May 2015 was one of the busiest months for independent contractor (IC) misclassification cases in the courts and administrative agencies – no less than a dozen cases including such well-known companies as BMW, the NFL and Buffalo Bills, Sleepy’s, FedEx, Super 8 Motels, and Uber, as well as some lesser known industry leaders in the cleaning/janitorial and theatre businesses. A new government report was also released to the public in May; it showed that 85% of independent contractors “appeared content with their employment type” and significantly more independent contractors (57%) were “very satisfied” with their jobs than those who held standard full-time employment (45%). Thus, it is no surprise that more and more businesses including those in the sharing and on-demand economy are making use of ICs and that workers are attracted to this form of work.
So, while more companies are using ICs, more plaintiffs’ class action lawyers and regulatory bodies are continuing to target companies that are believed to be misclassifying ICs. This suggests that companies would be wise to enhance their level of compliance with the rules governing ICs. While the cases described below indicate that many large businesses have not yet succeeded in demonstrating that they are complying with those rules, there are tools available, such as IC Diagnostics™, that companies can use to attain a greater level of comfort and assurance that they are minimizing or avoiding exposure when they make use of independent contractors.
In the Courts (9 cases)
- BMW’S ELECTRIC CAR SHARING / RENTAL UNIT SUED FOR IC MISCLASSIFICATION BY DRIVERS. DriveNow, a unit of BMW, operates an electric car-sharing rental service in the San Francisco Bay area. DriveNow’s phone app allows customers to locate available DriveNow vehicles on an interactive map of the area and to reserve the vehicle that is most conveniently located. BMW retained drivers whose services included locating vehicles that had been dropped off by customers and driving them to locations where they are needed, retrieving the electric rental cars with low battery levels that needed to be serviced, and driving fully-charged vehicles from DriveNow headquarters to locations where customers had left the rental car to make a vehicle exchange. A driver has alleged, on behalf of himself and other similarly situated DriveNow drivers, that they are employees who were misclassified as independent contractors. The complaint, brought under the California Labor Code and the state Private Attorneys General Act, alleges that DriveNow failed to pay minimum wage and overtime compensation, failed to provide meal and rest periods, failed to pay all wages due upon termination, and required that the drivers pay a commission out of their wages to TaskRabbit for managing the payroll system. In support of the IC misclassification claim, the driver further alleges that DriveNow “retained pervasive control over the work performed by the drivers,” supplied all items needed to perform the work, did not require drivers to make any investments in equipment or tools, retained the drivers for an indefinite amount of time, and terminated the drivers at will. Costas v. BMW of North America LLC, No. CGC 15-545541 (Super. Ct. San Francisco County, CA).
- $5.5 MILLION SETTLEMENT APPROVED BETWEEN MASSACHUSETTS FRANCHISEES AND COMMERCIAL CLEANING SERVICES COMPANY. In a case that started out as a simple claim by one janitor who filed for unemployment insurance benefits over a decade ago, a Massachusetts federal court judge preliminarily approves a $5.5 million settlement of a protracted IC misclassification class action brought by franchisees against Coverall North America, a commercial cleaning services company. As noted in our prior blog posts of February 1, 2015 and February 5, 2013, the federal court in 2010 found that 166 custodians who had signed franchise agreements were employees under Massachusetts’ strict “ABC” independent contractor law and had been misclassified as franchisees by Coverall. In 2013, the court entered judgment for $4.8 million and Coverall appealed. Shortly before arguments were about to commence before the U.S. Court of Appeals for the First Circuit in early January 2015, the parties reached a proposed class action settlement, which has now been preliminarily approved by the court. The settlement provides awards of back pay to, among others, all persons who provided cleaning services to Coverall’s customers in Massachusetts for an 11-year period and $1.8 million in attorneys’ fees. Awuah v. Coverall North America, Inc., No.1:07-cv-10287 (D. Mass. May 11, 2015).
