“Misclassification Mythbusters”: The Labor Department’s Latest Effort to Crack Down on Independent Contractor Misclassification

The U.S. Department of Labor has just released a dozen Q&A’s on the issue of IC misclassification in an online publication it calls “Misclassification Mythbusters.”  The 12 IC misclassification “myths” that it seeks to debunk are intended to educate workers about their status as ICs and to foster the Labor Department’s continued crackdown on misclassification of employees as independent contractors. Yet, a close review of the answers given by the Labor Department as “mythbusters” reveals that this new federal publication contains some misinformation about the subject.

The first myth is: “If I am an independent contractor under one law, I am an independent contractor under other laws.” The DOL correctly notes that “Even if you are a legitimate independent contractor under one law, you may still be an employee under other laws.” This is one of the most vexing aspects of IC classification, and confounds both workers and businesses.  In an effort to try to help educate the public, the Labor Department recites the tests for IC status under various federal and state laws.  Regrettably, though, it does not characterize some of those tests in an accurate manner.  For example, the DOL mischaracterizes state unemployment insurance law when it says:

“Each state UI law presumes a worker is an employee unless certain tests in each state’s UI law are passed to show that the worker is an independent contractor. The tests in each state differ slightly; however, the tests generally examine the direction and control exercised by the employer over the service performed and whether the worker is customarily engaged in an independent business.”

While some state unemployment laws presume a worker is an employee, not all states have IC tests that start out with a presumption that every worker is an employee. Further, the tests under the unemployment laws in many states do not “differ slightly” from another. Rather, the tests for IC status under many state unemployment laws differ dramatically from each other.  Some states use the IRS test; others use the common law test; a number use a three-factor ABC test; some ABC tests are interpreted quite differently by the courts in one state than another; a few states have tests with close to a dozen factors; and still other states use the FLSA’s economic realities test.  For this reason, state IC tests have been referred to as a “crazy quilt” of laws.

Of the next 11 myths, at least six are afflicted by a recurring inaccuracy. For example, Myth #3 says: “I received a 1099 tax form from my employer, and this makes me an independent contractor.” The Labor Department seeks to debunk this myth by stating that “Receiving a 1099 does not make you an independent contractor under the FLSA.”  No one would reasonably argue that the mere issuance or receipt of a Form 1099 tax form means that a worker is an IC as a matter of law, including the FLSA. But the DOL goes far afield when it next states: “Under the FLSA, you are an employee if your work indicates you are economically dependent on an employer.” (Emphasis added.)  This statement wholly mischaracterizes the law because it erroneously suggests that the test for IC status under the FLSA is a one-factor test – that is, if the worker is economically dependent on a business, the worker is an employee under the FLSA.

The courts, though, have stated that there is no single factor that is determinative of  whether an individual is an employee or independent contractor for purposes of the FLSA – and it is the courts that determine IC status under the FLSA, not the Labor Department. The courts have held that the totality of the working relationship must be examined. This means that all facts relevant to the relationship between the worker and the business must be considered, not simply economic dependence, in determining a worker’s status.  Merely because an otherwise legitimate IC chooses to provide services  to only one business does not automatically turn an otherwise legitimate IC into an employee, especially when the IC has the right to provide services to more than one company.

This erroneous statement by the DOL that IC status under the FLSA is essentially a one-factor test is then repeated verbatim by the Labor Department in five other myths. (See Myth # 5, #7, #8, #11, and #12.)  Thus, together with the errors noted in Myth #1, over half of the “mythbusters” contain misleading information.  Hopefully, the DOL will take note and remediate these misleading statements.

“Misclassification Mythbusters” follows by a year the issuance of an Interpretation by the Administrator of the Wage and Hour Division dealing with IC misclassification. In July 2015, Dr. David Weil, the newly appointed Administrator of the Wage and Hour Division, issued an Administrator’s Interpretation that, like the “Misclassification Mythbusters” publication,  failed to acknowledge (other than in a few obscure footnotes) that the test for IC status under the FLSA requires and permits an examination of many factors and not just a few. As we noted in our blog post on the Interpretation, while the Administrator acknowledges that legitimate independent contractor relationships “can be advantageous for workers and businesses,” he did not address the fact that a substantial amount of IC misclassification is not the result of an intention to violate federal or state law, but rather unintentional acts by businesses who are perplexed by the very first myth: that even if a worker is an IC under one law, he or she may be an employee under another law with a different test for IC status.

What can those companies do to enhance their IC compliance under an array of differing federal laws and this crazy quilt of state IC laws? As more fully described in our White Paper on “How Companies Can Minimize the Risks of Independent Contractor Misclassification,” businesses have three alternatives to mitigate their risk of misclassification liability: (1) restructuring, re-documenting and re-implementing their independent contractor relationships in a manner that enhances compliance with governing laws; (2) reclassifying their independent contractors; or (3) redistributing them to staffing or workforce management firms or other third-party vendors.

Businesses that wish to maintain an independent contractor model can use IC Diagnostics™ to restructure, re-document and re-implement. This proprietary tool assesses dozens of factors that courts and administrative agencies have identified as being pertinent to a determination of independent contractor status. The process results in a practical, customized and sustainable way to enhance independent contractor compliance, not only with the FLSA and other federal laws but also with the array of differing state laws.

