How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law

The latest version of Assembly Bill 5, which codifies the California Supreme Court’s Dynamex decision that was issued in April 2018, is about to become law.  Dramatically changing decades of settled law in California, Dynamex created a so-called ABC test requiring companies to satisfy each of three strict criteria in order to establish independent contractor status.  Prior to Dynamex, IC status was determined in that state by applying a multi-part test issued three decades earlier by the California Supreme Court in the Borello case, which weighed and balanced a number of factors.  Essentially, Dynamex instantly turned tens of thousands of businesses in scores of industries that were operated for years in compliance with settled law into companies that, overnight, might be operating outside of the law.

Prior to this legislative initiative, referred to as “AB5”, all businesses in California were covered by the Dynamex decision for so-called “wage order” claims.  However, Dynamex did not cover “non-wage order” claims, such as causes of action for overtime and reimbursement of expenses, as we noted in a blog post reporting on a case that delineated which types of claims were covered and which were not by Dynamex.  Thus, AB5 began as a legislative effort to codify Dynamex for both wage order and non-wage order claims (as well as claims under the unemployment and disability benefits laws in California).  But it ended up becoming a lobbying exercise whereby over 50 industries and types of businesses have been exempted from the ABC test in Dynamex. For those companies fortunate enough to have been carved out of the harsh ABC test, AB5 statutorily re-establishes the multi-factor test in Borello for wage and non-wage claims.

Those carved out of AB5 are the following:

  • licensed insurance agents
  • certain professionals (physicians and surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, and accountants)
  • broker dealers, investment advisers, direct salespersons, private investigators, and commercial fishermen
  • certain professional service providers that meet all of six specific requirements in the following occupations: marketing contractors, human resources administrators, travel agents, graphic designers, grant writers, fine artists, enrolled tax agents, payment processing agents, still photographers, photojournalists, freelance writers, publication editors, and newspaper cartoonists
  • licensed real estate salespersons, repossession agents, estheticians, electrologists, manicurists, barbers, and cosmetologists
  • business-to-business contractors that meet all of 12 specific requirements
  • selected construction subcontractors and motor club service providers
  • referral agencies connecting clients with service providers that meet all of 10 specific requirements in the following industries: graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, and yard cleanup

Some of the exemptions will not, however, cover all businesses in a particular industry, especially where the carve-outs include a number of specific requirements, all of which must be met.

Many industries were not granted exemptions even though they are similar to the types of industries that AB5 specifically carved out from having to meet the strict ABC test.  And certain types of gig economy businesses, such as ride-sharing technology companies, were likewise omitted from any relief from Dynamex and are now covered by the ABC test for both wage and non-wage claims.

Operating in California with ICs After AB5

An exemption from AB5 is not a “get-out-of-jail-free” card; those businesses carved out from the Dynamex ABC test must still comply with the multi-factor Borello test.  Many businesses in industries that obtained a carve out will still be governed by the ABC test (and not Borello) if they are unable to satisfy any of up to a dozen specific requirements.  Thus, those businesses that will be covered by Borello need to structure, document, and implement their IC relationships in California consistent with that multi-factor test, which is similar in many ways to most of the varying tests for IC status under the major federal laws and a majority of state laws.

For some companies that will be governed by the Dynamex ABC test in California, establishing all three prongs of the ABC test may be untenable.  But the ABC test may well be interpreted by the courts in California in a manner that legally permits a number of companies to continue to use ICs.  In that regard, few courts have yet to issue decisions applying Dynamex and the Supreme Court of California has yet to apply any of the three prongs in any case.  Therefore, while it will undoubtedly be more challenging now to structure, document, and implement an IC relationship in a business governed by the ABC test in California instead of the multi-factor Borello test, it still can be accomplished by certain types of businesses.  Indeed, California is not the only state with an ABC test – no less than 20 states have variations of that test for IC status, although most of the ABC tests are applicable only for unemployment insurance or workers’ compensation claims.

Many companies that have sought to enhance their compliance with both a multi-factor test and an ABC test have resorted to an enhancement process such as IC Diagnostics™, which elevates a company’s level of compliance with applicable state and federal laws  by restructuring, re-documenting, and re-implementing IC relationships.  This compliance approach can be done in a customized and sustainable manner without changing a company’s business model.

A process such as IC Diagnostics™ also can be utilized in an effort to meet the six specific requirements under AB5 for selected professional service providers, the 12 specific requirements under AB5 for business-to-business contractors, and the 10 specific requirements under AB5 for referral agencies.

Companies that are operating in California and elsewhere with ICs should also  enhance and update their arbitration clauses with class action waivers.  In doing so, they can most effectively limit class and collective action lawsuits, as we discussed in detail in an article published last fall in the Daily Labor Report by Bloomberg Bureau of National Affairs that was then posted on this legal blog.  

Written by Richard Reibstein

Posted in IC Compliance | Leave a comment

NLRB Finds Couriers Were Misclassified As Independent Contractors, But Rejects Argument That Misclassification Is a “Stand-Alone” Violation of the Law  

The National Labor Relations Board earlier today held that a courier services company misclassified drivers as independent contractors instead of employees protected under the National Labor Relations Act.  The Board also held that the company violated the NLRA when it terminated its relationship with one of the couriers because of her activities raising group complaints about the company’s classification of the drivers. With one member dissenting, the NLRB refused to conclude, however, that the company’s act of misclassifying the couriers as ICs was, standing alone, a violation of the NLRA.  It also rejected the argument that it should issue an order mandating that the courier company reclassify its drivers as employees and notify them that they are not ICs under the NLRA.  

At first blush, the Board’s decision may seem internally inconsistent – finding that the company misclassified the workers in question and committed an unfair labor practice by terminating a worker for engaging in protected activity, but concluding that the company did not violate the law by its act of misclassifying the workers and advising the workers that they are independent contractors.  Yet a close review of the majority’s opinion demonstrates that the Board’s decision on the “stand-alone” issue was mandated by the “free-speech” provisions of the NLRA as well as public policy considerations.