- JANITORIAL WORKERS BRING SUIT AGAINST A NATIONWIDE CLEANING COMPANY AND MOVIE THEATER CHAIN ALLEGING IC MISCLASSIFICATION. Seven janitorial workers filed a collective action lawsuit against Simply Right, a Utah-based, national janitorial company with 850 workers in 30 states, and Cinemark, the third largest U.S. movie theater company, in federal district court in Colorado alleging misclassification as independent contractors. The janitorial workers who clean Cinemark’s movie theaters claim that they were misclassified as ICs and have been denied overtime compensation and that the flat fee they were paid is less than the minimum wage when calculated on an hourly basis. Sanchez v. Simply Right, No. 1:15-cv-00974-RM-MEH (D. Colo. May 7, 2015).
- COURT DENIES NFL’S REQUEST TO BE DROPPED FROM BUFFALO JILLS IC MISCLASSIFICATION LAWSUIT. A New York State court denied a motion to dismiss the National Football League (NFL) as one of the several defendants in a IC misclassification suit brought by former members of the Buffalo Jills, who served as cheerleaders at NFL games for the Buffalo Bills. The court viewed the motion as premature because discovery has not yet been conducted regarding the NFL’s involvement in the lawsuit. Included among the allegations against the NFL are that the NFL aided and abetted the Buffalo Bills in the misclassification of the Jills as independent contractors and that the NFL furthered the Jills’ misclassification when Roger Goodell, the NFL Commissioner, approved broadcast rights contracts between the Bills and its former radio broadcasting company in which the NFL required the broadcasting company to have each cheerleader sign a contract and release stating that she was working as an independent contractor and would not be paid for working at Bills games. Ferrari v. Mateczun et al., No. 804125-2014 (Sup. Ct. Erie County, N.Y. May 4, 2015).
- NEW JERSEY FEDERAL COURT REVIVES AN IC MISCLASSIFICATION LAWSUIT BY DELIVERY DRIVERS AGAINST SLEEPY’S UNDER THE NEW STATE LAW TEST FOR IC STATUS IN WAGE CLAIMS. Applying the new independent contractor test recently adopted by the New Jersey Supreme Court, the Third Circuit Court of Appeals vacates a New Jersey District Court’s prior grant of summary judgment to Sleepy’s in an IC misclassification lawsuit brought by delivery drivers under the New Jersey state wage laws. The Third Circuit had asked the New Jersey Supreme Court to articulate the proper test to apply in lawsuits claiming that workers had been misclassified as ICs. On January 14 of this year, the state Supreme Court issued an opinion where it adopted the test found in the unemployment compensation law – a worker-friendly version of the ABC test, as detailed in our blog post of January 15, 2015. Because the District Court had applied the “right to control” test set forth by the U.S. Supreme Court in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992), the Third Circuit ruled that the District Court must now revisit the Sleepy’s case and apply the ABC test to the drivers’ wage claims. Hargrove v. Sleepy’s LLC, Nos. 12-2540 & 12-2541 (3d Cir. May 12, 2015).
- PORT TRUCKING FIRMS SETTLE ONE IC MISCLASSIFICATION CASE FOR $11 MILLION WHILE ANOTHER LAWSUIT IS FILED. A California federal district judge approves an $11 million settlement in a class action lawsuit brought by Los Angeles port truckers against Shippers Transport Express, Inc. and SSA Marine, Inc. alleging that they were misclassified as independent contractors. The settlement included $4.9 million in attorneys’ fees, which the court found to be reasonable. On average, each of the 540 drivers in the class will receive about $13,000. Taylor v. Shippers Transport Express., Inc., No. 2:13-cv-02092 (C.D. Cal. May 11, 2015). In another California port trucking case, two Los Angeles and Long Beach drivers filed a class action suit against their former employer, Sterling Express Services, Inc. (Sterling), a freight shipping and trucking firm, in an IC misclassification case alleging violations of the California Labor Code. They have reportedly alleged that, among other things, Sterling Express improperly deducted truck lease, fuel, registration, parking and other fees from the drivers’ pay; that the drivers did not receive overtime compensation or timely wage payments; and that if they rejected assignments, they would be subject to retaliation. This lawsuit is an outgrowth of the California Labor Commissioner’s prior decision several months ago in which it was determined that the drivers were employees and not independent contractors. In that administrative proceeding, the Labor Commissioner ordered Sterling to pay the drivers over $202,000. Vasquez v. Sterling Express Services, Inc., Los Angeles County Super. Ct. (May 6, 2015).
