August and September 2019 Independent Contractor Misclassification and Compliance News Update

There were several notable court and administrative cases over the past two months, but they were overshadowed by a legislative matter: the enactment of Assembly Bill 5 in California, which was the subject of our September 11, 2019 blog post entitled “How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law.” That bill, which seems to have been prompted by the California legislature’s desire to reclassify drivers in that state from independent contractors to employees, was enacted with exemptions for over 50 types of workers in an array of industries.

As summarized in “Legislative Developments” below, those exempted will not be subjected to an ultra-strict test for IC status but rather to a more the even-handed test comparable to the standard for IC status in most states and under a variety of federal laws. The California legislature, operating under time constraints so that the bill could become effective on January 1, 2020, rushed through the legislative process and, in so doing, ended up with statutory language that is ambiguous and inconsistent.  The bill also left many other types of workers that were not exempted – yet have for years operated productively as ICs, as well as the businesses that contracted with such workers – wondering why they were not also carved out from the new test and, all of the sudden, have to meet a higher standard to maintain IC status.  At best, they are left to hope that in the next legislative session they will be recognized as warranting an exemption as well.

In the meantime, more and more businesses are seeking to elevate their level of IC compliance both in California and across the country.  Many are using  a process such as IC Diagnostics™, which maximizes compliance with IC laws by restructuring, re-documenting, and re-implementing IC relationships in a customized and sustainable manner consistent with existing business models.

While AB5 dominated the news the past two months, companies in the pharmaceutical and commercial cleaning industries were paying millions of dollars to settle IC misclassification cases, while an adult entertainment business was exhausting its appeals of a multi-million jury verdict for misclassifying exotic dancers. Companies in the fashion and transportation industries appear headed for trial in IC misclassification cases, unless they settle their cases. Companies in the ride-sharing and travel industries, though, successfully obtained orders compelling workers who had brought class actions to arbitrate their cases on an individual basis instead of proceeding in court.

We also report on a major NLRB decision that was the focus of one of our blog posts in September. That federal agency narrowed the law and the remedies for IC misclassification, even though it concluded that a courier company had misclassified delivery drivers as ICs.

In the Courts (9 cases)

PHARMA WHOLESALERS TO PAY $7.5 MILLION TO SETTLE INDEPENDENT CONTRACTOR MISCLASSIFICATION CLAIMS BY DRIVERS.  Two pharmaceutical wholesale distributors, Kinray Inc. and Cardinal Health Inc., have reached a $7.5 million settlement with 115 delivery drivers in a proposed collective and class action lawsuit filed in New York federal court alleging wage and hour violations under the FLSA and New York Labor Law  due to misclassification as ICs, not employees.  The wholesalers supply generic and brand name prescription drugs as well as home health products to independent retail pharmacies and engage the drivers to deliver such goods.

The drivers alleged they consistently worked over 40 hours, and sometimes as much as 80 hours weekly without overtime compensation. In support of their argument that they were employees and not ICs, the drivers claimed that they were subject to credit and background checks; required to report to company warehouses at precise times; mandated  to follow delivery routes and manifests  specifying the identity, location, time and sequence of each stop; subject to discipline for tardiness; and prohibited from dealing directly with the companies’ customers. The settlement, if approved by the court, means that the average recovery per driver, before legal fees and costs, will exceed $65,000. Fernandez v. Kinray Inc., No. 1:13-cv-04938 (E.D.N.Y. Aug. 13, 2019).

PENNSYLVANIA CLEANING FRANCHISOR TO PAY $3.7 MILLION TO FRANCHISEES TO SETTLE IC MISCLASSIFICATION CLAIM. A Pennsylvania federal district court granted final approval of $3.7 million settlement between cleaning franchisor and franchisees in an independent contractor misclassification class action. As we reported in our blog post of June 10, 2019, the settlement involves Jani-King, Inc., the world’s largest commercial cleaning franchisor. Of the 265 class members who received notice of the settlement agreement, about 109 filed claims to date. Under the terms of the settlement, the franchisees will recover $2.4 million with the average individual payout of about $11,000; $1.25 million is earmarked for attorneys’ fees and costs; and $30,000 is designated for service awards to the named plaintiffs.

