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.

Takeaways

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

June and July 2017 Independent Contractor Misclassification and Compliance News Update

The most notable legal developments during the June/July  period were appellate decisions: one by the Vermont Supreme Court holding that a construction company did not misclassify a carpentry contractor under that state’s unemployment insurance law; the other by the California Court of Appeal, an intermediate level appellate court, affirming a decision by a lower court that home delivery newspaper carriers had been misclassified as ICs by the newspaper that used the delivery carriers’ services.

In the Vermont case, the IC classification was validated because the carpentry contractor was an LLC and not an individual, strongly suggesting that a company is more likely to have its IC classification upheld where the contractor is a business entity and not an individual. Of course, there have been a number of cases where courts have refused to find a legitimate IC relationship even when the contractor does business in the form of a corporation or LLC. See January 14, 2015 blog post (first “takeaway”).

In the California case, the newspaper’s misclassification of delivery carriers was hardly surprising given the lower court’s finding that there was a considerable amount of direction and control included in the IC agreement signed by the carriers as well as in the day-to-day practice by the newspaper. IC misclassification decisions like this one from California highlight the importance of businesses structuring, documenting, and carrying out their IC relationships in a manner that minimizes direction and control over the manner of performing services.  Some companies have chosen to use a process such as IC Diagnostics™ to minimize the likelihood that a court, like the one in California, would be inclined to conclude that workers classified as ICs have been misclassified.

In the Courts (8 cases)

VERMONT SUPREME COURT CLARIFIES UNEMPLOYMENT LAW FOR IC’S OPERATING AS LLC’S. The Vermont Supreme Court has decided that an LLC is a distinct legal entity separate from its members and is not an “individual” for purposes of assessing unemployment taxes. In deciding an appeal from the state Employment Security Board, the Vermont high court found that Bourbeau Custom Homes, a home construction and design company, was not liable for unemployment taxes on monies paid to a carpentry contractor, John Parah Construction LLC, “because an LLC is not an ‘individual’ under the unemployment tax statute and therefore not subject to the ABC test established under [the Vermont statute.]” The Board’s classifications of two other carpenters, an installer of cement siding and a painter, as employees and not independent contractors, were upheld by the court. After publication of the decision in this case, Lindsay Kurrle, Commissioner of the Vermont Department of Labor, issued a News Release on June 23, 2017 stating, “The Vermont Department of Labor is carefully reviewing the decision that was issued today by the Vermont Supreme Court. The classification of independent contractors is an issue the Department is committed to – both ensuring that workers are properly protected, and that businesses who want to utilize independent contractors are doing so with confidence and predictability of how the law is applied. The ruling today sheds an important light on the way the Department will classify LLCs in the future, and provides a level of clarity that we have not had previously.” In Re Bourbeau Custom Homes, Inc., No. 2016-157 (Sup. Ct. Vermont June 23, 2017).

NEWSPAPER’S MISCLASSIFICATION OF HOME DELIVERY CARRIERS AS IC’S UPHELD ON APPEAL. A California appeals court has upheld a lower court’s decision that home delivery newspaper carriers were misclassified as independent contractors by The San Diego-Union Tribune, a newspaper owned by The Copley Press Inc. The complaint alleged wage and hour claims under the California Labor Code, including failure to pay minimum wages and overtime compensation, failure to provide meal breaks and rest periods, and failure to reimburse for business expenses.  The carriers reportedly had signed independent contractor agreements containing provisions that they were required to deliver the newspapers “in a clean, dry, undamaged and readable condition at a time and location” that met the customer’s reasonable requests and expectations, could not work for competitors without consent from The Tribune, were required to obtain accident insurance and bonding, agreed to complete deliveries by specific times on weekdays and weekends, and were required to assemble the papers at  company distribution centers. The appeals court affirmed the lower court’s findings that the independent contractor agreement and the day-to-day operations evidenced the company’s right to control the carriers’ manner and means of delivery.  Although the carriers were awarded $3 million in restitution for mileage expense, the cost of supplies, insurance, bond premiums, and warehouse rent, the appeals court found that the lower court had erred in its calculations and remanded the damages portion back to the court for adjustments. This trial court decision was the subject of a January 24, 2014 post on this blog. It is anticipated that the publisher will seek to appeal this latest decision.  Espejo v. The Copley Press Inc., No. D065397 (Cal. Ct. App. July 7, 2017).

