What Does GrubHub’s Big Win In Its Independent Contractor Misclassification Trial Mean for Other On-Demand, Sharing Economy Businesses?

Earlier today, GrubHub, Inc. won its highly publicized case brought against it by a restaurant delivery driver / courier for allegedly misclassifying him as an independent contractor. The case drew sustained media attention during a non-jury trial in federal court in September 2017, as it was the first IC misclassification trial involving a gig economy business.

Magistrate Judge Jacqueline Scott Corley of the U.S. District Court for the Northern District of California released a lengthy opinion today where she issued a judgment in favor of GrubHub and against driver / courier Raef Lawson.  Is this a win for all on-demand sharing economy companies or only GrubHub?  The answer is, it depends.

What does it depend on? The facts in each case. According to the judge, while there were some facts that indicated a degree of control by GrubHub over the manner and means by which Lawson rendered his services, there were far more facts that, in the judge’s view, supported the conclusion that GrubHub did not control the details of how Lawson accomplished his work. As Judge Corley noted, the control factor is the most important legal consideration in any IC misclassification case.

If a number of the facts were different, though, the decision may have favored Lawson, except for one crucial circumstance: credibility. It appears that when there was a disputed issue of fact, the judge discredited Lawson’s testimony and credited the testimony of GrubHub’s witnesses. Why? Because, she found, Lawson engaged in “dishonest conduct” and that his “claimed ignorance of his dishonest conduct is not credible.”

The judge then evaluated eight “secondary factors,” finding that three favored GrubHub, four favored Lawson, and one was neutral. Finally, the judge distinguished a case that she said “has facts similar to those the Court found here.” By focusing on the differences between the facts in that case and this one, the judge confirms our view that it’s the facts that matter, not the industry. Thus, while this is most definitely good news for sharing economy businesses using an IC model, there is a compelling need to structure, document, and implement the IC relationship in a manner that, on the whole, can withstand a heightened degree of legal scrutiny – as GrubHub was able to do in this case.

The Issue of Control

Judge Corley recognized that the legal test for employee vs. independent contractor status is set forth in the 1989 California Supreme Court case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations. She noted that under Borello (which the California Supreme Court is currently reconsidering), the key is whether GrubHub retained or exercised the right to control the details of how Lawson performed his services.

The judge examined a number of facts relevant to control. First, Judge Corley noted that the company did not control the vehicle Lawson used for deliveries or its condition and Lawson did not have to have GrubHub signage on his vehicle, although GrubHub made sure the vehicle was registered and insured and he had a valid driver’s license. The judge found this type of “oversight” did not weigh in favor of employee status.

The judge also found that GrubHub did not control Lawson’s appearance while making deliveries; while he could wear a company shirt and hat, he was not required to do so. While he agreed to wear a GrubHub shirt and hat in exchange for GrubHub providing him with an insulated bag for food deliveries, the company did not check to see if he was wearing the shirt or hat.

The judge found that GrubHub did not require Lawson to engage in any training or orientation, and he was not provided with a script to follow when interacting with customers. He was not told what supplies, if any, he needed to have with him.

While GrubHub conducted a background check on Lawson and reserved the right to perform a background check on any worker to whom he subcontracted his deliveries, GrubHub had no control over who would make deliveries or accompany him in his vehicle.

The court noted that GrubHub did not control whether and when he would work and for how long.  He could sign up for a block of time but decide not to work that block of time at any time before the period began.  Lawson could also reject any order offered to him during the block of time. As the judge concluded, “Lawson had complete control of his work schedule.”  Judge Corley concluded that GrubHub’s right to terminate Lawson for signing up for a block of time and not cancelling is “not controlling the manner and means of how Mr. Lawson performed deliveries; it is merely the right to terminate the agreement if one party does not do what he contracted to do.”

The judge also noted that GrubHub did not specify the amount of time in which a driver had to pick up an order or how quickly he had to complete the order. The judge also found that Lawson could pick his own route, and even make deliveries for other companies while delivering for GrubHub.

The court found that GrubHub did control some aspects of Lawson’s work. GrubHub determined the rates Lawson would be paid and the fees customers would pay for delivery service. It also determined which blocks of time to make available for driver selection and the length of each block. Finally, it determined the geographical boundaries of the delivery zones and required drivers to stay in or around their zone during scheduled blocks. In the judge’s view, such control was not exercised over the manner and means of performing the services, but over the result of the work – to ensure diners received their meals in a timely fashion.

The court did, however, find that GrubHub had a right to control Lawson’s work by its right to terminate his agreement at will, upon 14 days’ notice. The judge did not give that factor as much weight as other courts have given it because, she noted, Lawson was not dependent on GrubHub as he made deliveries for other companies and only sporadically performed services for GrubHub “so he could pursue his acting career.”

In assessing all of the above facts, the court concluded that “the right to control factor weighs strongly in favor of finding that Mr. Lawson was an independent contractor.”

The So-Called “Secondary Factors”

Next, the judge, following Borello’s teachings, considered eight other “secondary factors.”

Whether the worker was engaged in a distinct occupation or business. The judge concluded he was not, and found that this factor favored employee status.