The plaintiffs alleged that by misclassifying the cleaning franchisees as independent contractors, Jani-King violated the Pennsylvania Wage Payment and Collection Law when it took improper deductions from their payments for services. According to the franchisees’ complaint, Jani-King solely determined whether the franchisees would be offered work and the nature, scope, frequency, and value of the work to be performed for each client; the cleaning methods and procedures to be used; and the training franchisees would receive. In reaching its settlement, Jani-King agreed to make changes to its business practices, including providing new franchise agreements to class member franchisees wishing to continue doing business with the company. The new agreement eliminates various elements of alleged control: no longer will there be post-termination non-competition agreements; the non-solicitation period regarding Jani-King accounts will be reduced to 12 months; and franchisees may sign new business without paying finder’s fees to Jani-King. Myers v. Jani-King of Philadelphia, Inc., No. 09-1738 (E.D. Pa. Aug. 26, 2019).

$4.6 MILLION JURY VERDICT FOR IC MISCLASSIFICATION UPHELD ON APPEAL AGAINST ADULT ENTERTAINMENT CLUB.  The United States Court of Appeals for the Third Circuit affirmed a $4.59 million jury verdict in favor of a class of exotic dancers who prevailed at trial in an IC misclassification class action.  A federal district court judge had approved the jury’s verdict against 3001 Castor Inc. d/b/a The Penthouse Club of Philadelphia. As we discussed in our blog posts of December 6, 2016 and April 9, 2018, the lawsuit alleged nationwide collective claims under the FLSA to recover unpaid wages, as well as state wage/hour claims due to misclassification as independent contractors.

The jury reportedly found that by obligating the dancers to pay certain fees for shifts worked, the Club violated federal and state wage and hour laws and owed the dancers over $4 million in unpaid wages.  In sustaining the jury’s verdict, the Third Circuit determined that the Club exerted “overwhelming control” over the performance of the dancers, including establishing shift times, checking attendance and assessing late fines, instructing the dancers regarding their physical appearance, dictating the choice of dress and makeup, choosing the music played while the dancers performed, and setting the price/duration of private dances. Verma v. 3001 Castor Inc d/b/a The Penthouse Club, No. 18-2462 (3d Cir. Aug. 30, 2019). This case is an example of what adult clubs should refrain from doing.  Indeed, there are also steps that entertainment emporiums can follow to enhance their IC compliance. As the title of our February 8, 2015 blog post states: “Even an Exotic Dance Club (a.k.a. Strip Joint) Can Comply with Independent Contractor Laws – And Avoid or Defend Against Class Actions.”

APPEALS COURT VACATES DECISION DISMISSING IC MISCLASSIFICATION LAWSUIT BY FIT MODELS, ALLOWING THEIR CLASS ACTION TO PROCEED TO TRIAL. The U.S. Court of Appeals for the Second Circuit has vacated a federal district court’s decision that granted summary judgment in favor of a modeling company in a class and collective action brought by fit models.  The appellate court held that summary judgment was not appropriate because there are material issues of fact in dispute as to the fit model’s classification as an independent contractor.  The plaintiff brought her complaint on behalf of herself and other fit models who are retained based on body proportions so that clothing designers and apparel companies may test the fit of their designs.  She alleges that by misclassifying models as ICs, the modeling service, Model Service LLC d/b/a/ MSA Models, and its owner denied them overtime and minimum wages and made deductions from their wages in violation of the FLSA and New York Labor Law (NYLL).

In 2018, the district court granted the company’s motion for summary judgment on the issue of whether plaintiff was the company’s employee for purposes of the FLSA and NYLL. On appeal, the Second Circuit concluded that “[w]hen drawing inferences in the light most favorable to [Plaintiff], which the district court did not do, a reasonable jury could have concluded that she was [the company’s] employee.” The appeals court also determined that although no one element of the parties’ relationship was dispositive of the FLSA inquiry, there existed genuine disputes regarding control of the plaintiff’s work schedule, whether she had the ability to negotiate her pay rate, and her ability to accept or decline work. Those disputed factors were viewed as “significant” by the appellate court to the extent they relate to the degree of control exerted by the company over the plaintiff and her opportunity for profit – two of the factors considered by the courts when assessing IC/employee status under the FLSA’s economic reality test. The court also stated that it was premature to resolve the question whether plaintiff was an employee under the NYLL. The case, which we first reported on in a July 5, 2015 blog post, was remanded for trial on the misclassification claims.  Agerbrink v. Model Service LLC d/b/a MSA Models, No. 18-1471 (2d Cir. Sept. 24, 2019).

