October 2017 Independent Contractor Misclassification and Compliance News Update

There were newsworthy developments in a number of cases in the area of independent contractor misclassification during the month of October. Those cases were brought against companies in an array of different industries throughout the country: a security guard company in New Orleans; an architectural firm in New York; a health care staffing company in Florida; a telephone sales and marketing company doing business in Arizona; an on-demand, sharing economy company in California; and a fireworks company in New Jersey.

While the cases seem rather diverse, there is a common thread throughout them all – each of the companies incurred substantial legal fees and distractions by class action or individual plaintiff lawsuits as well as administrative proceedings that are oftentimes avoidable. Many companies have seen fit to minimize their exposure to these types of litigation by enhancing their level of compliance with federal and state independent contractor laws. How?  As noted in the White Paper, “Independent Contractor Misclassification: How Companies Can Minimize the Risk,” there are a number of alternative ways by which businesses can avoid or minimize misclassification liability and the legal fees required to defend these types of judicial and administrative proceedings. Many companies have valid independent contractor relationships but have failed to document or implement the IC relationship in a compliant manner. Because the IC laws vary at the federal level and are oftentimes different from one state to another, there is a compelling need to structure, document, and carry out IC relationships in a state-of-the-art manner, using the types of tools discussed in the White Paper.  By so doing, businesses in most industries can create a customized, sustainable business model that is far less likely to be the subject of IC misclassification challenges and, if challenged, far more likely to demonstrate compliance with the law.

This is the 200th comprehensive blog post published on this site over the past 7-1/2 years.

In the Courts (6 cases)

SECURITY COMPANY SETTLES IC MISCLASSIFICATION CLASS ACTION LAWSUIT FILED BY NEW ORLEANS SECURITY GUARDS. A Louisiana federal district court has granted a motion approving a confidential settlement in a collective action by New Orleans security guards under the federal Fair Labor Standards Act.  The guards suedCrescent City Consulting, LLC for unpaid overtime wages arising from their alleged misclassification as independent contractors and not employees. The guards alleged that “dozens, if not hundreds, of members of the FLSA Collective Plaintiffs”  were affected by the company’s “improper policies and practices.” They claimed that the company had complete control over how, when and where the guards performed their work; set the guards’ work schedules; and required the guards to wear uniforms with the company’s logo. The court concluded that the settlement was “fair and reasonable,” although no details were available regarding the terms of the settlement, which is an unusual occurrence. Koviach v. Crescent City Consulting, LLC, No. 14-2874 SECTION “E” (E.D. La. October 2, 2017).

ARCHITECTURAL FIRM SETTLES LAWSUIT IN NEW YORK ALLEGING IC MISCLASSIFICATION. A federal court in New York approved a proposed settlement of an independent contractor misclassification lawsuit brought under the federal Fair Labor Standards Act and the New York Labor Law by a construction worker who provided services to an architectural firm. The worker testified at his deposition that he was subject to daily and extensive oversight and control by Studio Castellano Architect, P.C., while the company testified that he worked independently on discrete projects subject to minimal supervision. The court approved the settlement as reasonable and fair because the total settlement amount of $60,000 was over half of the maximum possible damages under both statutes. Flores v. Studio Castellano Architect, P.C., No. 15-cv-09158 (S.D.N.Y. October 2, 2017).

FLORIDA HEALTH STAFFING COMPANY FOUND TO HAVE DESTROYED PAY RECORDS OF NURSES IN IC MISCLASSIFICATION CASE BROUGHT BY U.S. LABOR DEPARTMENT.  A Florida health staffing company, Caring First, Inc., has been sanctioned by a federal court for willfully deleting payroll records in an independent contractor misclassification lawsuit brought by the U.S. Department of Labor (USDOL) under the Fair Labor Standards Act on behalf of nurses classified as independent contractors. The court had previously ordered the company to produce such records. In granting the USDOL’s  motion for sanctions, the court found that the company’s owner was aware of the pending litigation yet acquiesced to the weekly deletion of payroll records that she was allegedly aware were pertinent to the litigation.  The court stated that the USDOL had been prejudiced by the willful destruction of the payroll records because it is unable to confirm the amount of back wages the company may owe if the nurses are found to be employees and not independent contractors. Although the court did not order the ultimate sanction of default judgment, it ordered production of the nurses’ paychecks from the company’s bank and will allow the USDOL to recalculate potential back wages based on those paychecks. If the USDOL prevails as to liability at trial, the court ruled, that calculation will be presumed irrebuttably correct, subject to Court approval. Secretary of Labor v. Caring First Inc., No. 15-cv-01824 (M.D. Fla. Oct. 20, 2017).

TELEPHONE SALES AND MARKETING COMPANY AWARDED SUMMARY JUDGMENT ON BACKUP EMPLOYEE “EXEMPTION” ARGUMENT IN IC MISCLASSIFICATION CASE. A New York federal district court has granted summary judgment in favor of a telephone sales and marketing company in a proposed nationwide class and collective action brought by face-to-face sales agents who alleged that the company misclassified them as independent contractors.  The sales agents brought their claims under the federal Fair Labor Standards Act and Arizona state wage laws.  The court did not, however, rule in favor of the company on the issue of whether the agents were properly classified as ICs. Rather, it ruled that the agents, who gather applications from consumers seeking to enroll in programs offered by Credico’s clients, are exempt from the minimum wage and overtime provisions of the FLSA and Arizona state law under those laws’ outside sales exemption – even if they had been misclassified as ICs. To that end, the court found that the agents’ primary duty was sales, the agents customarily and regularly engaged in that primary duty away from the employer’s place of business, and the agents bore the indicia of outside salespeople including independently soliciting new business in the form of new applications, receiving commission-based compensation, and working free from day-to-day supervision. Vasto v. Credico (USA) LLC, No. 15 Civ. 09298 (S.D.N.Y. Oct. 27, 2017).