Whether the work was performed under the principal’s direction or control.  The judge found that this factor favored IC status because there was insufficient direction and control over Lawson’s work..

The degree of skill required.  The judge found that the evidence showed that no special skills were needed, so she found this factor favored employee status.

The provision of tools and equipment. The judge found that this factor favored IC status as Lawson supplied his own vehicle, smartphone, and could even supply his own insulated bags.

The length of time for performance of services. The judge found that this factor also supported IC status because Lawson only made deliveries for GrubHub for four months, only worked half the days of those months, and could sign up for blocks of time he wanted and was not obligated to sign up for times he was unavailable.

The method of payment. The court found that, in practice, Lawson was paid on an hourly basis and, in fact, was paid at the minimum wage because he did not perform enough deliveries. The court concluded that this factor “weighs slightly in favor of an employment relationship.”

Whether the work was part of GrubHub’s regular business. The judge found that even though GrubHub started as an internet ordering business, and only in recent years added a delivery component, this factor favored employee status.

The parties’ intent. The court found that this factor was neutral. The judge noted that the agreement states that Lawson was an IC, but Judge Corley noted that a label placed on a relationship by a party that offers workers a low wage, low-skilled job should not be given much weight.

Thus, of the eight “secondary” factors, four favored employee status, three favored IC status, and one was neutral.

The Court’s “Upshot” and “Conclusion”

Judge Corley then penned a section of the opinion she called “The Upshot.” Interestingly, this section confirms that “the facts make the case.” In this section, Judge Corley compared this case with the 2006 case of JKH Enterprises, which the court said “has facts similar to those the Court has found here.” Yet, the judge then proceeded to distinguish and differentiate the facts in that similar case from those in the GrubHub case.  

Judge Corley’s “Conclusion” was short and succinct: “Based on what the Court observed at trial and the facts found, and after applying the Borello test, the Court finds that the four months Mr. Lawson performed delivery services for GrubHub he was an independent contractor.”

Analysis and Takeaways

This case will have more impact in the media and among gig economy commentators than it may have legally.  As noted in a prior blog post after the trial in this case: “Cases of this nature dealing with a single individual frequently turn on their particular facts, which can differ from case to case. Differing facts often lead to different results regarding the proper classification of workers. Thus, where the evidence varies from one case to the next, another court may reach a different decision in other cases involving drivers or other on-demand workers providing services to companies in the gig economy. Indeed, the decision in this case may not even be a precedent for other drivers at GrubHub.”

So, how much precedential value will other courts give to this case? Just as Judge Corley “distinguished” the facts in JKH Enterprises from those in this GrubHub case, plaintiffs’ lawyers in the next on-demand sharing economy IC misclassification case are likely to try to distinguish the facts in their case from those here. Meanwhile, lawyers representing the business in the next such case will likely argue that their facts are close enough to the facts in this GrubHub case that the result here should govern in their case.

The lack of precedential value is more pronounced in cases that might be fairly be characterized as falling in the “gray“ area – where some facts favor independent contractor status and other facts favor employee status. In those types of cases, a difference in one or more key facts can sometimes completely change the outcome of a legal decision as a matter of law. Moreover, where the facts on key issues are in dispute, the court has to decide which witnesses to credit and which to discredit, and that determination can critically affect the outcome of a case.  As noted above, the decision in this case by Judge Corley was undoubtedly influenced to some degree by her conclusion that Lawson was not a credible witness.

But, the judgment in GrubHub’s favor most assuredly signals that an on-demand sharing economy business can lawfully be structured on an independent contractor model. To that end, GrubHub prevailed in large part because it structured, documented, and implemented its IC relationships with an eye on compliance with IC laws.

Still, the case was close enough that another judge might conceivably have reached a different conclusion if Lawson was not such a poor witness, and a jury trial deciding a case like this one, brought by a sympathetic plaintiff, might render a verdict that the worker was an employee.

So, the takeaway for businesses in the gig economy is to maximize compliance with the applicable state and federal IC laws. How can a company do so? Some companies have resorted to a process such as IC Diagnostics™, which seeks to restructure, re-document, and re-implement IC relationships in a manner than enhances IC compliance.

Undoubtedly, GrubHub could have, based on Judge Corley’s decision, tightened up its IC compliance even more – despite the fact that it was able to endure the judge’s scrutiny. Companies that feel that their IC relationships will likewise survive a legal challenge should still consider further enhancing their IC compliance. For those businesses that have yet to upgrade their IC compliance, this win by GrubHub should be a positive signal that they, too, can structure, document, and implement their IC relationships in a lawful manner.

Richard Reibstein

Posted in IC Compliance | Leave a comment

Oral Argument Tomorrow in Key California Supreme Court Case on Independent Contractor Status

The California Supreme Court will hear oral argument tomorrow in a case that has the potential for altering the long-standing test in California for independent contractor status. The case is Dynamex Operations West v. Superior Court (No. S222732), which has been on appeal before the California Supreme Court since January 2015. The issue in Dynamex is whether, in wage and hour cases in California, the Supreme Court should continue to follow its time-honored holding from 1989 in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations (which is roughly akin to a common law / economic realities test for determining IC status) or apply a far more rigorous standard as set forth in the 2010 holding in Martinez v. Combs.

