November 2018 Independent Contractor Misclassification and Compliance News Update  

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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How to Effectively Draft Arbitration Clauses with Class Action Waivers in Independent Contractor Agreements

Even before the U.S. Supreme Court’s decision last May in Epic Systems Corp., which upheld mandatory arbitration agreements, courts have been busy enforcing or striking down arbitration provisions. Many of those decisions were not based primarily on the law but rather on the language in the arbitration agreement drafted by the company. A well drafted arbitration clause with class action waiver will generally mean, with few exceptions, that a class or collective action cannot be maintained and that each plaintiff’s and class member’s case must be individually litigated. A poorly drafted one will result in the company having to defend itself in a class action because the language deployed by the business did not take full advantage of the current state of the law. Some arbitration provisions drafted by businesses can even needlessly impose contractual obligations or undesirable state laws upon the company.

Plaintiffs’ class action lawyers regularly challenge arbitration clauses with class action waivers; they regard them as a huge impediment to their ability to vindicate worker rights including claims asserted by workers who allege they have been misclassified as independent contractors. In contrast, businesses using arbitration agreements view them as a means to curtail the misuse of class actions used to exact costly settlements in circumstances where only a few members of the class truly feel aggrieved.

Whether an arbitration agreement in an independent contractor or employment setting will bar a class action depends as much of the wording in the arbitration clause as the applicable law, which is in flux and continues to evolve. That reality strongly suggests that existing arbitration clauses used in independent contractor agreements should be reexamined and updated periodically in tandem with the company’s effort to enhance its compliance with laws governing the use of independent contractors.

Three recent cases provide insights into how companies can create good arbitration clauses in independent contractor agreements.

Berryman v. Newalta Environmental Services, Inc.

Berryman, a solids control technician, was referred by a staffing company, Smith Management and Consulting LLC, to its client Newalta, a company in the oil and gas industry, to provide technical services. The technician filed a proposed class action lawsuit against Newalta Environmental, claiming that Newalta misclassified him and other similarly situated workers as independent contractors and failed to pay them overtime in violation of the federal Fair Labor Standards Act and the Pennsylvania Minimum Wage Act. Newalta filed a motion to compel arbitration based on the arbitration clause in the agreement between Smith Management and Berryman—an agreement to which Newalta was not a party.

A federal court judge in Pennsylvania was presented with the question of whether the language in that contract not only provided for arbitration of all covered disputes between Berryman and Smith Management, but also whether such disputes brought by Berryman against clients of Smith Management, including Newalta, were subject to the arbitration clause in the Smith Management/Berryman contract.

In its decision dated November 1, 2018, the court began its lengthy analysis by noting that the law of Texas, not Pennsylvania, applied, because that was the choice of law provision in the independent contractor contract signed by Berryman with Smith Management. The judge noted that under Texas law, there is a presumption against conferring third-party beneficiary status on non-contracting parties such as Newalta. The court further noted that Texas law requires a court to review the entire contract to determine if an arbitration clause confers third party beneficiary status upon a client of Smith Management. The court held that Newalta was a third-party beneficiary of the arbitration provision because of the language in the contract between Berryman and Smith Consulting that stated: “Arbitration shall apply to any and all Covered Claims, whether asserted by Contractor [Berryman] against the Company [Smith Consulting] and/or . . . any Company Client.” No. 18-cv-793 (W.D. Pa. Nov. 1, 2018) (emphasis added).

What can a company learn from the court’s decision in Berryman? Make sure the arbitration clause specifically designates as third-party beneficiaries all of the clients and customers of the business.

If that had been the case in Newalta, there would have been little or no issue that the client/customer, Newalta, would have been able to make use of the arbitration clause as well, all but eliminating the risk of an adverse decision under state law court as to whether the presumption against third party beneficiary status could be overcome. Thus, for staffing and referral companies as well as businesses that engage independent contractors to provide services to key customers, the larger lesson from Berryman is simple: ensure your independent contractor agreements are updated and enhanced to benefit your customers and clients as well as yourselves.

In addition, third party beneficiary language in arbitration agreements (as well as employment agreements) can and should also cover other possible defendants as well as customers and clients.

Lamps Plus Inc. v. Varela

The U.S. Supreme Court heard oral argument in late October 2018 in this case, which presented the Court with the issue of whether class arbitration is permitted when the parties’ agreement contains an arbitration clause which is silent as to whether the parties authorized the arbitrator to conduct a class arbitration. The U.S. Court of Appeals for the Ninth Circuit had concluded that because of the absence of any language in the agreement pertaining to class arbitration, the contract was ambiguous, and under California contract interpretation principles, any ambiguities should be construed against the drafter of the agreement, which was Lamps Plus, the party seeking to avoid class arbitration.

One of the Justices’ remarks during oral argument was of particular note. Justice Ginsburg questioned the value of a ruling in favor of the plaintiff seeking class arbitration. She projected that if the Court rules in favor of the plaintiff and orders class arbitration in the case, lawyers across the U.S. will simply add a provision in arbitration agreements that class arbitrations are not authorized by the parties. Justice Ginsburg asked the following rhetorical question of the plaintiff’s lawyer: “So, if let’s say you’re right, we’re not doing very much, are we, because contracts will specifically say that class action [arbitration] is waived?” No. 17-988 (Oct. 29, 2018).

What lesson can we learn from Lamps Plus? Any arbitration agreement with a class action waiver should specifically recite that the arbitrator is not given authority to conduct class arbitration. If a company’s arbitration agreement does not already include that language, it should certainly be included in future versions.

Portillo v. National Freight Inc.

A New Jersey federal district court was presented this past June with the question of what state’s law applied in an independent contractor misclassification class action brought by truckers against a logistics/transportation company, National Freight, Inc. (NFI). The plaintiffs, truckers from Pennsylvania and Rhode Island, made deliveries to Trader Joe’s stores throughout many East Coast states on behalf of NFI and claimed that NFI was liable for statutory wage/hour violations, unjust enrichment, and payment of their expenses as a result of allegedly being misclassified as independent contractors. The plaintiffs initially sued under Massachusetts law, but sought to amend their claims to be governed by New Jersey law, which was the choice of law cited in the parties’ contracts. The defendants objected to the motion to amend, even though NFI selected New Jersey law in the contracts it had drafted and tendered to the truckers to sign, and urged the court to apply Pennsylvania law, which contains a more favorable test for independent contractor status than the standard in New Jersey.