LAWYERS IN GRUBHUB IC MISCLASSIFICATION TRIAL MAKE CLOSING ORAL ARGUMENTS. The attorneys in the IC misclassification case brought against GrubHub made their closing arguments on October 30, 2017. As detailed in our blog post that day, the lawyers for each side highlighted what they regarded as the key facts supporting their positions in this case involving the status of a single driver. The plaintiff’s lawyers referred to evidence that GrubHub retained the right to terminate the driver’s engagement at will; drivers were terminated by GrubHub in its discretion and without notice or explanation; the drivers were instructed to be “polite and respectful to businesses and customers;” the drivers were required to use an insulated food delivery bag; the work was closely monitored; GrubHub set the drivers’ rate of pay; and drivers were expected to accept every order and faced negative consequences if they did not. GrubHub’s attorneys focused on evidence that GrubHub did not have a right to control the manner and means by which the driver performed his services; the driver was not supervised as to how he performed his services; the driver provided his own car and other tools; the driver worked when and where he wished to work and was free to work for other delivery services; and the driver could choose any driving route he wished and could wear the clothing of his choice.

Although this is the first gig economy IC misclassification case to be tried in the U.S., we noted in our blog post that the court’s decision is unlikely to be momentous from a legal standpoint. Whatever the judge decides in this non-jury trial, the precedential value of this case is likely to be marginal because cases involving the determination of independent contractor or employee status are fact-specific, whereas this case appears to be in the “gray area” where there are many facts favoring each side’s argument, and where differing facts can lead to different results in cases regarding the proper classification of workers. Lawson v. GrubHub Holdings, Inc., No. 15-cv-05128 (N.D. Cal).

NEW JERSEY COURT FINDS PYROTECHNICIANS TO BE IC’S UNDER NEW JERSEY LAW. A New Jersey state appellate court has reversed a decision of a state unemployment agency, finding pyrotechnicians for Garden State Fireworks, Inc. are independent contractors under the New Jersey test for IC status.  New Jersey courts apply a three-part “ABC” test for IC status, where all three prongs must be satisfied to establish non-employee status.  The court found in favor of the company on Prong A, which requires that the individual has been and will continue to be free from control and direction over the performance of the services in contract. The court found that this Prong was in fact satisfied because the company only provided the technicians with supplies, but otherwise gave them virtually complete control over the performance of the fireworks displays. The court also ruled that the company had satisfied Prong B, which requires a showing that the services are outside of either the employer’s usual course of business or all of the employer’s places of business, because the pyrotechnicians’ work was conducted entirely outside of the company’s primary facility. The court also found that the company met the elements of Prong C, which requires that the individual be customarily engaged in an independently established trade, occupation, profession or business. The court reasoned that Prong C is satisfied “when a person has a business, trade, occupation or profession that will clearly continue despite termination of the challenged relationship.” The court continued: “If the person is so ‘dependent on the employer’ that upon ‘termination of that relationship’ he would ‘join the ranks of the unemployed,’ then the prong would not be satisfied.” In this case, the pyrotechnicians were all either retirees or had full-time employment outside of the services they performed for the fireworks company. They did not rely on the company as their primary source of income and only performed services for the company during one or two weeks each year. Based on those facts, the court found that the pyrotechnicians would not be unemployed following the conclusion of their services with the company. Garden State Fireworks, Inc. v. New Jersey Department of Labor and Workforce Development, 2017 WL 4320819 (Super. Ct. N.J.).

Legislative Action (2 items)

NEW GIG ACT INTRODUCED IN HOUSE. On October 27, 2017, U.S. Representative Tom Rice (R-S.C.) introduced the New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017 (H.R. 4165), which mirrors the Senate bill of the same name (S.1549) previously introduced on July 13, 2017 by U.S. Senator John Thune (R-S.D.).  As noted in our prior blog post reporting on the bill, this legislation addresses the classification of workers as either independent contractors or employees and creates a safe harbor for income and employment tax purposes where the workers meet a set of objective tests. The safe harbor is reportedly intended to ensure that the service provider (worker) would be treated as an independent contractor and not an employee; the service recipient (customer) would not be treated as the employer; and in the gig economy context where an internet platform or app facilitates the transactions and payments, that third party would not be treated as the employer. The proposed objective tests involve three areas: the relationship between the parties, the location of the services or means by which the services are provided, and a written contract. The bill would preserve the existing common law test for determining IC/employee status for those workers who do not meet the objective criteria needed for the safe harbor. In addition, the bill proposes various reporting rules and provisions for retroactive reclassification where service providers or service recipients mistakenly believe they qualify for the safe harbor but fail to meet one or more of the objective criteria.”

In introducing the NEW GIG ACT, Rep. Rice stated, “The NEW GIG Act serves to bolster this booming sector of our economy while reducing the complexity in worker classification that exists today.”       This proposed legislation has received scant attention, and even if it gains traction in Congress, it would only apply to the test for independent contractor status for tax purposes and have no application to the test for IC status under the federal Fair Labor Standards Act, the National Labor Relations Act, or any state IC laws. Thus, it could create situations where workers were ICs under federal tax laws but employees under federal and state labor and employment laws.

PORT DRIVERS IC MISCLASSIFICATION BILL INTRODUCED IN CONGRESS. U.S. Representative Grace Napolitano (D-Cal.) introduced the Port Drivers’ Bill of Rights Act of 2017 (H.R. 4144) in the House of Representatives on October 26, 2017. This bill focuses on a particular industry where IC misclassification is perceived by some legislators to be prevalent. The bill states that it is the sense of Congress that truck drivers, including drayage drivers, have the right not be misclassified as independent contractors and “denied” legal protections, benefits and pay; to enjoy a basic standard of living; to be covered by federal, state and local labor and employment laws; to be included in workplace safety and health laws; to be free from “exploitative” truck lease or rental arrangements; and to bargain collectively for better wages and working conditions.  The bill seeks to have the Secretary of Transportation, in consultation with the Secretary of Labor, establish a Truck Leasing Task Force to examine truck leasing agreements entered into by drayage drivers and create a report regarding the impact of those agreements on take-home pay of truckers and whether changes in regulations may be warranted to protect the ability of drivers to earn a living wage. Rep. Napolitano and her co-sponsors claim there is a need for this bill due to independent studies that have repeatedly documented the low pay and “rampant worker misclassification in the port drayage and intermodal industries,” the many decisions issued by the California Labor Commissioner awarding over 400 port drivers in excess of $40 million in back pay due to wage and hour violations, and the 15 unfair labor practice strikes that have occurred over the past three years to protest misclassification, involving picketing that delayed cargo delivery and created congestion at the ports. In view of the Republican majority in both houses of Congress, this bill is unlikely to gain traction.