In connection with the oral argument, the California Supreme Court asked the parties to file supplemental briefs addressing whether the test for IC status in California should embody the standard set forth in 2015 by the New Jersey Supreme Court in a case called Hargrove v. Sleepy’s LLC. As we discussed in a blog post on January 15, 2015, the Hargrove decision held that, henceforth, when determining IC status in wage and hour cases, the courts in New Jersey would borrow the so-called “ABC” test formulated by the New Jersey legislature for IC status in unemployment cases. That decision is regarded as employee-friendly because, unlike most other IC tests including Borello, which consider and weigh a number of different factors when determining IC status, an ABC statute requires that each and every one of the three prongs of the ABC test be proven by a business to establish IC status.

What is the ABC Test?

The ABC test is the statutory definition of “employee” under the New Jersey Unemployment Compensation Act. It is the same test used by over 20 other states for determining eligibility for unemployment benefits. It presumes an individual is an “employee” unless the employer can show that:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

The New Jersey Supreme Court in Hargrove noted that “[T]he failure to satisfy any one of the three criteria results in an ‘employment’ classification.”

Analysis of the Arguments Made by the Parties in Their Supplemental Briefs

The worker whose status is in dispute in the Dynamex case is a delivery truck driver. His lawyers’ supplemental brief states that the Court should adopt the Hargrove test because the remedial, worker-protective purposes of the wage and hour laws in California mirror those in New Jersey. Of particular interest in the worker’s brief is the lawyers’ statement that “the second consideration in Part B of the ABC test (work performed outside all the places of business of the hirer) would be of limited value as a consideration, however, because in today’s modern economy, many people work remotely such that their services are typically performed outside of the principal’s places of business.”

But that analysis does not consider the impact of Prong B on those workers who, like the truck driver who began this case as well as a huge number of individuals classified as ICs, perform some or all of their services at one or more places where the company conducts business. Taking the worker’s brief to its logical conclusion would lead to the anomalous result that many workers would be classified as ICs or employees depending simply on whether or not they work from their home office and/or any other “remote” location.

The supplemental brief of the company focuses on the fact that the ABC test is a statutory test issued by a legislative body, and no court has adopted that test without such a “statutory or regulatory underpinning.” The company also notes that each of the three prongs of the ABC test are already considered in the Borello test for IC status.

This last point may be the most important one raised in the parties’ supplemental briefs. The California Department of Industrial Relations states on its website page entitled “Independent contractor versus employee” that, under Borello, the determination of a worker’s status “depends upon a number of factors, all of which must be considered, and none of which is controlling by itself.” The website page states that the California Division of Labor Standards Enforcement considers all factors bearing on “whether the person to whom service is rendered…has control or the right to control the worker both as to the work done and the manner and means in which it is performed.” The website page then lists 11 specific factors “that may be considered.” Notably, although court cases in California have made note of the location where the services are performed, none of the 11 factors listed on the webpage addresses the location where the services are performed, which is the second part of the B prong in the ABC test. At least in the minds of the government regulators, the location where the services are performed does not appear to be of particular significance.

Abandoning Borello in favor of an ABC test would eliminate the flexibility built into the current test for IC status. If for example, a business could establish all 11 of the IC factors listed on the Department of Industrial Relations website, but the worker performed a part of his or her services at a place of business of the company for which the services are provided, then the worker would automatically be deemed an employee.

One final observation: When the New Jersey Supreme Court held in Hargrove that the test for IC status in wage and hour cases would now be the ABC test, it did not change the law; rather, that Court had not previously issued a definitive ruling on IC status in that context. In contrast, Borello was decided by the California Supreme Court close to 30 years ago. Since issued, many businesses and individuals in California have sought to construct their IC relationships in compliance with the teachings of Borello. Indeed, when any new business in California wished to create a business model utilizing ICs and desired to structure and document their IC relationship in a lawful manner, they would likely have searched for the webpage described above and sought to follow the guidelines listed online by the California Department of Industrial Relations. To change the test for IC status would not only result in confusion, but also could be extremely costly and prejudicial to those companies and individuals who have sought to comply with the law as articulated by the courts and the Department of Industrial Relations if they otherwise are unable to meet any of the three prongs of an ABC test.

Takeaway

The laws applicable to ICs have been in flux for the last ten years, and the tests for IC status differ considerably among various federal laws and even more so under a crazy quilt of state laws. The California Supreme Court may opt for consistency, or it may see fit to change the law.

While oral arguments can be informative to the parties and interested members of the general public in terms of what the reviewing court may decide, few lawyers can predict with any degree of certainty how an appellate court will rule.

Regardless of the ultimate outcome in Dynamex, companies that wish to enhance their compliance with whatever test is used in California, or with the current tests in other states, should consider using a process that maximizes their IC compliance. One such process is IC Diagnostics,™ as discussed in the latest White Paper on “How Companies Can Minimize the Risk of IC Misclassification Liability.”

