What to Expect in 2018 in the Law of Independent Contractor Misclassification and Compliance (Part 2)

2017 was notable for a shift in the law of independent contractors. Part 1, published yesterday, discussed five key legal developments from 2017.  Part 2, below, offers readers predictions of what to expect in 2018 in this area of the law. Both parts also offer takeaways designed to maximize IC compliance and minimize exposure to IC misclassification liability.

What should you expect to see in 2018?

First, many commentators will attach outsized significance to two long-awaited court decisions, but another case could be a game-changer. 

We can expect no less than two court rulings to which many commentators are likely to attach oversized importance and notoriety.  The first such case is the U.S. Supreme Court’s decision, expected in the first half of 2018, involving mandatory arbitration clauses with class action waivers.  This case involving class action waivers may have little impact on companies, including those using ICs, which have already drafted their independent contractor agreements in a manner that will be enforceable regardless of the way in which the Court rules. Those companies are using “opt out” clauses that afford contractors the opportunity to opt out of arbitration agreements with class action waivers, and do to so without any penalty or repercussion on workers who have signed them.

Another case likely to be given outsized importance is a judge’s decision in the GrubHub trial involving a delivery driver using that company’s app, who has claimed that he should have been classified and paid by GrubHub as an employee and not treated as an IC. This is reportedly the first on-demand, gig economy case to go to trial.  While this sharing economy case has grabbed headlines, it is unlikely to be momentous from a legal standpoint.  Why?

Because cases of this nature dealing with a single individual frequently turn on their particular facts, which can differ from case to case. Differing facts often lead to different results regarding the proper classification of workers. And cases where there are some facts favoring IC status and other facts supporting employee status – cases in the so-called “gray area” – oftentimes have little precedential effect.  Indeed, the court’s decision may not even be a precedent for other drivers who contract with GrubHub.

One court decision that may be of outsized significance is likely to be decided in 2018. That case, Dynamex Operations West v. Superior Court, has been on appeal before the California Supreme Court (No. S222732) since January 2015. It is scheduled for oral argument on February 6, 2018.  The issue in Dynamex is whether, in wage and hour cases in California, where the issue is whether the workers in question are independent contractors or employees, should the Supreme Court continue to follow its time-honored holding in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations (which is roughly akin to a common law / economic realities test for determining IC status) or apply a far more rigorous standard that more closely resembles an ABC test.

While some commentators have written that most companies, including those in the gig economy, will be unable to satisfy the more rigorous test, that is by no means our view. Nonetheless, a departure from Borello could be extremely disruptive for companies with business models reliant upon independent contractors where such businesses have thoughtfully structured their IC relationships in a manner that was intended to comply with the law as set forth in Borello.  Indeed, the Borello standard has been incorporated into the California Department of Industrial Relations website advising the public of the test for “independent contractor versus employee” for many years.

Second, expect more state legislation affecting the ride-sharing industry. 

As noted in Part 1, in May 2017, the Governor of Florida signed the Transportation Network Companies Act (HB 221).  That law designates drivers for ride-sharing companies in the on-demand economy as independent contractors provided the transportation network company meets four criteria, all of which  were already being met by the major ride-sharing companies including Uber and Lyft.

Other state legislatures are likely to follow the lead of Florida and seek to create a safe harbor for ride-sharing companies using ICs to transport customers.

Third, don’t expect an abatement in the number of IC misclassification class actions.

We are likely to see class action lawyers doubling down on IC misclassification cases in the coming year, inasmuch as these types of lawsuits remain a lucrative cottage industry for those lawyers and multi-million-dollar settlements have become commonplace.

Class action lawyers are more likely to target companies that do not have an enhanced level of compliance with IC laws or valid arbitration provisions with class action waivers in their IC agreements.

Fourth, administrative reviews, proceedings, and audits are unlikely to diminish

As noted in Part 1, some state courts are making it less burdensome to satisfy state law tests for IC status. Nonetheless, it is still highly likely that state unemployment agencies will remain aggressive in seeking unemployment tax contributions from companies using ICs. It is also likely that state workforce agencies, including those enforcing state wage laws, will not become any less aggressive in pursuing companies that misclassify employees as independent contractors.

Thus, while the Trump Administration will be more hospitable to companies using ICs than the Obama Administration, this leveling of the playing field at the federal enforcement level is unlikely to trickle down to the state workforce agencies.  It will remain challenging for companies that use ICs to remain free from one or more state agency investigations, audits, or proceedings.

Takeaways

There are ways that companies using ICs can minimize the likelihood that they will become targets for class action lawyers and administrative agencies.  One way used by an increasing number of companies is IC Diagnostics™, a process designed to structure, document, and implement IC relationships in a customizable and sustainable way intended to maximize compliance with applicable federal and state IC laws and, at the same time, minimize IC misclassification liability.  Form IC agreements and one-size-fits-all approaches may be ill-fitting and create a comfort level that may betray businesses who can and should do more to enhance their IC compliance.

Another way to minimize the likelihood of being targeted by plaintiffs’ class action lawyers is to add an arbitration clause with a class action waiver to a company’s IC agreement.  Many of these clauses are being enforced by the courts.  At the same time, though, there have been numerous court decisions striking down arbitration clauses because they have not been drafted in a state-of-the-art manner or because they needlessly impose what some courts view as “unfair” burdens or costs on workers who sign such agreements.

While well-drafted arbitration agreements can help, they are not a panacea, because they don’t offer any protection against investigations by state or federal regulatory agencies.  Further, some companies with a high level of IC compliance have also concluded that arbitration clauses may not always be advantageous to add to existing IC agreements.

The bottom line: companies that wish to consider adopting an arbitration provision with a class action waiver should give as much thought to whether they should add that type of provision to their IC agreements and the wording of their arbitration clauses as they do to the language of every other provision in these important agreements.