Authored by Richard Reibstein.

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance | Leave a comment

Uber’s $100 Million Settlement Rejected by Judge; Independent Contractor Misclassification Lawsuit to Proceed

Earlier today, Uber was dealt yet another setback in its efforts to settle the IC misclassification lawsuits brought against it by Uber drivers in California and Massachusetts. As readers of this legal blog will recall from our post of April 22, 2016, Uber entered into a proposed settlement with counsel for the drivers that would pay them $84 million at a minimum with the potential of up $100 million, and afford them additional protections from unilateral termination by the company of their status as Uber drivers. Despite the large size of the proposed settlement, numerous objections were filed by proposed class members, by unions seeking to represent the drivers, and by other interested persons and entities. On August 18, 2016, Judge Edward Chen issued a 35-page Order denying the motion filed by the drivers’ counsel and supported by Uber that sought approval of the proposed settlement. Judge Chen expressed concerns about a number of provisions of the proposed settlement, but one reservation about the terms of the proposed settlement overwhelmed all others: Judge Chen found that the proposed payment of $1 million by Uber to settle the claims brought by the drivers under the California Private Attorneys General Act (PAGA) was only one-tenth of one percent of the value of that claim.

Analysis of the Court’s Decision

A claim under the California PAGA law is a private action on behalf of the State. The PAGA claim had been estimated by the drivers’ counsel to be worth up to $1 billion in damages. In order to determine whether the estimate was genuine, the Court had asked the California Labor and Workforce Development Agency (LWDA) to provide its estimate of the potential penalty that Uber would face if the LWDA sought to enforce its penalties against Uber for alleged misclassification of employees – and the LWDA confirmed that the $1 billion amount was accurate. In their negotiations of the proposed settlement, both counsel for the drivers and Uber appeared to shortchange the State of California by allocating only $1 million to the PAGA claim. According to Judge Chen, “the court cannot find that PAGA settlement is fair and adequate . . . .” Rather, Judge Chen concluded that the 99.9% reduction in the amount of the proposed penalty to Uber “has no rational basis.” In a rather harsh comment, the judge stated that “Plaintiffs appear to treat the PAGA claim simply as a bargaining chip in obtaining a global settlement for Uber’s benefit.”

Judge Chen also expressed concerns about the sweeping scope of the waiver and release that was part of the proposed settlement. He found that it covered workers who were not part of the class, covered claims that were not part of the lawsuits, and may adversely affect the prosecution of a number of other cases brought against Uber. While he found  the average amount of recovery for unreimbursed expenses and tips to be modest – only $24 for California drivers and $12 for Massachusetts drivers who drove under 750 miles for Uber, and $1,950 for California drivers and $979 for Massachusetts drivers who drove over 25,000 miles for Uber – the judge concluded that such amounts, although low, were about 10% of their potential recovery and therefore legally “adequate.”

On a more technical issue, the judge expressed concern that the proposed settlement would require him to vacate his prior decision finding the arbitration agreement that Uber sought to impose on drivers to be unenforceable because it contained a waiver of the drivers’ rights to bring a PAGA claim in court and was issued under circumstances that did not adequately explain the nature of the arbitration agreement to the drivers.

The Significance of the Court’s Decision

What exactly does all this mean? First, the parties may seek to negotiate a higher amount of a proposed settlement. As illustrated recently in the case involving Uber’s ride-sharing competitor, Lyft, the parties in that case substantially increased the amount of the settlement following a rejection by a court of the initial proposed resolution. As we noted in our blog post of July 6, 2016, the increase from $12.25 million to $27 million, along with non-economic advantages for the drivers, led the court to eventually approve that settlement following its initial rejection. However, here in the Uber case, the PAGA claim would have to be increased to $100 million to reach the same 10% figure that the judge found minimally adequate with respect to the non-PAGA claims. Uber may have little willingness in essentially doubling its offer to $200 million, including $100 million for the PAGA claims – and the Uber drivers may not insist on that much to settle their PAGA claims. It is expected, therefore, that the parties may seek to increase the PAGA claim to a range of between $25-50 million and take a shot that the court will approve it.

Second, at the end of the court’s decision, it terminated its order prohibiting Uber from seeking to have drivers enter arbitration agreements. Thus, it is expected that Uber may promptly require drivers to sign a new arbitration agreement, presumably without waiving their right to litigate their PAGA claims in court, and allowing the drivers to opt-out if they wish to bring their claims in court. It has been estimated that as few as 8,000 of the hundreds of thousands of Uber drivers in California may remain in the class action if that occurs. However, Uber would be required to arbitrate thousands of cases of IC misclassification.

Third, Uber may simply wish to try the case to a jury. While few companies find that option to be worthwhile, it is by no means unheard of. FedEx tried a case to a jury in an IC misclassification case and won a jury verdict, as the overwhelming number of FedEx Ground drivers wanted to remain their own bosses. Although the verdict in that case was overturned on appeal due to faulty jury instructions, Uber claims that the overwhelming number of drivers want to be their own bosses and not Uber employees.

A court conference in this case is scheduled for September 15, 2016. Presumably, the parties will tell the court then how they wish to proceed.

How Can Other Companies Avoid Being “Uberized” by an IC Misclassification Class Action?