Written by Richard Reibstein

Posted in IC Compliance

January 2018 Independent Contractor Misclassification and Compliance News Update

There were seven noteworthy cases in the area of independent contractor misclassification and compliance in January 2018 involving drivers of trucking companies, behavioral therapists, ride-sharing drivers, insurance agents, furniture delivery drivers, home care workers, and construction workers. Although IC misclassification is more prevalent in the home care and construction industries than in the other industries, each of those types of workers can be legitimate independent contractors under the various tests for IC status under federal laws and almost all state laws, when their IC relationships are properly structured, documented, and implemented. Many companies that make use of ICs have sought to minimize their likelihood of becoming a defendant in one of these types of IC misclassification lawsuits by using a process, such as IC Diagnostics™, to enhance their compliance with such laws, as more fully described in the White Paper, “Independent Contractor Misclassification: How Companies Can Minimize the Risk.”

At the end of this post, we refer our readers to a two-part article published by BNA Bloomberg Daily Labor Report addressing the five top legal developments in independent contractor misclassification and compliance in 2017, and what to expect in 2018 in this area of the law.

In the Courts (7 cases)

THE CITY OF LOS ANGELES FILES IC MISCLASSIFICATION LAWSUITS AGAINST PORT TRUCKING COMPANIES. Three trucking and drayage companies owned by NFI Industries Inc. have been sued by the City of Los Angeles in three separate actions for alleged misclassification of truck drivers as independent contractors. The companies operate in and around the Ports of Los Angeles and Long Beach, California, as well as throughout the U.S. and Mexico.  The lawsuits allege violations of federal truck leasing regulations and the California Unfair Competition Law. The complaint alleges that the misclassification of the drivers as independent contractors is a “scheme” to increase the companies’ profits by trying to avoid their obligations to provide benefits, pay relevant taxes, and absorb various operating costs. The City alleges that the companies regularly discharge drivers at any time with or without cause; retain absolute discretion to prohibit drivers from working for competitors; require the drivers to create a fictitious company name although they do not have distinct, independent businesses; control the drivers’ work assignments; set the piece rates paid to the drivers; and monitor the drivers’ work through a GPS system. The People of the State of California v. CMI Transportation LLC; The People of the State of California v. K&R Transportation California LLC; and The People of the State of California v. Cal Cartage Transportation Express LLC (Super. Ct. Los Angeles County Jan. 8, 2018).

BEHAVIORAL THERAPIST FILES PROPOSED CLASS ACTION IN PENNSYLVANIA FOR IC MISCLASSIFICATION. A school-based outpatient therapist has filed a collective and class action complaint in Pennsylvania federal court against Progressions Behavioral Health Services, Inc. and Progressions Companies, Inc., alleging that she and similarly situated behavioral therapists have been misclassified as ICs.  The plaintiff seeks allegedly unpaid overtime compensation under the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act.  The complaint also seeks recovery under the Pennsylvania Wage Payment and Collection Law for alleged failure of Progressions to track and compensate the therapists for all time spent performing compensable work that is allegedly designated by the companies as “non-billable.” According to the complaint, the therapists’ schedule were determined by Progressions; they were allegedly required to perform their services in accordance with certain specific guidelines, protocols, and trainings provided by the companies; they received annual performance evaluations from the companies, as well as feedback, coaching, and discipline for failure to perform in accordance with the companies’ expectations; and were required to spend several hours filling out paperwork, completing reports, and entering information into the companies’ client management software. The complaint alleges that “[u]pon information and belief, Defendants reclassified its Outpatient Therapists from independent contractors to employees on different dates depending on their office location between July 2014 and April 2016.” However, for the first several years of the named therapist’s relationship with the companies, the plaintiff, currently an employee of the companies, alleges that she and others similarly situated to her were misclassified as independent contractors. Thompson v. Progressions Behavioral Health Services, Inc. and Progressions Companies Inc., case no. 5:18-cv-00058 (E.D. Pa. Jan. 8, 2018).

APPELLATE BRIEFS OF INSURANCE COMPANY AND “FRIENDS OF THE COURT” FILED IN KEY INDEPENDENT CONTRACTOR CASE.  American Family Insurance filed its appellate brief, as did three amicus curiae, seeking reversal of a July 31, 2017 decision by a federal judge in the U.S. District Court for the Northern District of Ohio.  The decision being appealed held that the company’s insurance agents were employees for purposes of ERISA and not independent contractors. The appeal is to the U.S. Court of Appeals for the Sixth Circuit.  The three “friends of the court” briefs were filed by the U.S. Chamber of Commerce, the American Council of Life Insurers, and the Property Casualty Insurers Association of America, all supporting reversal of the district court’s decision.

As the appellate briefs point out, prior to the issuance of this decision, almost all federal courts have held that insurance agents are independent contractors. The briefs argue that the federal judge in Ohio failed to properly apply the so-called “Darden” test for IC status under ERISA. They focus on a number of alleged errors by the district court, including not giving sufficient weight to: (1) the terms of the agreements between American Family and its insurance agents stating that the parties are entering into an IC relationship and providing the agents with the right to determine the details regarding the manner and means of performing their services; (2) the financial relationship between the parties and their tax treatment, including the agents’ declaration to the IRS that they were self-employed and thus able to deduct their own business expenses; (3) the agents’ investment in and management of their own offices including their right to hire assistants; (4) the agents’ opportunity for profit by growing their own businesses; and (5) the level of skill required of insurance agents operating in a highly regulated and specialized field. The briefs also argue that the U.S. Supreme Court has favored predictability in ERISA cases so that the parties to an independent contractor agreement can proceed with some degree of confidence that their contractual preference for IC status will be honored by the courts.  The appellate brief by the plaintiffs is due next month. Jammal v. American Family Insurance Company, No. 17-4125 (6th Cir.).

