June 2013 Monthly Independent Contractor Compliance and Misclassification Update

June 2013

In the Courts 

  • Texas federal district court denies summary judgment motion of American subsidiary of Chinese oil rig company where two welders claim they were misclassified as independent contractors under the Fair Labor Standards Act. Applying the economic realities test, the court found that material issues of fact remained regarding the company’s degree of control over the welders; whether the welders were responsible for providing their own tools and equipment; what their investment was in those items; the extent to which the welders had the opportunity to control their profits and losses; the level of skill and initiative needed to perform the services; and the nature and permanency of the relationship between the welders and the company. Trahan v. Honghua America LLC, Civil Action No.H-11-2271 (S.D. Tex. June 10, 2013).
  • Federal district court in Pennsylvania denies motion for summary judgment by trucking and courier company sued in a misclassification action by nine delivery drivers. The company had argued that the drivers were independent contractors under the economic realities test and, therefore, they were not entitled to the disputed overtime pay under the Fair Labor Standards Act. The court reasoned that the task of determining whether the drivers should be considered employees or independent contractors was better left to a jury given the fact that the court would need to parse facts and evidence in this classification analysis.  Spellman v. American Eagle Express, Inc., d/b/a/ AEXGroup, No. 10-1764 (E.D. Pa. June 24, 2013).
  • Exotic dancers filed a proposed class action lawsuit seeking $5 million in back pay and other penalties in Pennsylvania federal court seeking to represent hundreds of similarly situated dancers who were allegedly misclassified by the Penthouse Club as independent contractors. The complaint includes nationwide claims under the Fair Labor Standards Act to recover unpaid wages on behalf of a nationwide collective class, as well as state claims to recover unpaid wages and overtime compensation under Pennsylvania law. Verma v. 3001 Castor Inc., case number 2:13-cv-03034 (E.D. Pa. May 31, 2013).
  • Red flags are typically raised with the IRS when workers are treated as both W-2 employees and 1099 independent contractors in a single tax year. Only rarely are those simultaneous designations found to be proper. As noted in a blog post dated June 6, 2013,  the Tax Court recently found in Ramirez v Commissioner (May 20, 2013) that a radio station announcer working as a W-2 employee could also be a valid 1099 independent contractor when he promoted the sponsors’ products both during on-air broadcasts and off-air appearances at their sites.

On the Legislative Front

  • Connecticut bill (HB 6151), which had passed the House last month, passes the Senate on June 1, 2013 and awaits the Governor’s signature. As reported in this blog last month, under this bill, truck drivers that transport property pursuant to an agreement with a contracting party will be exempt from the unemployment laws as independent contractors  only if they meet certain heightened conditions for IC status. See Blog Post published June 7, 2013 (On the Legislative Front).
  • Delaware Governor signs into law on June 6, 2013 a bill (HB 55) clarifying that franchisee parties to a franchise agreement are not considered employees of the franchisor under the state’s Wage Payment and Collection Act.
  • Tennessee bill (SB 833) becomes effective July 1, penalizing construction industry firms that  misclassify workers as independent contractors resulting in workers’ compensation fraud. The new law will impose fines on construction services providers up to the greater of $1000 or 1.5 times its average yearly workers’ compensation premium for misstatements and inaccuracies involving payroll, employees, or duties.
  • New York Assembly and Senate pass the Commercial Goods Transportation Industry Fair Play Act (S5867-2013) on June 21, 2013; it now awaits the signature of the Governor.  If enacted in its present form, this legislation “(1) defines presumption of employment in the commercial goods transportation industry; (2) outlines commercial goods transportation contractors’ obligation to correctly classify employees and to inform subcontractors of their obligations regarding employee classification; (3) defines penalties for contractors and subcontractors that violate and willfully violate the provisions of the law; and (4) protects against employer retaliation.” Under the new law, any person performing services for a commercial goods transportation contractor would be presumed to be an employee unless: (a) the person  demonstrates that he/she is a “separate business entity,” based on 11 factors outlined in the law, all of which must be met, or (b) a person may satisfy a conjunctive, three-part “ABC” test as an independent contractor  (requiring that the individual be free from control and direction in performing the job in contract and in fact,  that the service is performed outside the company’s usual course of business, and that the individual is customarily engaged in an independently established trade, occupation, profession or business that is similar to the services at issue). The bill is not certain to be signed into law in its present form, and reportedly may return to the legislature before submission to the Governor. The bill may not go into effect in its present or an altered state for a couple of months or more. 
  • Texas Governor signs bill (HB 2015) on June 14, 2013 aimed at cracking down on misclassification of workers performing services under government contracts. A penalty of $200 for each person misclassified as an independent contractor and not an employee will be assessed against the company. The law takes effect January 1, 2014.

Regulatory and Enforcement Initiatives

  • U.S. Department of Labor’s Wage and Hour Division (WHD) collects $687,489 in back wages from a Texas drilling rig company, Honghua America LLC, which was found to have misclassified roughnecks and crane operators as independent contractors and failed to pay them overtime under the Fair Labor Standards Act. A press release by the WHD on June 3, 2013, stated that employees at the company worked as many as 80 hours per week without any overtime compensation.
  • According to another press release by the WHD, Ratech Construction Inc., a Texas general contractor that provides services to heavy industrial and commercial sector construction projects, was assessed penalties by the WHD in the amount of $176,204 for back wages due to the misclassification of 17 maintenance employees as independent contractors.

Other Newsworthy Matters 

  • A blog post dated June 12, 2013 summarized an interview by ThomsonReuters of one of the publishers of this blog. Richard Reibstein discussed why he started the blog, how the co-publishers find the materials covered in the blog, the cutting edge issue of varying state law tests defining independent contractors, and strategies to enhance independent contractor compliance and to minimize misclassification liability.
  • An article in the Topeka Capital-Journal highlighted a new nationwide coalition called “It’s My Business,” which advocates on behalf of independent contractors to conduct business in that form and oppose attempts to change the rules classifying them. U.S. Senator Blanche Lincoln (D-Ark.), Chairwoman of the coalition, explained that it was launched “to give a voice to the 10.3 million people who have chosen to be their own bosses and build their own businesses.” The coalition includes businesses from California, Iowa, Kansas, New Jersey, Nevada, and Louisiana and is comprised of dozens of independent contractors and their customers from industries such as medical and health services, financial services, transportation, real estate and insurance.

Published by Richard Reibstein, Lisa Petkun, and Andrew Rudolph.  Compiled by Janet Barsky.

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