Written by Richard Reibstein

—–

Edited by Janet Barsky

This article was published in the Daily Labor Report (January 5, 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

Five Key Independent Contractor Legal Developments in 2017 – and What to Expect in 2018 (Part 1)

2017 was notable for a shift in the law of independent contractors. Part 1, below, discusses five key legal developments from 2017 you should be aware of. Part 2, which will follow tomorrow, offers readers predictions of what to expect in 2018 in this area of the law. Both parts offer takeaways designed to maximize IC compliance and minimize exposure to IC misclassification liability.

# 1. Two state Supreme Court decisions show that the courts are more willing to recognize IC status.

Although many businesses understand that there is a dizzying array of state and federal tests for independent contractor status, businesses in 2017 continued a trend over the past 10 years where they are making greater use of independent contractors despite the uncertainties in the law and the risk of misclassification. One of the most challenging tests for IC status is the so-called ABC test, which is most prevalent among state unemployment and workers’ compensation laws.  About half of the states have ABC laws governing IC status, but each state interprets their laws differently than other states. Two state Supreme Courts in 2017 fine-tuned their ABC tests to make the use of ICs more attainable for companies.

In March 2017, the Connecticut Supreme Court concluded that a business does not fail the “C” prong of the ABC test, which requires that a worker is “customarily engaged in an independently established trade, occupation, profession or business,” simply because the worker chooses to provide services only to a single company, especially where the contractor has the freedom to provide services to other companies.

In June 2017, the Vermont Supreme Court held that a Limited Liability Company (LLC) is a distinct legal entity; therefore, an owner of an LLC is not an individual under  the ABC test when the state seeks to assess unemployment taxes upon a business.  These types of decisions by the highest courts in two states signal a greater recognition that state IC laws should not be applied mechanically with a pre-ordained determination that the workers in question are employees.

# 2.  FedEx and Uber scored big wins in 2017

Far more than any two companies in the nation, FedEx and Uber have for years occupied the headlines regarding their use of independent contractors. 2017 was a pretty good year for both of those companies in terms of legal developments.

FedEx Ground has been the subject of more independent contractor misclassification lawsuits than any other U.S. company.  The overwhelming number of those lawsuits involved claims for allegedly unpaid employee business expenses, wages, and benefits, and most of them that were resolved by the courts unfavorably to the company.

Two such court decisions were issued by the Ninth and Seventh Circuits, which concluded that the wording in FedEx’s own IC agreement created an employment relationship as a matter of law.  This led FedEx to settle for nearly $500 million almost all of its scores of class actions.  In 2017, however, FedEx prevailed on what many believe to be the most important legal challenge it faced – a unionization effort by the Teamsters to organize its Ground Division drivers.

In March 2017, the United States Court of Appeals for the D.C. Circuit issued a decision striking down a ruling by the National Labor Relations Board that single-route Ground Division drivers were employees and not independent contractors. This was the second time that FedEx sought review by the U.S. Court of Appeals where the NLRB had sided in favor of the Teamsters and held that FedEx drivers were employees who could be represented by a union.

In Uber’s case, it received perhaps its most meaningful success not before a court but before an arbitrator.  Uber has used mandatory arbitration agreements in its independent contractor agreements for several years. In February 2017, a well-regarded former judge issued an arbitration decision finding that the preponderance of the evidence favored Uber’s position that, under the California wage laws, drivers who use the Uber app have more in common with independent contractors than employees.  While this arbitration decision is not binding on other drivers, it is likely to have significant impact on decisions by other arbitrators in arbitrations brought by drivers.

# 3.  The Trump Administration appears to be leveling the playing field for businesses using ICs

Toward the end of the Obama Administration, the U.S. Department of Labor issued enforcement guidelines under the Fair Labor Standards Act that conveyed its view that the Labor Department disapproved of the use of independent contractors.  Those guidelines seemed to disregard the Labor Secretary’s comment that while some companies have misused the IC classification, “there’s an important place for independent contractors” in the U.S. economy. It did not take long for the Trump Administration’s new Secretary of Labor, Alexander Acosta, to withdraw that formal guidance on ICs – he did so only six weeks after being confirmed by the Senate.

As reported on June 7, Secretary Acosta had issued a press release earlier that day announcing that the former guidance was being withdrawn.  But the Secretary did not signal that businesses can now use ICs without repercussion; rather, he stated that the “legal responsibilities of employers under the Fair Labor Standards Act” remain unchanged.  Secretary Acosta also noted that his department will “fully and fairly enforce all laws within its jurisdiction.”

Another similar change in the law of independent contractors took place at the National Labor Relations Board this past year. In November 2017, President Trump appointed a new General Counsel to the National Labor Relations Board following the expiration of the term of Richard Griffin, the General Counsel who was appointed by President Obama.  Peter Robb, the new General Counsel, quickly discarded a number of Griffin’s initiatives, including Griffin’s August 2016 Advice Memorandum dealing with independent contractors.

Griffin’s Advice Memo had been viewed as an endorsement of the view that misclassification of employees as independent contractors was, in and of itself, a violation of the National Labor Relations Act.  A close reading of the Advice Memo reveals that while it never quite reached that conclusion, it nonetheless laid the groundwork for an extension of the law that would have created a “misclassification-plus” type of unfair labor practice.  That expansive view of the NLRA is no longer in effect under the new General Counsel.

# 4.  Most legislative initiatives no longer seek to curtail the use of independent contractors

Whereas the overwhelming number of legislative initiatives over the ten years prior to 2017 involved efforts to curtail the misclassification of independent contractors, most of the legislative action in 2017 sought to recognize the importance of independent contractors and the emergence of the gig economy.

On May 15, 2017, a New York City law called the Freelance Isn’t Free Act went into effect.  That local law created rights for independent contractors who have not been paid the fees to which they are entitled.