By Richard Reibstein

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Posted in IC Compliance

Lawyers in GrubHub Gig Economy Trial Make Final Arguments in Independent Contractor Misclassification Case, But Decision Is Unlikely To Be As Momentous As Many Predict

The lawyers for GrubHub and the driver who is among thousands who sued the company for independent contractor misclassification made their closing arguments earlier today before federal Magistrate Judge Jacqueline Scott Corley. The case, which is said to be the first gig economy case to be tried in court, was not tried by a jury but rather by a judge in a bench trial.  Because many legal commentators and media outlets have referred to this as a “bellwether” case, the judge’s questions at closing oral argument today have been as closely scrutinized as some U.S. Supreme Court oral arguments.  But, as explained below, this sharing economy case is unlikely to be momentous from a legal standpoint.

Why? 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.

This 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 below, this case may well turn on the credibility of witnesses.

What the Judge Said At Oral Argument 

Judge Corley made it clear at the closing oral argument today that she was wholly unimpressed with the credibility of the plaintiff, Raef Lawson, reportedly stating:

“In this case, he produced a fabricated resume.  He represented that he got his degree from this three-year program, which he did not complete. That’s dishonest.  Number two, while this case was ongoing, he applied again to work for GrubHub.  I don’t know why. He used a different name, a different email address, and when he was asked whether he had worked for GrubHub before, he said no. So, I do have an issue with his credibility.  I know he’s not willing to tell the truth.”

Judge Corley also reportedly questioned the statement by Lawson’s lead counsel that the court should look at the case “wholistically.”  The judge responded, “Why should I look at it that way?”

But Judge Corley did not, however, give GrubHub’s lawyers an easy time. She reportedly grilled its lead counsel about Lawson’s termination, noting that the at-will nature of the right to terminate, which GrubHub retained in its contract with Lawson, “has inordinate importance.” She also reportedly mentioned that under the law, the company has a “heavy burden” to establish that Lawson is an independent contractor.

What Did the Evidence Show at Trial?

The papers submitted to the court in the past week by the lawyers for both sides presented stark contrasts in how each party views the evidence presented in this case. Lawson’s lawyers presented the following key “facts” that they believe were established at the trial:

  • GrubHub retained the right to terminate Lawson’s engagement at will;
  • Drivers were terminated by GrubHub in its discretion, without notice or explanation;
  • Lawson was instructed to be “polite and respectful to businesses and customers”;
  • Lawson was required to use an insulated food delivery bag;
  • GrubHub closely monitored its drivers’ work;
  • drivers were expected to accept every order possible and faced negative consequences if they did not;
  • in practice, drivers had limited ability to choose their schedule;
  • GrubHub set the drivers’ rate of pay;
  • drivers were expected to remain in their designated geographical zones while on shift;
  • Lawson worked under GrubHub’s direction and control, monitoring his every move electronically;
  • GrubHub required Lawson to “toggle” when he was unavailable and removed him from a block of time he had selected if he took off too much time during that shift;
  • Lawson was not engaged in a distinct business;
  • GrubHub handled complaints and issues with restaurants and customers and did not allow Lawson to remedy customer issues.

The lawyers for GrubHub presented a wholly different view of the key evidence at trial:

  • GrubHub did not have a right to control the manner and means by which Lawson performed his services;
  • Lawson was not supervised as to how he performed deliveries;
  • Lawson provided the car and other tools for his work;
  • Lawson worked when and where he wished to work;
  • GrubHub did not require Lawson to only work for it, and he worked for a number of other companies providing delivery services;
  • Lawson used his skill in performing deliveries;
  • Lawson had the right to use his own employees or subcontractors;
  • Lawson filed income tax returns as a self-employed business owner;
  • GrubHub allowed Lawson to choose his own vehicle of any make or model;
  • Lawson could choose any driving route he wished;
  • Lawson could choose what to wear while providing services;
  • GrubHub had no control over the delivery bags Lawson used.

Plainly, some of the key facts were disputed by the parties, particularly whether GrubHub directed and controlled the performance of services rendered by Lawson. Based on her comments at the oral argument today, it is more likely that Judge Corley will discredit Lawson’s testimony where it was disputed by witnesses for GrubHub.  That may be a huge hurdle for Lawson to overcome, but it is hardly insurmountable in view of the number of factors favoring both sides’ positions.

Analysis and Takeaways

There are other reasons why court decisions in the area of independent contractor misclassification typically do not serve as a precedent for other cases. Besides a different fact pattern from one case to another, independent contractor laws vary considerably from state to state; likewise, there are different tests for independent contractor status under various federal laws – as noted in this author’s White Paper and a number of prior blog posts and articles.

Many of the tests for independent contractor have one common factor: they oftentimes address various factors but say that no one fact is determinative of independent contractor or employee status. In the case that currently governs California law, S.G. Borello & Sons v. Department of Industrial Relations, 48 Cal. 3d 341, (1989), the California Supreme Court has stated that the factors a court should consider in reaching a decision on a worker’s status “cannot be applied mechanically as separate tests; they are intertwined and their weight depends often on particular combinations.”  The U.S. Labor Department, in commenting on the test for independent contractor status under the federal wage and hour law, similarly states in its Fact Sheet on the issue:

“The Supreme Court has indicated that there is no single rule or test for determining whether an individual is an employee or independent contractor for purposes of the FLSA. The Court has held that the totality of the working relationship is determinative, meaning that all facts relevant to the relationship between the worker and the employer must be considered.”

Nonetheless, even cases that may not serve as legal precedents due to their varied facts can be given great weight by stakeholders on both sides of a dispute. On the one hand, if Judge Corley decides that Lawson is an independent contractor, those who support independent contractor classifications in the gig industry will undoubtedly latch onto the court’s decision in GrubHub to support the use of the independent contractor classification throughout the industry.  On the other hand, if Judge Corley decides that GrubHub misclassified Lawson, those who regularly argue that virtually every 1099er has been misclassified will almost certainly try to use the decision as a moral if not a legal precedent that businesses in the on-demand economy routinely misclassify employees as independent contractors.