- FEDEX GROUND DRIVERS’ IC MISCLASSIFICATION LAWSUIT IN FLORIDA REVIVED BY FEDERAL APPELLATE COURT; JURY TO DETERMINE WORKER STATUS. The U.S. Court of Appeals for the Eleventh Circuit reverses a district court’s grant of summary judgment in favor of FedEx Ground Package Systems and allows Florida FedEx Ground drivers to have a jury decide whether they are independent contractors or employees under Florida law. This decision is yet another in the recent setbacks faced by FedEx after a series of victories in the dozens of class action cases brought against it by its Ground Division drivers, as noted in our blog post of August 29, 2014 and October 6, 2014. The appeals court found that “the FedEx Operating Agreement and FedEx’s standard practices and procedures, and the inferences to be drawn from them, create a genuine issue of material fact” as to the Florida drivers’ employment status. Although the appellate court detailed in its decision a number of factors that supported a conclusion that the drivers were ICs, including the Operating Agreement that recited that the drivers were independent contractors, it found the following factors, among others, could lead a jury to conclude that they were employees: the Agreement and FedEx practices provided an exhaustive and detailed list of procedures that the drivers are required to follow; selection and replacement of the drivers’ trucks is subject to consent by FedEx; additional trucks could only be used on the route if approved by FedEx; drivers must prepare daily driver logs and daily inspection sheets; and drivers were required to follow specific directions as to how to load the truck. The court did not find it appropriate for a court to determine how to weigh these conflicting factors “on the critical question of control,” nor did it believe that it was the responsibility of the court to determine which inferences should be drawn from the evidence. Instead, the appellate court concluded that only a jury could make that decision. Carlson v. FedEx Ground Package Systems, Inc., No. 13-14979 (11th Cir. May 28, 2015).
- EXOTIC DANCERS IN GEORGIA FAIL TO PROVE PINUPS NIGHTCLUB WILLFULLY MISCLASSIFIED THEM. A Georgia federal district court judge who previously held in December 2013 that exotic dancers at The Great American Dream d/b/a/ Pin Ups Nightclub were employees, grants summary judgment in favor of the Club finding that, based on the undisputed facts, the Club did not willfully misclassify the dancers. Consequently, the Club is subject to a 2-year statute of limitations for alleged Fair Labor Standards Act (FLSA) violations and not a 3-year statute of limitations for willful violations. In so finding, the Court concluded that (although mistaken) the Club believed in good faith that its compensation structure was consistent with the FLSA , that it “relied upon the advice of accountants, consultants, including wage and hour experts, attorneys and business managers,” and relied on decades-long industry practice. Additionally, although the dancers sought to hold the Club’s President individually liable under the FLSA, the Court granted summary judgment in favor of the President because he was not an “employer” within the meaning of the FLSA, finding that he was neither involved in the day-to-day operation of the Club nor did he bear direct responsibility for the supervision of the entertainers. Stevenson v. The Great American Dream, Inc., No. 1:12-cv-03359 (N.D. Ga. May 14, 2015).
On the Legislative Front (1 item)
- NEW FEDERAL IC BILL WOULD ELIMINATE “SAFE HARBOR” PROSPECTIVELY. On May 20, 2015, Representative Erik Paulsen (R-Minnesota) introduced a bill (H.R. 2483) called the Independent Contractor Tax Fairness and Simplification Act of 2015. This new bill would eliminate prospectively the statutory “safe harbor” for employment tax liability that has been relied upon since 1978 by many businesses that may have misclassified employees as ICs. On the other hand, it would allow a business that has treated a worker as an IC to qualify for a form of retroactive safe harbor for purposes of past employment tax liability. H.R. 2483 would also codify a new form of “safe harbor” if the worker (1) incurs significant financial responsibility for providing and maintaining equipment and facilities; (2) incurs unreimbursed expenses or risks income fluctuations because remuneration is “directly related to sales or other output rather than solely to the number of hours actually worked or expenses incurred”; (3) is compensated on such factors as percentage of revenue or scheduled rates and not solely on the basis of hours or time expended; and (4) “substantially controls the means and manner of performing the services” in conformity with regulatory requirements, or “the specifications of the service recipient or payor and any additional requirements” in the parties’ written IC agreement. A full analysis of the bill and its comparison to the most recent bill on the subject of the tax “safe harbor” by Senate Democrats was the subject of our blog post on June 1, 2015.
