The month of June 2015 created more newspaper stories and blog posts on the subject of independent contractor misclassification than any other. Why? Uber lost an IC misclassification case and FedEx Ground agreed to pay $228 million to settle an IC misclassification case with its drivers in California. Those articles have, in turn, prompted many CEOs to question whether independent contractors used by their companies are properly classified and how their companies can minimize or avoid any potential IC misclassification liability. As discussed in my June 13, 2015 blog post on the FedEx settlement, companies can reduce their exposure to misclassification risk by taking two steps that FedEx did not: (1) properly restructuring, re-documenting, and re-implementing their independent contractor relationships in a manner that enhances their IC compliance, such as through the use of a process such as IC Diagnostics™; and (2) assuming that they are free from misclassification exposure simply by retaining contractors who operate in the form of business entities, such as corporations or LLCs.

In the Courts (6 cases)

  • UBER FACES ANOTHER IC MISCLASSIFICATION SETBACK. On-demand giant Uber Technologies lost an IC misclassification claim by a pro se driver who sought unemployment claims after the termination of her relationship. The driver claimed that she was an employee and not an independent contractor and the California Labor Commissioner agreed, concluding that the direction and control Uber exercised or reserved over the performance of services by the driver was sufficient to establish an employment relationship between Uber and the driver. As more fully set forth in my blog post dated June 17, 2015, the Labor Commissioner found that Uber was “involved in every aspect of the operation” including the following: Uber vetted potential drivers; drivers had to pass background checks; Uber controlled the tools (i.e., the types of cars) used; Uber monitored the drivers’ approval ratings; and it reserved the right to terminate the relationships if the driver’s customer rating fell below a certain level. Uber filed an appeal of the Labor Commissioner’s decision on June 16, 2015. Berwick v. Uber Technologies, Inc., No. CGC-15-546378 (Super. Ct. San Francisco County, June 16, 2015).
  • FEDEX GROUND DRIVERS OBTAIN $228 MILLION IN SETTLEMENT OF MISCLASSIFICATION CLAIMS IN CALIFORNIA. As detailed in my June 13, 2015 blog post, following a stunning loss in a decision issued by the United States Court of Appeals for the Ninth Circuit in the second half of 2014, FedEx announced on June 12, 2015, in papers filed with the Securities and Exchange Commission, that it had entered into a proposed settlement agreement, subject to court approval, that will pay $228 million to 2,300 drivers in California who had filed class action IC misclassification claims against it.  The claims included those under federal and state laws including reimbursement of business expenses, unpaid overtime, failure to provide meal and rest periods, reimbursement for deductions in pay, and non-payment of termination pay. In its June 12 SEC filing, FedEx stated that it “faced a unique challenge in defending this case given the decision of the Ninth Circuit Court of Appeals last summer.” It noted that the settlement “resolves claims dating back to 2000 that concern a [business] model FedEx Ground no longer operates.” Alexander v. FedEx Ground Package System, No. 3:05-cv-00038-EMC (N.D. Cal.).
  • FIT MODELS IN NEW YORK MAY PROCEED WITH THEIR IC MISCLASSIFICATION CLAIMS AGAINST FASHION MODELING SERVICE. A New York federal district court denied a modeling service’s motion to dismiss an amended complaint brought by fit models (models who are perfect “fits” of various sizes) alleging class action claims of independent contractor misclassification including violations of federal and state wage and hour laws. The amended complaint alleged that, by misclassifying models as ICs, the modeling service, Model Service LLC d/b/a/ MSA Models (Model Service) and its owner, denied them overtime and minimum wages and made illegal deductions from their wages. Agerbrink v. Model Service LLC d/b/a MSA Models, No. 14-CV-7841 (S.D.N.Y. June 16, 2015).