DRIVERS AND UBER SEEK FINAL COURT APPROVAL OF $7.5 MILLION SETTLEMENT OF CRIMINAL BACKGROUND CHECK CASE. Both Uber Technologies and the drivers who filed a class action against it under the Fair Credit Reporting Act have each filed court papers asking a federal district court to approve the parties’ proposed $7.5 million settlement of a lawsuit alleging that the ride-sharing technology company failed to comply with the FCRA and Massachusetts state law when conducting criminal background checks of prospective drivers.  Over one million class members were sent notices of the proposed settlement, and just under 100,000 valid claims forms were returned after the court gave preliminary approval to the settlement.  One objection was filed to the settlement by a law firm purportedly representing hundreds of drivers who wish to opt out of the settlement.

Uber noted in its brief that the settlement amount is reasonable in view of its several defenses: the FCRA does not apply to the drivers because they are allegedly independent contractors; the drivers’ claims may be dismissed for lack of “standing”; the drivers may not be able to prove any FCRA violations at all; if any violation can be proven, the drivers cannot prove it was “willful”; and class certification is uncertain. The drivers concurred in their brief that the settlement amount was reasonable, noting that  a significant number of participating class members could be forced into individual arbitrations; the drivers faced significant risks on the merits of their claims, including the defenses noted by Uber in its brief; and the drivers face significant risks on their damages theory.  A “fairness” hearing on the proposed settlement is scheduled for February 8, 2018.  It is expected that the court will give final approval to the proposed settlement. In Re Uber FCRA Litigation, No. 14-cv-05200-EMC (N.D. Cal. Jan. 25, 2018).

DRIVERS MAKING DELIVERIES FOR MATTRESS AND HOME FURNISHINGS STORES DENIED SUMMARY JUDGMENT IN THEIR IC MISCLASSIFICATION CLASS ACTION CLAIMS. A Florida federal court has denied a motion for summary judgment by a driver, on behalf of himself and other drivers, who claim that Callahan’s Express Delivery, Inc. – a company that enters into contracts to make local deliveries of mattresses, furniture, and other goods on behalf of retail customers such as Mattress Firm and Ikea – misclassified him and other drivers as ICs. The driver alleged that the company violated the overtime provisions of the Fair Labor Standards Act. The court, in determining whether there were any genuine issues of material fact regarding the status of the drivers that a jury would have  to resolve, applied the six-factor economic realities test utilized by the 11th Circuit requiring the court to “look past the labels the parties apply to their relationship, and to examine both whether Plaintiff’s relationship to Defendant is that of a traditional employee and to what extent Plaintiff is economically dependent upon Defendant.” The court found that there were genuine disputes over the following facts: the nature and degree of control by the company over the drivers; their  opportunity for profit and loss; whether they could hire helpers; and whether the drivers possessed any special skills required to perform their job. Maldonado v. Callahan’s Express Delivery, Inc., No. 13-cv-292 (M.D. Fla. Jan. 12, 2018).

HOME HEALTH WORKERS WIN CLASS ACTION STATUS IN IC MISCLASSIFICATION CASE IN PENNSYLVANIA. A Pennsylvania federal district court has granted class and collective certification to home health care workers alleging overtime violations of the Pennsylvania Minimum Wage Act and the federal Fair Labor Standards Act as a result of alleged misclassification as independent contractors. The class, consisting of over 1,200 home care workers, seeks relief against Sweet Home Healthcare and Sweet Home Primary Care, LLC, home care agencies that engage home health care workers such as home health aides and direct care workers providing in-home support to elderly and disabled individuals. Williams v. Sweet Home Healthcare, LLC, No. 16-2353 (E.D. Pa. Jan. 31, 2018).

LOUISIANA COURT CONDITIONALLY CERTIFIES CLASS OF CONSTRUCTION WORKERS IN IC MISCLASSIFICATION CASE. A Louisiana federal court has granted a motion to conditionally certify the collective claims of construction workers against a construction company, Tasch, LLC, alleging overtime violations under the FLSA based on Tasch’s alleged misclassification of the workers as independent contractors. The plaintiffs alleged that the company classified them as independent contractors, yet directed, monitored, supervised, and evaluated the laborers’ work and set their schedules, work hours, and rates of pay.  In determining whether other construction workers are similarly situated to the proposed class, the court granted the workers’ motion, concluding that the plaintiffs had presented substantial allegations that they and the other putative class members were victims of the company’s alleged policy of improperly classifying construction workers as independent contractors and not paying them any overtime compensation. Lemons v. Tasch, LLC, No. 17-7212 (E.D. La. Jan. 24, 2018).

