October 2014 Independent Contractor Compliance and Misclassification Update

In the Courts (8 cases)

  • TAX COURT DECISION REMINDS COMPANIES THAT “OFFICERS” ARE STATUTORY EMPLOYEES AND THEREFORE CANNOT BE INDEPENDENT CONTRACTORS. The United States Tax Court held that a company that was engaged in the buying, reconditioning, and selling of cars misclassified as independent contractors instead of employees two of its officers and another worker and failed to pay employment taxes on their earnings. Because the officers (the President and Secretary/Treasurer) performed more than minor services for the company and both received remuneration for such services, the Tax Court concluded that they were “statutory employees” for employment tax purposes. Specifically, the President supervised and assigned work to others, determined the pay of other workers, and had the right to hire and terminate the employment of others; and the Secretary/Treasurer was responsible for detailing the cars for resale, including painting, washing and cleaning the cars. The third worker was found to be an employee under the common law right to control test. The worker, whose responsibilities included picking up and delivering cars and obtaining license plates and title certificates for them, was found to be subject to direction and control by the President, was not in a position to increase his profit through his own efforts, and had no risk of loss and needed minimal skill to perform his job. Central Motorplex, Inc. v. Commissioner of Internal Revenue, No. 2014 TNT 195-13 (October 7, 2014).
  • NEWSPAPER AGREES TO PAY $3.2 MILLION TO ITS DELIVERY WORKERS ALLEGEDLY MISCLASSIFIED AS INDEPENDENT CONTRACTORS. A California federal court granted preliminary approval of $3.2 million class action settlement of state wage and hour claims by nearly 800 newspaper delivery workers suing the publisher of the North County Times, Lee Publications. The newspaper carriers alleged they were misclassified as independent contractors and that the publisher engaged in unfair business practices and failed to pay minimum wage and overtime compensation, reimburse for business expenses, and keep accurate pay records. The proposed settlement would be allocated as follows: $2.27 million for class members’ claims; an estimated $800,000 in attorneys’ fees; and $36,000 in additional awards to the named plaintiffs. A fairness hearing is scheduled for February 2015. Dalton v. Lee v. Lee Publications, No. 308-cv-01072 (S.D. Cal. October 17, 2014).
  • THREE STRIP CLUBS FARE POORLY IN CLAIMS FOR UNPAID MINIMUM WAGES AND/OR OVERTIME PAY. We have been reporting on clubs that classify their exotic dancers as independent contractors for over four years, beginning with our blog post dated October 29, 2010. This past month, strip clubs experienced adverse developments in three separate class action independent contractor misclassification lawsuits brought by exotic dancers in Florida, Nevada and New York. In each case the dancers had alleged that they had been denied overtime pay or minimum wages. Although these three cases below apply only to strip clubs that fail to pay fees to dancers that exceed the minimum wage and/or fail to pay dancers overtime for hours worked over 40 per week, clubs whose dancers work less than 40 hours per week and that pay their dancers more than minimum wage may still have misclassification liability exposure under state wage payment laws barring deductions from the earnings of dancers if they have been misclassified as independent contractors.
    • First, the Supreme Court of Nevada, in a case brought by dancers against the Sapphire Gentlemen’s Club in Las Vegas, reversed a lower state court decision that performers were independent contractors and not employees. The performers were not paid by the club; rather their only compensation was derived from patrons’ tips and payments with the club’s “dance dollars,” from which “the club took a cut.” As a threshold matter, the court adopted the Fair Labor Standards Act’s economic realities test for determining independent contractor/employee status in the context of Nevada’s minimum wage laws, which the dancers alleged they were not paid. The court selected the federal test because it found it was the test most closely fostering the intent of the Nevada Legislature when it passed an amendment that was intended to encompass as many or more entities as the FLSA definition of “employer” under federal law. In applying the test, the court chose to reverse the lower court and concluded that the performers were employees and not independent contractors, relying principally on the control exercised by the club by giving the performers little choice but to use “dance dollars” that could only be used for a type of dancing, the manner of which the club dictated. Terry v. Sapphire Gentlemen’s Club, No. 59214 (Sup. Ct. Nevada Oct. 30, 2014).
    • Second, a Florida federal district court granted conditional certification of a Fair Labor Standards Act proposed collective action that may cover as many as 500 dancers at a Miami club, King of Diamonds. The alleged violations in this case involved claims that the dancers were not paid minimum wages or paid overtime for all hours worked in a workweek over 40. Espinoza v. Galardi South Enterprises, No. 14-21244-CIV-Goodman (S.D. Fla. Oct. 23, 2014).
    • Third, a $4.3 million settlement was reached between a class of 250 exotic dancers and trio of New York strip clubs, known as New York Dolls, Private Eyes, and Flashdancers. The dancers alleged, among other things, that they had been misclassified as independent contractors and that the clubs had violated the Fair Labor Standards Act as well as New York State wage/hour laws regarding the payment of minimum wages and overtime compensation. The dancers claimed that they were subject to control by the Clubs because they were required by the Clubs to work a minimum number of shifts, work certain days to which they were assigned, purchase uniforms approved and often provided by the Clubs, and share tips with others. Additionally, the dancers allegedly were prohibited from using glitter and heavy perfume, leaving the Clubs with customers, discussing the Club’s operating procedures with customers, or wearing particular clothing and hairstyles (even though the prohibitions did not relate to any particular theme of the clubs). Flynn v. New York Dolls Gentlemen’s Club, No. 13 CIV 6530 (S.D.N.Y. Oct. 6, 2014).
  • DIRECTV TECHNICIANS SEEK TO CONSOLIDATE CLASS ACTION LAWSUITS AROUND THE COUNTRY. Satellite television technicians who allege they are being misclassified as independent contractors requested the Judicial Panel on Multidistrict Litigation to consolidate eleven Fair Labor Standards Act lawsuits against DirecTV and its network of home service providers. The technicians argue that the claims “are dominated by common questions of fact that present identical legal issues” and that the common threshold question is “whether the economic realities of DirecTV’s uniform policies and practices render each [technician] as an employee of the Defendants, as opposed to an independent contractor.” The technicians seek an order from the Panel to transfer the actions currently pending across the country to a single federal district for consolidated proceedings. They assert that they expect 34 more suits to be filed soon, eventually creating 45 related cases across 35 federal districts on behalf of nearly 500 plaintiffs.  In Re DirecTV Inc. Fair Labor Standard Act Wage and Hour Litigation, MDL No. 2594 (October 16, 2014).
  • FEDEX GROUND DRIVERS CONTINUE AVALANCHE OF SUCCESSES AGAINST FEDEX GROUND IN INDEPENDENT CONTRACTOR CHALLENGES. FedEx experienced an avalanche of independent contractor misclassification rulings in the course of one week. As more fully discussed in our blog post dated October 6, 2014, both the Supreme Court of Kansas and the National Labor Relations Board considered the classification status of FedEx’s Home Delivery and Ground Division drivers in Kansas and Connecticut, respectively.  In blockbuster decisions that may portend extensive misclassification liability for FedEx, the court and federal agency concluded that the drivers had been misclassified as independent contractors under Kansas law and under the National Labor Relations Act. These decisions come on the heels of a profound victory for FedEx Ground and Home Delivery drivers only six weeks earlier, when the U.S. Court of Appeals for the Ninth Circuit found in two separate cases that the drivers were employees and not independent contractors under California and Oregon law.  See our blog post dated August 29, 2014.  For a recent discussion about FedEx’s business model in the wake of these decisions, see the October 23, 2014 article in the Washington Post entitled, “How Fedex is trying to save the business model that saved it millions,” in which this blog’s co-publisher, Richard Reibstein, is quoted.

