misclassification and Compliance News Update

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

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

In the Courts (5 cases)

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

Regulatory and Enforcement Initiatives (2 items)

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

Other Noteworthy Matters (1 item)

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

Written by Richard Reibstein.

Compiled by Janet Barsky. 

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

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Posted in IC Compliance

Opposition to Lyft’s $12.25 Million Independent Contractor Misclassification Settlement May Cause Court to Nix the Deal

Papers were filed in court today formally opposing the deal that Lyft agreed to with the lawyers representing over 100,000 Lyft drivers in their class action brought in the federal court in San Francisco.  The objectors were five Lyft drivers and two Teamsters union councils that are seeking to represent certain of the class members, if they are ruled to be employees.  The Lyft class action settlement, which is subject to judicial approval by federal judge Vince Chhabria, would require Lyft to pay its drivers in California and their lawyers $12.25 million, yet would allow Lyft to maintain its independent contractor business model.  Will the federal court judge overseeing this class action nix the deal based on the objections filed today?  A fairness hearing on the proposed settlement is scheduled for March 24, 2016, but approval of the proposed settlement is hardly a sure thing, as noted in the “Analysis” below.

The background of the lawsuit against Lyft was summarized in our March 12, 2015 blog post that focused on the court’s denial of Lyft’s motion for summary judgment seeking dismissal of the class action lawsuit.  Lyft’s motion was based on its argument that the drivers are independent contractors as a matter of law. The court held that because some facts supported IC status whereas other facts supported employee status, the ultimate issue of the drivers’ status as either employees or independent contractors was an issue of fact, not law, and would have to be decided by a jury.

Instead of expending millions of dollars trying the case before a jury and litigating it for years, Lyft chose to mediate its dispute with the lawyers representing the proposed class. This was a different strategy than the one taken by Uber, which is preparing for a lengthy trial this coming summer, as we commented in a recent blog post. Ultimately, the mediator facilitated a settlement between Lyft and the drivers’ counsel  that many in the industry have praised as a good deal for Lyft – if it is approved by the court. But, as we discuss in our “Takeaways” below, it may be a too good deal for Lyft unless it takes further steps to enhance its independent contractor compliance.

The Settlement Terms

The principal terms of the settlement are set forth in court papers filed by the lawyers for the class of drivers.  Those terms include:

  • Payment of $12.25 million to the drivers and their counsel, who will be paid 30% of the proceeds. The average payment to drivers will be modest, less than $1,000 per driver to cover their out-of-pocket car expenses, allegedly unpaid tips, and any unpaid overtime and minimum wages.
  • Lyft will no longer be able to deactivate drivers at will, for any reason, and instead will only be able to deactivate drivers for specific reasons or after providing notice and an opportunity to cure. Drivers deactivated will be able to arbitrate their deactivation, with Lyft paying for the fees of arbitration. (Evidently, the drivers may have to pay their own legal fees if they choose to hire counsel to represent them at the arbitration.)
  • Lyft will provide additional information about potential passengers to drivers prior to the driver accepting any ride request, which presumably will assist drivers in deciding whether to accept a ride request.
  • Lyft will create a “favorite” driver option where drivers who are designated by riders as a “favorite” are entitled to certain benefits.
  • In exchange for the above, all class members (except those who “opt out” of the settlement) will waive all existing claims they may have against Lyft arising from their alleged misclassification as independent contractors. This appears to include claims for periods prior to the time covered by the lawsuit.
  • In further exchange, all class members (except those who “opt out”) will be enjoined from maintaining or commencing a legal proceeding in another forum regarding their independent contractor status. This may include all claims for unemployment insurance and workers’ compensation benefits.

The Opposition Filed Today

The objections filed today state that the Teamsters unions are currently involved in organizing and seeking to represent Lyft drivers and other transportation workers in the “gig economy.” They argue that the settlement “threatens to interfere with the Teamsters’ current representation of Lyft drivers.”  The Teamsters refer the court to the unfair labor practice charge it filed with the National Labor Relations Board, where the unions claim that Lyft is denying drivers their right to organize and exercise their rights under federal labor law. In addition, the objectors contend that the proposed settlement is inadequate in terms of monetary relief to the class and to the State of California for certain penalties Lyft would be subjected to if it were found to have misclassified drivers as independent contractors.