The court examined the language contained in the Independent Contractor Operating Agreement and the Lessor and Lease Operating Agreement entered between the parties. The judge noted that the agreements had a choice-of-law provision designating New Jersey as the relevant and applicable body of law. The court then undertook a further analysis using “the most significant relationship” test and determined that New Jersey law did, in fact, apply to the claims brought by the truckers against NFI. The court found conflicting factors supporting usage of Pennsylvania law, which NFI favored, and New Jersey law, which the truckers favored. In reaching its conclusion, the court placed emphasis on the fact that NFI was the more sophisticated party and had drafted the contracts in which NFI elected to be bound by Jersey law, at least with regard to contract claims. No. 15-cv-7908 (D.N.J. June 11, 2018).

Businesses that use independent contractors can learn a lot from the National Freight case: avoid selecting a particular state’s law as the parties’ contractual “choice of law” if that state’s law contains an unfavorable test for independent contractor status. A few states’ independent contractor laws are particularly “employee friendly”; thus, a company’s choice of law selection in an independent contractor agreement should generally steer clear of those states. New Jersey is one such state. Its law became tilted toward employee status only in 2015, when the New Jersey Supreme Court issued its decision in Hargrove v. Sleepy’s, LLC, as we noted in our blog post analyzing that decision.

National Freight also teaches businesses that have had independent contractor agreements in place for many years to keep tabs on changing laws and to modify any choice of law provision in such agreements when there has been an unfavorable change in the independent contractor laws of the state selected as the choice of law.

In addition, the National Freight decision raises the question, why didn’t NFI have an arbitration clause with class action waiver in its independent contractor agreement with the truckers? Had it included such a provision, the case may well have been litigated in arbitration on an individual trucker basis and not in court as a class action.

So, what state law should businesses select in their arbitration agreements? That is a challenging question. Some state laws are less favorable toward independent contractor status than others; those should generally be avoided. In any event, plaintiffs’ class action lawyers generally argue that a choice of law provision cannot override the law of the state of residence of the worker classified as an independent contractor or the law where the worker provided services under the independent contractor agreement.

Additional Pointers in Drafting Effective Arbitration Provisions in Independent Contractor Agreements

There are dozens of other tips that can be used in creating an effective arbitration clause with a class and collective action waiver. Here are some more that will dramatically improve the enforceability and effectiveness of such provisions in independent contractor agreements – as well as freestanding arbitration agreements in the employment context.

  • Make sure the arbitration clauses can withstand unconscionability arguments.

Plaintiffs’ class action lawyers in independent contractor misclassification and employment cases not only routinely challenge the language of arbitration agreements with class action waivers but also frequently argue that certain types of arbitration provisions are unconscionable under applicable state law.

Unconscionability arguments can derive from the high arbitrator fees imposed upon the workers treated as independent contractors, the inconvenience of a forum selection clause that designates a distant location where all disputes are to be resolved, a limitation on statutory or common law remedies, restrictions on discovery, and a host of other provisions in arbitration clauses that are overly favorable to companies.

For example, only last week an appellate court ruled that an arbitration agreement was unconscionable under state law where it required the claimant to pay half of the costs of arbitration, included a limitation on relief, and contained an overly broad confidentiality provision that may impair the claimant’s ability to interview witnesses outside of the formal discovery process. Ramos v. Superior Court of San Francisco County, No. A153390 (Cal. Ct. of App. Nov. 2, 2018).

  • Don’t bury arbitration clauses deep within independent contractor agreements.

Class action lawyers also argue that some arbitration provisions are non-consensual where employers “bury” arbitration provisions deep within independent contractor agreements without informing the worker that the agreement contains a section providing for arbitration of certain disputes.

  • Place jury trial waivers in all capital letters, or bold type, or larger size typeface, and to state that the arbitration clause means that disputes will not be decided by a court or jury.

Some state laws or judicial decisions require waivers of jury trials to be conspicuous. But even if there is no such law or court case in a particular state, conspicuousness of a jury trial waiver is generally regarded as a best practice.

  • Draft a state-of-the-art “delegation” of authority clause.

The so-called “delegation” clause, which delegates authority to arbitrators to decide certain issues, has been the subject of considerable litigation recently. Certain disputes regarding the scope, application, or enforceability of an arbitration clause or the class action waiver itself will be decided by a court absent a delegation clause that direct such matters to be decided by an arbitrator.

  • Ensure your arbitration provisions are up to date, taking into account the newest court cases in this area of the law.

A review of court cases over the past six months indicates that plaintiffs’ class action lawyers are becoming more creative in their efforts to try to circumvent arbitration agreements with class action waivers. Oftentimes, the arbitration provisions were drafted several years ago and are no longer state-of-the-art.

The law in this specialized legal field has changed, and likely will continue to evolve. Businesses need to continually keep tabs on new case developments. Don’t rest on arbitration agreements drafted years ago; instead, companies should modify their arbitration agreements to avoid legal pitfalls that could result in a class action remaining in court.

  • Try to keep abreast of new laws affecting arbitration of wage and hour disputes.

For example, one or more state legislatures have proposed bills similar to California’s Private Attorneys General Act (PAGA), which has been held to be immune from arbitration agreements. Keep an eye out not only for new judicial decisions and trends, but also for new legislative developments.

A Final Key IC Compliance Takeaway

Businesses that use independent contractors should not regard arbitration clauses with class and collective action waivers as a panacea or protection from IC misclassification exposure. 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 a defense on the merits of a claim that workers were improperly classified as independent contractors and are allegedly owed overtime, minimum wages, employee benefits, expense reimbursements, or other workplace benefits available to employees.

Further, arbitration agreements with class action waivers are not binding on governmental regulators; therefore, they are wholly ineffective at forestalling federal and state regulatory agencies from conducting audits or initiating and maintaining enforcement proceedings under employment and independent contractor laws. The importance of enhancing compliance with employment and independent contractor laws – and not relying simply on an arbitration clause with a class action waiver – cannot be overstated.

More and more companies have sought to enhance their compliance with independent contractor laws through a process such as IC Diagnostics™. This type of process evaluates a company’s level of compliance and, to the extent feasible, restructures, re-documents, and re-implements the independent contractor relationship, without altering the business model – all in an effort to minimize independent contractor misclassification exposure by means of a customizable and sustainable solution.

Written by Richard Reibstein

 

This blog post is based on an article published in the Daily Labor Report (November 9, 2018). It is reproduced with permission from Daily Labor Report Copyright 2018 by The Bloomberg Bureau of National Affairs, Inc. (800.372.1033) www.bna.com.