Despite the Board majority’s view that misclassification itself is not an unfair labor practice, its decision today should not be read to suggest that the NLRB’s Republican-appointed members countenance IC misclassification.  The Board unanimously held that the drivers had been misclassified as ICs and, as a result, they are now subject to  unionization. For that reason, we discuss in the “Takeaways” below a means by which many businesses that utilize an IC business model can meaningfully enhance their IC compliance – and do so in a customized manner consistent with their business strategy.

The Decision 

The Misclassification of the Couriers

Before reaching the issue of whether the act of misclassifying employees as ICs violated the NLRA, the Board majority first addressed the threshold question of whether the company, Velox Express, Inc., had actually misclassified the drivers who provided services to Velox and its customers.  Applying the Board’s new test for IC status as set forth in its January 25, 2019 decision in SuperShuttle DFW, which was the subject of our blog post that day, the majority of the NLRB concluded that the Velox couriers were employees and not ICs under the NLRA’s test for IC status.

In concluding that the couriers were misclassified, the Board majority found the following factors supported employee status:  Velox’s drivers must personally service pre-established routes in which they had no proprietary interest and must service those routes during certain specific time periods on designated days with no discretion to determine when and how long they work;  they received flat fees over which they had no input or control; they had to request time off from Velox when they did not wish to work a scheduled day; and they had to follow detailed procedures and respond to all Velox communications or be subject to disciplinary fines.

The “Stand-Alone” Issue

After finding the couriers were statutory employees under the NLRA, the Board addressed the following question, which was posed by the Board 18 months ago when it issued a Notice and Invitation to File Briefs:  “Under what circumstances, if any, should the Board deem an employer’s act of misclassifying employees as independent contractors a violation of Section 8(a)(1) of the Act?”

In addition to the briefs of the parties and the General Counsel of the NLRB, over a dozen amicus curiae briefs were filed, including from the AFL-CIO and Teamsters, on the one hand, and the American Trucking Association and the Chamber of Commerce of the United States, on the other hand.

In finding that an employer’s classification of workers as ICs and its “mere communication to its workers that they are classified as independent contractors” does not violate the NLRA, the Board majority first addressed Section 8(c) of the Act, the so-called “free speech” section, which provides: “The expressing of any views, argument, or opinion, or the dissemination thereof, whether in written, printed, graphic, or visual form, shall not constitute or be evidence of an unfair labor practice . . . , if such expression contains no threat of reprisal or force or promise of benefit.”  It concluded that when an employer decides to classify its workers as independent contractors, it forms a legal opinion regarding the status of those workers and “its communication of that legal opinion to its workers is privileged by Section 8(c) of the Act . . . .”

Notably, the NLRB majority concluded that even if a company is wrong in its view that certain workers are ICs and is determined to have misclassified the workers, “erroneously communicating to workers that they are independent contractors does not, in and of itself, contain any ‘threat of reprisal or force or promise of benefit.”

As a policy matter, the Board majority noted that “[i]ndependent-contractor determinations are difficult and complicated enough when only considering the Act, but the Act is not the only relevant law.” It added: “An employer must consider numerous Federal, State, and local laws and regulations that apply a number of different standards for determining independent-contractor status. Unsurprisingly, employers struggle to navigate this legal maze. Further, in classifying its workers as independent contractors, an employer may be correct under certain other laws but wrong under the Act—which is all the more reason why it would be unfair to hold that merely communicating that classification is unlawful.”

The Remedy

The final issue addressed by the Board majority was the appropriate remedy for the unfair labor practice it found that Velox had committed.  The majority opinion, in a lengthy footnote, declined to order Velox to reclassify the workers as employees, finding that such a remedy only should be considered where the posting of a notice – the standard NLRB remedy – is insufficient, and there was no reason to believe that a notice would not dissipate the unlawful discharge of the driver.

The Dissent

In Member McFerran’s dissent, she focused on what she referred to as the “chilling effect” of misclassification, arguing that the IC agreement that declared each driver to be an IC “implied that drivers had no rights under the Act,” which she regarded as unlawful.  She also viewed Section 8(c)’s free speech provisions as inapplicable because, in her view, the communication of IC status to the drivers was not a “legal opinion” and itself restrained, coerced, and interfered with the drivers’ rights under the NLRA.  Finally, Member McFerran asserted that because Velox committed an unfair labor practice by terminating a driver for engaging in protected activities, it is necessary for Velox to inform the other drivers that they are not ICs but rather employees entitled to rights protected by the NLRA.

Analysis and Takeaways

This issue – whether the act of misclassifying workers as ICs is itself an unfair labor practice – was the subject of a prior blog post on this site.  On August 30, 2016, we commented on an “Advice Memorandum” issued by the General Counsel of the NLRB, an Obama appointee, who stated:  “Although the Board has never held that an employer’s misclassification of statutory employees as independent contractors in itself violates Section 8(a)(1), there are several lines of Board decisions that support such a finding.”  However, when we closely examined those NLRB decisions, we found that they all required what we referred to at the time as “misclassification-plus” – an unfair labor practice added to misclassification.  That issue is at the core of this case, and Member McFerran has essentially adopted the position of the former General Counsel.

The Board majority, though, essentially has adopted a “misclassification-plus” approach, but in its mind the “plus” needs to be “super-plus” – an unfair labor practice that applies not to a single worker but to the entire group of misclassified employees.  As noted above, the Board majority favorably cited to existing NLRB cases which held that companies will violate the NLRA if they seek to reclassify workers from employees to ICs to avoid unionization.