Those companies that use independent contractors as part of their business model or to supplement their workforce would be wise to view this case as a signal to enhance their current state of independent contractor compliance. Many companies using independent contractors are not in compliance with such laws and are likely targets for regulatory agencies and class action lawyers.  Even companies that regard themselves as being in compliance with an array of state and federal independent contractor laws are able to considerably fortify their level of compliance. How can companies do so?

Many businesses using independent contractors have utilized a process such as IC Diagnostics™ to restructure, re-document, and/or re-implement their independent contractor relationships. By so doing, they are able to minimize the likelihood that a governmental agency or class action lawyer will even attempt to challenge their independent contractor relationships – and if a challenge is mounted, they are well positioned to maximize the likelihood that the relationship will be upheld as valid.

Written by Richard Reibstein


Posted in IC Compliance

September 2017 Independent Contractor Misclassification and Compliance News Update

September included three court cases that have attracted considerable attention in the area of independent contractor misclassification: an $8.75 million settlement in the nationwide class action against Postmates by its couriers ; the riveting non-jury trial before a federal judge in California in what is believed to be the first trial of an IC misclassification claim in the on-demand industry; and a decision sending to trial perhaps the longest-running IC misclassification case in the country against FedEx Ground.

Another court case involved the denial of a staffing company’s motion to dismiss a class action IC misclassification case brought by nurses whom the staffing company supplied to a state corrections department. Regardless of whether the nurses might otherwise be legitimate independent contractors, the staffing company lost this motion – and may conceivably lose the case – because it was signatory to a contract with the state corrections department that provided that the nurses were “employees of Contractor and not of [the state].” This case stands as a stark reminder to businesses that utilize independent contractors to ensure not only that their own relationships with workers whom they treat as independent contractors are compliant with applicable IC laws, but also that they not enter into agreements with their clients that contain any contractual provisions that might undermine an otherwise valid IC relationship.  Staffing companies and other businesses that refer such workers to their clients should consider a compliance process, such as IC Diagnostics™, that not only assists in the structuring and documentation of IC relationships, but also addresses in detail the implementation of such relationships in a manner that enhances compliance with IC laws.  To that end, many companies fail to take into account that their IC relationships can be undermined by a variety of ancillary agreements as well as writings that they themselves create.  A comprehensive review of all communications and writings dealing with the 1099ers is essential.

In the Courts (5 cases)

$8.75 MILLION SETTLEMENT APPROVED IN IC MISCLASSIFICATION CASE AGAINST POSTMATES. A California federal court has preliminarily approved an $8.75 million settlement between the on-demand delivery service, Postmates, Inc., and proposed class of couriers in their state and federal wage and hour claims against the company arising from its alleged misclassification of the couriers as independent contractors.  The couriers, who provide services on the Postmates platform, alleged that the company failed to pay minimum wages and overtime required by federal and selected state laws, that the company failed to reimburse expenses under California and Massachusetts state laws. The settlement provides for a settlement fund of $8,750,000, of which and $6.1 million is to be allocated among the couriers; $100,000 will be allocated to the plaintiffs’ California Private Attorneys General Act claim; $300,000 will be paid to the Settlement Administrator; $2.2 million is designated for attorneys’ fees and costs; and $57,000 is payable to the named plaintiffs and certain opt-in participants as service fees.

The amount of the settlement fund was discounted due to the company’s defenses facing the couriers: some of the class members may otherwise have been compelled to arbitration; the class may be subject to decertification; some of the claims might not be suitable for class-wide adjudication; and the plaintiffs might lose at trail on the independent contractor issue.  The settlement also provides for certain non-monetary components, including changes to Postmates’ policies and practice such as modifying the terms of the couriers’ IC agreement to provide that the contractual relationship may only be terminated for certain material breaches and not at will; a provision that couriers whose contracts are terminated will have a right to appeal through an arbitration process to be paid for by Postmates; agreement by Postmates to facilitate access to third-party occupational accident insurance for bicycle couriers to be procured at the couriers’ expense; and Postmates’ agreement to establish an e-mail address exclusively dedicated to receiving feedback from couriers regarding all aspects of Postmates’ business.  The settlement agreement includes a provision that Postmates does not admit liability.  A fairness hearing has been scheduled for February 23, 2018. Singer v. Postmates Inc., No. 5-cv-01284 (N.D. Cal. Sept. 1, 2017).

GRUB HUB IC MISCLASSIFICATION TRIAL ENDS; LAWYERS TO BRIEF CASE TO THE JUDGE. Lawyers have completed their presentation of evidence in what may be the first trial of an IC misclassification claim in an on-demand business. The case involves a delivery driver for GrubHub who claims that he and other similarly situated drivers are employees whom GrubHub misclassified as independent contractors. The case was not tried to a jury but rather a federal district court judge, who has asked the lawyers for the parties to file post-trial briefs. The driver, Raef Lawson, claims that he was denied minimum wage, overtime, and reimbursement for business expenses allegedly in violation of California wage and hour laws. The driver has testified that he and other drivers are required to sign up for shifts in advance; that GrubHub directs drivers’ work in detail, instructing them where to report for shifts, how to dress, and where to pick up or await deliveries; drivers are required to follow requirements imposed on them by GrubHub regarding handling of the food and timeliness of the deliveries or risk termination; GrubHub requires drivers to sign up for work shifts (such as blocks of 2.5 hours, 3 hours, or 4 hours) where, during those shifts, drivers must be within an area assigned by GrubHub and be available to accept delivery assignments. GrubHub countered by introducing evidence that Lawson simply connects customers seeking food deliveries from restaurants with drivers willing to make those deliveries, and that Lawson had control over how when, where, and how often he performed delivery services. The trial is limited to whether this particular driver was misclassified; if so, a subsequent phase of the case will focus on whether the claims can be expanded class-wide. A deadline of October 30, 2017 has been set for submission of post-trial briefs and appearances for closing arguments.

While many commentators regard this case as likely to be precedent-setting, almost every IC misclassification case against a different company presents a separate set of facts, and cases in the “gray area” can turn on one or two key facts that may not be present in another case.  Indeed, even in IC misclassification cases against the same company, there are sometimes vastly different facts relevant to IC status between one plaintiff and the next, and those differences can lead to different results.  Lawson v. GrubHub Holdings, Inc., No. 15-cv-05128 (N.D. Cal.).