Posted in IC Compliance

October 2018 Independent Contractor Misclassification and Compliance News Update

October was an eventful month for legal developments in the area of independent contractor misclassification and compliance.  In one of the nine cases reported below, the U.S. Department of Labor continues to aggressively pursue an independent contractor misclassification claim against a franchisor in the cleaning contracting industry.  In that case, the U.S. Court of Appeals for the Tenth Circuit held that the Secretary of Labor may proceed with his claim under the Fair Labor Standards Act against a cleaning franchisor, alleging that it failed to maintain proper employment records for each of the franchisees, including those that incorporated at the direction of the cleaning franchisor. This decision confirms Labor Secretary Acosta’s commitment to pursue claims against companies he believes are violating federal wage and hour laws by misclassifying workers as independent contractors. As we indicated in a blog post shortly after President Trump’s election, “Companies using ICs to supplement their workforce or render services to their customers should not view Donald Trump’s election as an opportunity to misclassify employees as ICs.”

Other cases of significance last month include a claim against a public entity, the Metropolitan Transportation Authority of Harris County (Texas), for independent contractor misclassification. The county agency contracted with third parties to provide services to the public, and those third-party contractors in turn used ICs to provide the services – but instead of suing the contractors, the service providers sued the county authority. Even though the lawsuit was ordered to arbitration, it should send a message to public entities that they are not immune from class action independent contractor misclassification claims.

Another important case last month involved a decision by a California intermediate appellate court that last April’s decision in Dynamex, which we referred to at the time as a “bombshell for California businesses,” would not be applied to claims that are referred to in that state as “non-wage order” disputes, including claims for overtime and wrongful termination. We observed in a blog post issued shortly after Dynamex that “the decision in [that case] addressed only the test to be applied for determining employee status under wage orders promulgated by the Industrial Welfare Commissioner,” and did not by its terms cover non-wage order claims, including those for expense reimbursement under California Labor Code Section 2802. Fortunately for businesses using independent contractors in California, the two types of claims that often generate the highest damages exposure (overtime and Section 2802 expense reimbursement claims) should continue to be governed by the prior and more balanced test for independent contractor status, as set forth in the Borello case. This schizophrenic framework now in place in California for determining independent contractor status may prompt the state legislature to pass legislation adopting the longstanding Borello test for IC status in some if not all industries.

These cases and the others reported below, including a settlement for $4.75 million to be paid by a logistics company to delivery drivers, illustrate that IC misclassification claims have not diminished.  Indeed, they appear to be on the rise, as more and more companies elect to deploy business models reliant on independent contractors. Many of those companies continue to resort to a process such as IC Diagnostics™ to maximize their compliance with IC laws and minimize their IC misclassification risk.  By enhancing their IC compliance, such companies reduce the likelihood that they will be forced to defend legal challenges aimed at their use of ICs or, if subjected to a lawsuit or administrative proceeding alleging misclassification, increase the likelihood that they will prevail or, at worst, settle for a relatively modest amount.

In the Courts (9 cases)

U.S. LABOR DEPARTMENT MAY MAINTAIN FLSA LAWSUIT AGAINST LARGE CLEANING FRANCHISOR; FACT THAT SOME FRANCHISEES ARE LLC’S DOES NOT PRECLUDE THEIR COVERAGE UNDER FEDERAL WAGE AND HOUR LAW.  The U.S. Secretary of Labor can pursue his independent contractor/employee misclassification case under the FLSA against Jani-King of Oklahoma, Inc., a janitorial company providing cleaning services through franchisees in the Oklahoma City area, according to the U.S. Court of Appeals for the Tenth Circuit.  Jani-King engages individuals, pairs of related individuals, or small corporate entities that are allegedly composed predominantly or entirely of single individuals or pairs of related individuals to perform janitorial work on its behalf through franchise arrangements. Jani-King recently began to require all of those individuals to form corporate entities, which would then become the parties to franchise agreements.  Jani-King contended that those corporate entities are not covered by the FLSA, and a federal district court initially agreed, dismissing the original complaint without prejudice and permitting the Secretary of Labor to file an amended complaint. In response to yet another motion to dismiss by Jani-King, the lower court granted the motion, concluding the amended complaint “ignores corporate forms,” does not plausibly suggest the FLSA applies to all janitorial cleaners, and does not distinguish between those cleaners who are artificial entities and those who are individuals.

On appeal, the Tenth Circuit reversed, agreeing with the Secretary’s argument that individuals who form corporate entities and enter franchise agreements required by Jani-King yet who  personally performed the work on behalf of Jani-King can be Jani-King’s employees under law. According to the appeals court, “in determining whether an individual is an employee under the FLSA, the inquiry is not limited to the contractual terminology between the parties or the way they choose to describe the working relationship.” It further stated, “the fact that these individuals are franchisees or have formed corporations does not end the inquiry;” rather, one must still apply the six-factor economic realities test. Finally, the Tenth Circuit rejected Jani-King’s contention that the Secretary failed to plead sufficient facts regarding each individual franchise owner.  It concluded there was no need for the Secretary to do so at this stage of the proceedings, where the specific act of wrongdoing in which Jani-King allegedly had engaged (violating record-keeping requirements) and the descriptive identity of those individuals or entities to which those requirements allegedly apply (janitorial cleaners who personally perform the cleaning) were sufficient to permit the case to proceed. Acosta v. Jani-King of Okla., Inc., No. 17-6179 (10th Cir. Oct. 3, 2018).

CALIFORNIA INTERMEDIATE APPELLATE COURT CONFIRMS THAT DYNAMEX IS LIMITED TO CALIFORNIA WAGE ORDER CLAIMS ONLY.  Applying the blockbuster April 30, 2018 decision by the California Supreme Court in Dynamex, a California appeals court reversed a lower court’s issuance of summary judgment in favor of a taxi driver who had sued a taxi company, Border Transportation Group, Inc., for allegedly misclassifying him as an IC.  The appellate court held that the Dynamex decision, which the California Supreme Court applied to certain claims arising under wage orders issued by the Industrial Welfare Commission, required the appellate court to reverse the grant of summary judgment in favor of the taxi company with regard to the wage order claims (for unpaid wages, minimum wage, meal and rest periods, itemized wage statements, and unfair competition based on such violations) covered by Dynamex. It reached that conclusion because the taxi company had not produced any evidence regarding prong “C” of the new Dynamex ABC test – that the driver was customarily engaged in an independently established trade, occupation or business.” The appellate court stated, “Defendants presented no evidence in their moving papers that [the driver] in fact provided services for other entities ‘independently’ of his relationship with [the company].” It was not enough, according to the court, that the company only suggested that the driver was “free to offer his services as an entrepreneur to anyone he chose.”