The lesson for businesses based on an IC model or that engage a considerable number of ICs is to avoid the consequences and risks now faced by Velox.  While it likely Velox had a good faith belief that its classification of drivers as ICs was valid, at least one federal agency has now found its classification was unlawful, which makes it a target for unionization and/or a class action lawsuit for a wage and hour or other employment law violation.

How can companies minimize these types of risks?

One way by which an increasing number of businesses have elevated their level of IC compliance is through a process such as IC Diagnostics™, which provides companies with a customized means to restructure, re-document, and re-implement their IC relationships to minimize IC misclassification exposure without changing their business model. Had a company like Velox undertaken this type of process, the likelihood of it having to defend itself before the NLRB or risking unionization or being the subject of a class action would have been substantially reduced.

Written by Richard Reibstein

Posted in IC Compliance

July 2019 Independent Contractor Misclassification and Compliance News Update

We are often asked, what industries are impacted by independent contractor misclassification?  While IC misclassification claims are most prevalent in the construction, transportation, and gig economy businesses, there are few, if any, industries that are immune from IC misclassification allegations.  This past month alone we report on class and collective actions alleging that workers have been misclassified as ICs in such widely disparate industries as:

  • medical coding
  • interscholastic sports
  • oil and gas
  • mental health counseling and
  • transportation.

In other monthly news updates this year, we have reported on cases affecting the following industries:

  • adult entertainment
  • cleaning
  • logistics
  • medical technicians and physicians
  • food distribution
  • marketing
  • cell phone sales
  • insurance
  • financial services
  • retail sales
  • security
  • convenience stores
  • cable television
  • dentistry
  • airport shuttle and
  • referral services.

All totaled, we have reported in this legal blog on IC misclassification lawsuits and regulatory audits and investigations affecting more than 100 industries.  Some of those industries include non-profits and governmental agencies.

Regardless of the industry affected, companies that are best equipped to defend themselves in IC misclassification class and collective actions and regulatory audits and proceedings are those that have an enhanced level of compliance with IC laws before being challenged.  Many sophisticated companies engaging a substantial number of ICs or are built on IC business models have elevated their IC compliance by using a process such as IC Diagnostics™.  This process typically involves some degree of restructuring, re-documenting, and/or re-implementing of a company’s independent contractor relationships in a customized and sustainable manner without altering the company’s business model or key operational practices. A process of this nature might have otherwise insulated some of the companies reported below from having to defend themselves in these IC misclassification lawsuits.

In the Courts (6 cases)

LEADING MEDICAL CODING COMPANY TO PAY $1.5 MILLION TO SETTLE INDEPENDENT CONTRACTOR MISCLASSIFICATION CLASS ACTION IN UTAH.  Aviacode, Inc., a leader in outsourced medical coding expertise, has agreed to pay $1.5 million to past and current coders to settle an IC misclassification class and collective action brought in federal court in Utah.  The named plaintiffs alleged that Aviacode violated the Fair Labor Standards Act and the Utah Payment of Wages Act, failed to pay the coders for all hours worked, including overtime, and did not reimburse them for business expenses, as a result of their misclassification as independent contractors and not employees.  According to the complaint, the company exerted “substantial control” over the coders by requiring them, among other things, to comply with specific coding guidelines; meet the company’s turnaround time requirements; maintain 95% coding accuracy measured by the company’s standards; maintain required certifications; complete the company’s required training; and agree to the company’s policies, including confidentiality, nondisclosure and non-solicitation. The complaint in this case further alleged that the coders were subject to the fee rate set by the company, did not bear any risk of loss, had little investment in the business, and were not engaged in an occupation or business distinct from the company’s. The filing seeking court approval of the settlement provided, “[a]lthough Class Counsel calculated potential damages of up to $8 million in a best-case-scenario analysis assuming favorable outcomes on all disputed issues of liability and damages at trial, the recovery of $1.525 million in this Settlement is a significant win for the Class given the financial uncertainties Defendant is facing combined with the uncertainties in the outcomes of the disputed legal and factual issues”.  Hazel v. Aviacode, Inc., No. 2:17-cv-01065 (D. Utah July 1, 2019).

HIGH SCHOOL ATHLETIC ASSOCIATION SETTLES IC MISCLASSIFICATION CASE WITH SPORTS REFEREES IN PENNSYLVANIA.  An interscholastic sports association has settled an independent contractor misclassification class and collective action with sports referees in a case that has received widespread attention and varying prior results before the National Labor Relations Board and the courts.  The Pennsylvania Interscholastic Athletic Association‎ (PIAA), a non-profit corporation whose primary purpose is to promote uniformity in their ‎interscholastic athletic competitions among its 1,611 member schools in Pennsylvania, agreed to pay $262,500 in settlement of the lawsuit, which alleged that PIAA had violated the minimum wage and overtime compensation provisions of the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act due to the misclassification of the referees as independent contractors and not employees. According to the complaint, “every aspect of the Class Members’ jobs are controlled and determined by PIAA, down to their uniforms worn and locations they stand on the field during sporting events.”  This case was settled shortly after the U.S. Court of Appeals for the District of Columbia Circuit denied enforcement of a decision by the ‎NLRB holding that high school lacrosse referees were employees covered by the ‎National Labor Relations Act; the appellate court instead concluded that the referees are independent contractors and thereby exempt from the protections of the NLRA, as we discussed in our blog post of July 8, 2019.‎  Ruslavage v. PIAA, No. 2:17-cv-01598 (W. D. Pa. July 4, 2019).