Another new law in 2017 recognizing that independent contractor relationships should be encouraged rather than curtailed arose in the context of the ride-sharing industry in Florida.  In May 2017, the Governor of Florida signed the Transportation Network Companies Act (HB 221).  That law designates drivers for ride-sharing companies in the on-demand economy as independent contractors provided the transportation network company meets four criteria that were already being met by the major ride-sharing companies including Uber and Lyft.  The new law essentially created a safe-harbor from IC misclassification liability for those companies.

Two bills were introduced in Congress that sought to facilitate the use of independent contractors.  The New Economy Works for Guarantee Independence and Growth (NEW GIG) Act of 2017 (S. 1549 and H.R. 4165) was introduced in both houses of Congress.  This bill, if enacted, would create a safe harbor for income and employment tax purposes where contractors meet certain criteria.  The Portable Benefits for Independent Workers Pilot Program Act (H.R. 2685), if enacted, would create a $20 million fund for states, local governments, and non-profit organizations to study “broad innovation and experimentation with respect to portable benefits” for independent workers.

Not all legislative action sought to facilitate the use of independent contractors.  North Carolina enacted the Employee Fair Classification Act (SB 407), which became effective December 31, 2017.  That law creates a new Employee Classification Section within the North Carolina Industrial Commission to, among other things, receive and act upon complaints of IC misclassification.

# 5.  IC Misclassification class actions continue to produce multi-million-dollar settlements

Although the landscape of independent contractor law is becoming more hospitable for many companies, the bulk of businesses that use ICs remain targets for class and collective actions under state and federal wage payment laws, minimum wage and overtime laws, and employee expense laws.  2017 saw a host of large settlements, including (to name just a few):

Takeaways

Although the playing field may be leveling out a bit for businesses, the risk of independent contractor misclassification liability remains substantial and the cost can be prohibitive, especially from class action lawsuits and administrative proceedings. Each and every company that uses independent contractors as a key part of its business model or to supplement its workforce should ask the following questions:

  • Does our business model lend itself to the use of independent contractors?
  • If so, are our IC relationships structured in a manner that maximizes compliance with applicable state and federal laws governing independent contractors?
  • Does the language in our IC agreements minimize misclassification risk, or does it actually create liability?
  • Have we implemented our independent contractor relationship in a manner that is consistent with a valid IC relationship?
  • What can we do to make our IC relationships even more defensible to class action lawsuits and administrative proceedings?

An increasing number of businesses have used a process such as IC Diagnostics™ to answer those and related questions, and to help re-structure, re-document, and re-implement their IC relationships in a manner that is customized to their business model, while enhancing their IC compliance.

Those types of steps require an investment of time and resources, but a more level playing field means a company has a better shot at minimizing its IC risks, not that companies can ignore the need to heighten their IC compliance.

Written by Richard Reibstein

Edited by Janet Barsky

This article was published in the Daily Labor Report (January 4, 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

December 2017 Independent Contractor Misclassification and Compliance News Update

There were no notable settlements in independent contractor misclassification class action cases that came to our attention last month, but there was an array of significant IC cases in various stages of litigation.  Two of those cases involve the oil and gas industry, which is turning into a hotbed for IC lawsuits:  a successful motion to compel arbitration of a class action brought by oil well and drill site managers against a large international energy company, and an unsuccessful motion to dismiss a class action complaint filed by welders who were classified as ICs by an oil exploration and production company.

Another case involves laborers who claimed they had been misclassified as ICs by a home improvement company that engaged their services; the trial court ruled that they were ICs under the law, and an appellate court affirmed that finding.

The final case involved sports referees and game officials in Pennsylvania who filed a class action IC misclassification lawsuit against the interscholastic athletic association that retained their services.  This lawsuit appears to be an offshoot of a petition for representation that was filed with the National Labor Relations Board by a union seeking to represent the game officials and it may be related to a recent noteworthy administrative action.

As discussed below, on December 1, 2017, the new General Counsel of the National Labor Relations Board rescinded a number of enforcement initiatives of his predecessor.  One such initiative involved independent contractors.  That Obama-era initiative, which was the subject of an earlier blog post, appeared to suggest that classifying workers as independent contractors, if those workers qualify as “employees” under the National Labor Relations Act, would violate the federal labor law.  The lawsuit by the referees, brought only a week after the new General Counsel rescinded his predecessor’s IC initiative, may well be an effort by the sports officials, and/or the union seeking to represent them, to pursue alternative legal proceedings against the sports association.

In the Courts (4 cases)

COLORADO OIL EXPLORATION COMPANY UNABLE TO DISMISS RIG WELDER’S CLASS ACTION IC MISCLASSIFICATION LAWSUIT. A Colorado federal district court denied the motion of oil exploration and production company, Whiting Petroleum Corp., to dismiss a proposed collective action claiming that rig welders were not paid overtime compensation and other wages under the Fair Labor Standards Act due to their alleged misclassification as independent contractors. The specific allegations were that: (1) the welder was hired by the company, worked exclusively for the company and the company’s clients/customers, and was prohibited from working for other companies while “employed” on the company’s jobs; (2) the company supervised and controlled the “employees” work schedule or “conditions of employment,” even though the plaintiff often worked off company premises, and allegedly enforced mandatory compliance with the company’s or its clients’ policies and procedures; and (3) the company determined the rate and method of payment for all of the welders.

The company argued that the named plaintiff failed to establish that the company was his employer under the FLSA’s economic realities test. According to the company, because the complaint alleges that “[the rig welder’s] activities were controlled by Defendant and/or Defendant’s clients, some other entity – aside from Defendant – may have been [the rig welder’s] employer under the FLSA.” (Emphasis in original.) In rejecting the company’s argument, the court found that the allegations contained in the collective action complaint were sufficient to “plausibly assert”, at this early stage of the litigation, that the company was the “employer” under the FLSA. Schindler v. Whiting Petroleum Corp., D. Colo., No. 17-cv-1051 (D. Colo. Dec. 1, 2017).

