While there were no headline-grabbing cases or developments in the area of independent contractor misclassification and compliance during the past month, the first four court decisions reported below provide the basis for two useful strategies for companies to consider when using an independent contractor business model or supplementing their workforces with 1099ers.
A large percentage of plaintiffs who bring proposed class and collective actions for IC misclassifications are successful in obtaining conditional class certification because of the relatively modest standard applied by many courts across the country at that stage of a lawsuit. As noted in two cases below – one dealing with a moving company and the other involving an energy services business – the class representative only had to make a “modest factual showing” to obtain conditional certification. Once conditional certification is granted, plaintiff’s counsel can in most instances proceed with a full array of discovery devices addressing the merits of the dispute and involving dozens of depositions and thousands of documents. The costs of defending the case then elevate dramatically. Sometimes those costs become so overwhelming that many businesses feel they have little choice but to settle, even when they believe they would succeed on the merits if the case proceeded to trial.
A few companies, however, proceed through a costly discovery process after which they attempt to persuade the court to decertify the class or collective action. At that stage of the proceedings, however, most courts apply a far stricter standard to maintain the case as a class or collective action than the test used at the conditional certification stage. As shown in the energy services company case described below, because the test for independent contractor status is fact intensive and required the court to make an individualized analysis of the facts pertaining to each class or collective member’s status as either an IC or an employee, the court decertified the collective action. That accomplishment, though, is typically accompanied by a significant expenditure of legal fees and management time and resources.
How can companies avoid or minimize the likelihood of a class or collective action alleging IC misclassification? This can be accomplished in a two-step strategic approach. First, include an effective arbitration clause with a class action waiver provision in your independent contractor agreements. See the discussion of this topic in our recent blog post. Second, elevate your company’s level of independent contractor compliance as we discuss in our White Paper, so that there is less likelihood that plaintiffs’ class action lawyers would wish to “invest” their time and effort in an IC misclassification legal challenge that is less likely to succeed.
In the Courts (6 cases)
MOVING COMPANY UNABLE TO DEFEAT CONDITIONAL CERTIFICATION OF IC MISCLASSIFICATION IN CLASS ACTION LAWSUIT BY MOVING SERVICE CREW MEMBERS. A New York federal court has granted conditional certification of an FLSA and New York Labor Law collective and class action brought by a moving service crew member against Flat Rate Movers, Ltd. In reaching its decision, the court concluded that the named plaintiff representative crew member had made the necessary “modest factual showing” that he and prospective collective action members “were victims of a common policy or plan that [allegedly] violated the law,” i.e. due to their classification as ICs, the company allegedly had did not paid the operators minimum wages and overtime compensation, did not keep records of time worked and had never provided the crew members with any tip credit notice or pay stubs. Additionally, the court found that the plaintiff crew member had demonstrated he and the other crew members were “similarly situated with respect to their job requirements” because they were required to purchase and wear the company’s uniform; often worked 14-hour days or more, six days per week; and were subject to the company’s control over tips they received and whether they would pack a customer’s belongings in addition to moving them. The court also stated that at this preliminary stage, it was premature to make any merits determination regarding the company’s argument that the crew members were independent contractors, not employees. Djurdjevich v. Flat Rate Movers, Ltd., No. 17-CV-261 (AJN) (S.D.N.Y. Nov. 13, 2018).
ENERGY CONSULTANTS’ COLLECTIVE ACTION FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION IS “DECERTIFIED” BY OKLAHOMA FEDERAL COURT. Energy and petrochemical services company, Check-6, Inc., succeeded in obtaining an order from an Oklahoma federal district court decertifying a collective action by consulting “coaches” who provided services at the work sites of Check-6 clients. Check-6, which provides consulting services in the energy, manufacturing, mining, petrochemical, and transportation industries, argued that the coaches are not similarly situated and therefore it would not be appropriate to proceed to trial collectively on the claims of those who had opted into the case. A group of coaches consisting of the named plaintiff and 18 opt-ins claimed that they were denied overtime compensation under the FLSA due to their alleged misclassification as independent contractors, not employees. Earlier, four of the opt-ins had been excluded by the court because they fell within the FLSA’s foreign workplace exemption, which excludes from FLSA coverage any employee whose services during the workweek are performed in a workplace within a foreign country.