NO CLASS CERTIFICATION IN IC MISCLASSIFICATION CASE FOR BAKED GOODS DISTRIBUTORS. A California federal district judge has denied a motion for class certification in an IC misclassification class action brought under California labor laws by 150 California distributors who delivered baked goods under brands such as Wonder, Tastycake, and Nature’s Own to retail stores, restaurants, fast food businesses, and other customers of Flower Foods, Inc. and its subsidiaries. In denying class certification, the Magistrate Judge concluded that the case was not suitable for class action treatment because individualized issues existed over how to determine which of the 150 distributors personally serviced their routes, including when and for how many hours they worked, and whether the distributors operated distinct businesses, including whether they performed deliveries for other companies. According to the decision, the existence of those issues “prevents common questions of fact or law from predominating and class-wide treatment is not superior to individual actions.” Soares v. Flower Foods, Inc., No. 15-cv-4918 (N.D. Cal. June 28, 2017).

CREDICO SUED BY SALES MARKETING AGENTS IN IC MISCLASSIFICATION CLAIM.  Sales marketing agents have filed a new, nationwide collective action complaint in New York federal court against direct sales company, Credico (USA) LLC, alleging minimum wage and overtime compensation violations under the FLSA due to alleged misclassification as independent contractors. The collective action complaint alleges that “Credico has perpetrated a nationwide pyramid scheme whereby a network of over 200 companies across the country operate as Credico’s subcontractors, and contract with agents who provide face-to-face marketing services for Credico’s clients.” The agents’ lawsuit claims that Credico and the subcontractors for whom they worked are joint employers because there is allegedly substantial control exercised by Credico (and by the subcontractors) over the agents, who claim that they are employees and not independent contractors. Huffman v. Credico (USA) LLC, No. 17-cv-4242 (S.D.N.Y. June 6, 2017).

DEVELOPMENTS IN RIDE-SHARING INDUSTRY

Arbitration Compelled in Proposed IC Misclassification Class Action in Illinois. Uber has once again prevailed in compelling arbitration in a proposed misclassification class action.  An  Illinois federal court has ruled that drivers providing services to Uber customers using its app must arbitrate their claims where they voluntarily entered into valid agreements containing enforceable arbitration provisions and had not opted out of the arbitration clause when afforded an opportunity to do so. The arbitration provisions that the drivers signed included a class action waiver. The complaint against the company alleged that Uber had denied the drivers wages, tips, overtime pay and business expense reimbursements, allegedly in violation of the Illinois Wage Payment and Collection Act, the Illinois Minimum Wage Law, and the Fair Labor Standards Act (“FLSA”), all arising from their alleged classification as independent contractors. The state claims had been brought on behalf of the plaintiff driver and a proposed class of Illinois drivers, while the FLSA claims had been brought on behalf of the driver and a prospective nationwide collective class (except for California and Massachusetts drivers.) The court held that “[p]ursuant to that arbitration agreement, of which plaintiff did not opt out, the court finds that the arbitrator is responsible for determining the threshold issue of whether plaintiff’s relationship with Uber is that of employee or independent contractor.” In that regard, the district court found enforceable the delegation clause which “is an agreement to arbitrate gateway questions such as ‘whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.’” The court stated that “the operative delegation clause provides that the Arbitration Provision applies to all disputes between plaintiff and defendant, including any disputes arising out of or related to plaintiff’s relationship with Uber.” Olivares v. Uber Technologies Inc., No. 16-cv-6062 (N.D. Ill. July 14, 2017).