The appellate court, however, affirmed the grant of summary judgment on the non-wage order claims (for overtime, wrongful termination, and waiting time penalties, and an unfair competition claim based thereon). It ruled that the test for IC status for those claims was not changed by Dynamex.  In addition, the court in a footnote briefly addressed the issue of retroactive application of Dynamex, finding that the defendant taxi company “implicitly assume[d] retroactivity, and we therefore do not address that issue today.” Garcia v. Border Transportation Group, LLC, No. D072521 (Cal. Ct. App. 4th Dist. Oct. 22, 2018).

CLASS ACTION BY VAN DRIVERS FOR TEXAS PUBLIC TRANSIT AGENCY ALLEGING IC MISCLASSIFICATION MUST BE ARBITRATED. A Texas federal district court granted a motion to compel arbitration of a proposed collective action brought by a Houston public transportation driver alleging the Metropolitan Transit Authority of Harris County misclassified him and other van drivers as independent contractors.  The van driver brought the lawsuit under the FLSA, claiming that he and other van drivers were owed overtime compensation for their services to the MetroLift program, which provides affordable transportation services to elderly and disabled passengers. The plaintiff entered into an independent contractor agreement with Yellow Cab, one of the private companies that engages drivers for MetroLift. That contract contained an arbitration clause. The arbitration clause in the County’s agreement with Yellow Cab and in the Yellow Cab agreement with the van driver contained virtually identical arbitration provisions “for the resolution of all disputes and claims arising out of or in any way relating to this Services Agreement, whether in tort or in any other cause of action.”

In granting the County’s motion to compel arbitration, the court concluded that the County, a non-signatory to the drivers’ agreements with Yellow Cab, obligated the van driver to arbitrate any claim he had arising out of his agreement with Yellow Cab, including this lawsuit against the County.  The court based its holding on the doctrine of “direct benefits estoppel,” which generally requires that a signatory arbitrate claims that derive from that party’s contract containing an arbitration clause.  As the court noted, “a party cannot both ‘knowingly exploit the agreement containing the arbitration clause’ and avoid the arbitration clause’s requirements.” In this case, the court found that the plaintiff received direct benefits from the Yellow Cab agreement with the County, which provided him with a MetroLift route, insurance that qualified him to drive for the MetroLift service, and MetroLift-compliant equipment.  Although the van driver asserted that his claims arose under the FLSA and not his agreement with Yellow Cab or Yellow Cab’s agreement with the County, the court found that to prove his claims against County or Yellow Cab under the FLSA, the driver necessarily relies on the agreements, each of which contained arbitration provisions. Randle v. Metropolitan Transit Authority of Harris County, No. H-18-1770 (S.D. Tex. Oct. 1, 2018).

ENERGY AND PETROCHEMICAL SERVICES COMPANY IS NOT ENTITLED TO SUMMARY JUDGMENT IN IC MISCLASSIFICATION COLLECTIVE ACTION BY CONSULTING “COACHES”.  An Oklahoma federal court has denied the summary judgment motion of Check-6, Inc., a company in the business of providing consulting services in the energy, manufacturing, mining, petrochemical and transportation industries brought against it by consulting “coaches” who provided services at the work sites of Check-6’s clients. A collective 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 and not employees.  In its decision, the court stated that the Court of Appeals for the Tenth Circuit has “repeatedly denied summary judgment motions where there remained disputed facts material to the classification of workers as employees or independent contractors.” Applying the six-factor “economic realities” test, the court found that a reasonable trier of fact could find that the facts supported a determination that the coaches were employees and not independent contractors; therefore, the court held, summary judgment must be denied. Specifically, the court found that the evidence was in dispute as to four of the six factors:  the degree of control over the coaches; their opportunity for profit and loss; their investment in the their individual business; and the permanence of the parties’ working relationship. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N.D. Okla. Oct. 18, 2018).

LOGISTICS COMPANY AGREES TO SETTLE IC MISCLASSIFICATION CLASS ACTION FOR $4.75 MILLION.  Logistics company, TFI International Inc., has reached a proposed settlement with a class of 367 delivery drivers who delivered parcels to TFI customers throughout the U.S. The parties now seek approval of the proposed settlement resolving this 6-year-old litigation in which the drivers alleged that TFI violated the FLSA and California state laws by failing to pay overtime compensation and reimbursement for mileage due to its alleged misclassification of the drivers as independent contractors and not employees. The drivers claimed that they operated under the managerial control of the company with no material deviations in job duties or descriptions from location to location; the company deducted a percentage of the drivers’ pay from each paycheck to pay the drivers’ estimated federal and self-employment taxes; they had to arrive at the warehouse one to two hours early to sort packages for their routes; they were assigned routes and were provided with route sheets containing suggested stops; they were not able to negotiate the rates for their routes; and they had to wear company uniforms. If approved, the settlement provides that the participating drivers will receive $1.85 million, with individual awards based on the driver’s number of weeks of service, while $2.9 million is earmarked for attorneys’ fees. Flores v. TFI International Inc., No. 3:12-cv-05790 (N.D. Cal. Oct. 26, 2018).

CELL PHONE SALES COMPANY SETTLES CLASS ACTION LAWSUIT FOR IC MISCLASSIFICATION BY OUTSIDE SALES REPRESENTATIVES.  A California federal court has approved a settlement of a proposed class and collective action by sales representatives against cell phone marketing company, Open Door Marketing, LLC, and others, alleging wage and hour violations of the FLSA and various California labor laws due to the sales reps’ alleged misclassification as independent contractors. The sales reps claimed they worked for Defendants to promote free cell phones and wireless service plans for low-income individuals who meet the plans’ requirements. The complaint alleged that the defendants exercised direction and control over the sales reps by requiring they send a picture of themselves at work each morning to prove their attendance at the required time; use a script when providing services; regularly attend meetings; attend pre-employment training; wear a uniform; use company-provided tablets; and advise their “supervisors” how many customers they signed up each day. The settlement includes: $82,000 to the opt-in plaintiffs; $8,000 to the two named plaintiffs as enhancement awards; $10,000 in penalties under the California Private Attorneys General Act; and $25,000 to the plaintiffs’ lawyers as attorneys’ fees. The proposed settlement was found by the court to be fair and reasonable because a significant amount of discovery had been taken thereby enabling the parties to obtain an adequate appreciation of the merits of the case; and a significant risk existed that litigation might result in a lesser recovery or no recovery at all, especially since the defendants claimed that the sales reps were “outside salespersons” who were exempt from the FLSA and state wage and hour laws. Jennings v. Open Door Mktg., LLC, No. 15-cv-04080-KAW (N.D. Cal. Oct. 3, 2018).