On the Legislative Front (one matter)

  • CALIFORNIA PASSES NEW LAW AIMED AT STAFFING COMPANIES THAT REFER INDEPENDENT CONTRACTORS. A new California law imposes costly risks to companies using misclassified independent contractors supplied by staffing and recruiting firms. This new law was the subject of our blog post dated October 1, 2014, which includes an in-depth analysis of the new law and describes the way in which staffing companies and companies that utilize their services can minimize misclassification liability exposure.

Regulatory and Enforcement Initiatives (2 matters)

  • U.S. LABOR DEPARTMENT SIGNS UP ALABAMA AS THE 16TH STATE TO ENTER INTO A FEDERAL-STATE MISCLASSIFICATION PACT. The Alabama Department of Labor signed a memorandum of understanding with the United States Department of Labor’s Wage and Hour Division (“WHD”) “to protect the rights of employees by preventing their misclassification as something other than employees, such as independent contractors.” A News Release dated October 2, 2014 reported that the Alabama DOL became the 16th state agency to enter such a partnership with the federal government. Dr. David Weil, Administrator of the WHD, stated: “This memorandum of understanding sends a clear message that we are standing together with the state of Alabama to protect workers and responsible employers and ensure everyone has the opportunity to succeed.” The News Release clarified that the use of independent contractors is not “inherently illegal,” but that misclassification is a serious problem and the use of an independent contractor business model may not be used to evade compliance with federal labor law. As the publishers of this blog have stated in blog posts when reporting on other states that have signed up with the federal DOL, businesses using independent contractors have ways by which they can minimize the risk that increased government regulation will determine that a company’s otherwise legitimate independent contractor relationships are being used to evade compliance.
  • ILLINOIS RENEWS ITS PACT WITH U.S. DOL TO COMBAT INDEPENDENT CONTRACTOR MISCLASSIFICATION. In an effort to help coordinate state/federal investigations and other enforcement activities to detect and deter independent contractor misclassification in Illinois, the Administrator of the U.S. Labor Department’s Wage and Hour Division announced the renewal of a memorandum of understanding signed by the U.S. and Illinois Departments of Labor on October 17, 2014. According to a News Brief dated October 23, 2014, “the renewal of the MOU represents a continued effort on the part of the two agencies to protect workers and level the playing field for responsible employers by reducing the practice of misclassification.”

Other Noteworthy Matters (1 matter)

  • An article in Fusion on October 23, 2014 focused on the risks faced by companies in the “sharing economy” that utilize an independent contractor business model. In the article, entitled “Lawsuits May Cause Business Owners to Rethink ‘Sharing Economy,’” a co-publisher of this blog, Richard Reibstein, was quoted as follows: “Those [new businesses] that are not structured and documented consistent with the law will have to pay a very substantial cost, or go bankrupt.” He added: “It’s only a matter of time and good fortune, because there is a lot of low-hanging [liability] fruit among companies that haven’t gotten their independent contractor act together.”

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

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