New IC Misclassification Lawsuit Twist: Filed Only Against CEO and Chairman of the Board. Uber’s former CEO as well as its current Chairman of the Board were sued individually for alleged independent contractor misclassification by drivers who already had filed lawsuits against the ride-sharing technology company. As more fully discussed in our blog post of June 23, 2017, this new lawsuit might well be an attempt by the plaintiffs’ lawyers to avoid the arbitration provisions in the independent contractor agreements that most Uber drivers have signed with the company. It is likely that the individual defendants will argue that they too are covered by the arbitration provisions, and either a court or arbitrator may one day decide that issue. The basis for the lawsuit against the two individuals is the 2011 California Independent Contractor Law that imposes liability on companies that misclassify workers as independent contractors, but also imposes “joint and several liability” on persons who knowingly advise an employer to misclassify such individuals to avoid employee status. The former CEO and current Board Chairman will likely seek to use an exemption in the joint and several liability provision for anyone “who provides advice to his or her employer.” James v. Kalanick, No. BC666055 (Super. Ct. Los Angeles County, CA June 22, 2017).

North Carolina Federal Court Grants Conditional Certification in Proposed Nationwide Ride Sharing Collective Action by Drivers Who Have Opted Out of Arbitration. A federal court judge in North Carolina has granted a motion by drivers for conditional class certification in a proposed  nationwide collective action against Uber alleging wage and hour violations under the federal Fair Labor Standards Act. The proposed collective action alleges that the company  incorrectly classified the drivers as independent contractors; it seeks to cover “[a]ll natural persons who have worked or continue to work as an Uber Driver anywhere in the United States and have opted out of arbitration.”  By virtue of this decision, drivers who had opted out of the company’s standard arbitration clause would be afforded the opportunity to opt into the collective action.  A spokesman for Uber reportedly stated that the company was “disappointed with this decision, particularly because a Federal District Court recently denied conditional certification in another case” last month in Florida. The court’s order itself noted that  the requirements for conditional certification are “modest.” In cases of this nature, companies have a right at a later point in a litigation to file a motion to decertify the class; at that time, the class representatives are required to meet a rigorous standard if they wish to proceed further in the case as a collective or class action. As an Uber representative reportedly stated: “We look forward to challenging whether this case should proceed as a collective action, as well as litigating the merits of these claims.” Hood v. Uber Technologies, Inc., No. 16-cv-998 (M.D.N.C. July 12, 2017).

MICHIGAN FEDERAL COURT APPROVES $6.55 MILLION CLASS ACTION SETTLEMENT IN ADULT CLUB IC MISCLASSIFICATION CASE. A Michigan federal district court judge overrules objections and approves a $6.55 million nationwide class action settlement between Déjà Vu’s chain of gentlemen’s clubs and 28,177 exotic dancers in a lawsuit alleging misclassification as independent contractors and not employees. The class and collective action suit, filed nine years ago, alleged violations of the FLSA and state wage and hour laws, including failure to pay minimum wage, requiring dancers to split gratuities , and deducting employee wages through rents, fines, and penalties. In exchange for releasing their claims, the dancers will be afforded injunctive relief and either a single cash payment or remuneration in the form of a rent credit or dance fee payment to offset fees charged them by the club. Additionally, the settlement requires the club to provide the dancers with an “Entertainment Assessment Form,” which is described as “a questionnaire designed to ensure that Defendants accurately categorize each dancer as an independent contractor or employee based on the economic realities test.” The injunctive relief also requires the club to offer each class member the opportunity to cancel their current independent contractor status and accept a position as an employee. The settlement provides $1.2 million in attorneys’ fees to class counsel and $100,000 for resolution of California Private Attorneys General Act claims. Doe v. Déjà vu Services, Inc., No. 16-cv-10877 (E.D. Mich. June 19, 2017).