Regulatory and Enforcement Initiatives (5 matters)
- UBER DRIVER IN FLORIDA FOUND TO BE EMPLOYEE ENTITLED TO UNEMPLOYMENT BENEFITS. The Florida Department of Economic Opportunity, in conjunction with the state Department of Revenue, determines that a former Uber driver was misclassified as an independent contractor by the ride-sharing company and therefore is eligible for unemployment insurance benefits as an employee. The driver alleged that Uber “directs how, where, and when drivers work” and that “Uber drivers . . . are required to follow a litany of detailed requirements imposed on them by Uber and . . . are graded, and are subject to termination, based on their failure to adhere to these requirements.” As more fully discussed in our prior blog post dated March 12, 2015, Uber and other companies utilizing an on-demand model are currently under intense legal scrutiny as to whether the independent contractors in those businesses have been misclassified.
- CONSENT JUDGMENT ENTERED REQUIRING $119,434 PAYMENT TO BE MADE BY SHIVAM HOSPITALITY TO HOTEL STAFF FOR IC MISCLASSIFICATION. A U.S. Department of Labor (DOL) investigation into illegal misclassification practices of Shivam Hospitality LLC (formerly d/b/a Super 8 Motel) in Kentucky results in a consent judgment requiring the company to pay $119,434 in back wages and liquidated damages to 43 housekeeping, laundry, front desk and maintenance staff workers. In a News Brief dated May 8, 2015, the Wage and Hour Division of the DOL also stated that a permanent injunction was issued to ensure future compliance with the Fair Labor Standards Act. Karen Garnett, district director of the Wage and Hour Division in Louisville, Kentucky stated: “ Shivam Hospitality deliberately misclassified these low-wage workers as independent contractors, denying them the pay and protections they rightfully earned. This consent judgment [approved by the U.S. District Court for the Eastern District of Kentucky] demonstrates that the agency will use every tool available to ensure that employees are properly classified and receive the wages they are due. . . .”
- PUERTO RICO SECURITY COMPANY TO PAY $350,000 IN BACK PAY AND DAMAGES TO SECURITY GUARDS MISCLASSIFIED AS IC’S. A San Juan-based security company, Alpha Guards Management, is required to pay under a court consent judgment almost $350,000 in back wages and liquidated damages to 650 security guards who were misclassified as independent contractors and did not receive overtime compensation. In a Wage and Hour Division News Release dated May 11, 2015, Jose Vasquez, the division’s district director for Puerto Rico and the U.S. Virgin Islands, stated: “This case shows employers and workers that the Wage and Hour Division will use all available tools to enforce the law, especially in an industry where violations are too frequent and common. The practice of misclassifying employees as independent contractors and avoiding payment of required overtime – common in this industry – must cease. This unlawful practice not only harms these workers and their families, but puts businesses who obey the law at a competitive disadvantage.”
- RHODE ISLAND BECOMES 21ST STATE TO ENTER INTO MEMORANDUM OF UNDERSTANDING WITH U.S. DEPARTMENT OF LABOR. The United States Department of Labor (US DOL ) and the Rhode Island Department of Labor and Training signed a memorandum of understanding on May 7, 2015 to work together to protect the rights of employees who have been subject to IC misclassification. Together they will share training materials, provide employees and employers with compliance assistance information, conduct coordinated law enforcement investigations, and ensure proper compliance with applicable tax and licensing laws. According to a US DOL Wage and Hour News Brief dated May 7, 2015, the Rhode Island Department of Labor and Training is the 21st state agency to partner with the US DOL. Scott Jensen, Director of the Rhode Island Department of Labor and Training, stated, “The misclassification of employees as independent contractors is workplace fraud. Rhode Island will not allow bad actors to take advantage of their employees by failing to provide them with necessary workplace protections like Workers’ Compensation insurance, unemployment benefits and overtime pay. Allowing this activity to persist is unfair to Rhode Island businesses that play by the rules.”