As we have stated in an earlier blog post commenting on the legal challenges confronting Uber, many companies that use independent contractors have resorted to IC Diagnostics™ to enhance their level of compliance and determine whether a group of 1099ers would pass the applicable tests for independent contractor status under governing state and federal law. That proprietary process also offers a number of practical, alternative solutions to enhance compliance with those laws, including: restructuring, re-documenting and re-implementing the independent contractor relationship; reclassifying 1099ers as W-2 employees; and redistributing 1099ers – as more fully described in our White Paper on the subject.

Companies that wish to retain an independent contractor business model generally elect to restructure, re-document, and re-implement their independent contractor relationships. While not all companies can eliminate most control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their independent contractor relationships to comply with federal and most state laws. If the independent contractor relationship can be effectively restructured to comply with such laws, the next step in the process is re-documentation.  What seems like a simple act of dotting your i’s and crossing your t’s, though, is anything but; indeed, many independent contractor statutes and most judicial and administrative decisions in this area are often counter-intuitive.

As we noted in our August 29, 2014 blog post entitled “Earthquake in the Independent Contractor Misclassification Field,” we concluded that FedEx Ground lost a key case because of its misplaced reliance on an independent contractor agreement and its policies and procedures that were good, but not good enough.  While FedEx is a savvy company, close scrutiny by a court found that the very documents FedEx created were sufficient in degree to lead the court to rule against FedEx. As we noted then in that blog post, “IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”

Of course, the implementation of a legitimate IC relationship is also essential. As shown in the Uber case, even when its contractual provisions were drafted in a manner intended to be consistent with independent contractor laws, evidence was introduced by the drivers in Uber’s motion for summary judgment that it failed to strictly follow in practice the contractual limitations on direction and control it had put into its independent contractor agreements.  There is no reason, however, why a company committed to complying with independent contractor laws cannot, when exercising both rigor and restraint, implement and carry out in practice an enhanced independent contractor relationship. Had Uber undertaken the above steps, I may have been spared the lawsuits it has worked so hard to defend and settle.

Written by Richard Reibstein.

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph

Posted in IC Compliance | Leave a comment

July 2016 Independent Contractor Misclassification and Compliance News Update

Four of the five independent contractor (IC) misclassification cases reported below from July 2016 illustrate how companies continue to fail to structure, document, and implement a business’s IC relationships in a manner that minimizes the likelihood of being targeted by class action lawyers and regulators. These four cases involve two types of workers: drivers in the delivery/logistics and transportation industries, and musicians in the performing arts industry. Both types of workers can be bona fide ICs if their relationships are structured, documented, and implemented in a compliant manner. How can companies in these and other industries enhance their IC compliance? As noted in our White Paper on minimizing IC misclassification liability, this takes a focused effort using diagnostic tools designed to assess and then enhance IC compliance.

In the Courts (3 cases)

LOGISTICS COMPANY SERVING HOME DEPOT, J.C. PENNY AND SEARS SETTLES DRIVERS’ IC MISCLASSIFICATION LAWSUIT FOR $13.5 MILLION. A California federal judge has granted preliminary approval of a $13.5 million class action settlement between logistics company, Exel Direct Inc. (Exel), and 386 delivery drivers in their class action IC misclassification lawsuit, subject to a December fairness hearing. Exel, now known as MXD Group, provided retailers such as Home Depot, J.C. Penney and Sears with delivery drivers to make home deliveries of furniture and other oversized items purchased in those stores. The Court concluded that “the Settlement is sufficiently within the range of reasonableness to warrant the preliminary approval of the Settlement, certification of the Class, the scheduling of the Fairness Hearing, and the mailing of notices to Class Members.” Villalpando v. Exel Direct Inc., Nos. 12-cv-04137-JCS and 13-cv-03091-JCS (N.D. Cal. July 12, 2016).

PORT TRUCKERS SETTLE IC MISCLASSIFICATION CLASS ACTION WITH TRUCKING COMPANY FOR $5 MILLION. A class of port truckers has reached a tentative $5 million settlement with QTS Inc., a trucking company, and its related entities in an IC misclassification class action. The proposed class consists of almost 400 Latin- and Korean-American truck drivers who are represented by the Wage Justice Center and Asian Americans Advancing Justice-LA. The complaint, first brought in 2013 and most recently amended on July 7, 2016, alleges that the trucking companies violated various provisions of California and federal law by misclassifying drivers as independent contractors, making unlawful deductions from their pay, failing to reimburse them for meal and rest breaks and expenses reasonably incurred during their employment, and engaging in unfair competition. During the long course of litigation, QTS also filed for bankruptcy. The drivers’ motion for preliminary approval of the settlement is scheduled to be heard on August 12, 2016. Talavera v. QTS, Inc., No. BC501571 (Cal. Super. Ct. Los Angeles County, July 14, 2016).