Regulatory and Administrative Actions (5 matters)

SECRETARY OF LABOR WITHDRAWS OBAMA-ERA MISCLASSIFICATION GUIDANCE.  Alexander Acosta, the newly-confirmed Secretary of Labor in the Trump Administration, has withdrawn the U.S. Labor Department’s independent contractor misclassification guidance issued in 2015. As discussed in our June 7, 2017 blog post, Labor Secretary Acosta announced in a News Release that day that he had withdrawn the Labor Department’s formal guidance on two significant issues faced by businesses: independent contractors and joint employment. Although the withdrawal of those items is likely to be portrayed by many as a major shift in enforcement position by the U.S. Labor Department, it is unlikely to change the legal landscape of independent contractor misclassification, which is now waged mostly in private class action lawsuits and administrative proceedings, not by the Department of Labor.

MASSACHUSETTS ATTORNEY GENERAL CRACKS DOWN ON DOOR-TO-DOOR MAGAZINE SALES COMPANY THAT ALLEGEDLY LURED LOW-WAGE EARNING WORKERS INTO THE STATE BUT CLASSIFIED THEM AS IC’S.     Massachusetts Attorney General Maura Healey announces in News Release dated June 5, 2017 that she has assessed a door-to-door magazine sales company, Unified Doers Management Group, LLC, over $150,000 in penalties for independent contractor misclassification, including failure to pay wages in a timely manner, failure to pay the minimum wage, failure to keep accurate records and failure to furnish a pay stub. The Attorney General stated, “This company recruited low-income individuals from across state lines and lured them in with promises of successful jobs in direct sales, only to send them home without a paycheck for their work. This is not acceptable and this action should send a message to companies that if they want to do business in Massachusetts, they need to abide by our laws and treat their employees fairly.” According to the News Release, the investigation revealed that the company recruited young workers and transported them to Massachusetts communities to sell a variety of magazines door-to-door. The company guaranteed that if a job did not work out, they would be given money to return to their homes; however, when sales quotas were not met by the worker, the company terminated its relationship with the worker, leaving them without any earned wages and no way to return home.

NLRB FINDS HIGH SCHOOL LACROSSE REFS TO BE EMPLOYEES, NOT INDEPENDENT CONTRACTORS, IN BID BY UNION. The National Labor Relations Board has issued a decision that lacrosse officials providing referee services for the Pennsylvania Interscholastic  Athletic Association (PIAA) are employees under the National Labor Relations Act and not independent contractors. The PIAA is a non-profit corporation whose primary purpose is to promote uniformity in their interscholastic athletic competitions of its 1,611 member schools in Pennsylvania. The petitioner in the case, Office and Professional Employees  International Union, has sought to represent a unit of 140 officials that officiate at junior and senior high schools lacrosse games within the greater Pittsburgh area. In reaching its decision, the NLRB applied the analysis used in the Board in its FedEx decision, considering ten factors as well as whether the lacrosse official rendered services as an independent business with actual entrepreneurial opportunity for profit and loss. The NLRB concluded that the officials were employees because the PIAA had pervasive control over the means and manner of the work due to its comprehensive set of rules; the officials were not engaged in a distinct occupation or business because they performed their functions in furtherance of  PIAA’s core operations; the PIAA could not function without them; the PIAA tightly controlled the work through mandatory adherence to rules, policies, and procedures that evidenced direction by PIAA; the officials’ skills were integral to the PIAA’s ability to accomplish its core mission; the PIAA controlled the compensation process; the officials did not render officiating services as part of their own enterprise as they were not permitted to hire others to help perform their tasks and they did not control most scheduling or other important business decisions;  and the officials were constrained in their ability to earn more money by PIAA’s limiting each official to one geographic chapter in the state.