ALABAMA PACKAGE DELIVERY COURIERS’ CLASS ACTION LAWSUIT FOR IC MISCLASSIFICATION IS DISMISSED FOR FAILURE TO PLEAD SPECIFIC VIOLATIONS OF THE FLSA.  Couriers suing Express Courier International, Inc., a courier and package delivery company, for minimum wage and overtime compensation violations under the FLSA due to their alleged misclassification as independent contractors, may not maintain their lawsuit according to a decision by an Alabama federal court granting the company’s motion to dismiss – but they may seek to amend their complaint. Over 200 couriers, each of whom signed owner-operator agreements, picked up parcels from the company’s warehouses and delivered them to the company’s customers using the couriers’ own personal vehicles. In granting the company’s motion, the court found that the couriers did not identify which of them received less than the minimum wage; the complaint referred only to “some” couriers whose “pay fell below the minimum wages”; the couriers failed to allege that any courier received less than minimum wage or worked more than 40 hours in a week without overtime pay; and they only alleged that the company “generally” did not pay overtime compensation and had a “policy” not to pay overtime if any courier worked more than 40 hours per week. Bascomb v. Express Courier Int’l, Inc., No. 2:18-CV-00064-KOB (N.D. Ala. Oct. 5, 2018).

DOOR DASH COURIERS MUST ARBITRATE CLASS ACTION CLAIMS IN IC MISCLASSIFICATION LAWSUIT. A California federal court has compelled arbitration of a proposed misclassification class action lawsuit brought by a delivery driver on behalf of himself and other delivery drivers against DoorDash, Inc., a technology company that facilitates food delivery through its on-line platform that connects customers, restaurants and delivery drivers. The complaint asserted claims for failure to reimburse for business expenses; failure to pay at least the minimum wage; willful misclassification as independent contractors and not employees; inaccurate pay statements; and unlawful business practices under California state wage and hour laws. The named plaintiff driver had signed an agreement with DoorDash that included an arbitration provision with a class action waiver and 30-day opt-out terms, and he did not choose to opt out. Shortly before the named plaintiff filed his proposed class action, a driver opted out of DoorDash’s arbitration agreement.  DoorDash subsequently filed its motion to compel arbitration, asserting that the plaintiff present his claims in an individual arbitration.

The plaintiff then filed a motion to amend his complaint to add the driver who opted out as a plaintiff. Relying on a single case from another jurisdiction, the named plaintiff argued that “drivers who agreed to binding arbitration may now be ‘deemed’ to have opted out of arbitration because a single driver opted out of arbitration . . . .” The court rejected that argument, which was based on a claim under Georgia’s contract law and its class action statutes, neither of which the court found to be applicable in this case. The court also rejected the plaintiff’s argument that the driver’s contract was exempt from coverage under the federal transportation worker exemption, instead finding that because the plaintiff failed to allege that he ever crossed state lines as part of his services for DoorDash, he did not satisfy the terms of the exemption requiring that he engaged in interstate commerce. Rather, under the Federal Arbitration Act, the court found there was a valid agreement to arbitrate, and that the agreement encompassed the dispute at issue. Magana v. DoorDash, Inc., No. 18-CV-03395-PJH (N.D. Cal. Oct. 22, 2018).

TRUCK DRIVER’S CORPORATE ENTITY DOES NOT INSULATE FREIGHT FORWARDER FROM IC MISCLASSIFICATION CLASS ACTION CLAIM.  A truck driver’s class action complaint against freight forwarding company, Interglobo North America, Inc., has been revived after a New Jersey intermediate appeals court held that the lower court improperly granted Interglobo’s motion to dismiss the lawsuit based solely on the pleadings. The court concluded that the lower court improperly considered only the contract terms of the pertinent independent contractor agreement and failed to apply the three-part “ABC” test enunciated in January 2015 by the New Jersey Supreme Court in Hargrove v. Sleepy’s, LLC to determine independent contractor or employee status. In his complaint, the driver alleged that the company failed to pay overtime compensation to himself and other members of the proposed class in violation of the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law due to their alleged misclassification as independent contractors. The driver had entered into a contractor lease agreement with the company through his own Florida corporation, J&K Trucking Solutions, Inc. The contract identified J&K as an independent delivery operator with its own vehicle, equipment, and employees; provided that J&K must pay all expenses in the operation of “his business” including rent, wages, overhead, maintenance, and repair/insurance of vehicles; and stated that J&K had “the sole and complete discretion to hire, regulate, discipline or discharge all personnel engaged by the Contractor to carry out the Contractor’s obligations . . . .”

According to the complaint, Interglobo controlled the manner and means in which duties were performed; the driver’s work was performed from Interglobo’s New Jersey location; the driver was required to wear an Interglobo uniform; driving directions were issued by Interglobo; the driver was subject to discipline and termination by Interglobo; funds were withdrawn from the driver’s pay to reimburse Interglobo for truck insurance and gas; and the driver routinely worked in excess of 40 hours per week without receiving overtime pay. On appeal, the driver argued that the court failed to consider anything other than the contract terms when it should have applied the ABC test. The appeals court agreed and concluded: “To consider only the agreement, and not the totality of the facts surrounding the parties’ relationship, would be to place form over substance.”  The court added: “We are obliged to look behind contractual language to the actual situation – the status in which parties are placed by relationship that exists between them.” The court concluded its decision with the following remark: “It is rare for a court to determine a worker’s status on summary judgment after discovery is completed. It is even more unlikely that the issue can be resolved on the pleadings alone.”  Veras v. Interglobo North America Inc., No. A-3313-16T1 (N.J. App. Div. Oct. 26, 2018).

Written by Richard Reibstein

Compiled by Janet Barsky

Your comments are invited.

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

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Posted in IC Compliance

September 2018 Independent Contractor Misclassification and Compliance News Update

Independent contractor misclassification lawsuits swept across a swath of businesses last month, affecting companies in both the gig economy and traditional industries.  Discussed below are class action and individual plaintiff cases involving on-demand dog walkers, community living support specialists, oil field workers, cable installers, truckers, ride-share drivers, and exotic dancers.

We also report on two significant cases involving a large ride-sharing technology company: one where it succeeded in compelling arbitration of class members’ IC misclassification claims, and the other where it has been sued not by workers claiming misclassification but by another business – one that does not use ICs – in a class action lawsuit for unfair competition.