Other Noteworthy News

THE TOP LEGAL DEVELOPMENTS IN 2017 – AND WHAT TO EXPECT IN 2018 IN THE AREA OF IC MISCLASSIFICATION AND COMPLIANCE. What were the top  developments in the area of independent contractor law in 2017? What should those interested in this niche area of the law expect in 2018?  Those were the subjects of a two-part article, co-authored by the Publisher and the Managing Editor of this legal blog, in the  January 4 and 5, 2018 editions of BNA Bloomberg’s Daily Labor Reporter.  Click for Part 1 and Part 2 of that article.

Written by Richard Reibstein

Updated 2/5/18

Compiled by Janet Barsky

Your comments are invited.

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other newsworthy matters, such as newspaper articles, white papers, and government press releases and reports.

Posted in IC Compliance

What to Expect in 2018 in the Law of Independent Contractor Misclassification and Compliance (Part 2)

2017 was notable for a shift in the law of independent contractors. Part 1, published yesterday, discussed five key legal developments from 2017.  Part 2, below, offers readers predictions of what to expect in 2018 in this area of the law. Both parts also offer takeaways designed to maximize IC compliance and minimize exposure to IC misclassification liability.

What should you expect to see in 2018?

First, many commentators will attach outsized significance to two long-awaited court decisions, but another case could be a game-changer. 

We can expect no less than two court rulings to which many commentators are likely to attach oversized importance and notoriety.  The first such case is the U.S. Supreme Court’s decision, expected in the first half of 2018, involving mandatory arbitration clauses with class action waivers.  This case involving class action waivers may have little impact on companies, including those using ICs, which have already drafted their independent contractor agreements in a manner that will be enforceable regardless of the way in which the Court rules. Those companies are using “opt out” clauses that afford contractors the opportunity to opt out of arbitration agreements with class action waivers, and do to so without any penalty or repercussion on workers who have signed them.

Another case likely to be given outsized importance is a judge’s decision in the GrubHub trial involving a delivery driver using that company’s app, who has claimed that he should have been classified and paid by GrubHub as an employee and not treated as an IC. This is reportedly the first on-demand, gig economy case to go to trial.  While this sharing economy case has grabbed headlines, it is unlikely to be momentous from a legal standpoint.  Why?

Because cases of this nature dealing with a single individual frequently turn on their particular facts, which can differ from case to case. Differing facts often lead to different results regarding the proper classification of workers. And cases where there are some facts favoring IC status and other facts supporting employee status – cases in the so-called “gray area” – oftentimes have little precedential effect.  Indeed, the court’s decision may not even be a precedent for other drivers who contract with GrubHub.

One court decision that may be of outsized significance is likely to be decided in 2018. That case, Dynamex Operations West v. Superior Court, has been on appeal before the California Supreme Court (No. S222732) since January 2015. It is scheduled for oral argument on February 6, 2018.  The issue in Dynamex is whether, in wage and hour cases in California, where the issue is whether the workers in question are independent contractors or employees, should the Supreme Court continue to follow its time-honored holding in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations (which is roughly akin to a common law / economic realities test for determining IC status) or apply a far more rigorous standard that more closely resembles an ABC test.

While some commentators have written that most companies, including those in the gig economy, will be unable to satisfy the more rigorous test, that is by no means our view. Nonetheless, a departure from Borello could be extremely disruptive for companies with business models reliant upon independent contractors where such businesses have thoughtfully structured their IC relationships in a manner that was intended to comply with the law as set forth in Borello.  Indeed, the Borello standard has been incorporated into the California Department of Industrial Relations website advising the public of the test for “independent contractor versus employee” for many years.

Second, expect more state legislation affecting the ride-sharing industry. 

As noted in Part 1, in May 2017, the Governor of Florida signed the Transportation Network Companies Act (HB 221).  That law designates drivers for ride-sharing companies in the on-demand economy as independent contractors provided the transportation network company meets four criteria, all of which  were already being met by the major ride-sharing companies including Uber and Lyft.

Other state legislatures are likely to follow the lead of Florida and seek to create a safe harbor for ride-sharing companies using ICs to transport customers.

Third, don’t expect an abatement in the number of IC misclassification class actions.

We are likely to see class action lawyers doubling down on IC misclassification cases in the coming year, inasmuch as these types of lawsuits remain a lucrative cottage industry for those lawyers and multi-million-dollar settlements have become commonplace.

Class action lawyers are more likely to target companies that do not have an enhanced level of compliance with IC laws or valid arbitration provisions with class action waivers in their IC agreements.

Fourth, administrative reviews, proceedings, and audits are unlikely to diminish

As noted in Part 1, some state courts are making it less burdensome to satisfy state law tests for IC status. Nonetheless, it is still highly likely that state unemployment agencies will remain aggressive in seeking unemployment tax contributions from companies using ICs. It is also likely that state workforce agencies, including those enforcing state wage laws, will not become any less aggressive in pursuing companies that misclassify employees as independent contractors.

Thus, while the Trump Administration will be more hospitable to companies using ICs than the Obama Administration, this leveling of the playing field at the federal enforcement level is unlikely to trickle down to the state workforce agencies.  It will remain challenging for companies that use ICs to remain free from one or more state agency investigations, audits, or proceedings.