This case bears special note for two reasons: First, the FedEx decision on which the NLRB relied has been repeatedly rejected by the D.C. Circuit Court, as noted in my blog post of March 7, 2017. See FedEx Home Delivery, 361 NLRB No. 55 (2014), enf. denied, 849 F.3d 1123 (D.C. Cir. 2017), pet. for rehearing en banc denied, No. 14-1196 (June 23, 2017).  Second, NLRB Chairman Miscimarra filed a sharp dissenting opinion, disagreeing with the NLRB’s majority on three points: (a) whether the NLRB even has jurisdiction over the PIAA to the extent it is a “political subdivision” of the Commonwealth of Pennsylvania; (b) whether the NLRB should, in any event, decline to exercise jurisdiction over state interscholastic sports governing bodies; and (c) that the officials are not employees but rather independent contractors. By the time this case is reviewed by a federal court of appeals, the composition of the NLRB may be changed due to appointments to vacancies by the current Republican Administration; thus, the decision to permit the union to proceed with its petition to represent the lacrosse officials may be overturned by the time the PIAA might otherwise become legally obligated to bargain with the union over terms and conditions of employment for the refs.  Pennsylvania Interscholastic Athletic Association, Inc. and Office and Professional Employees International Union, Petitioner, Case 06-RC-152861 (July 11, 2017).

OAKLAND CONSTRUCTION COMPANY ASSESSED $3.5 MILLION FOR IC MISCLASSIFICATION. The California Labor Commissioner’s Office has assessed an Oakland, California construction company, Attic Pros, $3.5 million in allegedly unpaid wages and penalties for labor law violations allegedly due to misclassification of 119 workers. In a News Release dated July 25, 2017, Labor Commissioner Julie A. Su stated: “This is an egregious case of wage theft, with workers misclassified and denied a just day’s pay. My office enforces California’s labor laws to stop employers willing to cheat their employees of their pay as a means to gain an unfair advantage over their law-abiding competitors.”  According to the News Release, the investigation by the Labor Commissioner’s Office was triggered by notice it received of a proposed Private Attorneys General claim.  The Labor Commissioner determined that the employees worked 10-14 hour days up to six days per week and were paid a daily rate regardless of the actual number of hours worked, resulting in their allegedly being paid less than the minimum wage due to employees. The company was ordered to pay $191,400 in unpaid minimum wages, $321,000 in unpaid overtime wages, $191,400 in liquidated damages on unpaid minimum wages, $1,405,350 in waiting time penalties, and $1,481,600 in civil penalties for minimum and overtime wage violations, wage statement violations, and employee misclassification.  Decisions by the Labor Commissioner’s Office are subject to appeal.

NEW YORK STATE UNEMPLOYMENT APPEAL BOARD FIND RIDE-SHARING DRIVERS TO BE EMPLOYEES FOR UNEMPLOYMENT PURPOSES. A New York State Administrative Law Judge has upheld three initial determinations by the New York Department of Labor that the three drivers providing services to riders using the Uber ride-sharing app, as well as all others similarly situated in New York, are employees and not independent contractors. The ALJ found that although there were some indicia of the drivers’ independence – the drivers “set their own work schedule; selected their work areas; were not obliged . . . to report their absences or other leaves; and were not provided fringe benefits . . . – facts supported a determination that the drivers were, on balance, employees under the New York unemployment insurance law.  The ALJ found that the company “exercised sufficient supervision and control over substantial aspects of their work as Drivers. Uber has reportedly stated that it plans to appeal the decision. A spokesperson for the company stated: “We are confident we will prevail — the Department of Labor has already ruled that several drivers are independent contractors and a federal court has deemed all black car drivers to be independent contractors,” adding that the ALJ did not permit other drivers to testify in the proceeding, leaving three drivers “hand-picked” by the New York Taxi Workers Alliance to make the case. According to the company, it was “denied our due process rights in this matter.” Uber Technologies, Inc., ALJ Case No. 016-23858 (June 9, 2017).