CHEVRON SUCCEEDS IN OBTAINING COURT ORDER COMPELLING ARBITRATION OF IC MISCLASSIFICATION CLAIMS BY OIL WELL / DRILL SITE MANAGERS. A California federal court granted Chevron Corporation’s motions to compel arbitration of collective action claims brought by well site/drill site managers who alleged that Chevron violated the wage and overtime provisions of the FLSA due to alleged misclassification of the managers as independent contractors. The managers’ complaint alleged they were supervised by Chevron; Chevron determined their work schedules and set their pay rates without negotiation; Chevron provided all equipment to the managers, including a laptops, e-mail addresses, printers, internet access and uniforms; Chevron required the managers to follow instructions, processes, and policies regarding the method of completion of work; they were required to submit daily reports with details outlining their work and complete weekly invoices; and the managers were required to attend meetings and trainings.

Each of the four managers who were the subject of the motion to compel arbitration had entered into arbitration agreements with different consulting firms to provide services for Chevron. In granting the motion to compel arbitration, the court ruled that Chevron was entitled, as a third-party beneficiary, to enforce the arbitration provisions in the managers’ contracts with the consulting companies that had assigned the managers to work for Chevron. Each consultancy agreement contained similar arbitration language: “All claims, disputes or controversies arising out of, in connection with or in relation to this Agreement or the Services, including any and all issues of arbitration of such claim, dispute or controversy…shall be submitted to a mandatory and binding arbitration….”  The court rejected the managers’ arguments that the arbitration provisions were unconscionable, and that the arbitration agreements were unenforceable because the FLSA claims were “statutory and have nothing to do with contractual obligations.” The court reasoned that although the complaint involved statutory rights of the managers under the FLSA, the claims “are rooted in and inextricably intertwined with the third party contracting agreements.”  McQueen v. Chevron Corp., No. C 16-02089 (N.D. Cal. Dec. 18, 2017).

LOUSIANA LABORERS ARE INDEPENDENT CONTRACTORS, NOT EMPLOYEES, ACCORDING TO APPELLATE COURT.  A Louisiana appeals court has affirmed a trial court’s decision holding that laborers providing painting and related services for La Maison Renovations, LLC, a home remodeling company, were independent contractors under the Louisiana Wage Payment Act.  The laborers had claimed that they were misclassified under state law and owed wages and penalties. At trial, testimony was introduced by the owner of the remodeling company that the laborers set their own schedules; that they were not required to work a certain amount of hours; that the owner told them what to do, but not how to do it; that he laborers supplied their own tools; and that when the owner was on-site, she checked on the laborers’ progress to ensure the professionalism of their work.

In affirming the trial court’s decision, the appeals court found that the trial court’s determination that the laborers were independent contractors was supported by the evidence that an oral contract existed between the parties; the laborers used non-exclusive means in accomplishing their services; La Maison exercised minimal control over the laborers in the performance of their services; the parties agreed to a particular fee plus gas; and the work was for a specified duration. Ocampo v. Maronge, No. 17-CA-403 ( La. Ct. App., 5th Cir., Dec. 27, 2017).

SPORTS REFEREES AND OFFICIALS SUE PENNSYLVANIA HIGH SCHOOL ATHLETIC ASSOCIATION FOR IC MISCLASSIFICATION. Sports officials filed a class and collective action complaint against the Pennsylvania Interscholastic Athletic Association (PIAA) for minimum wage and overtime violations under the FLSA and Pennsylvania Minimum Wage Act due to alleged misclassification as independent contractors. According to the complaint, the purpose and function of PIAA is to develop and enforce rules that are authorized or adopted by member high schools regulating interscholastic athletic competition. The complaint alleges that PIAA has 13,200 registered sports officials who are misclassified, that it fails to pay for meetings, trainings, travel, pre- and post-game work, and uniforms, and that the officials are unable to re-assign or subcontract their assignments to other officials.

In support of the misclassification claims, the complaint further alleges that the sports officials are required by PIAA to apply for their positions using a specific application process, including taking mandatory tests administered by PIAA; affiliate with a PIAA chapter within a specified time-frame; attend the PIAA convention once every five years to maintain certain eligibilities; adhere to uniform requirements; accept PIAA’s established payment scheme; submit reports; accept the dictated game schedule set by PIAA; accept fees unilaterally set by PIAA for post-season game assignments; and be subject to discipline for failure to follow PIAA’s rules. Ruslavage v. Pennsylvania Interscholastic Athletic Association, No. 17-cv-1598 (W.D. Pa. Dec. 8, 2017).

The PIAA has previously been the subject of an NLRB petition filed by the Office and Professional Employees International Union to represent the sports officials, as reported in this blog. The NLRB found that the officials were not independent contractors but rather employees.  The PIAA has sought reconsideration of that decision by the NLRB, which is no longer comprised of a majority of Board members appointed by President Obama.

Regulatory Actions (1 matter)

NEW GENERAL COUNSEL OF THE NLRB RECENTLY APPOINTED BY PRESIDENT TRUMP RESCINDS IC MISCLASSIFICATION INITIATIVE BY HIS PREDECESSOR. The newly-appointed General Counsel of the National Labor Relations Board, Peter Robb, issued his first GC Memorandum on December 1, 2017, where he stated his intention to effectuate changes impacting many of the initiatives undertaken by the prior General Counsel, who had been appointed by President Obama. In his memorandum, Mr. Robb stated that among the initiatives that will no longer be in effect is that “an employer’s misclassification of employees as independent contractors, in and of itself, violates Section 8(a)(1).”  He noted, however, that Regional Directors should submit to the Division of Advice any case where there is evidence that an employer actively used the misclassification of employees to interfere with Section 7 activity.