In sum, they argue that “[i]n exchange for modest payments to individual drivers, the settlement leaves, approves, and authorizes the ongoing and continuing violation of California and federal labor law, namely, the misclassification of drivers who are regularly engaged to drive Lyft’s customers, while seeking judicial approval of illegal waivers of drivers’ statutory rights.” Cotter v. Lyft, Inc., No. 3:13-cv-04065-VC (N.D. Cal., Mar. 15, 2016).

Analysis 

The overwhelming number of proposed class action settlements are approved by the presiding judge.  But the objections filed today raise significant legal issues – quite different from those typically raised by objecting parties.

Yet, they do not raise as many questions as did the court itself in a February 11, 2015 order. There, Judge Chhabria required the drivers’ counsel to respond to a number of his specific concerns, including:

  • the amount each driver would receive, on average, under the settlement versus the amount each class member would be eligible to recover for his/her reimbursement of expenses claim, on average, if the plaintiffs prevailed at trial, using the Internal Revenue Service’s standard mileage reimbursement rate;
  • the disparity between the proposed settlement, which would “move the drivers closer to independent contractor status”, whereas the lawsuit was plainly intended to change their status to employees;
  • whether there are any factors specific to Lyft’s business model that precluded it from classifying drivers as employees or from providing drivers with some of the protections employees receive under California law.

Based on the new objections and the court’s own concerns, the result of the hearing scheduled for March 24, 2016 on the fairness of the proposed settlement is anything but certain. The court could approve it, require the parties to modify the terms, or reject it. The odds of approval appear to be considerably less than what they would be in a typical class action fairness hearing.

[Publishers’ Note (March 24, 2016):  At the fairness hearing on this date, the drivers’ counsel confirmed to the court that the drivers would be eligible to receive at trial as much as $126 million if they prevailed, using the IRS’s standard mileage reimbursement rate. Judge Chhabria reportedly expressed concern at this hearing that the proposed settlement arrangement may be inadequate in terms of the financial recovery for each driver.]

Takeaways

The structural changes that Lyft seems prepared to make to its independent contractor relationship with drivers will undoubtedly “move the drivers closer to independent contractor status,” as the court itself recognized.

We previously stated in a prior blog post that most companies using ICs to service customers, including those in the sharing or gig economy, have not structured, documented, and implemented their IC relationships in a manner that maximizes compliance with state and federal IC laws – and those businesses would be wise to restructure, re-document, and re-implement such relationships to meaningfully enhance their compliance. As part of the proposed settlement reached between Lyft and the lawyers representing the drivers, that is precisely what Lyft appears willing to do to a limited extent, without bankrupting the company – assuming the court approves the proposed settlement.

Yet, even if these changes are implemented in California and the other states where Lyft operates, they may not, by themselves, be sufficient to forestall new lawsuits or insulate the company from IC misclassification liability.

In the court’s decision to deny summary judgment to Lyft, Judge Chhabria not only focused on Lyft’s unbridled right to terminate or deactivate drivers, but also on a number of other facts that favored employee status.  For example, he pointed to the Lyft “Rules of the Road,” which gave drivers a list of “rules to live by.” These included “No talking on the phone (unless it’s the passenger)”; “Greet every passenger with a big smile and fist bump”; “Do not request tips”; and “Go above and beyond with good service such as helping passengers with luggage or holding an umbrella for passengers when it’s raining”.  Although Lyft replaced its “Rules of the Road” with “FAQs”, the court noted that they still instructed drivers about such things as the cleanliness of their vehicles, the use of GPS navigation while driving, not smoking in their vehicles, and not asking passengers for their telephone numbers.  The judge also found that Lyft’s monitoring of its drivers’ performance and solicitation of ratings from passengers about the drivers’ performance also favored employee status.

While “mov[ing] the drivers closer to independent contractor status” is certainly a positive step by Lyft, it would be prudent to address the other concerns expressed by Judge Chhabria as well as dozens of other factors bearing on the issue of independent contractor status. Moving the needle in the right direction may not be sufficient. As the co-publisher of this blog, Richard Reibstein, was quoted in a Los Angeles Times article by Tracey Lien, while the settlement may put to rest one lawsuit against the company, “it doesn’t mean Lyft is in the clear. In fact, many states have more stringent tests for independent contractor status than California, and there’s nothing stopping another lawyer from filing a similar lawsuit in [the future in] California”. The article continued: “‘Lyft would be well-served to reevaluate its structure and documentation,’ Reibstein said, ‘because just because you exit one lawsuit does not mean that there won’t be another coming right down the pipe tomorrow.’”