STAFFING COMPANY PROVIDING SKILLED NURSES TO SOUTH CAROLINA UNABLE TO GAIN DISMISSAL OF IC MISCLASSIFICATION CLAIM BECAUSE OF ITS CONTRACT WITH ITS CUSTOMER.  A South Carolina federal court has denied a motion to dismiss by skilled labor staffing agency in a proposed class action alleging the nursing professionals were misclassified as independent contractors in violation of the federal Fair Labor Standards Act and the South Carolina Payment of Wages Act. The company, Condustrial Inc., d/b/a Medustrial Healthcare and Staffing Services, provides nurses for patients under the custody and control of the South Carolina Department of Corrections.  The company had argued that dismissal was warranted because the amended complaint failed to state a claim under the state wage payment law inasmuch as the plaintiff failed to identify an employer policy or contract giving her the right to vacation, holiday,  and sick leave payments. In denying the motion to dismiss, the court found that under the contract between Condustrial and the South Carolina Department of Corrections, the contract between the state agency and staffing company provided that the nurses “are employees of Contractor and not SCDC,” and further stated that “[a]ll matters concerning wages, expenses, hours worked and paid, working conditions, and other similar administrative matters shall be resolved between Contractor and its employees and not between employees and SCDC.”  Based solely on the contract between the staffing agency and its client, the court held that the nurse could proceed with her IC misclassification claim.  Turner v. Condustrial Inc., No. 17-cv-00205-MBS (D.S.C. Sept. 21, 2017).

OKLAHOMA OIL AND GAS RIG LEASING COMPANY DENIED SUMMARY JUDGMENT IN IC MISCLASSIFICATION CLAIM. An Oklahoma federal court has denied summary judgment to an oil and gas rig leasing company, Black Cat Oil Company, finding that there are genuine issue of material fact to be tried to a jury as to whether the company and its owner qualify as the owner’s personal assistant’s “employer” under the FLSA. The plaintiff alleged that in addition to being owed unpaid compensation under the FLSA due to misclassification as an independent contractor, the company and its owner engaged in sexual harassment, wrongful discharge, intentional infliction of emotional distress, and assault and battery under state laws.  The plaintiff alleges she was the personal assistant to the owner of Black Cat, while the company and owner argue that she was a part-time contractor who did light secretarial work.  With regard to the company’s disputed status as an “employer” under the FLSA, the court applied the economic realities test and, viewing the facts in the light most favorable to the plaintiff, as it is required to do on a motion for summary judgment when the facts are in dispute, determined that there was evidence of “control and supervision over [the plaintiff’s] work”; a “predominate lack of opportunity for profit or loss”; a “complete lack of investment” by the plaintiff; a consistent working relationship;  a relative lack of skill or training; and a necessity for her to work. The court stated: “[b]ecause a trier of fact could make findings as to…the economic realities test which would support the legal conclusion that [the plaintiff] acted as an employee rather than an independent contractor, [defendants] [are] not entitled to summary judgment as a matter of law” on the FLSA misclassification claim. The court reached the same result under the plaintiff’s state law claim for sexual harassment, finding that while there are facts indicating that she is an independent contractor, “taken as a whole the evidence presented by [the plaintiff] raises a general issue as to whether [the owner] exercised the requisite level of control” for the company to as an “employer.” Johnson v. Mueggenborg, No. 16-CV-659 (N.D. Okla. Sept. 19, 2017).

SIX-YEAR OLD FEDEX IC MISCLASSIFICATION CASE IN MASSACHUSETTS HEADED TO TRIAL. FedEx Ground Package System, Inc. has defeated a delivery driver’s motion to summary judgment in his IC misclassification claim in a long-running misclassification lawsuit first filed in 2011.  This case was originally part of a lawsuit brought by many drivers, all of whom but one, driver Clayton Schwann, had already settled with the company. After many motions through years of litigation, the current issue before the court for this one remaining plaintiff is whether FedEx can satisfy Prong 3 of the Massachusetts Independent Contractor Law – is the individual customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.  Prong 2 of the law had previously been determined by the U.S. Court of Appeals for the First Circuit as being preempted by a federal law for companies in this industry. During the hearing of the summary judgment motion, the driver conceded that there may be disputed issues of fact that require a trial with regard to Prong 1 of the law.  That prong addresses whether the driver has been and will continue to be free from control and direction in connection with the performance of his services, both under his contract for the performance of service and in fact. Under the state’s IC test, the alleged employer must satisfy all three prongs (or in this case, two prongs) to establish that it is not the individual’s employer.

In support of his position under Prong 3 that FedEx cannot show that Schwann had an independently established trade, occupation, profession, or business, the driver argued that FedEx retained the right to audit and monitor his performance, including “ride-alongs” by company personnel in his vehicle;  that he could not control the number of packages FedEx assigned to him on any given day, which regularly required him to work 60 hours per week so he could not develop business elsewhere; and that although he could use his vehicle for non-FedEx activities provided he did not display the FedEx logo while doing so, covering up the logo was difficult and could not be re-applied if removed. In denying the driver’s motion for summary judgment, the court found questions of fact existed whether the ride-alongs were significant enough to undermine IC status, that no facts were presented suggesting the ride-alongs could or did result in termination of drivers,  that declarations from other FedEx drivers showed that it was common practice for drivers to swap packages among themselves to increase or decrease their package volume; and that conflicting evidence existed regarding how feasible it was for drivers to cover up FedEx’s logos so they could potentially engage in non-FedEx related activities. The court stated that at trial, “there must be a showing that the test under both prongs 1 and 3 of the Independent Contractor Law is satisfied for FedEx to prevail. If such showing is not made on either prong, [the driver] will be entitled to a verdict in his favor and, if shown, damages because of his misclassification as an independent contractor.” Schwann v. FedEx Ground Package System, Inc., No. 11-cv-11094 (D. Mass. Sept. 20, 2017).