OIL AND GAS FLOWBACK OPERATORS GRANTED CLASS ACTION STATUS IN IC MISCLASSIFICATION LAWSUIT AGAINST WELL MONITORING SERVICES FIRM.  A North Dakota federal court has granted a motion for conditional certification of overtime claims brought under the federal Fair Labor Standards Act and North Dakota state wage laws by flowback operator on behalf of himself and those similarly situated against KRH, Inc., a Montana company providing oil and gas well monitoring services to energy companies in North Dakota and elsewhere in the U.S.  The oil and gas workers alleged that KRH misclassified them as independent contractors and not employees because they were paid a non-negotiable flat daily rate set by the company without overtime compensation; were subject to supervision, discipline, and discharge by the company; and were required to seek permission to take time off, undergo safety training instructing them how to perform their work, follow the rules and order of work set by the company, and attend company meetings. In granting conditional certification, the court found that the named plaintiff presented evidence in the form of declarations from himself and another flowback operator “establishing a colorable basis that [the company’s] policy of classifying flowback workers and/or flow testers as independent contractors inflicted a common injury on the putative class by wrongly denying them overtime compensation.” Eastep v. KRH Inc., No. 1:19-cv-004 (D. N.D. July 9, 2019).

NEW JERSEY DRIVERS WERE MISCLASSIFIED AS IC’S AND MAY HAVE BEEN SUBJECT TO IMPROPER WAGE DEDUCTIONS.  A New Jersey appellate court has affirmed a lower court’s determination that trucking company, V.M. Trucking, LLC and related entities have misclassified truckers as independent contractors and not employees under the New Jersey Wage Payment Law.  Under that law, IC status is determined under the so-called “ABC test,” which requires the company to establish all three prongs of the test in order to validate its classification of the truckers as ICs. According to the class action complaint, the company violated the state’s Wage Payment Law by misclassifying drivers who provided transportation services to the company’s customers as independent contractors and deducting monies from their paychecks for payment for truck leases, insurance, and membership dues, in accordance with the terms of their independent contractor agreements. The lower court concluded that the drivers were employees because the company failed to establish any of the three prongs of the ABC test, but nonetheless concluded that the company did not violate the Wage Payment Law by making deductions from the trucker’s compensation.  On appeal, the Appellate Division affirmed that the drivers were employees and not independent contractors, but found that the facts were in dispute as to whether the deductions were properly authorized by the drivers under applicable New Jersey law.  Accordingly, the appellate court remanded the case back to the lower court. Morales v. V.M. Trucking, LLC, No. A-2898-16T4 (Super. Ct. App. Div. July 9, 2019).

PSYCHOLOGICAL COUNSELORS PROPERLY CLASSIFIED AS IC’S.  The Pennsylvania Commonwealth Court found that psychological counselors who provided services to clients referred by Pathways Counseling Services, LLC had been properly classified as independent contractors, applying the state’s two-prong AB test. Pathways has contracts with insurance companies to provide referrals for counseling, the costs of which are covered by insurance. The insurers do not contract directly with the individual psychologists or counseling practices; Pathways contracts with the counselors and provides them with referrals from the insurers. The counselors, in turn, are paid through Pathways with funds from the insurers for the counseling services provided to their insureds. In exchange for referrals, office space, telephone/fax service, and billing services provided by Pathways to the counselors, Pathways retains a percentage between 30-40% of the fees it receives on behalf of each counselor.

In reversing an assessment of unemployment taxes against Pathways by the Pennsylvania Department of Labor and Industry, the court determined that Pathways had met Prong A because the therapists operated free of direction and control by Pathways. Specifically, the counselors set their own rates of compensation and work schedules; have the right to accept or reject engagements; and obtain their own professional licenses and liability insurance.  In addition, no taxes were withheld by Pathways; Pathways provided no training, meetings, or tools to the therapists; counselors were not subject to monitoring or review by Pathways; and the requirement that services had to be provided at Pathways’ offices was imposed by the insurer, not Pathways. The court also found that Pathways satisfied Prong B, which requires a showing that the counselors were customarily engaged in an independently established trade, occupation, profession, or business. The court found that “professionals contracting with referral services to obtain clients, and who hold themselves out as providing their professional services to those who want them, are generally viewed as customarily engaged in an independent trade or profession”.  Likewise, the court stated, “one who practices in a ‘free-standing’ profession and whose arrangement with a referral service is ‘non-exclusive’ is ‘not compelled to look only to a single employer,’ and thus satisfies the second prong”.  Pathways Counseling Services, LLC v. Commonwealth of Pennsylvania, Dep’t of Labor & Industry, No. 1332 C.D. 2018 (Comm. Ct. Penn. July 12, 2019)

NINTH CIRCUIT WITHDRAWS OPINION THAT DYNAMEX SHOULD BE APPLIED RETROACTIVELY; REFERS ISSUE TO CALIFORNIA SUPREME COURT.  The U.S. Court of Appeals for the Ninth Circuit has withdrawn its prior decision to apply Dynamex retroactively in an independent contractor misclassification case and places the question of retroactivity squarely before the California Supreme Court. As discussed more fully in our prior blog post of June 10, 2019, the U.S. Court of Appeals for the Ninth Circuit had held that the California Supreme Court’s decision in Dynamex applied retroactively to an 11-year class action lawsuit brought against a nationwide janitorial cleaning business, Jan-Pro International Franchising, Inc. by franchisees who claimed they were misclassified as independent contractors. The Dynamex decision, which post-dated the district court’s decision in Jan-Pro, adopted a strict form of the “ABC test” for determining whether workers are independent contractors or employees for claims brought under the state’s wage orders. The Dynamex test makes it far more difficult for businesses to classify workers as independent contractors in California than had been the case for decades. The Ninth Circuit had vacated a federal district court’s grant of summary judgment dismissing the complaint brought by California cleaning franchisees and remanded the case back to the district court to apply the new California ABC test to the franchisees’ claims. The Ninth Circuit’s Order withdrawing its May 2, 2019 Jan-Pro decision states, “A revised disposition and an order certifying to the California Supreme Court the question of whether Dynamex … applies retroactively will be filed in due course.” Vazquez v. Jan-Pro Franchising International, Inc., No. 17-16096 (9th Cir. May 2, 2019 and July 22, 2019).