Takeaways

There are ways that companies using ICs can minimize the likelihood that they will become targets for class action lawyers and administrative agencies.  One way used by an increasing number of companies is IC Diagnostics™, a process designed to structure, document, and implement IC relationships in a customizable and sustainable way intended to maximize compliance with applicable federal and state IC laws and, at the same time, minimize IC misclassification liability.  Form IC agreements and one-size-fits-all approaches may be ill-fitting and create a comfort level that may betray businesses who can and should do more to enhance their IC compliance.

Another way to minimize the likelihood of being targeted by plaintiffs’ class action lawyers is to add an arbitration clause with a class action waiver to a company’s IC agreement.  Many of these clauses are being enforced by the courts.  At the same time, though, there have been numerous court decisions striking down arbitration clauses because they have not been drafted in a state-of-the-art manner or because they needlessly impose what some courts view as “unfair” burdens or costs on workers who sign such agreements.

While well-drafted arbitration agreements can help, they are not a panacea, because they don’t offer any protection against investigations by state or federal regulatory agencies.  Further, some companies with a high level of IC compliance have also concluded that arbitration clauses may not always be advantageous to add to existing IC agreements.

The bottom line: companies that wish to consider adopting an arbitration provision with a class action waiver should give as much thought to whether they should add that type of provision to their IC agreements and the wording of their arbitration clauses as they do to the language of every other provision in these important agreements.

Written by Richard Reibstein

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Edited by Janet Barsky

This article was published in the Daily Labor Report (January 5, 2018).
It is reproduced with permission from Daily Labor Report Copyright 2018 by The Bloomberg Bureau of National Affairs, Inc. (800.372.1033) www.bna.com

Posted in IC Compliance

Five Key Independent Contractor Legal Developments in 2017 – and What to Expect in 2018 (Part 1)

2017 was notable for a shift in the law of independent contractors. Part 1, below, discusses five key legal developments from 2017 you should be aware of. Part 2, which will follow tomorrow, offers readers predictions of what to expect in 2018 in this area of the law. Both parts offer takeaways designed to maximize IC compliance and minimize exposure to IC misclassification liability.

# 1. Two state Supreme Court decisions show that the courts are more willing to recognize IC status.

Although many businesses understand that there is a dizzying array of state and federal tests for independent contractor status, businesses in 2017 continued a trend over the past 10 years where they are making greater use of independent contractors despite the uncertainties in the law and the risk of misclassification. One of the most challenging tests for IC status is the so-called ABC test, which is most prevalent among state unemployment and workers’ compensation laws.  About half of the states have ABC laws governing IC status, but each state interprets their laws differently than other states. Two state Supreme Courts in 2017 fine-tuned their ABC tests to make the use of ICs more attainable for companies.

In March 2017, the Connecticut Supreme Court concluded that a business does not fail the “C” prong of the ABC test, which requires that a worker is “customarily engaged in an independently established trade, occupation, profession or business,” simply because the worker chooses to provide services only to a single company, especially where the contractor has the freedom to provide services to other companies.

In June 2017, the Vermont Supreme Court held that a Limited Liability Company (LLC) is a distinct legal entity; therefore, an owner of an LLC is not an individual under  the ABC test when the state seeks to assess unemployment taxes upon a business.  These types of decisions by the highest courts in two states signal a greater recognition that state IC laws should not be applied mechanically with a pre-ordained determination that the workers in question are employees.

# 2.  FedEx and Uber scored big wins in 2017

Far more than any two companies in the nation, FedEx and Uber have for years occupied the headlines regarding their use of independent contractors. 2017 was a pretty good year for both of those companies in terms of legal developments.

FedEx Ground has been the subject of more independent contractor misclassification lawsuits than any other U.S. company.  The overwhelming number of those lawsuits involved claims for allegedly unpaid employee business expenses, wages, and benefits, and most of them that were resolved by the courts unfavorably to the company.

Two such court decisions were issued by the Ninth and Seventh Circuits, which concluded that the wording in FedEx’s own IC agreement created an employment relationship as a matter of law.  This led FedEx to settle for nearly $500 million almost all of its scores of class actions.  In 2017, however, FedEx prevailed on what many believe to be the most important legal challenge it faced – a unionization effort by the Teamsters to organize its Ground Division drivers.

In March 2017, the United States Court of Appeals for the D.C. Circuit issued a decision striking down a ruling by the National Labor Relations Board that single-route Ground Division drivers were employees and not independent contractors. This was the second time that FedEx sought review by the U.S. Court of Appeals where the NLRB had sided in favor of the Teamsters and held that FedEx drivers were employees who could be represented by a union.

In Uber’s case, it received perhaps its most meaningful success not before a court but before an arbitrator.  Uber has used mandatory arbitration agreements in its independent contractor agreements for several years. In February 2017, a well-regarded former judge issued an arbitration decision finding that the preponderance of the evidence favored Uber’s position that, under the California wage laws, drivers who use the Uber app have more in common with independent contractors than employees.  While this arbitration decision is not binding on other drivers, it is likely to have significant impact on decisions by other arbitrators in arbitrations brought by drivers.