DRIVERS FOR COURIER SERVICE ARE NOT ENTITLED TO SUMMARY JUDGMENT IN MASSACHUSETTS IC MISCLASSIFICATION CLASS ACTION.  A Massachusetts federal district court has denied a motion for summary judgment by a driver making deliveries for Google Express through transportation logistics company, Dynamex Operations East, LLC in a proposed IC misclassification class action.  However, the court did certify a class of approximately 100 drivers. In the court complaint, the driver alleges individual, class, and collective claims on behalf of himself and other drivers under the FLSA and the Massachusetts wage and hour laws due to the alleged misclassification of the drivers as independent contractors. Dynamex contracted with Google Express to provide drivers to perform same-day delivery services allowing customers to place orders online from retailers like Target, Walgreens, and Staples. The drivers contracted directly with another company that Dynamex used to supply drivers for Google Express deliveries, and were paid as independent contractors by the other company.

In ruling on the driver’s summary judgment motion, the court applied the Massachusetts three-prong ABC test.  It concluded that under Prong A, the court “does not find as a matter of law that Dynamex exercised actual control over the…drivers.” There was no discussion of Prong B inasmuch as the First Circuit has held that Prong B is pre-empted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA) when applied to entities such as Dynamex that arrange for product deliveries. The court did not consider Prong C. In denying summary judgment, the Court found many contradictions between the documentary evidence and deposition testimony of the parties related to recruitment, equipment, deductions from pay, ability to terminate the relationship, assignment of shifts, and communication with the drivers, all of which, the court said, would have to be resolved at trial.   Ouadani v. Dynamex Operations East Inc., No. 1:16-cv-12036 (D. Mass. Sept. 13, 2019).

TRAVEL CONSULTANTS MUST ARBITRATE THEIR IC MISCLASSIFICATION CLAIMS.  A federal district court in Washington state has granted the motion to compel arbitration filed by an online travel management company in a proposed collective action brought on behalf of travel consultants.  The consultants provide customer communications services for clients of Expedia Group, Inc. and Egenia, LLC.  Those two companies together ‎operate an online travel management company. The plaintiff and the companies never entered directly into either an employment or independent contractor agreement. Egenia contracts with another company, WSOL LLC, which provides telephone, email, and call center and business processing support. WSOL contracted with the plaintiff to provide customer assistance to travelers via chat, email, and phone.

The operative issue involved the plaintiff’s independent contractor agreement with WSOL that included specific references to her relationship with Egenia as well as a broad arbitration provision, a clause delegating authority to the arbitrator to make certain determinations, and a class action waiver. The complaint alleged that Expedia violated the Fair Labor Standards Act by failing to pay the travel consultants overtime compensation due to their alleged misclassification as independent contractors. In opposition to Expedia’s motion to compel arbitration, the plaintiff argued among other things that, even if a valid arbitration clause existed, Expedia and Egenia may not enforce it as non-signatories to the Agreement.  The court was not persuaded; it held that Expedia and Egenia were third-party beneficiaries to the independent contractor agreement’s arbitration provision and were therefore able to compel arbitration based on the arbitration clause contained in plaintiff’s agreement with WSOL.  Krause v. Expedia Group., Inc., No. 2:19-cv-00123 (W. D. Wash. Sept. 17, 2019).

