June 2014 Monthly Independent Contractor Compliance and Misclassification Update

JUNE 2014

In the Courts (10 Cases)

  • FEMALE FOOTBALL PLAYERS SUE LINGERIE LEAGUE FOR IC MISCLASSIFICATION. A former Lingerie Football League player has filed a class action lawsuit in a California state court against the all-female, professional league (now called the Legends Football League). The lawsuit claims that current and former players were willfully misclassified as independent contractors instead of employees. The complaint alleges a number of violations of the California wage and hour laws, including failure to pay compensation for all hours worked; failure to pay at least the minimum wage; and failure to pay overtime wages. The League allegedly mandated attendance at practices, games, and promotional events on dates and at times set by the League and reserved the right to discipline players for failure to attend such events; prevented the players from engaging in any outside activities that might result in serious physical injury; and did not allow any negotiation regarding the terms of the independent contractor agreement. Margulies v. Legends Football League, LLC, No. BC550244 (Super. Ct. Cal. June 27, 2014).
  • UBER CAR SERVICE SUED IN MASSACHUSETTS BY DRIVERS. A Massachusetts car service driver has commenced a lawsuit in Massachusetts state court against Uber Technologies on behalf of individuals who have worked in the state as Uber car service drivers. Uber is a car service that provides customers with the ability to request, ride and pay via their mobile phones. The lawsuit claims, among other things, that Uber misclassified the drivers under the state law as ICs instead of employees. The complaint alleges that the drivers are required to follow detailed requirements imposed upon them by Uber including cleanliness of their vehicles, timeliness in picking up customers, and how to speak to customers – and the drivers are subject to termination if they fail to abide by such rules. The complaint further states that because of the alleged unlawful misclassification, the drivers have improperly been required to bear the expenses of their employment, such as the costs for maintaining or leasing their vehicles, insurance, fuel, and phone data charges. Yucesoy v. Uber Technologies, Inc., Docket No. SUCV2014- 02056 (Super. Ct. Mass. June 26, 2014).
  • AIRLINE AND ITS AIRCRAFT SUBCONTRACTOR SUED FOR IC MISCLASSIFICATION IN MAINE.  A division of Lutfhansa Airlines and its subcontractor, Global Aircraft Service, have been sued in a class action lawsuit filed in the U.S. District Court for the District of Maine for allegedly misclassifying sheet metal workers as ICs in violation of state and federal wage/hour laws. According to the complaint, the workers, who were to provide services in furtherance of Lufthansa’s aircraft restoration project, were allegedly denied overtime compensation for hours over 40 in a workweek when they worked on average over 63 hours per week; were not permitted to deviate from the schedule set by the companies; were provided with tools to be used on the job; were required to wear Global Aircraft tee shirts every day; and were provided with a company e-mail address, furnished apartments, and/or housing allowances. Venegas v. Global Aircraft Service, Inc., No. 2:14-cv-00249 (D. Maine June 24, 2014).
  • LOGISTICS COMPANY FOUND TO HAVE MISCLASSIFIED ITS DRIVERS AS ICs. The United States Court of Appeals for the Ninth Circuit held that yet another logistics and delivery company, Affinity Logistics Corp., misclassified its drivers as independent contractors. As discussed more fully in our prior blog post dated June 20, 2014, the federal appeals court, applying California law, concluded that 300 drivers who were retained by the company to make home deliveries and install products purchased by customers from Sears were employees and not independent contractors, even though the contractors were all separate entities. Ruiz v. Affinity Logistics Corp., No. 3:05-cv-02125- JLS-KSC (9th Cir. June 16, 2014).
  • AIRPORT SHUTTLE COMPANY AGREES TO $11.9 MILLION IC MISCLASSIFICATION SETTLEMENT.  Car service drivers of SuperShuttle, a shared-ride transportation service that provides door-to-door service to and from California airports, have secured an $11.9 million settlement in their IC misclassification lawsuit filed in federal court in California. The drivers alleged that SuperShuttle improperly classified them as independent contractors or franchisees. The drivers contended that SuperShuttle improperly failed to pay the drivers for business expenses, overtime pay, and minimum wages and failed to comply with California meal and rest period laws. SuperShuttle maintained that the franchisees and the non-franchisee drivers have at all times been properly classified as non-employees. The settlement amount allocated to the drivers under the proposed settlement would be about $7.6 million, to be distributed to over 3,000 class members, with the average class member receiving approximately $2,350. The settlement agreement also provided for payment of the drivers’ attorneys’ fees of up to $4 million, plus court costs of up to $300,000. A fairness hearing is scheduled for October 2014. Kairy v. SuperShuttle International, Inc., No. 4:08-cv-02993-JSW (N.D. Cal. June 12, 2014).
  • PELLA WINDOWS BEATS ILLINOIS IC MISCLASSIFICATION CLAIM BY “BONA FIDE” CORPORATE INDEPENDENT SUBCONTRACTOR.  An Illinois appeals court has affirmed a lower court’s grant of summary judgment in favor of Pella Products, Inc., finding that when a “bona fide corporation” rather than an individual performs services for a contractor, the Illinois Employee Classification Act does not apply. Pella Products, which sells and installs windows and doors, entered a subcontracting agreement with Robert Michael Homes, Inc., an incorporated residential contracting business, to provide window and door installation services for Pella. The Act’s administrative regulations promulgated by the state Department of Labor provide that incorporated businesses like Robert Michael Homes are excluded from the Act because they are not “individuals.” Those factors include whether the corporation is capitalized, has issued corporate stock, maintains a corporate bank account, intermingles corporate and personal accounts or funds, holds itself out as a corporation, maintains corporate books and records, files corporate tax returns, and has filed articles of incorporation. The court found that the subcontracting company satisfied those factors and that Robert Michael Homes, Inc., and not the corporation’s owner, Robert Michael, had rendered services individually to Pella Products through the subcontracting company’s own employees. Additionally, the court found that, under the agreement between Pella Products and the subcontracting company, the latter agreed to supply labor, skills, and tools necessary to perform the work; determined its employees’ rate of pay; hired, fired and paid its employees; paid employees out of its corporate account; and set the schedules for its employees, even though Pella scheduled the installation jobs to meet customer demand. Michael v. Pella Products, Inc., 2014 Ill. App. (1st Dist.) 132695 (June 25, 2014).