The court had granted conditional certification of the class, but following discovery, the court applied a more rigorous standard to determine whether the opt-ins were “similarly situated” to the lead plaintiff and each other. In applying that key test, the court considered the factual and employment settings of each plaintiff, the various defenses available to the company, and fairness and procedural considerations. Applying those standards, the court concluded that the coaches were not similarly situated and that, “decertification is warranted by individualized issues, which include, but are not limited to, the application of the foreign workplace exemption . . . and the determination of each plaintiff’s status as an independent contractor or employee.” With regard to the issue of whether the “coaches” were properly classified as independent contractors, the court utilized the fact-intensive economic realities test and concluded that any such determination would require individualized analysis of each of the opt-in plaintiffs especially because they worked at different Check-6 client sites and had different responsibilities depending on the site. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N. D. Okla. Nov. 1, 2018).
NFL SUCCEEDS IN COMPELLING ARBITRATION OF SECURITY REPRESENTATIVES’ CLASS ACTION ALLEGING IC MISCLASSIFICATION. The National Football League successfully obtained an order granting its motion to compel arbitration of claims by nine former security representatives alleging violations of the Employee Retirement Income Security Act, the FLSA, the Age Discrimination in Employment Act, and various other New York state laws, based on the NFL’s alleged misclassification of the plaintiffs as independent contractors and not employees. The complaint, filed in federal court in New York, alleged that the security representatives each worked for the NFL between 12 and 26 years; were required to participate in training sessions; did not have autonomy in the means and methods of providing their services; were required to follow the NFL’s dress code and use NFL ID cards; were mandated to follow an NFL Operations Manual; and had to be on-call at all times, day or night.
Each of the plaintiffs provided services under Security Representative Agreements which classified them as independent contractors and provided for compulsory arbitration of all disputes between the parties. The court rejected the security representatives’ argument that they were fraudulently induced to sign the agreements based on the NFL’s knowingly false representation that they were independent contractors and not employees. Instead, the court determined that the plaintiffs’ claims were arbitrable because each of the parties had agreed to arbitrate and the scope of the agreements encompassed the claims at issue. Three of the nine plaintiffs also argued they were not bound by the arbitration provisions of the agreements because they did not sign them in their personal capacities but rather as the president or owner of an entity. The court rejected their argument, holding that a party who receives a direct benefit from a contract containing an arbitration clause is estopped from denying its obligation to arbitrate. Here, the direct benefit the representatives received was the compensation for their services provided for in the agreement. Additionally, in finding the arbitration clause to be enforceable, the court stated that contrary to the plaintiffs’ arguments, the arbitration clause did not prevent them from vindicating their statutory rights and pursuing equitable remedies, including reinstatement. Likewise, the arbitration clause did not prevent the plaintiffs from accessing the legal fee-shifting provisions of statutes like the FLSA and ADEA. Buckley v. National Football League, No. 18 civ. 3309 (LGS) (S.D.N.Y. Nov. 16, 2018).
RIDE-SHARING COMPANY SUCCEEDS IN COMPELLING ARBITRATION OF CLASS ACTION FOR VIOLATION OF FEDERAL BACKGROUND CHECK LAW BY DRIVERS CLASSIFIED AS IC’S. A California federal court has granted Lyft’s motion to compel arbitration of a prospective driver’s claim in a proposed class action based on the ride-sharing company’s alleged violation of the Fair Credit Reporting Act. According to the court’s determination, Lyft twice denied the driver’s applications to be a driver based on a “consumer report” that a screening company provided to Lyft regarding the driver. The plaintiff asserted that Lyft violated the FCRA by failing to provide him with a copy of the report and a written description of his rights before it took adverse action based on the report. The plaintiff had accepted electronically “Terms of Service” that included a provision requiring him to arbitrate all disputes and legal claims. The court found that (1) the parties entered into a binding agreement containing the arbitration requirement, (2) the parties in their agreement had delegated questions about the arbitrability of disputes – such as whether [the plaintiff’s] FCRA claim falls within the scope of the arbitration provision – to the arbitrator, and (3) the arbitration provision is enforceable and not unconscionable. Peterson v. Lyft, Inc., No. 16-cv-07343-LB (N. D. Cal. Nov. 19, 2018).