RIDE-SHARING COMPANY SUCCEEDS IN COMPELLING ARBITATION OF WARN ACT CLASS ACTION.  A former driver providing transportation services to customers of Uber Technologies may not litigate in court his proposed class action claims under the Worker Adjustment and Retraining Notification Act. The driver alleged that the company violated the WARN Act when it ceased operations in Austin, Texas without providing WARN Act notice to drivers at least 60 days in advance of the closing. According to the complaint, in May 2016, after losing a public referendum to repeal an ordinance requiring transportation network companies like Uber to make changes in their manner of operation, Uber chose to terminate immediately its business operations in Austin. The driver contended that he and the other potential class members are employees of Uber who were entitled to WARN notice as “affected employees;” if they were independent contractors, however, the WARN Act would not apply.

Uber filed a motion to compel individual arbitration of the driver’s claims. With the parties in agreement that the driver had signed Uber’s arbitration agreement and did not opt-out, the “key disagreement pertains to whether the Court should enforce the Arbitration Agreement and order Plaintiff to individually arbitrate his claims or find the class action waiver in the Arbitration Agreement unenforceable because it conflicts with the WARN Act.” At a hearing on the issue, both parties agreed that it would be inappropriate for the Court to decide the issue whether the driver was an IC or an employee given that the arbitration provision clearly and unmistakably provided that the arbitrator must decide all disputes including the enforceability, revocability, or validity of the arbitration provision. The court concluded: “If the arbitrator determines that Plaintiff is properly classified as an Uber employee – such that Plaintiff would qualify for the protections of the WARN Act – the arbitrator must send the case back to this Court for a determination whether the Class Action Waiver is valid in light of the WARN Act. If the arbitrator determines that Plaintiff is properly classified as an independent contractor, the arbitrator may retain jurisdiction over the rest of the case since the WARN Act would not impede arbitration under that circumstance.” Johnston v. Uber Technologies, Inc., No. 16-cv-03134 (N. D. Cal. Sept. 16, 2019).

TRUCKING COMPANY FACES CLASS ACTION LAWSUIT BY DRIVERS ALLEGING OVERREACHING IN CONNECTION WITH THEIR IC MISCLASSIFICATION CLAIM.  A group of Illinois trucking companies face a new proposed class action lawsuit by drivers, most of whom are recent immigrants, claiming wage and hour violations of the Illinois Wage Payment and Collection Act and common law fraudulent inducement, misrepresentation and concealment due to their alleged misclassification as ICs and not employees. According to the class action complaint, the companies, Patriot Transport Inc. and Expeditor Systems Inc., “implemented their exploitative scheme in full knowledge that most of the truck drivers they hired would take the job offered, not complain about underpayment of wages, and not seek any recourse in court or otherwise with government authorities.”

The complaint further alleges that the drivers “had low English language proficiency and lacked legal sophistication,” and the companies required them to comply with instructions dictated by written and unwritten policies, procedures and directives regarding the drivers’ duties; imposed supervision; mandated  certain insurance;  required advance notice of intended time off; prohibited the drivers from having their own customers; ordered them to use company vehicles with company branding; and prohibited them from negotiating any matters or bargains with customers or brokers. Tlenchiyev v. Patriot Transport, Inc., No. 2019CH09186 (Cir. Ct. Cook County, IL Aug. 8, 2019).

RIDE-SHARING COMPANY SUED IN MASSACHUSETTS FOR IC MISCLASSIFICATION. Drivers for San Francisco-based on-demand ride-sharing company, Lyft, Inc., have filed a class action complaint in Massachusetts federal court alleging that Lyft violated the state’s wage and hour laws by requiring the drivers to pay business expenses, failing to pay them at least a minimum wage, and failing to pay overtime premiums  for hours worked in excess of forty per week due to their alleged misclassification as independent contractors. According to the complaint, among other things, Lyft allegedly requires drivers to follow its policies and rules that, they claim, controls the drivers’ work performance; retains the right to terminate drivers at any time in its discretion; assigns particular rides to drivers; does not require drivers to possess any advanced skills; sets the rate of pay for drivers, which it can change it at its sole discretion; monitors drivers’ performance; and may suspend or terminate drivers who do not accept enough rides, cancel too many rides, do not maintain high customer satisfaction ratings, or do not take the most efficient routes.  It is anticipated that the company will make a motion to compel arbitration and vigorously defend the claims. Cunningham v. Lyft, Inc., No. 1:19-cv-11974 (D. Mass. Sept. 17, 2019).