  • DRIVER FOR LOGISTICS COMPANY HELD EMPLOYEE, NOT INDEPENDENT CONTRACTOR. A driver who delivered auto parts for a logistics company, BMS Limited 1999, was held by a Utah court to be an employee and not an independent contractor where the court found that the driver was not customarily engaged in an independently established trade or business. It was reported earlier this month that the Utah Court of Appeals held, in late May 2014, that although the logistics company was able to satisfy some of the seven factors considered in analyzing whether an individual has an independently established business under the Utah Employment Security Act, it failed to meet its statutory burden when all seven of the factors were evaluated. Although the court found that the driver had at one point obtained a business license, kept track of expenses, provided his own equipment including his own vehicle, and could realize a profit or loss, such factors were outweighed by the fact that the worker was required to secure the initial business license, the driver did not supply any equipment beyond his vehicle, tarps, and straps, the company paid some of the driver’s fuel expense, and there was no evidence that the driver serviced or attempted to obtain other customers. BMS Limited 1999, Inc. v Department of Workforce Services, No. 20130499-CA (Ct. App. Utah May 22, 2014).
  • HOME CARE WORKERS SUE CALIFORNIA COMPANY FOR MISCLASSIFYING THEM AS FRANCHISEES INSTEAD OF EMPLOYEES. A California home care franchisor, Griswold International LLC, has been sued in federal district court for $3 million by group of franchisees who claim they entered franchise agreements based on misrepresentations by Griswold that the independent contractor business model used by Griswold was “proven, thoroughly tested, validated by 30 years’ experience, documented and defended by the best legal minds, and supported by [Griswold’s] ongoing specialists in state and local laws and regulations, and that it was specifically valid in California.” In this action, where the franchisees are seeking damages for fraud, negligent misrepresentation, fraudulent concealment, and violation of the California Franchise Investment Law, the franchisees allege that at the same time they were entering into these agreements, Griswold allegedly knew or should have known that classification of caregivers as independent contractors had been under attack for several years by various state labor and employment departments, that California had introduced and passed relevant legislation, and that in some states the franchisor had already converted to an employee-based business model and/or a modified independent contractor business model. Andersen v. Griswold International LLC, No. 3:14-cv-02560 (N.D. Cal. June 3, 2014).
  • ANOTHER FEDERAL COURT FINDS EXOTIC DANCERS WERE MISCLASSIFIED AS ICs. An Arkansas federal court finds class of exotic dancers, who sued an adult entertainment club operated by French Quarter Partners, LLC are employees under the federal Fair Labor Standards Act (FLSA). In applying the “economic realities” test used under the FLSA, the Court concluded that (1) control was exercised by the club over the dancers because they were expected to abide by certain rules while working at the club; were expected to appear for work at specified times subject to penalty; were not supposed to leave while on a shift even if no customers were present; were not supposed to hire themselves out to dance in people’s homes or at parties; and the club set the prices charged for private dances; (2) although the dancers made some investment in order to dance at the club, such as purchasing their own costumes, shoes, and cosmetics, the club had a much more significant investment including renting the space used by the dancers, procuring the business license, and attending to the maintenance, cleaning, and renovations of the club; (3) the dancers required little specialized skill and initiative to perform their work; (4) the dancers’ relationship with the club was transient in nature; and (5) the dancers were an integral part of the club’s business. The court found that all of the factors, other than factor 4, supported IC status. Whitworth v. French Quarter Partners, LLC, Case No. 6:13-CV-6003 (W.D. Ark. June 30, 2014).
  • CALIFORNIA SUPREME COURT ALLOWS CLASS ACTION LAWSUITS FOR IC MISCLASSIFICATION. The Supreme Court of California has held that the independent contractor/employee misclassification claims asserted by newspaper carriers delivering papers against Antelope Valley Newspapers may be brought as a class action lawsuit. The Court stated that “Certification of class claims based on the misclassification of common law employees as independent contractors generally does not depend upon deciding the actual scope of the hirer’s right of control over its hires. The relevant question is whether the scope of the right to control, whatever it might be, is susceptible to class-wide proof.” The court found that the newspaper carriers’ relationship with the newspaper company was governed by one of two form contracts covering all of the workers, both of which addressed the extent of the company’s control over many aspects of the deliveries. The California Supreme Court directed that the trial court, on remand, examine the contract closely to determine whether “the degree of control it spells out is uniform across the class.” In addition, besides the central factor of right to control, secondary factors including whether carriers are engaged in a distinct occupation/business, may be considered as to whether those factors will require individual inquiries or can be assessed on a class-wide basis. Finally, the court ruled that alleged wage/hour violations such as unpaid overtime, unlawful deductions, failure to provide meal breaks, and failure to reimburse for expenses, could not be managed on a class-wide basis. Ayala v. Antelope Valley Newspapers, Inc., S206874 (Sup. Ct. Cal. June 30, 2014).