Regulatory and Administrative Initiatives (1 case)

NLRB FINDS INDIANA MEDICAL LAB VIOLATED FEDERAL LABOR LAW BY MISCLASSIFYING ITS DRIVERS WHO TRANSPORT MEDICAL SAMPLES.  An Administrative Law Judge for the National Labor Relations Board has found that an Indiana medical specimen transport company, Velox Express, not only violated the National Labor Relations Act by terminating a courier driver whom the ALJ found to be an employee and not an independent contractor due to her complaints about IC misclassification, but also by classifying as independent contractors the other drivers/medical couriers who collect and deliver specimens collected from doctor’s offices, clinics, and hospitals to a laboratory for analysis. Using a multi-factor analysis, the ALJ found the following factors favored employee status: there was significant control over the way the drivers performed their jobs including submission to random drug tests, non-solicitation and non-compete clauses, mandatory pick up times of the specimens, permission needed for time off, a dress code;  the drivers were not engaged in a distinct occupation or business;  the work was done under the direction of the employer;  the level of knowledge required to be a Velox driver/courier did not rise to the level of a skill; there was more of an at-will relationship than a contractual relationship; the company set the fee for services provided by the drivers; the work is part of the regular business of the company; and the drivers did not render services as part of their own independent business.  The ALJ found that only one factor, that the drivers use their own vehicles and pay for their fuel, insurance, and maintenance of their vehicles, supported IC status.  In addition to finding that the company’s termination for complaining about misclassification violated the NLRA, the ALJ concluded that by requiring courier drivers to sign IC agreements and thereby misclassifying its drivers, Velox “restrained and interfered with their ability to engage in protected activity by effectively telling them  that they are not protected by Section 7 and thus could be disciplined or discharged for trying to form, join or assist a union or act together with other employees for their benefit and protection.”  Velox Express Inc., No. 15-CA-184006 (NLRB Sept. 25, 2017) (ALJ Arthur J. Amchan).

Legislative Initiatives (1 matter)

CONGRESSIONAL COMMITTEE HOLDS EXPLORATORY HEARING ON CHANGES TO LABOR AND TAX LAWS AFFECTING THE GIG ECONOMY. A Congressional hearing was held on September 6, 2017 by the House Education and Workforce Committee to gather viewpoints over the possible need for new federal labor and tax legislation addressing the growing gig economy. Included among the participants were Michael Beckerman, President and CEO of the Internet Association, who reportedly testified that he is concerned that “policymakers and regulators have put up roadblocks to consumer choice and competition in some communities.”  But Sharon Block, a former Labor Department official and current executive director of Harvard University Labor and Worklife Program, who also testified, reportedly stated “We have a danger here of placing the online platform economy in one category and saying that labor and employment laws don’t fit.” Rep. Virginia Foxx (R-N.C.) said at the hearing:  “ The self-employed individuals who rely on the sharing economy for work don’t fit neatly into obsolete job categories defined in another era. So, there are important questions over how we can modernize policies to meet the needs of the future.”

While members of Congress have introduced 15 bills dealing with IC classification and misclassification since mid-2007, no bills have been passed.  In the meantime, new state laws have been passed in over half the states in that time, and any new federal laws would not impact the crazy-quilt of state laws that currently exists in this area.

Written by Richard Reibstein

Posted in IC Compliance

Why the Supreme Court’s “Big” Case on Class Action Waivers May Have Little Impact on Some Companies Including Those Using Independent Contractors

Tomorrow, October 2, the Supreme Court will hear argument on what many commentators are calling one of the biggest issues affecting companies in the past decade – whether mandatory arbitration clauses with class action waivers in the employment context violate the National Labor Relations Act and are therefore unenforceable, or whether the Federal Arbitration Act, which favors arbitration of disputes, overrides the NLRA. Whatever the decision is, though, it is unlikely to have much of any impact on employers or businesses using independent contractors – even when sued by workers claiming to be employees – if they are savvy enough to have drafted their independent contractor agreements in a manner that will be enforceable regardless of the way in which the Court rules.

Following oral argument tomorrow in a trio of cases including one where the National Labor Relations Board is a party, there is likely to be a flood of legal commentators predicting what the Supreme Court is likely to decide based on questions posed to the parties’ lawyers by the Justices. The outcome may not be particularly meaningful for some companies if they have taken steps to bullet-proof these types of agreements. As discussed in the “Takeaways” at the end of this commentary, though, state-of-the-art arbitration agreements are not a panacea to protect against workplace liability. Rather prudent companies have not only shored up their arbitration agreements, but also taken steps to enhance their compliance with applicable employment and independent contractor laws.

The Likely Impact of the Supreme Court’s Decision – Whatever It Decides

On the one hand, if the Supreme Court holds that the NLRA is not violated by a class action waiver or that the FAA overrides the NLRA, then virtually all such arbitration agreements with class action waivers (if properly drafted) would require workers to litigate their cases on an individualized basis before an arbitrator – and not on a class or collective basis before a judge in a courtroom.

This would be a huge blow to plaintiffs’ class action lawyers. It would also prompt more businesses that have yet to use these types of arbitration agreements to include these types of clauses in their employee and independent contractor agreements.

On the other hand, what if the Supreme Court holds that the NLRA is violated by mandatory arbitration agreements with class action waivers and finds that the FAA does not override the NLRA? In that event, such arbitration agreements will not be enforceable, and employees and independent contractors claiming they have been misclassified will be able to bring and maintain wage, discrimination, and other types of lawsuits on a class or collective action basis – unless the company’s arbitration clause with a class action waiver includes a state-of-the-art “opt-out” clause.

Opt-Out Clauses Are Likely to Moot Any Argument That Such Agreements Are Unenforceable

If an employee or independent contractor can “opt out” of the arbitration agreement within a specified period of time, the agreement is no longer mandatory in nature because the employee or independent contractor has a choice whether to accept the clause or not. Savvy companies have already figured this out and have included an opt-out provision in their arbitration agreements to protect against a possible invalidation of class action waivers by the Supreme Court.

While the Obama-era NLRB has said that an opt-out clause may also violate the NLRA, that position is likely to change under an NLRB soon to be comprised of a Republican majority of its five Board members. Further, the federal courts have generally found that opt-out clauses in arbitration clauses with class action waivers defeat the argument that a class action waiver violates the NLRA.

In any event, there are ways to carefully draft opt-out provisions that would likely survive scrutiny even under the current NLRB decisions from the Obama era.

Thus, those companies using arbitration agreements containing a state-of-the-art opt-out clause are not likely to be the least bit nervous about the upcoming Supreme Court decision, as it only deals with mandatory arbitration clauses with class action waivers. Whatever the decision, it is unlikely to have any application to them. Nor should companies that have enhanced their compliance with employment and independent contractor laws be concerned about the eventual decision by the Supreme Court of the cases being heard tomorrow.