Legislative Initiatives (2 matters)

NEW GIG ACT OF 2017 INTRODUCED IN U.S. SENATE. U.S. Senator John Thune (R-S.D.) introduced the New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017 (S. 1549) on July 13, 2017. According to a Press Release issued by Senator Thune’s office that same day, this legislation addresses the classification of workers as independent contractors or employees and creates a safe harbor for those who meet a set of objective tests that would qualify them as ICs, both for income and employment tax purposes. 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 also 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 will 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. Senator Thune stated in the Press Release that, “Today’s fast-growing ‘gig economy’ has made it easier for people to offer unique services, like home repair and cleaning, child care, food delivery, or ride sharing, through easy-to-use mobile applications that can be opened with a simple swipe of a finger. While these gig economy companies have created thousands of new jobs, they’ve also faced new challenges when it comes to how the service providers are classified by the IRS.”

It is notable that 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 certain “gig” workers under the tax laws enforced by the Internal Revenue Service; it would have no application to the test for IC status under the federal wage and hour law (the Fair Labor Standards Act), the National Labor Relations Act, or any other federal law – and of course no application to IC laws in any of the 50 states.

NEW YORK CITY RELEASES REGULATIONS IMPLEMENTING ITS INDEPENDENT CONTRACTOR PAYMENT PROTECTION LAW. The New York City Department of  Consumer Affairs (DCA) has published its final rules, effective July 24, 2017, implementing the Freelance Isn’t Free Act, the first-in-the-nation independent contractor payment protection law. (The final rules can be found at the following link, after the text of the Act.)  As discussed more fully in our blog posts of November 16, 2016 and May 9, 2017, New York City’s Freelance Isn’t Free Act went into effect on May 15, 2017.  It is the only law in the nation regulating the relationship between independent contractors and those who retain their services, requiring that IC agreements provide minimal terms, and protecting ICs from non-payment of their fees. Introducing the rules on its website, the DCA states: “These rules clarify provisions in the law, establish requirements to implement and meet the goals of the law, and provide guidance to covered hiring parties and protected freelance workers.”  The Rules provide, among other things,  for an expansion of the term “adverse action” to include actions taken not only “by a hiring party, but by their actual or apparent agent or any other person acting directly or indirectly on behalf of a hiring party”; that a freelance worker is entitled to the protections of the Act regardless of immigration status; that a freelance worker may establish a claim for retaliation where the worker shows that the exercise or attempt to exercise any right under the Act was a motivating factor for an adverse action; that agreements entered into between the worker and the hiring party shall not include any prospective waivers or limitations of rights under the Act; and that if the contract includes a waiver or limitation regarding the worker’s right to participate in or receive money/other relief from any class, collective, or representative proceeding, such term shall be void. The new Rules, however, fail to address or clarify a number of uncertainties in the law that have been pointed out in the above blog posts, such as whether the law applies to independent contractors who provide services in New York City but do not use a mailing address in the City; whether it applies to service recipients who contract for services with a non-New York City independent contractor; whether a freelancer loses the protections of the law if he or she uses one or more helpers or subcontractors to assist in any manner with the services provided; and when services are deemed complete, which initiates a service recipient’s payment obligation.

By Richard Reibstein

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Posted in IC Compliance

Uber’s Former CEO and Current Chairman of the Board Sued Personally for Independent Contractor Misclassification – Is This an Effort by the Drivers to Circumvent Uber’s Arbitration Agreements?

Yesterday, the lawyers representing drivers who have sued Uber in California commenced another lawsuit on behalf of drivers alleging that the company misclassified them as independent contractors instead of employees. This lawsuit, though, is not against the company itself; rather, it is against Travis Kalanick, the former CEO and a current Board member, and Garrett Camp, the Chairman of the Board of Uber Technologies, Inc.

It also appears that this new lawsuit may well be an attempt by the drivers to avoid the arbitration provisions in the independent contractor agreements that most Uber drivers have signed with Uber – much the same way that Gretchen Carlson sought to avoid the arbitration provisions in her employment agreement with Fox News when she decided to only sue Roger Ailes personally. Undoubtedly, Kalanick and Camp will likely argue that they are covered by the Uber arbitration clause, and it will be up to a court (or an arbitrator) to decide that issue.