UBER UNSUCCESSFUL IN COMPELLING ARBITRATION OF IC MISCLASSIFICATION CASE IN PENNSYLVANIA. Uber’s motion to compel arbitration and stay the proceedings in an IC misclassification class action was denied by Pennsylvania federal court on grounds that the plaintiff limousine drivers demonstrated that they had “opted out” of Uber’s Arbitration Agreement. Uber, a ride-hailing company providing on-demand car services to the public, unsuccessfully argued a highly-technical legal assertion that the drivers’ opt-outs were invalidated by an order issued in another Uber case being litigated in a California federal court that “nullified” the arbitration provision and therefore rendered ineffective the drivers’ right to opt out of the Arbitration Agreement. The Pennsylvania court rejected that argument and held that, as a matter of law, the California judge’s order did not render the Arbitration Provision a nullity and that the drivers did not agree to arbitrate whether a court or arbitrator should determine this issue because they opted out from the Arbitration Provision. The drivers will now continue to litigate their misclassification claims against Uber in federal court in Pennsylvania alleging violations of the Fair Labor Standards Act, Pennsylvania Minimum Wage Act, and Pennsylvania Wage Payment and Collection Law. Razak v. Uber Technologies, Inc., No. 16-cv-573 (E.D. Pa. July 21, 2016).

Administrative and Regulatory Initiatives (3 matters)

NLRB FINDS MUSICIANS ARE EMPLOYEES, NOT IC’S, AND MAY THEREFORE CHOOSE TO BE REPRESENTED BY A MUSICIANS UNION. The NLRB ruled in July that musicians who played in performances for a Massachusetts production company, Fiddlehead Theatre Company, Inc., are employees and not independent contractors and that a union election should proceed where the Boston Musicians’ Association is seeking to represent the musicians for purposes of collective bargaining. In reaching its decision, the NLRB found that the following factors supported employee status: the musicians’ performance of music in Broadway-style musicals constituted the regular business of the Company; the Company provided the venues for rehearsals and performances; musicians did not have any input into scheduling of rehearsals or performances; musicians had to familiarize themselves “with how the artistic director wanted the conductor” to have the music played; and a dress code had to be followed.  Although the NLRB found other factors to support IC status, such as the work was on a show-by-show basis, the musicians were highly skilled, the method of payment was a flat fee-for-service, the musicians supplied their own instruments, and they had the right to decline engagements, it did not find those factors to be sufficient. Rather, the NLRB concluded that the factors in favor of employee status outweighed those favoring IC status. The NLRB’s decision to issue a complaint may well have favored the production company if it had used a tool such as IC Diagnostics.  Fiddlehead Theatre Company, Inc., No. 01-RC-179597 (NLRB, July 26, 2016).

NLRB ISSUES TWO MORE IC MISCLASSIFICATION COMPLAINTS AGAINST TRUCKING COMPANIES REGARDING DRIVERS ALLEGEDLY MISCLASSIFIED AS IC’S. The NLRB Regional Office in Los Angeles issued unfair labor practice complaints against two separate port trucking companies, XPO Cartage and Laca Express, based on charges filed by the International Brotherhood of Teamsters. The complaints stem from the identical argument that the drivers have been misclassified as independent contractors and not employees “thereby inhibiting them from engaging in Section 7 activity and depriving them of the protections of the [National Labor Relations] Act.” The complaints are not based solely on an allegation of misclassification; rather, misclassification is alleged in the context of other unfair labor practices, including claims that drivers were prohibited from talking about the union during work hours; drivers were prohibited from displaying union stickers on their trucks or wearing union insignia at work; drivers were threatened with job loss and/or other reprisals if the union won; and that as a condition of employment, the employees had to sign and be bound by lease agreements and an Independent Contractor Agreement. As remedies for the alleged unfair labor practices, the NLRB General Counsel seeks, among other things, an order requiring reimbursement of all work-related expenses incurred by the drivers, including reimbursement for the purchase of trucks. As noted in our recent blog post analyzing a similar complaint issued by an NLRB Regional Office, where an unfair labor practice complaint includes allegations of other “classic” violations of the law (threats, interrogations, and promises), it is not feasible to ascertain 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. XPO Cartage, Inc., No.21-CA-150873 (July 14, 2016);  Laca Express, Inc., NLRB Region 21, No.21-CA-150928 (June 28, 2016).

NEW YORK EXPANDS IC MISCLASSIFICATION TASK FORCE. New York Governor Andrew Cuomo has established a permanent Joint Task Force to develop strategies for systematically investigating employee misclassification and facilitating the prosecution of employers in violation of the law. As described more fully in our blog post of July 21, 2016, Executive Order No. 159 expanded the existing Joint Enforcement Task Force on Employee Misclassification into a Joint Task Force on Worker Exploitation and Worker Misclassification.  According to a Press Release issued by the Governor on July 20, 2016, the Joint Task Force is vested with many powers and duties including facilitating the sharing of information between Task Force members relating to suspected employee misclassification and worker exploitation violations in a timely manner; working cooperatively with labor and community organizations, businesses and business coalitions, and other advocacy groups to (1) seek and develop new methods of prevention, detection, and deterrence of employee misclassification and worker exploitation; (2) enhance or modify mechanisms for identifying and reporting instances of alleged employee misclassification and worker exploitation; (3) receive input on educational needs or compliance opportunities; and (4) collaborate with federal, state, and local social services agencies to provide timely assistance to vulnerable populations that have been misclassified and exploited. Together with the issuance of the Executive Order, the Joint Task Force issued the 2016 Annual Report, which identified several industries where independent contractor misclassification and/or worker exploitation is prevalent, such as nail salons, restaurants, agriculture, car washes, domestic workers, construction, landscaping, dry cleaning, supermarkets, home health care, and retail. While the Executive Order and 2016 Report focus on the negative impact of misclassification of ICs, there is no mention of the value to the U.S. economy from the legitimate use of independent contractors that has been noted both by U.S. Secretary of Labor Thomas Perez and Dr. David Weil, Administrator of the Wage and Hour Division of the U.S. Department of Labor.