Many companies have mistakenly concluded that an arbitration clause with a class action waiver is all they need to do in order to protect themselves from workplace liability. Such clauses can only protect against a claim being asserted as a class or collective action (assuming the arbitration agreement is properly drafted). They don’t provide any defense to a claim that employees were properly paid or that workers classified as independent contractors are not misclassified employees who allegedly are owed overtime, minimum wages, employee benefits, expense reimbursement, or other workplace benefits available to employees.

Arbitration agreements with class action waivers are also wholly ineffective at forestalling federal and state regulatory agencies from conducting audits or initiating and maintaining enforcement proceedings under employment and independent contractor laws. Such contractual clauses are not binding on governmental regulators. Hence, the importance of enhancing compliance with employment and independent contractor laws cannot be overstated.

And some state laws have been interpreted, at least at present, as not being susceptible to arbitration, such as California’s Private Attorneys General Act (PAGA).

Businesses that wish to minimize potential workplace exposure from employees and independent contractors can, of course, conduct an internal workplace audit. With regard to employees, companies can review compliance with the most troubling types of wage and hour requirements, such as whether an employee satisfies an overtime exemption. There are also some tried and true steps that employers can take to ensure that their audits won’t backfire on them and that the results are not only reliable but also useful in the event of a legal challenge.

In the area of independent contractor compliance, internal audits are typically most effective at determining that a group of workers paid on a 1099 basis do not satisfy the applicable tests for independent contractor status. Such audits do not ordinarily provide companies with the tools needed to enhance their independent contractor compliance of those workers. Businesses that wish to fortify their independent contractor compliance can use a proprietary process such as IC Diagnostics™ that enables companies to consider alternative ways to minimize misclassification liability, including restructuring, re-documenting, and re-implementing their independent contractor relationships.

Richard Reibstein


Posted in IC Compliance

August 2017 Independent Contractor Misclassification and Compliance News Update

This past month was unusually “slow” in terms of developments in the law of independent contractor misclassification and compliance.  There was no blockbuster court decision or lawsuit filed, although one interesting development is an effort by some FedEx drivers who were not included in prior settlement agreements between the company and drivers, allegedly because they signed IC agreements after the cutoff date defining the class, to seek conditional class certification in a new class action lawsuit against the company.

This legal development highlights the need for businesses that settle class actions to take affirmative steps to enhance their compliance so that they are less likely to be sued in successive lawsuits and, if sued a second (or third) time, to increase their likelihood of success. Companies facing legal challenges, either in court or an administrative proceeding, may wish to consider using an IC compliance process such as IC Diagnostics™ to restructure, re-document, and/or re-implement their IC relationships.

In the case of FedEx, that company has wisely restructured its IC relationships through its Independent Service Provider (ISP) program. As I noted several years ago in an earlier blog post, FedEx Ground undertook a change in its relationship with Ground Division drivers when it implemented an Independent Service Provider (ISP) program where single-route drivers were only offered FedEx Ground routes if they acquired the rights to multiple routes.  This required them to (a) incorporate as a business, purchase from FedEx Ground three or more work areas in the same geographic area, and enter into an agreement with FedEx on an approved ISP arrangement for the work areas; or (b) become an employee driver of an approved FedEx Ground ISP (that is, become an employee driver for another driver that has set up a business as an ISP). Two federal courts of appeal, though, have concluded that drivers with more than one service route may still prevail in an IC misclassification case.

Another state last month joined the majority of states that have enacted laws related to IC misclassification. North Carolina Governor Roy Cooper signed the Employee Fair Classification Act. While the law does not change the test for IC status, it does create a new Employee Classification Section that has been given powers to coordinate enforcement efforts in the state.  The law also requires employers in that state to post a notice informing employees that if they believe they have been misclassified as an independent contractor, they may report the suspected misclassification to the newly created Employee Classification Section. This new law is what I have referred to as “IC-Neutral” legislation: laws that continue to allow businesses to use bona fide ICs, properly classified as such under long-standing state laws, but tighten enforcement efforts or increase penalties on those who intentionally misclassify workers. “IC-Minus” legislation, on the other hand, seeks to curtail the legitimate use of bona fide ICs by, among other things, changing long-standing tests for IC status.

In the Courts (3 cases)

FEDEX DRIVERS IN NEW YORK SEEK CLASS CERTIFICATION IN NEW IC  MISCLASSIFICATION LAWSUIT.  Five New York FedEx Ground Division drivers who had entered into independent operator agreements with FedEx sought conditional certification of their class action IC misclassification claims alleging violations of the New York  Labor Law (NYLL). The drivers stated in their motion that although a class of drivers was certified in a previous case against FedEx to pursue identical wage claims due to alleged misclassification, another 200 or so drivers (including the plaintiffs) were not included in the prior class action that was part of a $240 million class action settlement because they were either hired after the 2007 cutoff date defining the class in the previous lawsuit or they had opted out of that class. The five drivers claim that due to FedEx’s alleged misclassification of them as ICs, the company allegedly deducted amounts from the “wages” of each member of the proposed class in violation of the NYLL. According to the plaintiffs, FedEx had a “categorical policy” of treating all class members as ICs, and that all of the drivers shared the same job title, executed the same Operating Agreement, performed deliveries pursuant to FedEx’s specifications, wore the same uniform, drove trucks bearing the FedEx logo, were supervised by FedEx managers, scanned and tracked every delivery and pick up with FedEx’s scanner equipment, and had every delivery recorded and monitored through FedEx’s software. They also argue that plaintiffs’ claims present a single, underlying legal question common to every proposed member: whether FedEx misclassified all of these workers as independent contractors when they should have been treated as employees for purposes of NYLL sec.193.  FedEx is expected to vigorously oppose the motion. Padovano v. FedEx Ground Package System, Inc., Civ. No. 16-cv-00017 (W.D.N.Y. August 15, 2017).