Legislative Initiatives (1 matter)

NORTH CAROLINA IC MISCLASSIFICATION LAW BECAME EFFECTIVE DECEMBER 31, 2017; ALL EMPLOYERS IN THAT STATE MUST NOW POST AN IC NOTICE.  The North Carolina Employee Fair Classification Act (SB 407), aimed at combatting independent contractor misclassification, became effective December 31, 2017. As discussed in our blog post of September 6, 2017, North Carolina Governor Roy Cooper signed the new law on August 11, 2017, creating the Employee Classification Section within the North Carolina Industrial Commission.

The new law authorizes the Employee Classification Section to receive complaints of employee misclassification; investigate reports of employee misclassification; coordinate with other state agencies and District Attorneys’ offices in the prosecution of employers and individuals who fail to pay civil assessments or penalties; provide information about each report of misclassification to the Department of Labor, the Division of Employment Security, the Department of Revenue, and the Industrial Commission to facilitate investigation of potential statutory violations; educate employers, employees, and the public about employee misclassification; and report annually to the Governor and Joint Legislative Commission on Governmental Operations.

This law does not change the test for employee or independent contractor status in North Caroline; that test remains essentially a “common law” test, which is generally regarded as the test most accommodating to IC status.  Nor does the new law increase penalties for IC misclassification.

While none of these legislative requirements impacts a company’s use of independent contractors, there is one provision of the law that does affect every employer in North Carolina: they must now post a notice that includes the following language: (1) Any worker who is defined as an employee under the law shall be treated as an employee unless the individual is an independent contractor; (2) any employee who believes that he/she has been misclassified as an independent contractor may report the suspected misclassification to the Employee Classification Section within the Industrial Commission; and (3) the physical location, mailing address, telephone number, and e-mail address where alleged incidents of employee misclassification occurred may be reported to the Employee Classification Section within the Industrial Commission.

Written by Richard Reibstein

Compiled by Janet Barsky

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Posted in IC Compliance

November 2017 Independent Contractor Misclassification and Compliance News Update

This past month’s legal developments in the area of independent contractor misclassification and compliance was notable for some non-class action cases: one where two office workers in New York, who were found by a jury to have been misclassified as independent contractors, were each awarded substantial sums (one over $100,000) against a water-filtration company; and the second where two limo drivers in Alabama together received over $20,000 in a settlement approved by the court.

While the total liability in both of those cases was rather affordable for most companies, the amount recovered by each plaintiff was far more than plaintiffs receive in most class actions.  These cases illustrate why companies who classify even a few workers as ICs run a risk that they will be subject not only to the costs of defending these types of cases, but also to considerable monetary damages in the tens or hundreds of thousands of dollars per worker – unless such businesses take steps to enhance their IC compliance.  Some companies have resorted to the use of a process such as IC Diagnostics™ to maximize their compliance with IC laws and minimize the likelihood that they will be subjected to IC misclassification lawsuits or, if sued, will increase the likelihood that they will prevail in court.

The first of the two cases was tried to a jury verdict. Of particular interest was the court’s conclusion that the workers’ federal tax returns, where they reported to the IRS that they were self-employed, were found to be non-dispositive of their legal status in their IC misclassification case. Of particular interest in the second case was the court’s refusal to allow the parties to settle the case on a confidential basis.  Instead, the court unsealed the terms of the settlement agreement because of what the court viewed as a strong public interest supporting the full disclosure of settlements in this type of legal proceeding.

The other two court cases involve a $1.5 million settlement by moving company drivers against a well-known van line and a new lawsuit filed against a preeminent company in the oil and gas industry.

In the Courts (4 cases)

JURY VERDICT OF OVER A QUARTER OF A MILLION DOLLARS TO TWO OFFICE WORKERS MISCLASSIFIED AS IC’S IS UPHELD BY NEW YORK FEDERAL COURT. A New York federal court upheld a jury’s verdict that Aqualife, a company selling and servicing water filtration systems to the Russian-speaking community in New York City, violated the FLSA and the New York Labor Law as a result of the company’s misclassification of two office workers as independent contractors. The workers were awarded $106,431 and $67,126, respectively, in unpaid overtime and other compensation for office/clerical and sales-related work they performed for the company, plus legal fees. The court found that “the jury could reasonably have concluded that the defendants controlled the schedule, hours, pay, place of work, and tasks of the plaintiffs.”  Specifically, the court noted that there was evidence presented to the jury that both workers were “bound by the decisions of management”; they worked set hours each day; were paid on an hourly basis; clocked in and out; although they were allegedly promised commissions, such commissions were never or only sparingly paid, eliminating any prospect for individual economic success; some skill was involved in booking appointments, but it did not give rise to economic independence and did not require advanced training; and their business activities were strictly controlled by the company. Although the workers designated themselves as independent contractors on their tax returns, that factor alone was not dispositive.  Leevson v. Aqualife USA, Inc., No. 14-CV-6905 (E.D.N.Y. Nov. 1, 2017).

TWO ALABAMA LIMO DRIVERS SUCCEED IN IC MISCLASSIFICATION LAWSUIT.  An Alabama federal court has approved a settlement in an FLSA overtime and retaliation lawsuit brought by two drivers against limousine/sedan service, Over the Mountain Sedan, LLC, and its owner, claiming the company misclassified them as ICs. The amended complaint alleged that the owner determined the drivers’ passenger routes, times to pick up customers, and the fares that customers paid for services; the company required the drivers to report by 4 AM each morning; in the event the drivers did not have an assigned customer or route, the drivers were required to remain at the company premises from 4 AM until 2 PM each day, and if no reservations or bookings were necessary after 2 PM, the drivers had to remain on company premises and be available to work; the vehicles were owned by the company and not the drivers; the drivers could not reasonably work for the company and other transportation companies simultaneously; and the drivers could not refuse engagements. The approved settlement totaled $21,600.  It provides that each of the two drivers will receive $350 per month for 18 months (a total of $6,300 per driver) and the drivers’ counsel will receive $9,000 in attorneys’ fees and costs. The court rejected a confidentiality clause that was proposed in the settlement, finding that neither party offered a compelling reason for its inclusion and citing case law that provided “the sealing from public scrutiny of FLSA agreements between employees and employers would thwart the public’s independent interest in assuring that employees’ wages are fair and thus do not endanger ‘the national health and well-being.’” Additionally, the court stated that due to the risks of continued litigation and the owner’s potential inability to pay a judgment even if the drivers were successful at trial, the compromise of the drivers’ claims was reasonable. Fogg v. Over the Mountain Sedan, LLC, No. 16-cv-699 (N.D. Ala. Nov. 17, 2017).

