September 2014 Independent Contractor Compliance and Misclassification Update

This month’s headline developments are the crescendo of cases finding against FedEx Ground’s classification of drivers as independent contractors.  On the heels of last month’s decision by the U.S. Court of Appeals for the Ninth Circuit, which held that FedEx Ground had misclassified drivers who should have been classified as employees in California and Oregon, this month’s update includes a case decided by the NLRB and another case decided by a federal district court, both of which are adverse to FedEx’s interests.  (A fourth recent decision unfavorable to FedEx was issued in October; it was one of the subjects of my blog post earlier today, and will appear in next month’s update.)  Collectively, these cases not only are a huge setback for FedEx, but also are likely to prompt even more legal challenges by state and federal regulatory agencies and plaintiffs’ class action lawyers to the misuse of independent contractors by businesses. Companies that wish to minimize exposure to independent contractor misclassification liability may wish to examine the publisher’s White Paper on the subject.

In the Courts (6 cases)

  • TRUCK DRIVERS FOUND TO HAVE BEEN MISCLASSIFIED IN CALIFORNIA. California federal district court finds class of 300 current and former truck drivers have been misclassified as independent contractors and not employees by Shippers Transport Express, Inc. (STE), a trucking and logistics company providing land transportation services for ocean containers to and from international ports in California. Among the state law claims asserted by the drivers are failure to pay minimum wage and failure to reimburse business expenses. In granting the drivers’ motion for partial summary judgment, the Court found that STE not only retained the right to exercise control over the manner and means of the truckers’ accomplishing the desired results, but also exercised such control. Taylor v. Shippers Transport Express, Inc., CV 13-02092 BRO (PLAx) (C.D. Cal. September 30, 2014).
  • U.S. OPEN TENNIS UMPIRES ARE IC’S, NOT EMPLOYEES. A New York federal district court granted the United States Tennis Association’s motion for summary judgment, finding a class of umpires performing services at the U.S. Open to be independent contractors. In seeking to recover unpaid overtime, the umpires claimed that they should have been classified as employees under the Fair Labor Standards Act and the New York Labor Law. Applying the economic realities test under the FLSA, the court determined that the umpires were in business for themselves; were highly skilled professional umpires who exerted a high degree of control over their work; had “immense” discretion, within the parameters of the rules of tennis, to conduct their duties; invested themselves as professional umpires by pursuing additional certifications and officiating at other tournaments; controlled their own schedules; and had a short-term relationship with the USTA, even if they officiated each year. The court reached the same outcome under New York state law. Meyer v. United States Tennis Association, No. 1:11-cv-06268 (SDNY September 11, 2014 (ALC) (MHD).
  • MISCLASSIFICATION CLAIMS BY CAR SERVICE DRIVERS IN NYC DISMISSED. “Black car” drivers providing services in New York City to clients of Corporate Transportation Group have been held by a federal court to be independent contractors. The drivers had alleged violations of the FLSA and New York Labor Law, including claims for unpaid overtime. The court found that the company had limited control over the drivers; the drivers had the opportunity for profit or loss; the drivers had an investment in the business because they could rent or buy a franchise and had to buy or rent a car; the drivers needed to exercise a significant degree of independent initiative to be successful; and the drivers could terminate their contracts at will. The court reached the same conclusion under state law, finding that the drivers worked at their own convenience; were free to engage in other employment; did not receive fringe benefits; were paid as non-employees; were not on the company’s payroll; and did not have fixed schedules. Saleem v. Corporate Transportation Group, Ltd., 12-CV-8450 (SDNY September 16, 2014) (JMF).
  • FED EX DRIVERS MAY MAINTAIN LAWSUIT FOR THE VALUE OF EMPLOYEE BENEFITS. A Missouri federal district court held that ERISA does not pre-empt state law claims by FedEx drivers for the value of employee benefits they claim they would have received had they been properly classified by FedEx as employees and not independent contractors. By statute, ERISA pre-empts a state law if the claim broadly “relates to” an ERISA plan. The court noted that a state law claim “relates to” an ERISA plan if it either expressly refers to an ERISA plan or has a connection with such a plan. The court determined that the FedEx drivers’ claims did not have a connection to an ERISA plan and, therefore, the state law claims were not pre-empted. It reasoned: “These are not claims to recover benefits due under the terms of FedEx’s plans, to enforce rights under the terms of the plans or to clarify rights to future benefits under the terms of the plans. Rather, Plaintiffs seek the value of employee benefits denied them based on their misclassification as independent contractors; any damages would come from FedEx, not from the plan itself.” Gray v. FedEx Ground Package System, Inc., No. 4:06-CV-00422 (E.D. Mo. September 5, 2014) (JAR).
  • NEWSPAPER CARRIERS FOUND TO BE MISCLASSIFIED. A class of newspaper carriers for the Sacramento Bee have been found to have been employees misclassified as independent contractors. The Superior Court for the County of Sacramento based its holding on, among other things, that the newspaper had the right to (and did) exercise pervasive control of the manner and means of the performance of the carriers’ work; the carriers had little or no right to negotiate the terms of their IC agreement; the carriers received daily mail that set forth how they were to deliver the newspapers each day; and the newspaper managed, trained, and supervised the carriers. Sawin v. The McClatchy Company, No. 34-2009-00033950 (Sacramento Super. Ct. September 22, 2014) (GWW).
  • NLRB HOLDS FED EX GROUND DRIVERS ARE EMPLOYEES AND MAY BE UNIONIZED. As noted in my blog post earlier today, the NLRB held that FedEx Home Delivery drivers are employees under the National Labor Relations Act and, therefore, may be represented by the Teamsters local that had petitioned the NLRB for an election among single-route drivers in Connecticut. The majority opinion of the NLRB expressly noted that it “declined to adopt the District of Columbia Circuit’s recent holding [in another FedEx case], insofar as [the Court] treats entrepreneurial opportunity . . . as an ‘animating principle’ of the inquiry.” One member of the NLRB dissented, concluding that the D.C. Circuit’s decision should be followed by the Board. FedEx Home Delivery, an Operating Division of FedEx Ground Package Delivery Systems, 361 N.L.R.B. No. 155 (September 30, 2014).  