One way in which companies can stress-test their level of IC compliance is through IC Diagnostics™, a process that examines the level of compliance with applicable IC laws and then restructures, re-documents, and re-implements IC relationships in a manner that minimizes IC misclassification exposure.  This process can be applied in a customized fashion consistent with a company’s business model.

Businesses like Lyft that can wisely turn legal IC skirmishes, such as the present lawsuit in California, into positive changes in its IC relationships can be the envy of others in the sharing economy that use ICs – but that is far more likely if Lyft undertakes a number of other steps to further enhance its IC compliance.

Written by Richard Reibstein.

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph

 

 

 

 

 

 

 

Posted in IC Compliance

February 2016 Independent Contractor Compliance and Misclassification News Update

In February 2016, two federal appellate courts ruled in favor of companies in IC misclassification cases: one where the NLRB was reversed in a decision where the agency had found stagehands to be employees and not ICs; the other where an appellate court gave a small but important victory to FedEx Ground in its IC misclassification fight in Massachusetts under the nation’s strictest test for IC status. At the same time, two cases involving food companies are highlighted below: one where merchandisers who maintained shelf space in food stores filed a new lawsuit against Pepperidge Farm under the Illinois wage laws; the other where a nationwide food manufacturer tried to win its IC misclassification class action on a motion for summary judgment but was unable to do so and will instead now have to convince a jury in North Carolina that it properly classified distributors.

One of the more notable developments in February was just reported two days ago, when a Buzzfeed article noted that the drivers delivering items for Amazon Now’s new 2-hour rush order service have been reclassified as employees just months after the filing of a class action lawsuit alleging that they were misclassified as ICs and deprived benefits under California law. The corporate decision to re-classify drivers in the Amazon.com case highlights the need for companies to “play it smart” when initially structuring, documenting, and implementing their IC relationships so they remain free from preventable lawsuits in situations where the individuals are not subject to direction and control over the manner and means by which they perform their services.  That was also the thrust of an article noted below in “Other Noteworthy Matters.” American City Business Journals reported on two approaches to the issue of independent contractor classification: “play it safe” by classifying all workers in the gray area as employees, or “play it smart” by using tools such as IC Diagnostics™ to maximize compliance when structuring, documenting, and implementing IC relationships.

In the Courts (4 cases) 