Administrative and Regulatory Initiatives (2 matters)

NEW JERSEY MISCLASSIFICATION TASK FORCE ISSUES FIRST REPORT WITH 16 RECOMMENDATIONS TO CURTAIL IC MISCLASSIFICATION.  On July 9, 2019, the New Jersey Misclassification Task Force issues its first Report including 16 regulatory and legislative recommendations to combat independent contractor misclassification. The Task Force, created by an Executive Order issued by Governor Phil Murphy on May 3, 2018, includes representatives from the New Jersey Labor, Treasury, and Law Departments as well as five other state agencies. As more fully discussed in our blog post of July 9, 2019, the Task Force Report estimated that in 2018 alone, over 12,000 workers in New Jersey were misclassified as independent contractors, franchisees, or limited liability companies or simply paid “off the books.”  Additionally, the Report found that in 2018, over $462 million in wages in New Jersey were unreported and more than $13 million was lost in tax contributions to the state for unemployment, disability, and family leave insurance.  Based on those findings, the Task Force issued 16 recommendations that, if carried out, will likely make New Jersey one of the most challenging states in the nation for companies that operate on an IC business model or make substantial use of ICs to supplement their workforce. The stated objective of the recommendations is to “reduce and eliminate non-compliance and create deterrence by strengthening tools for education, enforcement, and compliance assistance.”

Some of the 16 recommendations by the Task Force are targeted education and public outreach, including a hotline, a webpage, and an email address to report misclassification; strengthening state contracts by including requirements such as mandating  state government contractors to affirm their awareness of the law regarding classification of workers; interagency coordinated enforcement; data sharing; cooperation with neighboring states; cross-training, which includes training all agencies and licensing boards in the state on New Jersey’s version of the ABC test; criminal referrals of intentional wrongdoing to the Attorney General; using existing workers’ compensation laws to bolster misclassification enforcement; passing legislation allowing the state Division of Taxation to share tax information on with the Attorney General, State Auditor, and other state agencies; and enacting laws that increase fines and penalties to $5,000 per misclassified worker for a first offense and $10,000 for a second offense, as well as increasing the penalties for record-keeping violations. The Task Force Report and its recommendations, however, are written in a manner that fails to recognize the important role that legitimate ICs play in the nation’s (and New Jersey’s) economy.  The Report relies on academic studies by a professor who authored articles on IC misclassification, but it fails to acknowledge that, in his prior role as Administrator of the Wage and Hour Division of the U.S. Department of Labor during the Obama Administration, the author stated in unequivocal terms that “the use of independent contractors [is] not inherently illegal [and] legitimate independent contractors are an important part of our economy.”

THREE MID-ATLANTIC STATES TO SHARE INFORMATION TO COMBAT IC MISCLASSIFICATION.  The Labor Departments of Delaware, New Jersey and Pennsylvania have signed a reciprocal agreement to better protect workers and employees from independent contractor misclassification through information sharing and coordination of enforcement efforts. According to a News Release issued on July 10, 2019 by the New Jersey Department of Labor and Workforce Development (NJDOL), the agreement provides for strategic data sharing, interstate case referrals, and joint investigations that will impact wage claim investigations, worker misclassification, workplace safety efforts, and other labor-related compliance matters. NJDOL Commissioner Robert Asaro-Angelo stated, “All three states have been tasked with protecting our workers, and looking out for those businesses who play by the rules. This new cooperation agreement will ensure that those crossing state lines to do business are in full compliance with our laws, and employees are taking home every single penny they have earned.” Similar statements were made by the Delaware Secretary of Labor Cerron Cade and Pennsylvania Department of Labor and Industry Secretary Jerry Oleksiak.

Written by Richard Reibstein

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Posted in IC Compliance

New Jersey Getting Tougher on Independent Contractor Misclassification: Task Force Issues Report With 16 Regulatory and Legislative Recommendations

Earlier today, July 9, the New Jersey Misclassification Task Force issued its first Report. The Task Force, created by an Executive Order issued by Governor Phil Murphy on May 3, 2018, includes representatives from the New Jersey Labor, Treasury, and Law Departments as well as five other state agencies. The Task Force Report estimated that in 2018 alone, over 12,000 workers in New Jersey were misclassified as independent contractors (ICs), franchisees, or limited liability companies or simply paid “off the books.”  It also found that over $462 million in wages were unreported in 2018, and more than $13 million was lost in tax contributions to the state for unemployment, disability, and family leave insurance.  Based on those findings, the Task Force issued 16 recommendations for regulatory and legislative initiatives that, if carried out, will likely make New Jersey one of the most challenging states in the nation for companies that operate on an IC business model or make substantial use of ICs to supplement their workforce. These initiatives will propel more companies doing business in New Jersey through the use of ICs to elevate their level of compliance with the state’s IC laws, in a manner more fully discussed in the “Takeaways” below.

New Jersey is one of about two dozen states with a so-called “ABC” test for determining IC status, a test regarded as worker-friendly.  But unlike most state ABC tests, which typically apply only to unemployment and workers’ compensation benefits, New Jersey’s ABC test also applies to wage payment, overtime, and minimum wage claims.  In that regard, it is similar in scope to the stringent ABC test adopted in a few other states including Massachusetts, California, and Illinois.