Regulatory and Enforcement Initiatives (5 matters)

  • U.S. DEPARTMENT OF LABOR AWARDS OVER $10 MILLION TO STATES TO CURB IC MISCLASSIFICATION. My blog post on September 16, 2014 reported that the U.S. Department of Labor awarded $10.2 million in federal grants to 19 states including California, Delaware, Florida, Hawaii, Idaho, Indiana, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oregon, South Dakota, Tennessee, Texas, Utah, Vermont, and Wisconsin to implement or improve worker misclassification detection and enforcement initiatives. In a News Release dated September 15, 2014, U.S. Secretary of Labor Thomas E. Perez stated that the federal grant awards “will enhance states’ ability to detects incidents of worker misclassification and protect the integrity of state unemployment insurance trust funds.” An additional $2 million bonus was shared by Maryland, New Jersey, Texas, and Utah due to their high performance or most improved performance in detecting incidents of misclassification.
  • TECH START-UPS FACE MISCLASSIFICATION LIABILITY. A New York Magazine article highlighted the potential exposure of tech start-up companies to costly liability for their misuse of independent contractors in their business models. In my September 18, 2014 blog post entitled “Silicon Valley Misclassification: ‘New York’ Magazine Focuses on How the 1099 Economy May Be Exposing Tech Start-Up Companies to Costly Liability for Their Use of Independent Contractors,” I discuss the misclassification risks that may be present in such 1099 start-ups as TaskRabbit, Homejoy, Uber, BloomThat, Washio, and Spoonrocket. The blog post also examines whether courts can destroy the 1099 model and how private equity firms should conduct due diligence in the area of independent contractor misclassification risk – and how such investors can minimize their risks.
  • U.S. LABOR DEPARTMENT FINDS AUTO PARTS COMPANY MISCLASSIFIED OVER 200 DRIVERS. An Arizona auto parts company has been found to have misclassified its delivery drivers as independent contractors. The U.S. Department of Labor, Wage and Hour Division, reported in the Department’s Newsletter that Delivery Driver Solutions has paid 240 drivers $80,000 in back wages due to overtime violations. The drivers delivered auto parts from retailers to auto repair shops and dealerships in the Phoenix area.
  • OFCCP ISSUES INDEPENDENT CONTRACTOR TEST. The Office of Federal Contract Compliance Programs has published a list of Frequently Asked Questions on the Department of Labor website to help federal contractors in assessing whether a worker is an employee or independent contractor. The FAQs inform contractors how the OFCCP determines which workers are employees that must be included in Affirmative Action Plans under Executive Order 11246, Section 503 of the Rehabilitation Act of 1973, and the Vietnam Era Veterans’ Readjustment Assistance Act.
  • IRS FOUND BY INSPECTOR GENERAL TO HAVE FAILED TO SECURE NECESSARY INFORMATION FOR ITS VCSP PROGRAM. The Treasury Inspector General for Tax Administration (TIGTA) issued a report on September 24, 2014 finding that the Internal Revenue Service (IRS) does not obtain the information it needs to ensure that employers are eligible for, and comply with, the Voluntary Classification Settlement Program (VCSP). The VCSP had been implemented to allow employers to voluntarily reclassify workers from independent contractors to employees for federal employment tax purposes, as noted in my prior blog post on the program. In a press release issued that same day, TIGTA stated that the IRS does not require the workers’ names and social security numbers, yet without that information, the IRS cannot determine if the VCSP applicant met VCSP eligibility requirements. TIGTA made five recommendations, including that the IRS (1) require employers applying for the VCSP to provide the names and Social Security Numbers for the workers being reclassified; (2) revise internal procedures for processing VCSP applications to evaluate employer eligibility and ensure that worker compensation and the VCSP payment is accurate; (3) develop follow-up review processes to ensure compliance with the terms of agreements; (4) develop reporting capabilities to allow for a single system for both tracking inventory and monitoring program performance; and (5) revise processes to ensure that accepted agreements are successfully sent to and received by the IRS business units responsible for monitoring.

Other Noteworthy Matter

Written by Richard Reibstein.

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