  • NLRB REVERSED BY FEDERAL APPELLATE COURT ON INDEPENENT CONTRACTOR STATUS OF STAGE HANDS RETAINED BY REFERRAL SERVICE. The Court of Appeals for the Eleventh Circuit reverses the National Labor Relations Board and finds that the NLRB misapplied the law of agency when it ruled that local freelance stagehands were employees of a referral service and not independent contractors. The referral service, Crew One Productions, referred stagehands to event producers for sporting, business, musical and other events in the Atlanta area. Once a contract was entered between Crew One and an event producer, stagehands that were in Crew One’s database were e-mailed information about the particular engagement and, on a first-come, first served basis, could accept the offer. Following the filing of a petition by the International Alliance of Theatrical Stage Employees to represent the stagehands, the NLRB found the stagehands to be employees and directed an election, which was won by the union, leading to review by the Eleventh Circuit. In reversing the Board’s decision and finding that the stagehands were independent contractors and not employees, the appeals court found that Crew One had no right to and did not exercise any control over the manner, means, and details of the stagehands’ services; any such control, the court found, was exercised by the clients of Crew One. The court also concluded that the NLRB erroneously found that the stagehands performed essential functions of Crew One’s operations, whereas the court noted that Crew One is in the business of referring stagehands to event producers, not performing stagehand work itself. Crew One Productions, Inc. v. NLRB, No 15-10429 (11th Cir. Feb. 3, 2016).
  • PEPPERIDGE FARM SUED FOR MISCLASSIFICATION OF SALES DEVELOPMENT ASSOCIATES AS IC’S. Pepperidge Farm, Inc., a manufacturer and seller of snack and bakery goods, is sued in Illinois federal district court in a class action by sales development associates (SDAs) claiming misclassification as independent contractors instead of employees in violation of the Illinois Wage Payment and Collection Act and the Illinois Minimum Wage Law. According to the complaint, the SDAs performed delivery, stocking, merchandising, promotional, and removal services on behalf of Pepperidge Farm at various stores within defined territories. The plaintiffs claim that Pepperidge Farm did not negotiate any of the terms contained in the Consignment Agreement it required SDAs to sign; SDAs are prohibited from distributing any products that are competitive with those of Pepperidge Farm, unless prior written consent is given; Pepperidge Farm reserves the right to establish sales and/or distribution goals; SDAs must provide and maintain a delivery truck and computer that meets specifications set by the company; Pepperidge Farm unilaterally dictates the amount of products the SDAs are required to deliver to each customer and determines the retail sales prices; the SDAs are required to follow a code of appearance and conduct; and the activities of the SDAs are carefully monitored for quality assurance and efficiency by Pepperidge Farm. Mulhern v. Pepperidge Farm, Inc., No. 1:16-cv-02199 (N.D. Ill. Feb. 12, 2016).
  • FLOWERS FOODS FAILS TO WIN SUMMARY JUDGMENT IN IC MISCLASSIFICATION CLASS ACTION BY DRIVERS. On February 12, 2016, a federal district court in North Carolina denied a motion for summary judgment by Flowers Foods that sought to dismiss a class action lawsuit filed against it by distributors who claim the company misclassified them as independent contractors and thereby denied them overtime under federal and state wage laws. The distributors purchased distribution rights to sell and distribute food products to customers in a defined territory. They agreed to do so in accordance with “good industry practice,” which was defined in their Distributor Agreements as properly ordering products; keeping shelves stocked with Flowers products; keeping store shelves in good condition in conformance with a planogram; properly rotating products on a regular basis; promptly removing all stale products; meeting customer service requirements; maintaining proper service and delivery to all outlets requesting service; and maintaining all equipment in a sanitary condition and in good, safe working order. The distributors claim that they are required to deliver products to retailers within certain timeframes every service day; must stock products according to predetermined planograms; and can only deliver, order, and stock the products that a retailer has approved with Flowers Foods. According to Flowers Foods, the Distributors determine the type of product and quantity to be delivered to a particular customer, and quantity can be adjusted based upon the customers’ needs, historical sales, and other variables such as weather and holidays. In the course of arguing the motion, Flowers Foods acknowledged that there were issues of fact regarding the IC status of the distributors that could not be resolved on a motion for summary judgment and would have to be resolved by a jury. The company’s alternative argument that the distributors were exempt from overtime in any event as “outside salespersons” even if they are employees under the wage laws, was also denied; the court found that, like the question of their status as ICs, their exempt status also presented issues of fact that could only be resolved at trial. Rehberg v. Flowers Baking Company of Jamestown, LLC, No. 3:12-cv-00596-MOC-DSC (W.D.N.C. Feb.16, 2016).
  • FEDERAL APPEALS COURT HOLDS THAT MASSACHUSETTS WAGE LAW BARRING INDEPENDENT CONTRACTORS IS PARTIALLY PRE-EMPTED BY FEDERAL LAW GOVERNING MOTOR CARRIERS. FedEx has prevailed in maintaining a defense to a class action IC misclassification lawsuit brought against it by its Ground Division drivers in Massachusetts seeking damages under the Massachusetts Independent Contractor Law. In a lengthy decision issued by the U.S. Court of Appeals for the First Circuit, the appellate court finds that the Federal Aviation Administration Authorization Act (FAAAA) pre-empts one portion of the Massachusetts law that sets forth the test for independent contractor status of individuals providing services in that state. The Massachusetts law is the strictest version of a type of statute referred to as an “ABC” law requiring companies to establish three prongs of a test in order to establish the IC status of workers providing services. The second prong of the test, commonly called the “B” prong, requires that the company show that the services of the person classified as an IC “is performed outside the usual course of the business of the employer.” That prong, according to the First Circuit, constitutes a form of “regulatory interference” that the FAAAA preempts in the case of federally registered motor carriers. The other two prongs of the ABC test, according to the court, must still be satisfied by FedEx to establish the IC status of the drivers. Schwann v. FedEx Ground Package System, No. 15-1214 (1st Cir. Feb. 22, 2016).