The Task Force Recommendations

The stated objective of the recommendations issued by the Misclassification Task Force is to “reduce and eliminate non-compliance and create deterrence by strengthening tools for education, enforcement, and compliance assistance.” The 16 recommendations by the Task Force are summarized below:

  1. Targeted education and public outreach, including a hotline, a webpage, and an email address to report misclassification.
  2. Strengthening state contracts by including requirements such as mandating  state government contractors to affirm their awareness of the law regarding classification of workers.
  3. Interagency coordinated enforcement, including workplace investigations and joint enforcement sweeps.
  4. Data sharing, including sharing of information about companies found to have misclassified workers as ICs, subject to confidentiality laws.
  5. Cooperation with neighboring states, such as entering into agreements for data sharing of wage collection records and audit results.
  6. Cross-training, which includes training all agencies and licensing boards in the state on New Jersey’s version of the ABC test.
  7. Criminal referrals of intentional wrongdoing to the Attorney General as head of the Department of Law.
  8. Utilizing existing workers’ compensation laws to bolster misclassification enforcement, including imposing fines on companies that misclassify workers as ICs and, as a result, fail to provide workers’ compensation for individuals who should have been covered under state law.
  9. Using the Department of Labor’s power to revoke or suspend licenses issued by the state to companies that require licenses to operate in New Jersey and are found to have misclassified workers as ICs.
  10. Enacting legislation to require employers and the state Department of Labor to create notices that companies must post informing workers of the legal prohibition against IC misclassification.
  11. Use of stop-work orders for repeat violators in the construction business in New Jersey.
  12. Passing legislation allowing the state Division of Taxation to share tax information on with the Attorney General, State Auditor, and other state agencies.
  13. Enactment of a bill that imposes joint and several liability on third party companies that contract with organizations which have unsatisfied final judgments requiring them to pay wages, remit payroll taxes, or provide workers’ compensation insurance.
  14. Imposition of personal liability on a company’s owners, directors, officers, and managing agents whose businesses are found to have engaged in IC misclassification, and the imposition of IC misclassification liability on successor entities.
  15. Requiring businesses found to have misclassified workers as ICs to pay to the state the costs of the investigatory and enforcement process including legal fees incurred by the state.
  16. Enacting laws that increase fines and penalties to $5,000 per misclassified worker for a first offense and $10,000 for a second offense, as well as increasing the penalties for record-keeping violations.

Analysis and Takeaways

The Task Force Report and its recommendations are written in a manner that fails to recognize the important role that legitimate ICs play in the nation’s (and New Jersey’s) economy.  The Report relies on academic studies by a professor who authored articles on IC misclassification, but it fails to acknowledge that, in his capacity as Administrator of the Wage and Hour Division of the U.S. Department of Labor during the prior Administration, the author stated in unequivocal terms that “the use of independent contractors [is] not inherently illegal [and] legitimate independent contractors are an important part of our economy.”

The Report also fails to mention that a 2015 study undertaken by the U.S. Government Accountability Office, entitled “Contingent Workforce: Size, Characteristics, Earnings, and Benefits,” found that 85.2% of independent contractors responded “No” to the question, “Would you prefer a different type of employment?” And when independent contractors were asked if they were satisfied with their jobs, 92% said they were satisfied, with 56.8% of ICs saying they were “very satisfied”.  In contrast, only 45.3% of full-time employees in traditional employment reported that they were “very satisfied” with their jobs.

Many workers reading reports about the Task Force Report or posters in workplaces around the state are likely to conclude that most ICs are misclassified and are dissatisfied with their type of work arrangement, when studies show just the opposite.

Similarly, many businesses that make substantial use of ICs or operate in New Jersey with an IC business model are likely to conclude, after reading the Task Force Report, that the government may have a pre-conceived view that most businesses engage in misclassification. Those companies may, and of course should, take steps to enhance their compliance with the IC laws in New Jersey (and with IC laws in any other states in which they operate).

Many businesses that are compliance-focused have utilized a process such as IC Diagnostics™, which enables them to restructure, re-document, and re-implement their IC relationships in a customized manner that maximizes compliance with applicable IC laws – without changing their business models. Companies using this type of process are not only able to minimize the likelihood of a legal challenge by government agencies, but also reduce the likelihood they will be subject to a class or collective action filed in court invoking a worker-friendly IC standard such as the ABC test in New Jersey.

Written by Richard Reibstein

Posted in IC Compliance

June 2019 Independent Contractor Misclassification and Compliance News Update

This past month was relatively uneventful in the area of independent contractor misclassification and compliance news, if one regards a $16.5 million settlement as unremarkable. But the amount of the settlements in IC misclassification cases appears to be increasing substantially.  This $16.5 million settlement involves a very large logistics company sued in a class and collective action by about 850 drivers.  What is  consequential about the settlement is not just its total sum but also the amounts to be paid individually to each of the drivers, averaging $14,000 per driver (with a high of $138,700).

While the total amount of this settlement is extraordinarily high for an IC misclassification case, it is not the highest we have seen. Last March, we reported on a $100 million settlement in an IC misclassification case involving 20,000 owner-operator drivers, with the average settlement about $5,000 per class member.  The settlement amount in this new case last month nearly triples that amount per driver.

Nonetheless, the $14,000 per class member award, while on the high side in terms of settlement payments per class member in IC misclassification cases brought by drivers, pales in comparison to the amount payable per class member in at least one non-driver case.  Last month, we reported on a settlement between an oil and natural gas exploration and production company and a group of 82 oilfield technicians who received on average $40,000 per class member.

The large amounts of the settlements in IC misclassification cases leads to the conclusion that plaintiffs’ class action lawyers are pursuing these types of cases with very high-dollar potential exposure.

Because of these types of developments, an increasing number of companies that operate with an IC business model or use numerous ICs to supplement their workforce are resorting to a process such as IC Diagnostics™ to enhance their compliance with IC laws – even in states like California and Massachusetts where the tests for IC status are the most challenging.  The evolution of IC litigation also explains why companies, as part of an IC Diagnostics process, are upgrading their IC agreements’ arbitration clauses in a state-of-the-art manner to ensure that their class action waivers in those provisions are as effective as possible and provide them with maximum protection from costly class and collective action lawsuits.