Administrative and Regulatory Actions (1 case)

NLRB FINDS COURIERS WERE MISCLASSIFIED AS INDEPENDENT CONTRACTORS, BUT REJECTS ARGUMENT THAT MISCLASSIFICATION IS A “STAND-ALONE” VIOLATION OF THE LAW.  As we discussed in detail in our blog post of August 29, 2019, the National Labor Relations Board has held that a courier services company misclassified drivers as independent contractors, not employees protected under the National Labor Relations Act.  The Board also ruled 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 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.  As we noted in our blog post, the Board’s decision on the “stand-alone” issue was dictated by the “free-speech” provisions of the NLRA as well as public policy considerations. Velox Express, Inc., 368 NLRB No. 61 (Aug. 29, 2019).

Legislative Developments (2 new laws)

CALIFORNIA AB5 ENACTED WITH OVER FIFTY EXEMPTIONS; MORE CLARIFICATIONS EXPECTED.  Assembly Bill 5 (AB5), which codifies the California Supreme Court’s Dynamex decision that was issued in April 2018, was signed into law by California Governor Gavin Newsom on September 18, 2019 and becomes effective January 1, 2020.  As we discussed in our detailed September 11, 2019 blog post entitled “How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law,” Dynamex created a so-called ABC test requiring companies to satisfy each of three strict criteria in order to establish independent contractor status, dramatically changing decades of settled law in California.  Prior to Dynamex, IC status was determined in that state by applying a multi-part test issued 30 years 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 well be operating outside of the law.

Prior to the AB5 legislative initiative, 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. Although 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), it became 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 both wage and non-wage claims. Some of the businesses carved out of AB5 are: licensed insurance agents; certain professionals (physicians and surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, and accountants); referral agencies connecting clients with service providers  in the following industries that meet all of 10 specific ‎requirements: 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; and certain professional service providers in the following occupations that meet all of six specific requirements: 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.

An exemption from AB5 is not a “get-out-of-jail-free” card; those businesses carved out from the Dynamex ABC test still must abide by 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.  The publisher of this blog was quoted in Law360 on September 11, 2019 stating, “There are probably 150 industries that lobbied, and 50 were successful,” and those industries that failed this go-round will likely make another attempt in a “cleanup bill” in the 2020 legislative session, which could yield more exemptions and clarify other exemptions that were added in haste after legislative hearings had concluded.

NEW YORK CITY BROADLY EXPANDS HUMAN RIGHTS LAW TO INDEPENDENT CONTRACTORS.  On September 12, 2019, the New York City Council passed a bill (Intro No. 136-A) by a vote of 47-3‎ ‎expanding the New York City Human Rights Law’s anti-discrimination protections to independent contractors and freelancers. The bill, sponsored by Councilman Brad Lander, is due to take effect in December 2019 after the Mayor signs it into law, as is expected shortly.  This additional protection for independent contractors and freelancers follows other enactments that have expanded safeguards for ICs, such as the 2017 Freelance Isn’t Free Act. Councilman Lander said, “Closing the loophole that left independent contractors without sufficient recourse for ‎discrimination or harassment builds on the Council’s ambitious work to win protections for gig-‎economy workers.” Likewise, Caitlin Pearce, Executive Director of the Freelancers Union, reportedly posted, “This is huge news for NYC’s 1.3 million independent workers, who may face harassment and discrimination in the workplace with fewer protections or paths for recourse than traditional employees.” Regarding the expansion of protections to ICs and freelancers, the publisher of this blog was quoted in Bloomberg Law’s September 12, 2019 Daily Labor Report as follows: “The Council bill, by ensuring that freelancers shouldn’t be subject to discrimination by a company that utilizes them to further its business, is consistent with a growing trend in the city and the state to give additional protections to freelancers and independent contractors.” But, finding the bill “overbroad,” this blog’s publisher said: “It goes beyond only a company’s decisions to retain or let go an independent contractor, and encompasses everything in between: their compensation, promotion, benefits, and other terms and conditions or privileges of employment.”

Written by Richard Reibstein

Posted in IC Compliance | Leave a comment

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

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