Written by Richard Reibstein.

Compiled by Janet Barsky, Managing Editor.

Posted in IC Compliance

New York Establishes a Super IC Misclassification-Plus Task Force

Yesterday, New York Governor Andrew Cuomo signed Executive Order No. 159 expanding the existing Joint Enforcement Task Force on Employee Misclassification into a Joint Enforcement Task Force on Worker Exploitation and Employee Misclassification. Those who follow IC misclassification developments in all 50 states, such as the publishers of this legal blog, were wondering why the annual Task Force Report issued by New York each February 1 for the past eight years had not yet been issued this year.  Executive Order No. 159 tells us why – New York has now subsumed IC misclassification into a subset of “worker exploitation.”

Analysis of the New Executive Order

The Executive Order issued in 2007 establishing the Employee Misclassification Task Force required the Task Force to issue an annual report each February 1; this new Executive Order, however, has no such reporting requirement. Nonetheless, simultaneous with the issuance of Executive Order No. 159, the new and expanded Task Force issued its 2016 Report.

The Executive Order recites in its Preamble the reasons for the Governor’s action, and includes the statement that “an increasing number of employers in New York improperly classify individuals they hire as ‘independent contractors,’ even when those workers should be legally classified as ‘employees’ . . . .” Neither the Executive Order nor the 2016 Task Force Report, though, provide any empirical data or basis on which the Executive Order based its conclusion that more and more employers in New York are either classifying workers as independent contractors or, more to the point, are misclassifying employees as ICs.

The 2016 Task Force Report identifies a number of industries where IC misclassification and/or worker exploitation is regarded as prevalent: nail salons, restaurants, agriculture, car washes, domestic workers, construction, landscaping, dry cleaning, supermarkets, home health care, and retail. Past Task Force Reports have also focused attention on other industries that are the focus of regulators in New York: food services; professional, scientific, and technical services; publishing; performing arts; administrative and support services; spectator sports; educational services; motion picture and sound recording; and merchant wholesalers and nondurable goods.

Notably, there is nothing in the Executive Order or the 2016 Report that recognizes, as the current U.S. Secretary of Labor has said, the value to the U.S. economy from the legitimate use of independent contractors. For example, when Labor Secretary Thomas Perez met earlier this year with Silicon Valley high-tech industry leaders, workers, venture capitalists, and other community leaders, he expressed in his blog post of January 25, 2016 the need to encourage innovation while coming to terms with changes in the world of work, such as the growth of the gig or on-demand economy where independent contractors are prevalent. Secretary Perez wrote: “This is an exciting, entrepreneurial development that is tapping into powerful consumer demand while giving workers flexibility and enabling them to monetize existing assets, like their cars or extra rooms in their homes. At the same time, the on-demand economy raises important questions about how to continue upholding time-honored labor standards and how to promote economic security for American workers in a changing labor market.”

Similarly, while the Administrator of the Wage and Hour Division of the U.S. Labor Department has used his office to combat the illegitimate use of ICs, Dr. David Weil has stated that “the use of independent contractors [is] not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy.” Indeed, the current DOL Misclassification website contains the following “balanced” view about the use of legitimate ICs:  “The Department supports the use of legitimate independent contractors, who play an important role in our economy, but when employers deliberately misclassify employees in an attempt to cut costs, everyone loses.”

Instead, the New York State Task Force Report appears to have overlooked the fact that the New York Department of Labor and the New York courts have found many instances where a company’s use of ICs has fully complied with the law, and that the New York Labor Department has itself issued Guidelines establishing how businesses can legitimately engage ICs in the state.

Takeaways for Businesses in New York and Other States

New York State has been and remains one of the most aggressive states in identifying independent contractor misclassification. It has enacted two of the most far-reaching misclassification statutes in the country covering two industries where independent contractor misclassification is deemed prevalent in the state: the construction industry and the commercial goods transportation industry.

Businesses in New York, though, should not regard the state as unfriendly to companies that have a business model using bona fide independent contractors. Many instances of employee misclassification identified since 2007 in New York involve businesses that are using legitimate independent contractors but have simply failed to structure, document, and implement the independent contractor relationship in accordance with applicable law and enforcement guidelines.

Companies located in New York and other states are encouraged to undertake a process of enhancing their independent contractor compliance before being subjected to audits and investigations by regulators or class action lawsuits for allegedly unpaid wages, benefits, and employee expenses.  One methodology used by an increasing number of businesses is IC Diagnostics™, which facilitates the restructuring, re-documentation, and re-implementation of an IC relationship in a manner that minimizes IC misclassification liability through the use of proprietary tools and processes. Other alternative forms of compliance available to companies under IC Diagnostics™ includes reclassification and redistribution of workers, as more fully described in our White Paper on the subject.