  • KNOWLEDGE OF IC MISCLASSIFICATION BY COMPANY THAT CONTRACTS WITH ANOTHER TO PROVIDE SERVICES EXPOSES SECOND-LEVEL CONTRACTING COMPANY TO MISCLASSIFICATION LIABILITY. Anschutz Entertainment Group (AEG) contracted with Levy Premium Foods (Levy) to manage the food and beverage services at several entertainment venues in southern California. Levy then contracted with Canvas Corporation (Canvas) to provide workers who sold food and beverages at the venues. In 2013, several vendors filed a wage and hour class action against AEG, Levy, and Canvas alleging, among other things, willful misclassification as independent contractors and failure to pay minimum wage in violation of California Labor Code section 226.8. That section imposes civil penalties on any person or employer who “engage[s] in” the act of “voluntarily and knowingly misclassifying [an] individual as an independent contractor.” The trial court held that no claim could be pursued under section 226.8 against AEG or Levy because neither entity had made the alleged misclassification decision; that decision, according to the lower court, had only been made by Canvas. The appeals court disagreed and held: “[C]ontrary to the trial court’s interpretation, section 226.8 is not limited to employers who make the misclassification decision, but also extends to any employer who is aware that a co-employer has willfully misclassified their joint employees and fails to remedy the misclassification.” The appellate court did conclude, however, that “section 226.8 cannot be enforced through a direct private action and [we] deny the plaintiffs’ writ on that basis.” Noe v. Superior Court of Los Angeles, No. B259570 (Cal. Ct. of App. 2d App. Dist. June 1, 2015).
  • EXOTIC DANCERS RECEIVE $6 MILLION IN SETTLEMENT OF IC MISCLASSIFICATION CLAIM IN FLORIDA. J.W. Lee, Inc. d/b/a Scarlett’s Cabaret, which operates a chain of adult nightclubs, agreed to pay $6 million to settle an IC misclassification class action claim on behalf of a class of 4,700 current and former exotic entertainers. They alleged that the cabaret clubs violated the Fair Labor Standards Act, the Florida Minimum Wage Act, and the Ohio Minimum Fair Wage Standards Act. The dancers, who worked at the chain’s Florida and Ohio locations from December 2009 through February 2015, claimed, among other things, that their only form of compensation was in the form of tips from club patrons; they were not compensated for all hours worked; the club had the power to hire and fire; dancers were told what to wear on certain days; they were required to sell the club’s promotional products; they were required to pay “house fees”; and the club set the dancers’ schedules. Approximately 28% of the settlement amount is being paid as attorneys’ fees to class counsel. Encarnacion v. J.W. Lee, Inc., d/b/a Scarlett’s Cabaret, Civ. No. 14-61927(S.D. Fla. June 26, 2015).
  • FEDERAL APPELLATE COURT HOLDS THAT U.S. OPEN TENNIS UMPIRES WERE PROPERLY CLASSIFIED AS IC’S. The United States Court of Appeals for the Second Circuit affirmed a lower court’s ruling that U.S. Open tennis umpires, who had asserted claims for unpaid overtime under the Fair Labor Standards Act and the New York Labor Law, are independent contractors and not employees as a matter of law. In upholding the district court’s grant of summary judgment in favor of the United State Tennis Association (USTA), the Second Circuit found that the lower court correctly determined that that the umpires were independent contractors because they are highly skilled; have a high degree of independent initiative and control in officiating tennis matches; are free to decide each year whether to apply to officiate at the event; decide the number of days they wish to officiate; may serve as umpires for other tennis associations; maintain other non-umpiring jobs throughout the year; worked at their own convenience; did not receive fringe benefits; and were not on the USTA’s payroll. The court noted that even though the umpires are an integral part of the Open and they invested little in the sporting event, those facts were insufficient to sway its decision. Meyer v. United States Tennis Association, No. 14-3891 (2d Cir. June 29, 2015).