Regulatory and Enforcement Initiatives (3 matters)

  • TENNESSEE ISSUES NEW PROCEDURES TO CRACK DOWN ON IC MISCLASSIFICATION. The Tennessee Department of Labor and Workforce Development, through its Workers’ Compensation Division, announced in a press release on June 4, 2014 that it has issued and implemented new procedures to identify employers who intentionally misclassify workers as independent contractors, failing to report all wages paid, misrepresenting the kind of work performed by its workers, or paying workers “under the table.” To support its initiative, the Department has established a referral process for possible criminal prosecution, hired additional investigators, been acquiring fraud detection software, launched a public awareness initiative, and created a website that provides useful distinctions between employees and independent contractors, as well as a tip form to report businesses suspected of misclassifying employees.
  • IRS ANNOUNCES INCREASED CORPORATE AUDITS FOR IC MISCLASSIFICATION. The Internal Revenue Service has announced that it plans to audit more S corporations because many are misclassifying their employees as independent contractors, according to Gerry Kelly-Brenner, senior stakeholder liaison for the IRS Small Business/Self-Employed Division, who participated in the IRS-San Jose State University Small Business Tax Institute on June 18, 2014. Ms. Kelly-Brenner reminded companies that “a corporate officer is always an employee, whether part-time or full-time.”
  • DRYALL CONTRACTOR SETTLES IC MISCLASSIFICATION INVESTIGATION FOCUSING ON CONSTRUCTION WORKERS. A drywall contractor, TJ Drywall, agreed to pay a $300,000 penalty imposed by the Tennessee Department of Labor, which alleged that the construction contractor had misclassified construction workers and materially understated its payroll to its insurance carrier. The penalty was reported in a June 4, 2014 press release, which noted that the amount of the penalty was the largest to date in a statewide crackdown in Tennessee against the misclassification of employees as independent contractors.

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

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