Editors’ Note: The court decision by a federal district court that was the subject of this blog post was appealed to the U.S. Court of Appeals for the Third Circuit, which asked the New Jersey Supreme Court to articulate what test federal courts should use in determining the independent contractor status of workers for purposes of the New Jersey wage payment and wage/hour laws. On January 14, 2015, the New Jersey Supreme Court rejected the test used by the federal district court in favor of a test that is more burdensome for businesses to meet. See our blog post on January 15, 2015.
Most class action lawsuits alleging that workers have been misclassified as independent contractors (ICs) end up being settled for seven figure amounts – but not all. Last month, a large mattress retailer with showrooms in 13 states won summary judgment in a class action misclassification case brought under the federal Employee Retirement Income Security Act (ERISA) for health and 401(k) benefits, the federal Family and Medical Leave Act (FMLA) for unpaid medical leave, as well as state wage laws requiring payment of overtime pay to employees.
In Hargrove v. Sleepy’s LLC, a federal district court judge in New Jersey ruled that the common law factors for determining the status of a worker, as set forth in 1992 by the U.S. Supreme Court in Nationwide Mutual v. Darden, “overwhelmingly show that the plaintiffs were independent contractors [and not employees].” The judge found that each driver had entered into an Independent Driver Agreement; hired their own workers; purchased their own trucks; maintained their own vehicle insurance; obtained their own motor vehicle registration; paid their own expenses; set up their own business entity; and maintained a relationship with the IRS as a business.
While the judge noted that Sleepy’s monitored the delivery progress each day with electronic equipment and required background checks on all delivery drivers and their employees, these and other facts indicating employee status did not counterbalance the facts in favor of IC status. Further, the judge noted that the requirements allegedly imposed on the drivers were merely to “assure customer satisfaction and safety in a competitive business.”
Unless overturned on appeal, this court decision illustrates that legitimate use of ICs is permitted under applicable laws, provided the relationship is properly structured, documented, and implemented. Many companies that properly structure their IC relationships fail to document them properly; others that properly document such relationships have imperfectly structured or implemented them.
Pepper Hamilton’s Independent Contractor Compliance practice uses its IC Diagnostics™ methodology to analyze the structure, documentation, and implementation of IC relationships. Utilizing Pepper’s 48 Factors-Plus and IC Compliance Scale™, Pepper provides clients with alternative means to enhance their compliance with labor and employee benefits laws, such as those that the class action lawyers claimed the mattress company had violated. Tax compliance is also reviewed and enhanced by the tax lawyers in this interdisciplinary practice group, to minimize or eliminate tax, labor, and benefits exposure from misclassification liability.
Your comments are appeciated.