In the Courts (5 cases)

LOGISTICS COMPANY’S $16.5 MILLION SETTLEMENT WITH DRIVERS ALLEGING IC MISCLASSIFICATION IS APPROVED BY COURT.  A California federal district court has preliminarily approved a $16.5 million settlement of collective and class action claims brought by delivery drivers against XPO Logistics, Inc., one of the largest transportation and logistics companies in the world.  The lawsuit alleged that XPO violated the federal Fair Labor Standards Act and California state wage and hour laws by misclassifying them as independent contractors and not employees. According to the drivers, XPO provides delivery services to retail merchants like Home Depot, Lowe’s, Macy’s, Ethan Allen, and Pottery Barn; those companies contract with XPO to provide the delivery and basic installation services attendant to newly purchased appliances and removal of old appliances from their customers’ homes in California. The drivers claimed, among other things, that XPO reserved the rights to determine the locations where the drivers pick up and drop off merchandise assigned to them; control the order and timing of deliveries; require the drivers to wear XPO uniforms and follow customer service standards; determine the year and branding of the vehicles driven by the drivers; unilaterally determine the fees to be received by the drivers; and require the drivers to follow specific methods regarding how to move and install appliances and interact with customers.

The settlement, reached on behalf of approximately 847 current and former delivery drivers, includes a fund of almost $12 million in awards, which consisted of approximately $70 for each day worked by a class member plus an additional $2.50/workday to those who opted in to the FLSA collective action.  Estimated payments to drivers range from as low as $70 to as high as $138,700, with an average of approximately $14,000 per driver. The settlement further provides $4,125,000 (25% of the gross settlement fund) for plaintiffs’ counsel’s fees and expenses, a $24,000 PAGA allocation, settlement administration costs not to exceed $50,000, and up to $102,500 for class representative service awards. A hearing to consider whether the settlement should be granted final approval by the court is scheduled for October 16, 2019. Carter v. XPO Logistics, Inc., No. 3:16-cv-01231 (N.D. Cal. June 27, 2019).‎

$6.6 MILLION SETTLEMENT WITH EXOTIC DANCERS UPHELD BY FEDERAL COURT OF APPEALS.  Over the objections of four class members, the U.S. Court of Appeals for the Sixth Circuit has upheld a federal district court’s approval of a $6.6 million settlement reached in a worker misclassification suit between class of 28,177 exotic dancers and Déjà Vu dance clubs. In their nationwide class and collective action complaint, the dancers claimed that Déjà Vu Consulting, its affiliate dance clubs, and the clubs’ owner violated the federal Fair Labor Standards Act and Michigan wage and hour laws by “intentionally misclassif[ying] class members as independent contractors, refus[ing] to pay minimum wage, unlawfully requir[ing] employees to split gratuities, and unlawfully  deduct[ing] employee wages through rents, fines and penalties.”  The settlement was approved by the federal district court in June 2017 and provided for $1 million towards a general settlement fund; $4.5 million towards a secondary pool of settlement remuneration; $900,000 in attorneys’ fees; and $100,000 to resolve all Private Attorneys General Act claims against Déjà Vu clubs in California.  The settlement also included a requirement that every club provide its current dancers with an Entertainer Assessment Form to determine whether the dancer should be classified as an employee or independent contractor.

Four dancers objected to the settlement. The district court overruled their objections, and the Sixth Circuit (with one of the three judges dissenting in part) affirmed the district court’s decision. In so doing, the Sixth Circuit concluded that, contrary to the objections, the district did not abuse its discretion in finding that the tangible benefits afforded to class members as a result of the settlement agreement outweigh the value of the volatile claims that the Dancers released. Cabrera v. Déjà Vu, No. 17-1801 (6th Cir. June 3, 2019).                                                                                                            

D.C. CIRCUIT FINDS REFEREES IN PENNSYLVANIA ARE INDEPENDENT CONTRACTORS, NOT EMPLOYEES, UNDER THE NLRA.  The U.S. Court of Appeals for the District of Columbia Circuit reversed a decision by the National Labor Relations Board that high school lacrosse referees were employees covered by the National Labor Relations Act.  Instead, the court found the referees to be independent contractors and thereby exempt from the protections of the NLRA. As discussed more fully in our blog post of August 7, 2017, the NLRB had issued a decision that lacrosse officials providing referee services for the Pennsylvania Interscholastic Athletic Association were employees under the NLRA 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, sought to represent a unit of 140 officials that officiated at junior and senior high schools lacrosse games within the greater Pittsburgh area.

After the PIAA refused to bargain with the Union, it petitioned the D.C. Circuit for review of the Board’s holding. On appeal, the D.C. Circuit reversed the Board on the grounds that it “failed to adequately account for the strength of the two aspects of this relationship that most strongly favor independent-contractor status: the few times on which PIAA actually pays the officials [as compared to the many games for which the officials are paid by the schools] and the short duration of their employment.”  The court further identified other factors that supported IC status, although not as strongly as the payment and duration factors – the skill and expertise needed to be a lacrosse referee, the fact that the referees had to provide their own equipment, and the parties’ understanding of their relationship as ICs as evidenced by the PIAA Constitution and Bylaws, the Officials’ Manual, and registration/application materials. A few factors were identified by the D.C. Circuit as favoring employment status, but found that they were “not as strongly as those that point to classifying them as independent contractors.” Those factors included that the referees were part of PIAA’s regular business, and there was a “mixed bag” of control and supervision. Ultimately, in finding the referees to be ICs, the court stated, “Indeed, ‘almost every state court decision involving an amateur sports official’s employment status’ has come to the same conclusion.” Pennsylvania Interscholastic Athletic Association, Inc. v. NLRB, No. 18-1037 (D.C. Cir. June 14, 2019).