Regulatory and Enforcement Initiatives (3 items)

  • UTAH CONSTRUCTION WORKERS RECEIVE MORE THAN $1.8 MILLION IN BACK WAGES IN IC MISCLASSIFICATION INVESTIGATIONS BY U.S. LABOR DEPARTMENT. On June 1, 2015, the U.S. Department of Labor issued a press release announcing that its investigations over the past 18 months in Utah resulted in construction workers being paid over $1.8 million in back wages by companies found to have misclassified them as independent contractors. The enforcement actions benefited more than 2,700 construction workers, according to Dr. David Weil, Administrator of the Labor Department’s Wage and Hour Division, who stated, “When workers are misclassified as independent contractors – a common practice in the construction industry – they lose out on legally entitled wages and benefits, including workers’ compensation if they are hurt on-the-job, and unemployment insurance if they ae laid off.”
  • WAGE AND HOUR ADMINISTRATOR GETTING READY TO ISSUE ADMINISTRATIVE GUIDANCE ON CLASSIFICATION OF WORKERS AS IC’S. On June 5, 2015, Dr. David Weil, the Administrator of the Wage and Hour Division (WHD) of the U.S. Department of Labor, stated at New York University’s 68th Annual Conference of Labor that an administrative guidance will be issued in “early summer” on the criteria to determine employee/independent contractor status. Dr. Weil stated that the analysis will be “a holistic process of assessment” in the form of “an administrator interpretation specifically about [the WHD’s] view of what is a legitimate independent contractor.” He added that the interpretation will also contain “a very clear set of criteria.” At the conference, Dr. Weil also discussed other problems within what he referred to as the “fissured workplace,” including how companies are outsourcing jobs to subcontractors and how staffing agencies and service providers are misclassifying workers as independent contractors.  In addition, he noted that the WHD is targeting companies that outsource or subcontract work and claim not to employ the workers performing the work, yet exercise direction and control through the use of very detailed manuals and standards.
  • VIRGINIA TO ISSUE OSHA DIRECTIVE TO COMBAT IC MISCLASSIFICATION. The Virginia Department of Labor and Industry announced on June 2, 2015 that it is implementing a new Occupational Safety and Health policy, effective July 1, 2015, in effort to combat worker misclassification. Virginia Labor Commissioner C. Ray Davenport stated, “In furtherance of the Department’s mission to make Virginia a better place to work, live and conduct business, [this] policy is being adopted to assure to the fullest extent of the law that the rights of employees and employers are protected from worker misclassification during Virginia Occupational Safety and Health (VOSH) inspections and investigations.” A website has been developed addressing misclassification issues and an outreach program will be undertaken to explain to employers and employees what worker misclassification is and what procedures will apply under the new policy.

Other Noteworthy News (2 items)

  • NEW WORKING PAPER ISSUED BY THINK TANK NOT IN SYNC WITH GOVERNMENT REPORT. The Economic Policy Institute (EPI) released a working paper entitled “Independent Contractor Misclassification” that assails the use of independent contractors. As stated in my blog post of June 12, 2015, the EPI report overlooks key conclusions reached in the recent comprehensive report by the Government Accountability Office (GAO), and seems to disregard Secretary of Labor Thomas Perez’s statement that while the use of independent contractors has been abused, “there’s an important place for independent contractors” in our economy.
  • FORBES PUBLISHES IC “HIT LIST” IN GUEST POST BY CO-PUBLISHER OF THIS BLOG. On June 16, 2015, Forbes published a guest blog post by Richard Reibstein, publisher of this blog, entitled “Is Your Company on the Independent Contractor Hit List?” Regulatory agencies and plaintiffs’ class action lawyers continue to target industries where misclassification is thought to be most prevalent. The blog post lists the industries that are in the crosshairs of the U.S. Department of Labor, the IRS, and state workforce agencies, including janitorial services, construction, nursing, staffing, Internet services, transportation, trucking, cable companies, security, catering services, hotel/motel, oil and gas, landscaping and car service/limousines. The blog post also notes that some states have created their own “hit lists,” such as New York, which recently published a list of industries with the “highest incidence of worker misclassification.” Those include construction, food services, publishing, ambulatory health care, performing arts, spectator sports, educational services, and motion picture/sound recording. The guest post also identifies recent cases with significant damages awards, and discusses class action lawsuits and how companies can enhance their compliance with federal and state IC misclassification laws.

Written by Richard Reibstein.