What does this mean for businesses?  Because there are plaintiffs’ class action lawyers willing to invest their time and resources in filing and maintaining class action lawsuits against companies in virtually every industry that use business models dependent on the use of ICs, companies should consider doing the following: enhancing their level of compliance with IC laws, and entering into arbitration agreements containing class action waivers with workers classified as independent contractors.  The most prudent companies do both, many starting with a process such as IC Diagnostics™ to restructure, re-document, and re-implement their IC relationships, and then adding or updating an arbitration clause with a class action waiver that is drafted in a manner likely to be enforced by the courts.

In the Courts (8 cases)

ON DEMAND DOG WALKING COMPANY TO PAY $1.1 MILLION TO SETTLE IC MISCLASSIFICATION CLASS ACTION.  A class of dog walkers seeks a federal court’s preliminary approval of a class and collective action settlement in an IC misclassification suit alleging violations of the federal Fair Labor Standards Act (FLSA) and the California Labor Code.  The dog walkers sued Wag Labs Inc., an on-demand company that dog owners use to engage dog walkers through a mobile app.  The proposed settlement provides that Wag Labs agrees to pay $1,050,000 into a Settlement Fund plus an additional $75,000 for Settlement Administration Costs.  $50,000 of the settlement will be paid in settlement of a claim under the  California Private Attorneys General Act (PAGA); under that law, 75% ($37,500) would be paid to the State of California via payment to the Labor and Workforce Development Agency and the remaining 25% ($12,500) would go to the class members as part of their Net Settlement Amount. Additionally, attorneys’ fees would be set at $375,000 – one-third of the total of the Settlement Fund plus Settlement Administration Costs. The motion for settlement approval notes that “were this litigation to proceed, [Wag Labs] would invoke individual arbitration agreements to bar a vast majority of settlement class members from participating or attack Plaintiff’s typicality…, leaving only a handful of class members.” Darsey v. Wag Labs, Inc., No. 2:17-cv-07014 (C. D. Cal. Sept. 27, 2018).

KENTUCKY DISABILITY SUPPORT SERVICES COMPANY SETTLES IC MISCLASSIFICATION CASE.  A Kentucky federal court has been asked a second time to approve a proposed settlement reached between a community living support specialist and A Brighter Future, Inc., which provides support services to individuals with disabilities.  In this FLSA case, the plaintiff alleged that the company’s failure to provide him with overtime compensation was a result of his classification as an independent contractor and not an employee. The first request for approval of the proposed settlement was denied because the parties had not provided sufficient information to allow the court to determine whether the agreement represented a fair and reasonable resolution of a bona fide dispute. The parties subsequently provided additional information including the plaintiff’s allegations that he consistently worked 75-80 hours per week for the company; his job required specialized knowledge, but not much skill or initiative; provided the plaintiff with materials; he had no control over profit or loss; he received hourly compensation; and his supervisors exercised extensive control over his work hours and job duties. The company asserted that the plaintiff was an independent contractor because he signed an IC agreement; his relationship was non-exclusive; he could choose as many or as few hours as he wished; and his work was not supervised. The proposed settlement would award the plaintiff $33,000, of which nearly $16,000 is to be earmarked for attorneys’ fees. Although the court has now concluded that the parties established sufficiently that the plaintiff’s “true employment status” constitutes a bona fide dispute, it ruled that it still could not approve the proposed settlement because plaintiff’s counsel had not provided the court with any documentation in support of the request for fees and costs, nor had she provided any information regarding the “reasonable hourly rate” for an attorney of her experience and practice area. The plaintiff was afforded yet another opportunity to provide the missing information and to request that the settlement then be approved.  Southerland v. A Brighter Future, Inc., No. 6:17-268-DCR (E. D. Ky. Sept. 19, 2018).

DRILLING/WELL SITE CONSULTANT FILES IC MISCLASSIFICATION CLASS ACTION IN PENNSYLVANIA. A drilling consultant/well site supervisor has filed a proposed class and collective action on behalf of himself and other oil field personnel against EdgeMarc Energy Holdings, LLC, an oil and natural gas company primarily doing business in Pennsylvania, Ohio, and West Virginia. The lawsuit is aimed at recovering unpaid overtime compensation under the FLSA and wage and hour laws of Pennsylvania and Ohio that the plaintiff claims is due because he and the other oil field workers were classified as independent contractors and not employees.  This lawsuit is one of an increasing number of IC misclassification challenges that have recently been brought against companies in the oil and gas industry, as we have previously reported in a blog post earlier this year.

According to the complaint, the workers operate oilfield machinery; perform manual labor and work long hours in the field, and are paid a day-rate with no overtime compensation.  The complaint further alleged, among other things, that the daily activities of the workers were mostly governed by EdgeMarc’s or its clients’ standardized plans, procedures and checklists; virtually every job function was pre-determined by EdgeMarc or its clients, including what tools to use, what data to compile, the schedule of work and related work duties; and the workers were prohibited from varying their job duties outside pre-determined parameters. The plaintiff also alleges that no substantial investment was required of him; that EdgeMarc or the company it contracted with exercised control over all aspects of the plaintiff’s job, including the hours and locations of work, tools used, and rates of pay received; he did not incur operating expenses like rent, payroll, marketing and insurance; he was prohibited from working other jobs for other companies; and his work required little skill, training or initiative.  Larsen v. EdgeMarc Energy Holdings LLC, No. 2:18-cv-01221 (W. D. Pa. Sept. 13, 2018).

CABLE INSTALLATION COMPANY UNABLE TO FORESTALL CLASS AND COLLECTIVE CERTIFICATION IN IC MISCLASSIFICATION LAWSUIT COVERING INSTALLERS IN TEN STATES. IC misclassification class and collective actions have been prevalent in the cable installation industry, and we have reported on many of them in past blog posts.  Last month, a Missouri federal district court granted the plaintiff’s motion for conditional certification in a proposed nationwide FLSA collective action brought by a cable installation technician alleging that she and similarly situated cable installers in ten states were improperly classified as ICs and thereby denied overtime compensation by Communications Unlimited Inc. In reaching its decision to grant conditional certification, the district court concluded that the plaintiff’s assertions in her complaint based on personal knowledge, as well her submission of detailed declarations by five other installers, were enough to establish that the installers were all subject to a single decision, policy, or plan – the company’s decision to classify installers at all of its offices as independent contractors. Specifically, the declarations all provided that the installers were assigned 2-hour timeframes in which to complete work; required to maintain and report metrics to the company; required to wear “Communications Unlimited” uniform shirts; had to carry an ID badge; were provided with equipment; and were denied overtime compensation despite working more than forty hours a week. The installers who provided the declarations worked in seven of the ten states where the company provides installation services. Fair v. Communications Unlimited Inc., No. 4:17 CV 2391 RWS (E.D. Mo. Sept. 19, 2018).