MOVING COMPANY TO PAY $1.48 MILLION IN SETTLEMENT WITH ITS DRIVERS IN IC MISCLASSIFICATION CASE.  Truck and moving drivers for Atlas Van Lines, Inc. have sought preliminary approval of a $1.48 million settlement in California case alleging IC misclassification. This case was originally filed on October 25, 2016 in the Superior Court of California, County of Los Angeles; it was later removed to federal court. The complaint  alleged that in misclassifying the drivers, Atlas violated California law by failing to provide meal and rest breaks, failing to pay minimum and overtime wages, failing to pay all wages due at separation, failing to reimburse business expenses, violating California’s Unfair Competition Act, and failing to furnish timely and accurate wage statements. The settlement agreement provides that each of the approximately 494 class members will receive about $2,000; up to 30% ($440,000) will be allocated to attorneys’ fees; $25,000 for claims under the California’s Private Attorneys General Act; $11,000 towards settlement administration; and $15,000 for the class representative’s service award.  Leitzbach v. Atlas Van Lines, Inc., No. 16-cv-08790 (C.D. Cal. Nov. 27, 2017).

CHEVRON SUED FOR IC MISCLASSIFICATION OF SAFETY CONSULTANTS IN CALIFORNIA. Safety consultants have commenced a collective and class action in California federal court against Chevron U.S.A. Inc., alleging wage and hour violations under the FLSA and California Labor Code due to alleged independent contractor misclassification. According to the complaint, Chevron not only engages in the business of oil and natural gas exploration and production, it also provides safety personnel that offer safety services to operators and other oil field services companies. The safety consultants were allegedly responsible for implementing safety procedures, monitoring well-site safety and testing, and assisting in incident investigation and reporting. In support of their IC misclassification claim, the safety consultants alleged that Chevron determines the consultants’ schedules of work and rates of pay; provides all essential equipment and tools for the consultants; retains them for extended periods of time; has the authority to hire, discipline, and fire the safety consultants; directs their work; and controls all meaningful aspects of the consultants’ services to ensure that Chevron’s strategic objectives are fulfilled. No response has been filed yet by Chevron, who is expected to deny the allegations.  Goodman v. Chevron U.S.A., Inc., No. 17-6649 (N.D. Cal. Nov. 17, 2017).

Regulatory and Administrative (1 case)

NLRB FINDS HOME DELIVERY DRIVERS/HAULERS TO BE IC’S.

The NLRB has found that drivers/haulers who make deliveries to customers of home improvement retailer, Menard Inc., are independent contractors and not employees. The complaint alleged that Menard violated Section 8(a)(1) of the National Labor Relations Act by misclassifying the drivers as independent contractors rather than employees and by maintaining delivery service agreements that contain a mandatory arbitration clause that delivery drivers would reasonably understand as prohibiting them from filing class actions against Menard in any legal or arbitral forum, and from filing unfair labor practice charges with the Board. In determining whether the drivers were independent contractors or employees, the NLRB evaluated a non-exhaustive list of common law factors and also considered whether the driver had actual entrepreneurial opportunity for gain or loss, e.g. whether the drivers can work for other clients, can hire their own employees, and have a proprietary interest in the work. In finding that the drivers were ICs, the NLRB concluded that the drivers had more control, on balance, than did Menard over the details of the work (particularly where the drivers are free to work for other clients, determine what equipment to use, hire and train their own staff, select and purchase their own trucks, decide upon the routes they will use to make deliveries, and choose how to perform the hauling services), the drivers were engaged in the distinct business of providing hauling and delivery services while Menard is in the business of retail sales of home improvement merchandise; the drivers supplied the instrumentalities needed to do the work; the contracts entered between Menard and the drivers were for relatively short periods of time; the drivers were paid “by the job;” the parties believed they were creating an independent contractor relationship; and there was significant entrepreneurial opportunity for gain or loss. Only one factor, the level of skill required to provide the services, weighed in favor of employee status. The NLRB also found that Menard did not violate Section 8(a)(1) by maintaining a mandatory arbitration clause in its delivery service agreements with the drivers because as independent contractors, the drivers do not fall within the protections of the Act. Menard Inc., No. 18-CA-181821 (NLRB Nov. 17, 2017).

By Richard Reibstein

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Posted in IC Compliance

October 2017 Independent Contractor Misclassification and Compliance News Update

There were newsworthy developments in a number of cases in the area of independent contractor misclassification during the month of October. Those cases were brought against companies in an array of different industries throughout the country: a security guard company in New Orleans; an architectural firm in New York; a health care staffing company in Florida; a telephone sales and marketing company doing business in Arizona; an on-demand, sharing economy company in California; and a fireworks company in New Jersey.

While the cases seem rather diverse, there is a common thread throughout them all – each of the companies incurred substantial legal fees and distractions by class action or individual plaintiff lawsuits as well as administrative proceedings that are oftentimes avoidable. Many companies have seen fit to minimize their exposure to these types of litigation by enhancing their level of compliance with federal and state independent contractor laws. How?  As noted in the White Paper, “Independent Contractor Misclassification: How Companies Can Minimize the Risk,” there are a number of alternative ways by which businesses can avoid or minimize misclassification liability and the legal fees required to defend these types of judicial and administrative proceedings. Many companies have valid independent contractor relationships but have failed to document or implement the IC relationship in a compliant manner. Because the IC laws vary at the federal level and are oftentimes different from one state to another, there is a compelling need to structure, document, and carry out IC relationships in a state-of-the-art manner, using the types of tools discussed in the White Paper.  By so doing, businesses in most industries can create a customized, sustainable business model that is far less likely to be the subject of IC misclassification challenges and, if challenged, far more likely to demonstrate compliance with the law.