- U. S. DEPARTMENT OF LABOR RELEASES SPRING 2015 AGENDA INCLUDING “RIGHT TO KNOW’ REGULATIONS AFFECTING INDEPENDENT CONTRACTORS. In May, the U.S. Department of Labor issued its Semi-Annual Regulatory Agenda for Spring 2015. The so-called “Right to Know” rule remains a “long-term action”. That rule, 1235-AA04, is described by the Department of Labor on page 57 of its 72-page agenda, as a means to “update the recordkeeping regulations under the Fair Labor Standards Act in order to enhance the transparency and disclosure to workers of their status as the employer’s employee or some other status, such as an independent contractor . . . .”
Other Noteworthy News (2 items)
- GOVERNMENT ACCOUNTABILITY OFFICE RELEASES REPORT ABOUT THE CONTINGENT WORKFORCE, INCLUDING INDEPENDENT CONTRACTORS. The U.S. Government Accountability Office (GAO) publicly releases a report on May 20, 2015 entitled “Contingent Workforce: Size, Characteristics, Earnings and Benefits” containing surprising statistical conclusions about independent contractors. Among the study’s findings were that 85% of independent contractors “appeared content with their employment type;” significantly more independent contractors (57%) were “very satisfied” with their jobs than those who held standard full-time employment (45%); independent contractors may comprise as much as 10% of the entire U.S. workforce; and that independent contractors are more likely to be older, male, White non-Hispanic and college-educated than those who hold standard full-time jobs. See our blog post of May 22, 2015 for a more in-depth analysis of the GAO report.
- SPEAKERS AT AMERICAN BAR ASSOCIATION WEBINAR ADDRESS IC MISCLASSIFICATION ISSUES IN THE SHARING ECONOMY INCLUDING RECENT UBER AND LYFT COURT DECISIONS. On May 19, 2015, the American Bar Association (ABA) presented a webinar entitled “Independent Contractors and the Sharing Economy: Uber, Lyft, and other ‘Tech’ Business Models.” The speakers included the principal attorney for the drivers challenging Uber and Lyft’s classification of drivers as ICs, Shannon Liss-Riordan; one of the publishers of this blog, Richard Reibstein of Pepper Hamilton LLP; and Evan Spelfogel of EpsteinBeckerGreen, P.C. The webinar was moderated by Professor Benjamin Sachs of the Harvard Law School. Professor Sachs first gave several descriptions of the sharing economy and invited comment from Ms. Liss-Riordan about the litigations she was handling. She explained that she had been involved in litigation involving cleaning companies, trucking companies (FedEx), adult entertainment, call center workers, and more recently ride-sharing companies who are “trying to shift the costs and risks of running a business to the workers and saving on all types of labor costs such as wage protections, unemployment, workers comp, [and] the right to form a union.” Ms. Liss-Riordan noted that because Uber and Lyft terminate drivers who do not receive a high customer ratings, they are treating them as employees. Mr. Spelfogel commented that, like franchises, requiring an independent contractor to maintain a high customer rating “should not convert someone . . . from an independent contractor status to an employee status.” Ms. Liss-Riordan also mentioned how important it was to play by the rules. In response, Mr. Reibstein noted that while plaintiffs’ class action lawyers and regulators talk about “playing by the rules,” there are two sets of rules: those governing employees and those governing independent contractors, and the Secretary of Labor and the Wage and Hour Administrator have both gone on record as saying that independent contractors play an important role in the U.S. economy. He also stated: “So the overarching takeaway that I see from the Uber and Lyft decisions is that independent contractor relationships between companies in the sharing economy and those who provide on-demand services can be structured, can be documented, and can be implemented in compliance with federal and most state laws. The best time to do that, of course, is before you get a summons or court complaint from someone such as [Ms. Liss-Riordan] or before a regulatory challenge is commenced. And even for those companies that are in the midst of legal challenges, it’s not too late to minimize or avoid future independent contractor misclassification exposure. We’ve used a proprietary process called IC Diagnostics that has worked very well for companies that are trying to fit their business model into existing laws, both at the federal and state level.” The webinar closed with questions from the audience. The entire webinar is available directly from the ABA.
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