While the industries identified in the latest and more recent Task Force Reports run the greatest risk of encountering a sweep, audit, or investigation in New York and other states, no industry is immune these days from governmental scrutiny of workers treated as independent contractors.  Absent a current examination of a company’s level of IC compliance and an effort to enhance same, businesses in New York and other states run an increased risk of exposure to IC misclassification liability.  Those businesses that have taken a proactive approach to their use of independent contractors and have structured, documented, and implemented their IC relationships in a manner designed to enhance compliance are far less likely to be the subject of an audit or investigation by a state or federal labor department, the IRS, or a state unemployment, taxation, or workers’ compensation agency.

IC Diagnostics™ has also been used by companies that have already been subjected to governmental orders to pay unpaid unemployment contributions, workers’ compensation premiums, or back payroll taxes.  While the kneejerk reaction by such businesses is that they have to or should reclassify workers found to have been misclassified, there is an alternative: keep the independent contractor model.  How can that be done?  After paying the back charges, many businesses can start fresh through a process of restructuring, re-documenting, and re-implementing their IC relationships using proprietary tools designed to enhance and maintain IC compliance.

None of the three alternative methods of IC compliance are entirely painless, and each takes dedicated commitment, resources, and considerable management time and attention. One-size-fits-all approaches usually are ill-fitting and provide little if any genuine protection. But, whether a business that is not running at a heightened level of IC compliance chooses the restructuring, reclassification, or redistribution alternative, the process need not be daunting. The only alternative that is universally regarded as unwise for such companies is continuing the status quo.

Written by Richard Reibstein

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance

June 2016 Independent Contractor Misclassification and Compliance News Update

The poster children of IC misclassification cases dominated the news in June: Uber, Lyft, GrubHub, FedEx, an exotic dance club, and a trucking transport company. It was not a good month for any of them, yet as we have articulated in this legal blog on numerous occasions, every one of those companies as well as most businesses in the adult entertainment and transport industries can lawfully use ICs – if they properly structure, document, and implement their IC relationships in a manner that enhances compliance with IC laws instead of retaining needless direction and control over the ICs, much of which is non-essential to their business models.

Earlier this month, we noted in a blog that if FedEx and its lawyers had simply drafted their IC agreements with a sharp eye on clever compliance, they may well have prevailed in many of their class actions or settled them for a fraction of what FedEx eventually agreed to pay to its Ground Division drivers and their class action lawyers: over $468 million since June 2015.

Similarly, in our recent blog post on Uber and Lyft’s proposed settlements for $100 million and $27 million, respectively, we noted that even if Uber and Lyft implemented the provisions that they included in their proposed settlement agreements, where they relinquished the absolute right to terminate drivers, those changes alone may not be sufficient to forestall new lawsuits or insulate those companies from IC misclassification liability in similar cases pending against them. Rather, we remarked that both companies needed to minimize the types of direction and control that the judges in both of those cases focused on, including control expressed in their driver handbooks where they gave the drivers instructions 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”,  “make sure to open the door for your client”, “have an umbrella in [your] car for clients to be dry until they get in your car or after they get out”, “no talking on the phone (unless it’s the passenger)”, and “greet every passenger with a big smile and fist bump”.

Similarly, in our recent blog post on Uber and Lyft’s proposed settlements for $100 million and $27 million, respectively, we noted that even if Uber and Lyft implemented the provisions that they included in their proposed settlement agreements, where they relinquished the absolute right to terminate drivers, those changes alone may not be sufficient to forestall new lawsuits or insulate those companies from IC misclassification liability in similar cases pending against them. Rather, we remarked that both companies needed to minimize the types of direction and control that the judges in both of those cases focused on, including control expressed in their driver handbooks where they gave the drivers instructions 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”,  “make sure to open the door for your client”, “have an umbrella in [your] car for clients to be dry until they get in your car or after they get out”, “no talking on the phone (unless it’s the passenger)”, and “greet every passenger with a big smile and fist bump”.

We also noted in a prior blog post that “even an exotic dance club (a.k.a strip joint) can comply with independent contractor laws – and avoid or [successfully] defend against class actions.”

Likewise, over five years ago, we stated in one of our blog posts that focused on drivers in the transportation industry: “There are ways to minimize or eliminate independent contractor misclassification; neither disguising nor ignoring it appear to be sound alternatives….This…[d]elivery case is an example of how a company can become a casualty of failing to structure its relationship with its drivers in a bona fide manner that complies with applicable employment, tax, benefits, and independent contractor laws.

The method by which those and similar companies can enhance their compliance with IC laws is described in those blog posts and in our Updated White Paper on minimizing IC misclassification liability.

In the Courts (9 cases)

UBER REMAINS A MOVING IC MISCLASSIFICATION TARGET AROUND THE COUNTRY. Following lawsuits filed against it in Florida, Arizona, and Pennsylvania, Uber was sued by drivers this past month in Indiana and New York for IC misclassification, and in California for federal WARN Act violations.