CALIFORNIA TRUCKING ASSOCIATION LOSES EFFORT TO PREEMPT STATE LAW TEST FOR IC STATUS IN THAT STATE. The U.S. Court of Appeals for the Ninth Circuit has affirmed a district court’s ruling that a federal law does not preempt the common law test for independent contractor status in California.  The Ninth Circuit held that the Borello test used by the Labor Commissioner of the California Department of Industrial Relations to determine whether drivers providing trucking services for the California Trucking Association (“CTA”) had been properly classified as independent contractors is not preempted by the Federal Aviation Administration Authorization Act (“FAAAA”). The CTA had alleged that the Commissioner’s application of the Borello standard disrupted the contractual arrangements between owner-operator drivers and motor carriers, thereby causing inefficiencies in the transportation market and, hence, was inconsistent with Congress’s goal under the FAAAA of preventing states from undermining federal deregulation of interstate transportation.

The court explained that its task was “to discern on which side of the line the Borello standard falls: a forbidden law that significantly impacts a carrier’s prices, routes, or services; or, a permissible one that has only a tenuous, remote, or peripheral connection.” CTA argued that the FAAAA preempts the Borello test because use of that standard can replace freely bargained, efficiency-driven contract terms with a state’s policy judgment about what those terms ought to be with respect to the service providers who engage in interstate transportation. In rejecting CTA’s arguments, the court stated that even if there was “a line between the permissible enforcement of contractual terms and the preempted enforcement of normative policies, the line does not control when the contractual relationship is between a carrier and its workforce, and the impact is on the protections afforded that workforce.” Likewise, the court stated that, “At most, carriers will face modest increases in business costs, or will have to take the Borello standard and its impact on labor laws into account when arranging operations.” Finally, the court addressed the recent Dynamex decision by the California Supreme Court.  As noted in a number of our blog posts, over the past six months, the California Supreme Court in Dynamex concluded that its decades-old precedent in Borello would no longer be followed in decisions involving certain California Labor Code violations that were the subject of that appeal. The Ninth Circuit noted that the CTA only sought to preempt Borello, which continues to be applied by the Labor Commissioner to laws not addressed in the Dynamex decision. California Trucking Association v. Su, No. 17-55133 (9th Cir. Sept. 10, 2018).

NINTH CIRCUIT AGREES WITH RIDE-SHARING TECHNOLOGY COMPANY THAT ARBITRATION AGREEMENTS WITH CLASS ACTION WAIVERS ARE VALID.  In a decision affecting hundreds of thousands of drivers who claim that they were misclassified as ICs, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s denial of a number of motions filed by Uber Technologies, Inc. to compel arbitration in class actions brought against it by Uber drivers.  Current and former drivers have alleged violations of various state and federal statutes due to their alleged misclassification as independent contractors and not employees. Although the court had previously considered and reversed the district court’s orders denying Uber’s motion to compel arbitration in Mohamed v. Uber Technologies, Inc., the drivers offered additional arguments in this appeal why the arbitration agreements were unenforceable: first, that even if the arbitration agreements were otherwise enforceable, they are irrelevant because the lead plaintiffs in O’Connor (among the many cases consolidated in this appeal) constructively opted out of arbitration on behalf of the entire class; and second, the arbitration agreements are unenforceable because they contain class action waivers that violate the National Labor Relations Act. The court rejected both arguments.  It first ruled that nothing gave the lead plaintiffs in one of the class action lawsuits the authority to take any action on behalf of any other drivers.  It next ruled that the U.S. Supreme Court in Epic Systems Corp. v. Lewis found arbitration agreements with class action waivers to be enforceable. The court also concluded that because the arbitration agreements were enforceable, the district court’s class certification orders must be reversed. Other than PAGA claims, these misclassification claims now will have to litigated in arbitration in individual arbitration proceedings.  O’Connor v. Uber Technologies, Inc., Nos. 14-16078, 15-17420, 15-17532, 16-17475,  No. 15-15000,  16-15595; Yucesoy v. Uber Technologies, Inc., Nos. 15-17422, 15-17534, 16-15001; Mohamed v. Uber Technologies, Inc.,  Nos. 15-17533, 16- 15035; DelRio v. Uber Technologies, Inc., No. 15-17475 (9th Cir. Sept. 25, 2018).

EEOC PREVAILS IN CLASS ACTION ON BEHALF OF EXOTIC DANCERS ALLEGEDLY DISCRIMINATED AGAINST ON THE BASIS OF RACE WHO HAD BEEN CLASSIFIED AS IC’S.  Exotic dancers at Danny’s Downtown Cabaret, a Missouri gentlemen’s club, were found to be “employees,” and not independent contractors, and therefore  covered by Title VII of the federal Civil Rights Act protecting employees from workplace discrimination. This lawsuit was brought by the Equal Employment Opportunity Commission (EEOC) on behalf of a group of black female dancers to correct allegedly unlawful employment practices of the club based on race. In its motion for partial summary judgment regarding whether the dancers were independent contractors or employees, the EEOC prevailed under a test that assessed the extent to which the employee was economically dependent upon the business, i.e. “whether the individual is, as a matter of economic reality, in business for herself.” In granting the EEOC’s motion and concluding that the dancers were employees, the court relied on the following evidence: the club exercised significant control over the dancers, including establishing work schedules and implementing workplace rules such as fines for lateness; setting the amounts charged to customers for private dances; and approving the music used. The court noted that the club failed to provide any evidence of its alleged lack of control over the dancers. Equal Employment Opportunity Commission v. Danny’s Restaurant, LLC, No. 3:16-cv-00769 (S. D. Mo. Sept. 11, 2018).

NEW TYPE OF LEGAL CHALLENGE POSED TO COMPANIES WHO USE IC’S AS PART OF THEIR BUSINESS MODEL. A new type of independent contractor misclassification lawsuit was filed last month – a legal challenge by a business that does not use independent contractors accusing another business that uses them of violating state unfair competition laws. As discussed in our blog post of October 1, 2018, Diva Limousine, Ltd., a provider of livery services who classifies its drivers as employees, has sued Uber Technologies, Inc., the largest ride sharing technology company in the U.S., in federal court. The lawsuit was brought as a class action on behalf of an array of class members. The class action complaint alleges that Uber continues to misclassify the drivers as independent contractors when California law requires them to be paid minimum wage, overtime compensation and other wage/hour protections as employees, and that Uber uses those cost savings to price rides far below their true cost, which allegedly takes business and market share from competitors who are complying with the law by classifying its drivers as employees. It is expected that Uber will deny the allegations and vigorously defend the case, pointing to arbitration, administrative, and court decisions where it has succeeded in establishing that the drivers are ICs and not employees. Diva Limousine v. Uber Technologies Inc., No. 18-cv-05546 (N. D. Cal. Sept. 10, 2018).