# 3.  The Trump Administration appears to be leveling the playing field for businesses using ICs

Toward the end of the Obama Administration, the U.S. Department of Labor issued enforcement guidelines under the Fair Labor Standards Act that conveyed its view that the Labor Department disapproved of the use of independent contractors.  Those guidelines seemed to disregard the Labor Secretary’s comment that while some companies have misused the IC classification, “there’s an important place for independent contractors” in the U.S. economy. It did not take long for the Trump Administration’s new Secretary of Labor, Alexander Acosta, to withdraw that formal guidance on ICs – he did so only six weeks after being confirmed by the Senate.

As reported on June 7, Secretary Acosta had issued a press release earlier that day announcing that the former guidance was being withdrawn.  But the Secretary did not signal that businesses can now use ICs without repercussion; rather, he stated that the “legal responsibilities of employers under the Fair Labor Standards Act” remain unchanged.  Secretary Acosta also noted that his department will “fully and fairly enforce all laws within its jurisdiction.”

Another similar change in the law of independent contractors took place at the National Labor Relations Board this past year. In November 2017, President Trump appointed a new General Counsel to the National Labor Relations Board following the expiration of the term of Richard Griffin, the General Counsel who was appointed by President Obama.  Peter Robb, the new General Counsel, quickly discarded a number of Griffin’s initiatives, including Griffin’s August 2016 Advice Memorandum dealing with independent contractors.

Griffin’s Advice Memo had been viewed as an endorsement of the view that misclassification of employees as independent contractors was, in and of itself, a violation of the National Labor Relations Act.  A close reading of the Advice Memo reveals that while it never quite reached that conclusion, it nonetheless laid the groundwork for an extension of the law that would have created a “misclassification-plus” type of unfair labor practice.  That expansive view of the NLRA is no longer in effect under the new General Counsel.

# 4.  Most legislative initiatives no longer seek to curtail the use of independent contractors

Whereas the overwhelming number of legislative initiatives over the ten years prior to 2017 involved efforts to curtail the misclassification of independent contractors, most of the legislative action in 2017 sought to recognize the importance of independent contractors and the emergence of the gig economy.

On May 15, 2017, a New York City law called the Freelance Isn’t Free Act went into effect.  That local law created rights for independent contractors who have not been paid the fees to which they are entitled.

Another new law in 2017 recognizing that independent contractor relationships should be encouraged rather than curtailed arose in the context of the ride-sharing industry in Florida.  In May 2017, the Governor of Florida signed the Transportation Network Companies Act (HB 221).  That law designates drivers for ride-sharing companies in the on-demand economy as independent contractors provided the transportation network company meets four criteria that were already being met by the major ride-sharing companies including Uber and Lyft.  The new law essentially created a safe-harbor from IC misclassification liability for those companies.

Two bills were introduced in Congress that sought to facilitate the use of independent contractors.  The New Economy Works for Guarantee Independence and Growth (NEW GIG) Act of 2017 (S. 1549 and H.R. 4165) was introduced in both houses of Congress.  This bill, if enacted, would create a safe harbor for income and employment tax purposes where contractors meet certain criteria.  The Portable Benefits for Independent Workers Pilot Program Act (H.R. 2685), if enacted, would create a $20 million fund for states, local governments, and non-profit organizations to study “broad innovation and experimentation with respect to portable benefits” for independent workers.

Not all legislative action sought to facilitate the use of independent contractors.  North Carolina enacted the Employee Fair Classification Act (SB 407), which became effective December 31, 2017.  That law creates a new Employee Classification Section within the North Carolina Industrial Commission to, among other things, receive and act upon complaints of IC misclassification.

# 5.  IC Misclassification class actions continue to produce multi-million-dollar settlements

Although the landscape of independent contractor law is becoming more hospitable for many companies, the bulk of businesses that use ICs remain targets for class and collective actions under state and federal wage payment laws, minimum wage and overtime laws, and employee expense laws.  2017 saw a host of large settlements, including (to name just a few):

Takeaways

Although the playing field may be leveling out a bit for businesses, the risk of independent contractor misclassification liability remains substantial and the cost can be prohibitive, especially from class action lawsuits and administrative proceedings. Each and every company that uses independent contractors as a key part of its business model or to supplement its workforce should ask the following questions:

  • Does our business model lend itself to the use of independent contractors?
  • If so, are our IC relationships structured in a manner that maximizes compliance with applicable state and federal laws governing independent contractors?
  • Does the language in our IC agreements minimize misclassification risk, or does it actually create liability?
  • Have we implemented our independent contractor relationship in a manner that is consistent with a valid IC relationship?
  • What can we do to make our IC relationships even more defensible to class action lawsuits and administrative proceedings?

An increasing number of businesses have used a process such as IC Diagnostics™ to answer those and related questions, and to help re-structure, re-document, and re-implement their IC relationships in a manner that is customized to their business model, while enhancing their IC compliance.

Those types of steps require an investment of time and resources, but a more level playing field means a company has a better shot at minimizing its IC risks, not that companies can ignore the need to heighten their IC compliance.

Written by Richard Reibstein

Edited by Janet Barsky

This article was published in the Daily Labor Report (January 4, 2018).
It is reproduced with permission from Daily Labor Report Copyright 2018 by The Bloomberg Bureau of National Affairs, Inc. (800.372.1033) www.bna.com

Posted in IC Compliance