  • In Indiana, the new federal class action complaint alleges, among other things, that the drivers lack discretion in the performance of their relationship with Uber; that Uber regulates and monitors the drivers’ performance and sets all fares; and that Uber requires all drivers to maintain an average customer star evaluation of 4.5 out of 5 or face deactivation of the drivers’ ability to access Uber’s app. The drivers seek damages in this new lawsuit for expense reimbursement, overtime pay, rest and meal breaks, and minimum wages. Scroggins v. Uber Technologies, Inc., No. 16-cv-1419 (S.D. Ind. June 9, 2016).
  • In New York, the New York Taxi Workers Alliance and ten drivers brought a federal class action lawsuit alleging that Uber requires drivers to strictly follow a litany of very specific company imposed regulations that govern how, when, where and who gets to work; requires them to lease or purchase specific types of expensive vehicles; sets the fares and fees; tells drivers what to wear and what routes to take; requires and provides training; and deactivates drivers for failure to accept a required percentage of dispatches or failure to maintain a minimum rating from customers. The drivers seek damages for minimum wage and overtime compensation; recovery of equipment costs; and recovery of unlawful deductions for taxes, surcharges, or deductions including iPhone leases and fuel cards. New York Taxi Workers Alliance v. Uber Technologies, Inc., No. 16-cv-04098 (S.D.N.Y. June 2, 2016).
  • Lyft and Uber were both sued by drivers in separate California federal class actions for their alleged failure to provide advance notice of mass layoffs/plant closings in violation of the federal Worker Adjustment Retraining Notification (WARN) Act. Under the WARN Act, aggrieved or affected “employees” are entitled to the WARN Act notice. While Uber and Lyft will undoubtedly assert that the WARN Act does not apply to these workers because they are ICs and not employees. These lawsuits stem from the recent political fallout in Austin, Texas. In December 2015, the Austin, Texas City Council approved an ordinance requiring transportation network company to subject drivers to fingerprint-based background checks. Lyft and Uber opposed the ordinance and engaged in a political campaign to roll it back. A referendum to repeal the ordinance failed. Immediately thereafter, Lyft and Uber indefinitely terminated their Austin operations, which resulted in thousands of Lyft and Uber drivers in that market losing their jobs and incomes. The class action complaints, which are virtually identical, allege that the drivers were affected or aggrieved “employees”; that the companies’ withdrawal from Austin constituted a “plant closing” or “mass layoff” under the WARN ACT; that the affected Austin area is a “single site of employment”; and that legally sufficient notice was not provided to the drivers. Thornton v. Lyft, Inc., No. 16-cv-03135 (N.D. Cal. June 9, 2016); Johnston v. Uber Technologies, Inc., No. 16-cv-03134 (N.D. Cal. June 9, 2016).

LYFT’S $27 MILLION SETTLEMENT PROPOSAL GETS PRELIMINARY APPROVAL FROM COURT. A California federal judge has granted preliminary approval of a proposed $27 million class action settlement in the IC misclassification suit brought by drivers against Lyft, the on-demand ride-sharing company, after the original $12.25 million settlement proposal was rejected by the court. As we discussed in a prior blog post, the original settlement proposal provided that the average payment to the drivers would be modest, well under $1,000 per driver, to cover their out-of-pocket car expenses, allegedly unpaid tips, and any unpaid overtime and minimum wages. In rejecting that proposal in April of this year, Judge Chhabria stated that “[t]he modest nonmonetary relief set forth in the agreement does not come close to making up for…serious defects in the monetary aspect of the settlement.” Most importantly, the judge concluded that “[t]he drivers were…shortchanged by half on their reimbursement claim alone.” This past month, though, the judge found that new proposal adequately addressed the flaws in the original proposal. Cotter v. Lyft Inc., No. 13-cv-04065 (N.D. Cal. June 23, 2016).

FEDEX CLOSES CHAPTER IN IC MISCLASSIFICATION CLASS ACTION WAR WITH ANOTHER HUGE SETTLEMENT PAYOUT: $240 MILLION. FedEx announced this past month that it settled the remaining independent contractor class action lawsuits in 20 states with its Ground Division drivers for $240 million. In our blog post of June 16, 2016, we noted that this proposed settlement, which now awaits court approval, follows the recent $226 million settlement in the California class action lawsuit involving Ground Division drivers who claimed to have been misclassified as ICs. The blog post provided a brief chronology of the key legal challenges that FedEx lost in the past two years because, as one court noted, FedEx’s independent contractor agreement is a “brilliantly drafted contract creating the constraints of an employment relationship with [the drivers] in the guise of an independent contractor model—because FedEx not only has the right to control, but has close to absolute actual control over [the drivers] based upon interpretation and obfuscation.” Yet another court was equally uncharitable as to FedEx’s legal drafting: “FedEx has established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing.” As a result, unlike Uber and Lyft, whose settlements were reached before their cases reached a final determination, FedEx essentially had no choice but to pay huge settlements in the face of appellate court decisions that could fairly be characterized as catastrophes for FedEx.

GRUBHUB FACES NEW IC MISCLASSIFICATION CLASS ACTION IN ILLINOIS. On-demand food delivery company, GrubHub, faces a nationwide lawsuit for IC misclassification covering all states other than California, where a similar lawsuit has been pending. The proposed class and collective action was filed in Illinois federal court by delivery drivers. According to the complaint, GrubHub schedules and dispatches drivers through mobile phone apps or GrubHub’s website to pick up and deliver food orders from restaurants to customers’ homes or businesses. The drivers allege that by misclassifying them as ICs instead of employees, GrubHub has violated the federal Fair Labor Standards Act (FLSA) as well as the wage and hour laws of Illinois, Connecticut, New York, Oregon and Pennsylvania. The complaint alleges that GrubHub directs drivers’ work in detail; instructs drivers where to report, how to dress, and where to go to pick up or await; requires drivers to follow requirements of GrubHub regarding food handling and timelines of deliveries; and may terminate drivers at-will. Souran v. GrubHub Holdings Inc., No. 16-cv-6720 (N.D. Ill. June 28, 2016).

