On Friday, May 23, 2014, Lowe’s Home Centers agreed to settle a class action brought by its home improvement contractors who allege that they were misclassified as independent contractors instead of employees. The maximum settlement amount, depending on the number of contractors who file claims, is $6,500,000, plus an additional 25% payment for plaintiffs’ attorneys. A hearing is scheduled for June 27, 2014, where a federal district court judge in California, Judge Jeffrey S. White, will approve the proposed settlement if he finds it meets applicable standards of “fairness.” Shepard v. Lowe’s HIW, Inc., No. 12-CV-03893-JSW (N.D. Cal. May 23, 2014).
The plaintiffs in this case are home improvement contractors comprised of both individuals and businesses. They allege that Lowe’s Home Centers offered its customers the opportunity to hire contractors to install products and services purchased from Lowe’s. Such installations included appliances, kitchens, bath and plumbing fixtures, flooring, doors and windows, garage doors, lighting, outdoor fixtures, and insulation. The complaint, originally filed in state court, alleged that Lowe’s had the right to control, and did control, all aspects of installation jobs by, among other things, requiring that the installers:
- identify themselves as “installers for Lowe’s” or “I work for Lowe’s”;
- wear Lowe’s hats and shirts at work sites;
- use signs stating “Lowe’s Installation”;
- attend training by Lowe’s; and
- comply with Lowe’s production requirements;
The complaint also alleged that Lowe’s Production Office managed each installation project; Lowe’s set the fees to be earned by each home improvement contractor; imposed a non-compete covenant on installers; and marketed the contractors’ services on its website on an “Installation” page that provided “Let Us Do The Installation For You” with our “trained installers,” who services were “guaranteed by Lowe’s warranty.”
The installers alleged that Lowe’s failed to provide them with an array of benefits that were available to employees, including comprehensive group medical insurance, prescription drug coverage, vision care, group life insurance, paid sick leave, paid vacation, tuition reimbursement, employee discounts for purchases, short and long term disability coverage, a stock purchase plan, and a matching 401(k) savings plan. The installers alleged that they were entitled to such benefits under California Labor Code Sections 2750.5 (which establishes a rebuttable presumption that a worker performing services for which a license is required is an employee and not an independent contractor). The installers also alleged that under California Labor Code Section 2802. They were entitled to reimbursement, as employees, for all necessary expenses incurred in performing their services.
Lowe’s denied the allegations and maintains that the installers are independent contractors. After numerous motions and extensive discovery including the exchange of thousands of pages of documents and depositions of both the plaintiffs and Lowe’s personnel, the parties settled their disputes at a private mediation.
The proposed settlement notes that if the case went to trial, the maximum amount recoverable for the class would be approximately $33 million, but the case presents “complex legal and factual issues” including the risk that class certification will be denied. Those issues, the plaintiffs’ counsel claim, make the maximum settlement amount of $6.5 million a fair and reasonable compromise that is in the best interests of the class members.
Analysis: A Failure to Structure, Document, and Implement IC Relationships
It appears from the allegations that Lowe’s Home Centers may not have structured its relationship with home improvement contractors in a manner that enhanced compliance with independent contractor laws in California and other states. While the laws in almost all states allow companies like Lowe’s to contract with individuals or businesses to provide services to customers and clients of the company, many companies that do so fail to take steps to structure, document, and implement properly their independent contractor relationships to fully comply with those laws.
Businesses that use many independent contractors or pay workers on a 1099 basis are well advised to address the issue of their independent contractor compliance before being served with a class action summons and complaint or before receiving a notice from a state unemployment or workers compensation office, the IRS, or state revenue department.
This case illustrates the value of using, in advance of a legal challenge, a methodology such as IC Diagnostics™ to evaluate whether an existing or proposed independent contractor relationship can be legitimately structured as such, and if so, whether it needs to be restructured, re-documented, and re-implemented to maximize the likelihood that those workers will be regarded by the courts and government regulators as independent contractors and not employees. Other proprietary compliance tools include the 48 Factors-Plus™ analysis and IC Compliance Scale.™
While Lowe’s itself continues to deny any wrongdoing, the cost of the lawsuit, when the company’s own legal fees are included, is likely to exceed $10 million. Further, the costs of misclassification do not always come to an end in class action cases when the last payment is made to the workers. Companies that settle class action cases may also be facing claims for unpaid payroll taxes at the state and state levels, unpaid unemployment tax payments, and unpaid workers compensation premiums – although there may be defenses to those types of claims.
Neither the settlement of a class action or an adverse determination by a regulatory agency should necessarily be regarded as an obligation on the part of the affected business to treat the workers in question as employees on a going-forward basis. Many businesses can adopt an independent contractor model that may well survive future scrutiny under federal and most state laws, provided the business properly engages in bona fide restructuring, conducts proper re-documentation, and implements and follows new, state-of-the-art independent contractor practices.
While efforts today to enhance independent contractor compliance cannot eliminate past exposure to misclassification liability, any changes that enhance compliance with the independent contractor laws will not only minimize or avoid future liability but also lessen the likelihood that the business will become a target for class action lawyers and government agencies.
Written by Richard Reibstein.