Regulatory and Enforcement Initiatives (1 item)

  • U.S. LABOR DEPARTMENT NOW FOCUSING ON IC MISCLASSIFICATION IN HOME HEALTH CARE FIELD. David Weil, Administrator of the Wage and Hour Division of the U.S. Department of Labor, writes in a blog post on February 25, 2016 that the home care industry is a current focus where the DOL has “worked hard to update the rules to guarantee minimum wage and overtime protections” and to continue to combat IC/employee misclassification. Dr. Weil stated: “As of Jan. 1, 2016, the [home care minimum wage and overtime] rule is being fully enforced and we are working to ensure that basic wage rights are guaranteed to those they are intended to protect. Employers should use care to ensure their workers are properly classified and that employees are paid at least the minimum wage and overtime.”  

Other Noteworthy Matters (3 items)

  • AMAZON PRIME DELIVERY DRIVERS REPORTEDLY RECLASSIFIED AS EMPLOYEES FOLLOWING CLASS ACTION IC MISCLASSIFICATION LAWSUIT. As reported in our blog post of October 28, 2015, Amazon.com and the companies that retained drivers who delivered Amazon products within two hours of being ordered through Amazon’s “Prime Now” app were sued by the drivers in a proposed class action in Los Angeles County Superior Court. The drivers claimed that they had been misclassified as independent contractors and should instead have been treated as employees and paid for an array of state labor and employment benefits that independent contractors (who are paid on a 1099 basis) are not eligible to receive – unless they have been misclassified. Now, just five months later, the drivers have reportedly been reclassified as employees by the companies that formally retained their services, according to a February 29, 2016 article by Carolyn O’Donovan in Buzzfeed. This type of reclassification will stem any alleged damages claimed by the drivers and indicates that the companies retaining the drivers for Amazon may have imperfectly structured, documented, and/or implemented their IC relationship with the drivers from its inception.  
  • FINAL OBAMA BUDGET PROVIDES $10 MILLION TO COMBAT INDEPENDENT CONTRACTOR MISCLASSIFICATION. President Obama released his Fiscal Year 2017 Budget on February 9, 2016 and funds earmarked to crack down on IC misclassification remain in the Budget. The Department of Labor’s Budget in Brief outlined the following points regarding misclassification of employees: “The Budget also expands funding for efforts to ensure that workers receive back wages they are owed and cracks down on the illegal misclassification of some employees as independent contractors, a practice that deprives misclassified workers of basic protections like unemployment insurance, workers’ compensation, and overtime.” Specifically, the budget includes $10 million to improve state efforts to detect and remedy misclassification of workers as independent contractors.
  • “PLAY IT SAFE” OR “PLAY IT SMART” WHEN CLASSIFYING WORKERS WHO FALL IN THE “GRAY AREA.” Richard Reibstein, one of the publishers of this blog, writes in a February 23, 2016 blog post about an article written recently by Frances McMorris of American City Business Journals. McMorris identified two approaches that companies can take when deciding whether to use an independent contractor or employee business model where the individuals providing services are in the “gray area.” She first quotes a Florida lawyer who suggests that companies in that instance “play it safe” and classify the workers as W-2 employees. She then asked Reibstein about any other compliance approaches. He noted: “At Pepper Hamilton, [the firm] helps clients improve their compliance with a proprietary system known as IC Diagnostics. It reviews as many as 60 to 70 different factors to determine classification and whether a company’s system needs to be revamped. With IC Diagnostics, Reibstein said, “you keep your business model but you tailor it to the law. You tweak it, you restructure it, you re-document it, [and] you re-implement in a way that [enhances compliance] with the law” – i.e., you “play it smart” using IC Diagnostics™. Ms. McMorris then listed a few of the many things companies can do to maximize compliance: “Among the actions Reibstein counsels businesses who use independent contractors to avoid are: Needlessly directing and controlling actions [that] may transpire [in the ordinary course] without [exercising any] direction and control. For example, Reibstein said, ‘You don’t have to direct a contractor to provide services between 9 and 5 when your business is [only] open between those hours. When else can they do the work?’ ‘You don’t need to prevent or restrict a contractor [from] delegating responsibility or duties to others.’ Avoid paying for expenses of the contractor and work out a fee that includes those costs. ‘If someone wants $10 hour plus expenses, [negotiate an all-in rate of] $12 an hour,’ Reibstein said.

Written by Richard Reibstein.

Compiled by Janet Barsky. 

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

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Posted in IC Compliance