This is the 200th comprehensive blog post published on this site over the past 7-1/2 years.

In the Courts (6 cases)

SECURITY COMPANY SETTLES IC MISCLASSIFICATION CLASS ACTION LAWSUIT FILED BY NEW ORLEANS SECURITY GUARDS. A Louisiana federal district court has granted a motion approving a confidential settlement in a collective action by New Orleans security guards under the federal Fair Labor Standards Act.  The guards suedCrescent City Consulting, LLC for unpaid overtime wages arising from their alleged misclassification as independent contractors and not employees. The guards alleged that “dozens, if not hundreds, of members of the FLSA Collective Plaintiffs”  were affected by the company’s “improper policies and practices.” They claimed that the company had complete control over how, when and where the guards performed their work; set the guards’ work schedules; and required the guards to wear uniforms with the company’s logo. The court concluded that the settlement was “fair and reasonable,” although no details were available regarding the terms of the settlement, which is an unusual occurrence. Koviach v. Crescent City Consulting, LLC, No. 14-2874 SECTION “E” (E.D. La. October 2, 2017).

ARCHITECTURAL FIRM SETTLES LAWSUIT IN NEW YORK ALLEGING IC MISCLASSIFICATION. A federal court in New York approved a proposed settlement of an independent contractor misclassification lawsuit brought under the federal Fair Labor Standards Act and the New York Labor Law by a construction worker who provided services to an architectural firm. The worker testified at his deposition that he was subject to daily and extensive oversight and control by Studio Castellano Architect, P.C., while the company testified that he worked independently on discrete projects subject to minimal supervision. The court approved the settlement as reasonable and fair because the total settlement amount of $60,000 was over half of the maximum possible damages under both statutes. Flores v. Studio Castellano Architect, P.C., No. 15-cv-09158 (S.D.N.Y. October 2, 2017).

FLORIDA HEALTH STAFFING COMPANY FOUND TO HAVE DESTROYED PAY RECORDS OF NURSES IN IC MISCLASSIFICATION CASE BROUGHT BY U.S. LABOR DEPARTMENT.  A Florida health staffing company, Caring First, Inc., has been sanctioned by a federal court for willfully deleting payroll records in an independent contractor misclassification lawsuit brought by the U.S. Department of Labor (USDOL) under the Fair Labor Standards Act on behalf of nurses classified as independent contractors. The court had previously ordered the company to produce such records. In granting the USDOL’s  motion for sanctions, the court found that the company’s owner was aware of the pending litigation yet acquiesced to the weekly deletion of payroll records that she was allegedly aware were pertinent to the litigation.  The court stated that the USDOL had been prejudiced by the willful destruction of the payroll records because it is unable to confirm the amount of back wages the company may owe if the nurses are found to be employees and not independent contractors. Although the court did not order the ultimate sanction of default judgment, it ordered production of the nurses’ paychecks from the company’s bank and will allow the USDOL to recalculate potential back wages based on those paychecks. If the USDOL prevails as to liability at trial, the court ruled, that calculation will be presumed irrebuttably correct, subject to Court approval. Secretary of Labor v. Caring First Inc., No. 15-cv-01824 (M.D. Fla. Oct. 20, 2017).

TELEPHONE SALES AND MARKETING COMPANY AWARDED SUMMARY JUDGMENT ON BACKUP EMPLOYEE “EXEMPTION” ARGUMENT IN IC MISCLASSIFICATION CASE. A New York federal district court has granted summary judgment in favor of a telephone sales and marketing company in a proposed nationwide class and collective action brought by face-to-face sales agents who alleged that the company misclassified them as independent contractors.  The sales agents brought their claims under the federal Fair Labor Standards Act and Arizona state wage laws.  The court did not, however, rule in favor of the company on the issue of whether the agents were properly classified as ICs. Rather, it ruled that the agents, who gather applications from consumers seeking to enroll in programs offered by Credico’s clients, are exempt from the minimum wage and overtime provisions of the FLSA and Arizona state law under those laws’ outside sales exemption – even if they had been misclassified as ICs. To that end, the court found that the agents’ primary duty was sales, the agents customarily and regularly engaged in that primary duty away from the employer’s place of business, and the agents bore the indicia of outside salespeople including independently soliciting new business in the form of new applications, receiving commission-based compensation, and working free from day-to-day supervision. Vasto v. Credico (USA) LLC, No. 15 Civ. 09298 (S.D.N.Y. Oct. 27, 2017).

LAWYERS IN GRUBHUB IC MISCLASSIFICATION TRIAL MAKE CLOSING ORAL ARGUMENTS. The attorneys in the IC misclassification case brought against GrubHub made their closing arguments on October 30, 2017. As detailed in our blog post that day, the lawyers for each side highlighted what they regarded as the key facts supporting their positions in this case involving the status of a single driver. The plaintiff’s lawyers referred to evidence that GrubHub retained the right to terminate the driver’s engagement at will; drivers were terminated by GrubHub in its discretion and without notice or explanation; the drivers were instructed to be “polite and respectful to businesses and customers;” the drivers were required to use an insulated food delivery bag; the work was closely monitored; GrubHub set the drivers’ rate of pay; and drivers were expected to accept every order and faced negative consequences if they did not. GrubHub’s attorneys focused on evidence that GrubHub did not have a right to control the manner and means by which the driver performed his services; the driver was not supervised as to how he performed his services; the driver provided his own car and other tools; the driver worked when and where he wished to work and was free to work for other delivery services; and the driver could choose any driving route he wished and could wear the clothing of his choice.