REAL ESTATE MANAGEMENT COMPANY UNABLE TO DISMISS TITLE VII LAWSUIT BY PROPERTY MANAGER IT TREATED AS AN INDEPENDENT CONTRACTOR. A former property manager classified as an independent contractor by a real estate management company may proceed with her Title VII sex discrimination, hostile work environment, and retaliation lawsuit against Gold Crown Management LLC, according to a recent ruling by a Missouri federal court. The company had made a motion to dismiss the lawsuit, arguing the plaintiff was not covered by Title VII because she was an independent contractor, not an employee. The company referred the court to her EEOC charge, where she identified herself as a “Leasing Consultant” and stated that she was paid “as a contractor.” The court rejected the company’s argument and found that the plaintiff adequately alleged that the company was her employer in her original and amended complaint, her EEOC charge, and related documents. The court concluded that the plaintiff’s statement that she was “paid as a consultant” was not fatal to her claims because she “attached documents to her Amended Complaint suggesting the location, hours and hourly rate of her employment were set by [the Company].” The court stated: “While Plaintiff referred to herself as a ‘contractor’ or ‘consultant’ in other places, the nature of Plaintiff’s employment cannot be decided on a motion to dismiss given the fact-intensive nature of the inquiry [into independent contractor/employee status].” Teegarden v. Gold Crown Mgmt., LLC, No. 4:18-cv-00554-SRB (W. D. Mo. Nov. 5, 2018).
U.S. JUSTICE DEPARTMENT UNABLE TO DISMISS CLAIM IT WAS JOINT EMPLOYER OF DENTAL HYGIENIST WORKING AT FEDERAL PRISON WHO WAS CLASSIFIED AS AN IC BY A GOVERNMENT CONTRACTOR. A Missouri federal court denied the Department of Justice’s motions to dismiss and for summary judgment in an employment discrimination lawsuit filed by a part-time dental hygienist at the U.S. Medical Center for Federal Prisoners. The hygienist alleged she was jointly employed by the DOJ and the government contractor that had classified her as an independent contractor. The plaintiff asserted that while working in the prison, she was harassed and retaliated against based on her gender, sexual orientation, age, and religion in violation of Title VII of the Civil Rights Act and the Age Discrimination in Employment Act. The DOJ contended that the hygienist was not a federal employee but rather an independent contractor ineligible to recover under the federal anti-discrimination laws. Although certain factors favored independent contractor status, the court concluded that a number of other factors supported employee status, including evidence that the DOJ controlled the manner and means of her services, provided the tools for her job, and controlled the hygienist’s work schedule. It also emphasized that she had worked at the same facility for six years and that the DOJ supervised her day-to-day duties, oversaw and reviewed her patient care abilities and performance, and scheduled her patient appointments. Tipton v. Sessions, No. 6:17-03179-CV-RK (W. D. Mo. Nov. 13, 2018).
Administrative and Regulatory Developments
U.S. LABOR DEPARTMENT ISSUES QUARTER MILLION DOLLAR ASSESSMENT AGAINST ELECTRICAL CONTRACTOR FOR IC MISCLASSIFICATION. An electrical contracting company, Ernest P. Breaux Electrical LLC, has been assessed $249,278 by the U.S. Department of Labor for allegedly misclassifying workers as independent contractors and not employees. Following an investigation by the Labor Department’s Wage and Hour Division in Louisiana, the company was ordered to pay the assessed amount to 117 employees for allegedly violating the FLSA’s overtime and recordkeeping requirements due to their misclassification as independent contractors. In a press release issued on November 28, 2018, WHD District Director Troy Mouton stated: “Employers in the construction industry must pay their employees the wages they have legally earned. We want to help employers in construction, and in all industries, learn what federal labor laws require so that employees are paid what they have legally earned, and employers can avoid violations and compete on a level playing field.”
Written by Richard Reibstein
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