EXOTIC DANCERS FOUND TO HAVE BEEN MISCLASSIFIED BY FEDERAL APPELLATE COURT. The U.S. Court of Appeals for the Fourth Circuit affirmed a federal district court’s decision that exotic dancers were misclassified as independent contractors by two Maryland dance clubs – Fuego Exotic Dance Club and Extasy Exotic Dance Club – in violation of the FLSA and state wage/hour laws. In upholding the district court’s decision, the Fourth Circuit reached the same result under the FLSA’s economic realities test. The Fourth Circuit concluded that the adult entertainment clubs exercised significant control over the dancers by, among other things, requiring them to pay “tip-in” or entrance fees; work schedules that were set by the club; follow written guidelines and one-on-one instructions on behavior and conduct at work; and choosing the dancers’ music and lighting. The Court also rejected the clubs’ arguments that they were not liable for liquidated damages when the clubs sought counsel to help them enhance their IC compliance and that the tips received by the dancers should have offset the minimum wage they were required to pay the dancers. McFeeley v. Jackson St. Entertainment, No. 15-1583 (4th Cir. June 8, 2016).

TRUCKING COMPANY TO PAY $4.25 MILLION TO SETTLE IC MISCLASSIFICATION CLASS ACTION. Pacer Cartage Inc., a trucking transport company, has reached a proposed $4.25 million settlement with a class of 625 current and former California truckers. The drivers alleged that Pacer misclassified them as ICs, failed to pay them overtime and minimum wage compensation, failed to provide meal and rest breaks or premium pay in lieu thereof, and failed to reimburse their business expenses. The proposed settlement provides that class counsel would receive an unopposed fee amount of 30% of the settlement award, or $1,250,000. Mendoza v. Pacer Cartage Inc., No. 13-cv-02344 (S.D. Cal. June 14, 2016).

Administrative and Regulatory Initiatives (2 matters)

U.S. LABOR DEPARTMENT ASSESSES STAFFING COMPANY $173,000 FOR MISCLASSIFYING HOTEL EMPLOYEES. An investigation by U.S. Department of Labor’s Wage and Hour Division (WHD) has resulted in a $173,000 assessment against Allstars Staffing LLC, an Arizona-based staffing agency, for misclassifying as ICs 275 hotel employees, including servers, bussers, cooks, dishwashers, and banquet staff. The staffing agency will pay $75,683 in overtime back wages and an equal, additional amount in damages to the employees.  In addition, the hotel will pay a $22,094 civil penalty for the misclassification. In a WHD News Brief issued June 2, 2016, Eric Murray, director of the Wage and Hour Division in Phoenix, stated:  “Staffing agencies and their employer clients share responsibility to ensure that all employees working on their behalf are paid the wages they are entitled to by law. These violations are all too common in the hotel industry. Our agency will do everything in its power to end the willful misclassification of employees as independent contractors. This practice deprives workers of basic wage and employment rights and allows an employer to illegally spare the costs of full wages, payroll taxes and other employment related expenses. This cheats not just the workers and their families – it also the undercuts the competition.”

VIRGINIA IS 31ST STATE TO SIGN JOINT ENFORCEMENT PACT WITH U.S. LABOR DEPARTMENT. Virginia has become the 31st state to sign a joint enforcement agreement with the U. S. Department of Labor. On June 16, 2016, the Virginia Employment Commission signed a Memorandum of Understanding with the U.S. Labor Department’s Wage and Hour Division. The three-year agreement sets forth specific mutual goals of “providing clear, accurate, and easy-to-access outreach to employers, employees, and other stakeholders, and of sharing resources and enhancing enforcement by conducting coordinated investigations and sharing information.” In a June 16, 2016 news release, the Administrator of the Wage and Hour Division, Dr. David Weil, stated: “The Wage and Hour Division continues to attack this problem head on through a combination of a robust education and outreach, and nationwide, data-driven strategic enforcement across industries.” He continued: “Our goal is always to strive toward workplaces with decreased misclassification, increased compliance and more workers receiving a fair day’s pay for a fair day’s work.” In the same news release, the Virginia Employment Commissioner Ellen Marie Hess stated: “Virginia is excited to partner with the U.S. Department of Labor’s Wage and Hour Division on this important issue. Virginia has increased its emphasis on identifying misclassified workers. This MOU is another tool Virginia has in our effort to end misclassification of workers and the harm it causes.”

Written by Richard Reibstein.

Compiled by Janet Barsky, Managing Editor.

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

* * * * To receive blog posts and regular Monthly IC Compliance and Misclassification News reports, you may subscribe by e-mail or RSS to the Independent Contractor Compliance and Misclassification Legal Blog.

* * * * Invitation to upload content: Readers may contribute to this repository of newsworthy matters by sending an e-mail to ICComplianceBlog with any recent:

  • court cases commenced;
  • developments or updates in existing court cases, including any judicial decisions;
  • legislative bills proposed or enacted;
  • regulatory or administrative actions, including enforcement initiatives and task force developments; and
  • other newsworthy matters, such as newspaper articles, white papers, and government reports.
Posted in IC Compliance