TWO NEW JERSEY APPELLATE COURT DECISIONS DIFFER ON COMPELLING ARBITRATION OF INTERSTATE TRANSPORTATION DRIVERS’ IC MISCLASSIFICATION CLAIMS.  Two decisions by appellate courts in New Jersey reached different results as to whether delivery drivers can be compelled to arbitrate their claims for IC misclassification. In the first case, plaintiff drivers sued in state court alleging that Strategic Delivery Solutions, a freight broker and forwarder that arranges for the local delivery of pharmaceutical products and general merchandise to its customers, violated the New Jersey Wage and Hour Law and Wage Payment Law due to their misclassification as independent contractors and not employees. Each driver signed an Independent Vendor Agreement that provided that the law of the state of the residence of the vendor would govern the agreement – in this instance, New Jersey law. The agreement also contained an arbitration provision and class action waiver. SDS filed a motion to dismiss the complaint and to compel arbitration of the claims on an individual basis, not as a class. The drivers, relying on the recent U.S. Supreme Court decision in New Prime, Inc. v. Oliviera, which extended the reach of the FAA transportation exemption to independent contractor agreements as well as employment agreements, argued that they were exempt from arbitration, as was the driver in the New Prime case under the interstate transportation worker arbitration exemption. The trial court granted SDS’s motion to dismiss and found the drivers’ agreement to arbitrate and the class action waivers were clear, unambiguous, valid and enforceable. Following an appeal by the drivers, the New Jersey Appellate Division vacated the order of dismissal and reinstated the complaint, concluding that the trial court had failed to determine whether the drivers were engaged in transportation services in interstate commerce and therefore exempt under the FAA. In addition to remanding that issue to the lower court, the appeals court included another wrinkle: it held that even if the trial court found that the drivers were engaged in interstate commerce and were exempt under the FAA, they would still be subject to the New Jersey Arbitration Act (“NJAA”) which does not include an exemption for interstate transportation workers.

A day after the SDS decision, another panel of the New Jersey Appellate Division reviewed a similar case alleging IC misclassification by delivery drivers who delivered Health Express Corporations’ pharmaceutical products in and around New Jersey. The drivers had signed contracts with the company that included an arbitration clause providing that the agreement was to be governed by the FAA. Prior to the issuance of the Supreme Court’s New Prime decision, the lower court has issued an order compelling arbitration. Following the issuance of New Prime, the Appellate Division granted the drivers permission to reinstate the appeal based on a change in the law. In reversing the lower court, the appeals court concluded that the drivers’ contract with the company constituted a “contract of employment” under the interstate transportation exemption to the FAA, stating: “Consequently, the FAA cannot govern the arbitration agreement, as contemplated by the parties. The inapplicability of the FAA to the parties’ arbitration agreement undermines the entire premise of their contract. Because the FAA cannot apply to the arbitration, as required by the parties, their arbitration agreement is unenforceable for lack of mutual assent.”

Unlike the SDS case, neither the company nor the panel of appellate judges addressed or mentioned the New Jersey Arbitration Act (“NJAA”), which would have required arbitration in this case. Thus, the conflict in rulings may be attributed to a difference in how the companies’ lawyers litigated the two cases. Colon v. Strategic Delivery Solutions, LLC, No. A-2378-17T4 (N.J. Super. Ct. App. Div. June 4, ‎‎2019); Arafa v. Health Express Corp., No. A-1862-17T3 (N.J. Super. Ct. App. Div. June 5, 2019).

Other Newsworthy Matters (2 items)

PRIVATE EQUITY FIRMS PROVIDED WITH GUIDANCE AS TO HOW TO CONDUCT DUE DILIGENCE OF A PORTFOLIO COMPANY’S POTENTIAL FOR IC MISCLASSIFICATION LIABILITY.  Private equity firms were the focus of an article entitled “How to Evaluate Portfolio Companies for Independent Contractor Misclassification Liability,” published June 18, 2019 in Private Equity Law Reports. The publisher of this legal blog together with Matthew Kane, General Counsel and Chief Compliance Officer of Z Capital Group, LLC, wrote an article as guest authors for PELR discussing the array of IC misclassification claims that have been brought as class and collective action lawsuits, the materiality of the risks, the abundance of multi-million dollar settlements in these types of cases, how to value the potential risk of IC misclassification liability, and what post-closing steps can be taken generally to minimize such risk. Our blog post of July 1, 2019 provides an elaboration of the steps that private equity firms can encourage their new portfolio companies to undertake to maximize compliance with IC laws.

PUBLISHER QUOTED IN INSURANCE PUBLICATION DEALING WITH INSURANCE AGENT EXEMPTION TO NEW CALIFORNIA BILL CODIFYING THE DYNAMEX TEST FOR IC STATUS.  The Financial Times’ June 12, 2019 publication of Life Annuity Specialist included an article entitled, “Insurers Watch as California Moves to Tighten Independent Contractor Rules.”  The article by Arthur D. Postal reports on the insurance industry’s interest in Assembly Bill 5, a bill that has passed the California Assembly and has now moved to the California Senate. As discussed more fully in our blog post of June 10, 2019, AB5 proposes to codify the California Supreme Court’s decision in the Dynamex case creating an ABC test for purposes of classifying workers as employees or ICs.  The newly-enunciated ABC test made it far more challenging for businesses to classify workers as independent contractors in California. With regard to the insurance industry, AB5 currently includes an exemption for licensed insurance agents, among other categories of workers listed as exempt. Without that exclusion for licensed insurance agents, Alan Levin of Locke Lord LLP stated in the article that the proposed legislation would potentially “shake the foundations” of how insurance policies are distributed and serviced in the state. The publisher of this blog was also quoted as follows: “This is the most important issue facing the insurance industry at this time. Insurance companies cannot be complacent and count on past decisions to apply to them, especially when class action lawyers are targeting the industry and continuing to bring misclassification cases.” He added that the full implication of the bill is unclear, because the “B” prong of the ABC test has not been litigated in California.

Written by Richard Reibstein

 

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Posted in IC Compliance