NLRB FINDS CREWMEMBERS PROVIDING ELECTRONIC CONTENT SERVICES TO NBA TEAM TO BE EMPLOYEES CAPABLE OF BEING UNIONIZED.  The NLRB has held that crewmembers producing electronic content that is displayed on video boards suspended above the court during professional basketball games played by NBA’s Minnesota Timberwolves and Minnesota Lynx are employees under the National Labor Relations Act and, therefore, are subject to being represented by the union that filed a representation petition with the NLRB. For each of the 60 home games played by the team per season, 16 crewmember positions are filled from a roster of 51 individuals including camera operators, engineers, audio/tape operators, technical directors, font operators, directors and replay operators.  Initially, a Regional Director dismissed the petition, concluding that the crewmembers were  properly classified as independent contractors by team’s owner, Minnesota Timberwolves Basketball, LP.  However, the union sought review by the full Board in Washington, D.C., which reversed the Regional Director, concluding that the crewmembers are employees and not ICs, and reinstated the union’s petition for representation.

In reaching its 2-1 decision (with Chairman Miscimarra dissenting), the NLRB majority found that the team’s owner controlled the content that was displayed during each game, which of the available crewmembers will report for each game, what role each crewmember will occupy within the crew, the time and place where each crewmember must report, and whether a crewmember will be removed from the roster and barred from future work.  The NLRB majority also found that the team owner supplied all of the necessary production equipment and instrumentalities such as cameras, cables, instant replay machines, headsets, sound and broadcasting, and the video boards. The NLRB’s decision also relied on the potentially long-term working relationship with the team’s owner; the crew’s work being part of the regular business of the owner; the owner being in the same business as the crewmembers; and the fact that crewmembers do not operate as part of an independent business or have any entrepreneurial opportunity. Although the Board considered factors that favored IC status, the Board determined that those factors did not render the crewmembers to be ICs. Chairman Miscimarra filed a lengthy dissent, concluding that the crewmembers “are independent contractors based on the distinct skills they possess, the fact that they are paid on a per-game basis, their freedom to take other work, and the fact that Timberwolves Basketball does not control the details of their work or supervise them.”  Minnesota Timberwolves Basketball, LP, 365 NLRB No. 124 (August 18, 2017).

NEW JERSEY APPELLATE COURT FINDS ADULT ENTERTAINMENT CLUBS DID NOT SATISFY STATE’S “ABC” TEST FOR EXOTIC DANCERS.  A New Jersey appeals court has found that exotic dancers are employees of gentlemen’s club, JPRC, Inc. t/a Liquid Assets, and were misclassified as independent contractors under the state’s “ABC” test for IC status.  As the court describes in its decision, beginning in 2003 the club unilaterally restructured its relationship with the dancers whereby the discontinued its practice of paying wages to the dancers and began to charge them a small fee for the right to “perform” for compensation in the form of tips that customers gave them and fees the dancers charged customers for “private dances.” In affirming the decision of the Commissioner of the Department of Workforce and Development that the dancers were employees, the appeals court found that the club’s advertising, with its focus on erotic entertainment featuring “over 20 girls daily,” belied its claim that the dancers were merely incidental or peripheral to the club’s business of serving food and drink.  The court also concluded that the club presented little evidence concerning the alleged independent contractor status of the dancers. The court concluded, “ Petitioner’s ability to unilaterally impose a new mode of operation on its existing employees – for the avowed purpose of enabling petitioner to avoid paying unemployment taxes – did not demonstrate the dancers’ independence as ‘contractors.’”  JPRC Inc. v. New Jersey Department of Labor and Workforce Development, No. A-1736-15T2 (App. Div. N.J. Aug. 4, 2017).

Regulatory and Administrative Actions (1 matter)

CALIFORNIA LABOR COMMISSIONER TARGETS CONSTRUCTION CONTRACTOR FOR IC MISCLASSIFICATION.  A Glendale, California construction company has been sued by the California Labor Commissioner in Los Angeles Superior Court alleging that Calcrete Construction, Inc. “willfully misclassified” 175 workers as independent contractors. According to a News Release issued by the California Department of Industrial Relations on August 14, 2017, an investigation beginning in October 2016 revealed that the company allegedly forced its workers to sign contracts that they were independent contractors and then used staffing agencies to pay the workers. The lawsuit seeks $6.3 million in unpaid wages and penalties for overtime, waiting time, unpaid sick leave, and liquidated damages, as well as statutory penalties for alleged willful misclassification. Labor Commissioner Julie A. Su stated in a press release: “It is illegal for employers to use subcontractors to distance themselves from the obligation to pay workers, and we will use every tool to dissuade employers from this scheme. This lawsuit aims to recover the money these misclassified workers should have been paid . . . .”

Legislative Initiatives (1 matter)

NORTH CAROLINA CREATES SPECIAL EMPLOYEE CLASSIFICATION UNIT TO COMBAT IC MISCLASSIFICATION.  North Carolina Governor Roy Cooper signed the Employee Fair Classification Act (SB 407) on August 11, 2017, creating by law the Employee Classification Section within the North Carolina Industrial Commission. Previously, on December 18, 2015, former Governor McCrory had issued Executive Order No. 83 establishing the Employee Classification Section. The new law, which becomes effective December 31, 2017, authorizes the Employee Classification Section to receive complaints of employee misclassification; investigate reports of employee misclassification; coordinate with other state agencies and District Attorneys’ offices in the prosecution of employers and individuals who fail to pay civil assessments or penalties; provide information about each report of misclassification to the Department of Labor, the Division of Employment Security, the Department of Revenue, and the Industrial Commission to facilitate investigation of potential statutory violations; educate employers, employees and the public about employee misclassification; and report annually to the Governor and Joint Legislative Commission on Governmental Operations.

While none of the foregoing legislative initiatives impact companies that use independent contractors, there is one provision of the law that effects every employer in North Carolina: they must post a notice that includes the following language: (1) Any worker who is defined as an employee under the law shall be treated as an employee unless the individual is an independent contractor; (2) any employee who believes that the employee has been misclassified as an independent contractor by the employee’s employer may report the suspected misclassification to the Employee Classification Section within the Industrial Commission; and (3) the physical location, mailing address, telephone number, and e-mail address where alleged incidents of employee misclassification occurred may be reported to the Employee Classification Section within the Industrial Commission. Notably, the new law does not change the test for employee or independent contractor status; that test remains essentially a “common law” test, which is generally regarded as the test most friendly to IC status.  Nor does the new law increase penalties for IC misclassification.

Written by Richard Reibstein

Posted in IC Compliance