The case is James v. Kalanick, No. BC666055 (Super. Ct. Los Angeles County, CA, June 22, 2017), and is assigned to Judge Maren E. Nelson.

The California Law in Question – Does It Apply?

The law under which the individual defendants are being sued is the California Independent Contractor Law, enacted in 2011.  (Cal. Labor Code § 226.8)  It prohibits “willful misclassification” of employees as independent contractors.  That law contains a provision that not only imposes liability on companies who are found to have “willfully” misclassified workers as ICs, but also imposes “joint and several liability” on persons who knowingly advise an employer misclassify such individuals to avoid employee status.  (Cal. Labor Code § 2753)  However, that law exempts from liability anyone “who provides advice to his or her employer.” It is likely, therefore, that the former CEO will argue that he is exempt from joint liability, and the current Chairman of the Board will likely make the same argument in his role as a Board member, even if Uber was not technically his “employer.”

The law is unclear as to whether “advisors” can be jointly liable with a business they “advise” unless the company is also sued, and in this latest lawsuit the company was not sued.

The California Independent Contractor Law requires “willful” misclassification, which is defined to mean “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” That is a higher standard than that imposed by the laws under which Uber has currently been sued and may be quite challenging for the plaintiffs to prove.

Whether or not this case is litigated on the merits – in court or in front of an arbitrator –both individual defendants would likely argue that neither engaged in any misclassification and especially not “willful” misclassification. Indeed, the issue of whether Uber drivers are employees or independent contractors is one where the courts have concluded that there are cogent factual arguments in favor of independent contractor status while at the same time there are facts in favor of employee status. That is the reason why a federal district court denied summary judgment in another case involving the company, finding that there were material issues of fact that had to be decided by a jury.  Essentially, this may be one of those types of IC misclassification cases in the “gray” area, although lawyers for both sides would presumably contend that the facts overwhelmingly favor their respective positions.

Takeaways for Other Businesses Using Independent Contractors in California and Elsewhere

Companies that find themselves in the “gray” area, and there are tens of thousands of such companies around the country, may wish to evaluate their current degree of IC compliance and then take steps to considerably enhance their level of compliance.

Some companies have chosen to accomplish this through a process such as IC Diagnostics,™ which offers alternatives to businesses that wish to minimize their exposure to independent contractor misclassification liability. One such alternative is restructuring, re-documenting, and re-implementing a company’s IC relationships in a manner that elevates a business’s level of compliance, consistent with the underlying business model, in a customized and sustainable manner. This is typically the preferred methodology chosen, as it can often be accomplished with little or no additional operating costs.

Companies whose IC compliance is already at a high level can also benefit considerably by some restructuring, re-documentation and/or re-implementation of their IC relationships. The IC legal landscape has been for many years and remains in flux.  Structures and agreements that once seemed safe may contain legal cracks that need repair.  Take, for example, FedEx, a company with top in-house and outside counsel.  Its independent contractor agreement, which may at one time have been regarded as state-of-the-art, was recently found by two federal appellate courts to have created an employee relationship with its Ground Division drivers, instead of the IC relationship for which it was intended to establish.

Other alternatives may include reclassification (either voluntarily or through a governmental program or arrangement) or redistribution through the use of a knowledgeable fee-based workforce management firm. These alternatives, though, can involve a considerable cost – and they are not risk-free if not accomplished in an effective manner.

Another way in which such companies in the “gray” area (as well as those already at a high level of IC compliance) can seek to minimize the likelihood of class action lawsuits is with a state-of-the-art arbitration clause with class action waiver, drafted in a manner that avoids the legal issues presently under review by the U.S. Supreme Court.

Written by Richard Reibstein

Posted in IC Compliance