Written by Richard Reibstein

Compiled by Janet Barsky

Your comments are invited.

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

INVITATION TO UPLOAD CONTENT: Readers may contribute to this repository of newsworthy matters by sending an e-mail to the publisher (through the About the Publisher page on this blog) with any recent:

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

New Type of Independent Contractor Misclassification Lawsuit: Business vs. Business

It was only a matter of time.  For many years, class action lawyers have filed thousands of lawsuits under wage / hour and other employment laws on behalf of individuals who allege they were employees who have been misclassified as independent contractors. Unions have likewise been prominently involved in challenging companies that use independent contractors, filing petitions with the NLRB seeking to unionize many such businesses. And state government agencies as well as the U.S. Department of Labor have commenced legal proceedings against companies using independent contractors or, like the IRS, subjected them to audits and investigations about whether they have misclassified those workers.

The newest type of legal challenge is by a business that doesn’t use independent contractors, accusing another business that does use them of violating state unfair competition laws.

The new lawsuit alleges unfair competition.  It was recently filed against the largest ride sharing technology company in a federal district court as a class action on behalf of an array of class members alleging violations of the California unfair competition laws.  The proposed class included all persons and entities who earned revenue through pre-arranged ground transportation services, including affiliates throughout the U.S. who obtained revenue for “non-shared” rides in California over the past four years. Diva Limousine, Ltd. v. Uber Technologies, Inc., No. 18-cv-05546 (N.D. Cal. Sept. 10, 2018).

The defendant has not yet responded to the complaint, but it is anticipated that a vigorous defense will be mounted.

Analysis

No state or federal law prohibits the use of independent contractors and, as we have noted in prior blog posts, even the Secretary of Labor and the Wage and Hour Administrator in the past Administration publicly commented that legitimate independent contractors are an important part of the nation’s economy.

While lawsuits between competitors under unfair competition laws are not uncommon, their emergence in the independent contractor realm is a notable development.  The thrust of these types of lawsuits follow the tenor of press releases issued by state officials about companies alleged to have violated employment and independent contractor laws by misclassifying employees as ICs.

Those press releases typically state that companies that misclassify workers as independent contractors unlawfully seek to avoid the higher costs of hiring employees (including payroll and unemployment taxes, workers’ compensation premiums, and state-mandated paid leave or disability benefits) and, by so doing, are “unfairly competing against law abiding companies” that treat as employees workers who provide comparable services.  We have regularly reported on these types of press releases, such as the one issued by the New Jersey Labor Commissioner in August 2018 and a similar one issued previously by the California Labor Commissioner in June 2018.

Some unfair competition laws require only modest pleading requirements in order to survive a motion to dismiss and minimal proof to survive a motion for summary judgment.  However, at a bare minimum such laws require an affirmative showing that the defendant violated certain laws.

Few of the thousands of independent contractor misclassification cases have been litigated to judgment; the overwhelming number of such cases have been settled or dismissed prior to trial – or remain mired in protracted litigation.  When settled, these types of cases almost invariably include a standard non-admission of liability clause and/or a prominent denial of wrongdoing.

Similarly, very few administrative proceedings initiated by regulatory agencies result in admissions by a company that it violated any law; while non-admission clauses are not as universal with administrative agencies as they are in private party litigation, they are rather commonplace.

Thus, this new type of lawsuit will likely require the plaintiff to prove a violation of law – something of a challenging undertaking to say the least, particularly where the issue of misclassification of employees as independent contractors is frequently a matter that is not typically decided on a motion for summary judgment, but rather only at trial.

Further, some companies who have had several lawsuits or administrative proceedings filed against them in the past have secured decisions in their favor in certain cases.  Thus, this unfair competition claim might not be litigated on a clean slate, but rather in the context where prior decisions in favor of a defendant may further complicate the plaintiff’s proof.

In addition, this area of the law dealing with independent contractor misclassification has been evolving and is in flux in many states. As we have discussed in a number of blog posts, the California Supreme Court recently changed the test for independent contractor status in its employee-friendly decision in Dynamex. That decision, which covers some, but not all, types of claims for independent contractor misclassification, undoubtedly prompted this new lawsuit; indeed, the complaint in this newly-filed case specifically referred to Dynamex and quoted a passage from that case. Presumably, the plaintiff’s class action lawyers feel that Dynamex paved the way for this type of lawsuit.  However, the jurisprudence under Dynamex is still developing and may take years before there is clarity as to how the Dynamex test will be applied, including whether it will have retroactive effect.

In addition, many industries are asking the California Legislature to exempt certain types of businesses from the Dynamex decision, including companies in the ride-sharing technology industry. Businesses are also seeking an alteration of the newly-enunciated judicial test for independent contractor status.

Many of the more commonplace lawsuits alleging independent contractor misclassification – those filed by workers in California – include an unfair competition claim, if only to plead a cause of action that has a longer statute of limitations than that applicable to the typical Labor Code and employment claims.  Those cases by workers, though, focus not on unfair competition but rather on the Labor Code and employment law statutes.  In contrast, this new business vs. business sort of lawsuit only includes claims for unfair competition. That claim, though, asserts that the defendant violated the California Labor Code, Unemployment Insurance Code, and Insurance Code “in order to reduce the company’s labor expenses and prices, which in turn harms competition.”

Takeaway

This type of case presages years of litigation in an area of the law that is in flux in California and throughout the country. While the result of these types of actions are uncertain, they signal to companies that use independent contractors as part of their business model that enhancing independent contractor compliance is a sound objective.

Many companies have sought to maximize their compliance with independent contractor laws by using a legal process such as IC Diagnostics™, which examines whether a group of workers not being treated as employees would pass the applicable tests for independent contractor status under governing state and federal laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws. While no solution is without some risk, one of the sustainable alternative solutions that enables many companies to minimize their independent contractor exposure is restructuring, re-documenting, and re-implementing their independent contractor relationships, without adjusting their business models, as described in our White Paper.

Written by Richard Reibstein

Your comments are invited.

 

 

Posted in IC Compliance