Although this is the first gig economy IC misclassification case to be tried in the U.S., we noted in our blog post that the court’s decision is unlikely to be momentous from a legal standpoint. Whatever the judge decides in this non-jury trial, the precedential value of this case is likely to be marginal because cases involving the determination of independent contractor or employee status are fact-specific, whereas this case appears to be in the “gray area” where there are many facts favoring each side’s argument, and where differing facts can lead to different results in cases regarding the proper classification of workers. Lawson v. GrubHub Holdings, Inc., No. 15-cv-05128 (N.D. Cal).

NEW JERSEY COURT FINDS PYROTECHNICIANS TO BE IC’S UNDER NEW JERSEY LAW. A New Jersey state appellate court has reversed a decision of a state unemployment agency, finding pyrotechnicians for Garden State Fireworks, Inc. are independent contractors under the New Jersey test for IC status.  New Jersey courts apply a three-part “ABC” test for IC status, where all three prongs must be satisfied to establish non-employee status.  The court found in favor of the company on Prong A, which requires that the individual has been and will continue to be free from control and direction over the performance of the services in contract. The court found that this Prong was in fact satisfied because the company only provided the technicians with supplies, but otherwise gave them virtually complete control over the performance of the fireworks displays. The court also ruled that the company had satisfied Prong B, which requires a showing that the services are outside of either the employer’s usual course of business or all of the employer’s places of business, because the pyrotechnicians’ work was conducted entirely outside of the company’s primary facility. The court also found that the company met the elements of Prong C, which requires that the individual be customarily engaged in an independently established trade, occupation, profession or business. The court reasoned that Prong C is satisfied “when a person has a business, trade, occupation or profession that will clearly continue despite termination of the challenged relationship.” The court continued: “If the person is so ‘dependent on the employer’ that upon ‘termination of that relationship’ he would ‘join the ranks of the unemployed,’ then the prong would not be satisfied.” In this case, the pyrotechnicians were all either retirees or had full-time employment outside of the services they performed for the fireworks company. They did not rely on the company as their primary source of income and only performed services for the company during one or two weeks each year. Based on those facts, the court found that the pyrotechnicians would not be unemployed following the conclusion of their services with the company. Garden State Fireworks, Inc. v. New Jersey Department of Labor and Workforce Development, 2017 WL 4320819 (Super. Ct. N.J.).

Legislative Action (2 items)

NEW GIG ACT INTRODUCED IN HOUSE. On October 27, 2017, U.S. Representative Tom Rice (R-S.C.) introduced the New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017 (H.R. 4165), which mirrors the Senate bill of the same name (S.1549) previously introduced on July 13, 2017 by U.S. Senator John Thune (R-S.D.).  As noted in our prior blog post reporting on the bill, this legislation addresses the classification of workers as either independent contractors or employees and creates a safe harbor for income and employment tax purposes where the workers meet a set of objective tests. The safe harbor is reportedly intended to ensure that the service provider (worker) would be treated as an independent contractor and not an employee; the service recipient (customer) would not be treated as the employer; and in the gig economy context where an internet platform or app facilitates the transactions and payments, that third party would not be treated as the employer. The proposed objective tests involve three areas: the relationship between the parties, the location of the services or means by which the services are provided, and a written contract. The bill would preserve the existing common law test for determining IC/employee status for those workers who do not meet the objective criteria needed for the safe harbor. In addition, the bill proposes various reporting rules and provisions for retroactive reclassification where service providers or service recipients mistakenly believe they qualify for the safe harbor but fail to meet one or more of the objective criteria.”

In introducing the NEW GIG ACT, Rep. Rice stated, “The NEW GIG Act serves to bolster this booming sector of our economy while reducing the complexity in worker classification that exists today.”       This proposed legislation has received scant attention, and even if it gains traction in Congress, it would only apply to the test for independent contractor status for tax purposes and have no application to the test for IC status under the federal Fair Labor Standards Act, the National Labor Relations Act, or any state IC laws. Thus, it could create situations where workers were ICs under federal tax laws but employees under federal and state labor and employment laws.

PORT DRIVERS IC MISCLASSIFICATION BILL INTRODUCED IN CONGRESS. U.S. Representative Grace Napolitano (D-Cal.) introduced the Port Drivers’ Bill of Rights Act of 2017 (H.R. 4144) in the House of Representatives on October 26, 2017. This bill focuses on a particular industry where IC misclassification is perceived by some legislators to be prevalent. The bill states that it is the sense of Congress that truck drivers, including drayage drivers, have the right not be misclassified as independent contractors and “denied” legal protections, benefits and pay; to enjoy a basic standard of living; to be covered by federal, state and local labor and employment laws; to be included in workplace safety and health laws; to be free from “exploitative” truck lease or rental arrangements; and to bargain collectively for better wages and working conditions.  The bill seeks to have the Secretary of Transportation, in consultation with the Secretary of Labor, establish a Truck Leasing Task Force to examine truck leasing agreements entered into by drayage drivers and create a report regarding the impact of those agreements on take-home pay of truckers and whether changes in regulations may be warranted to protect the ability of drivers to earn a living wage. Rep. Napolitano and her co-sponsors claim there is a need for this bill due to independent studies that have repeatedly documented the low pay and “rampant worker misclassification in the port drayage and intermodal industries,” the many decisions issued by the California Labor Commissioner awarding over 400 port drivers in excess of $40 million in back pay due to wage and hour violations, and the 15 unfair labor practice strikes that have occurred over the past three years to protest misclassification, involving picketing that delayed cargo delivery and created congestion at the ports. In view of the Republican majority in both houses of Congress, this bill is unlikely to gain traction.

By Richard Reibstein

Your comments are invited.

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Posted in IC Compliance