June and July 2017 Independent Contractor Misclassification and Compliance News Update

In early July, the publisher of this blog, Richard Reibstein, changed law firms, joining Locke Lord LLP in its New York office.  Due to this change of law firm, the June update has been combined with the July update of developments in the law of independent contractor misclassification and compliance.

The most notable legal developments during that two-month period were appellate decisions: one by the Vermont Supreme Court holding that a construction company did not misclassify a carpentry contractor under that state’s unemployment insurance law; the other by the California Court of Appeal, an intermediate level appellate court, affirming a decision by a lower court that home delivery newspaper carriers had been misclassified as ICs by the newspaper that used the delivery carriers’ services.

In the Vermont case, the IC classification was validated because the carpentry contractor was an LLC and not an individual, strongly suggesting that a company is more likely to have its IC classification upheld where the contractor is a business entity and not an individual. Of course, there have been a number of cases where courts have refused to find a legitimate IC relationship even when the contractor does business in the form of a corporation or LLC. See January 14, 2015 blog post (first “takeaway”).

In the California case, the newspaper’s misclassification of delivery carriers was hardly surprising given the considerable amount of direction and control included in the IC agreement signed by the carriers as well as in the day-to-day practice by the newspaper. IC misclassification decisions like this one from California highlight the importance of structuring, documenting, and carrying out their IC relationships in a manner that minimizes direction and control over the manner of performing services.  Some companies have chosen to use a process such as IC Diagnostics™ to minimize the likelihood that a court, like the one in California, would be inclined to conclude that workers classified as ICs have been misclassified.

In the Courts (9 cases)

VERMONT SUPREME COURT CLARIFIES UNEMPLOYMENT LAW FOR IC’S OPERATING AS LLC’S. The Vermont Supreme Court has decided that an LLC is a distinct legal entity separate from its members and is not an “individual” for purposes of assessing unemployment taxes. In deciding an appeal from the state Employment Security Board, the Vermont high court found that Bourbeau Custom Homes, a home construction and design company, was not liable for unemployment taxes on monies paid to a carpentry contractor, John Parah Construction LLC, “because an LLC is not an ‘individual’ under the unemployment tax statute and therefore not subject to the ABC test established under [the Vermont statute.]” The Board’s classifications of two other carpenters, an installer of cement siding and a painter, as employees and not independent contractors, were upheld by the court. After publication of the decision in this case, Lindsay Kurrle, Commissioner of the Vermont Department of Labor, issued a News Release on June 23, 2017 stating, “The Vermont Department of Labor is carefully reviewing the decision that was issued today by the Vermont Supreme Court. The classification of independent contractors is an issue the Department is committed to – both ensuring that workers are properly protected, and that businesses who want to utilize independent contractors are doing so with confidence and predictability of how the law is applied. The ruling today sheds an important light on the way the Department will classify LLCs in the future, and provides a level of clarity that we have not had previously.” In Re Bourbeau Custom Homes, Inc., No. 2016-157 (Sup. Ct. Vermont June 23, 2017).

NEWSPAPER’S MISCLASSIFICATION OF HOME DELIVERY CARRIERS AS IC’S UPHELD ON APPEAL. A California appeals court has upheld a lower court’s decision that home delivery newspaper carriers were misclassified as independent contractors by The San Diego-Union Tribune, a newspaper owned by The Copley Press Inc. The complaint alleged wage and hour claims under the California Labor Code, including failure to pay minimum wages and overtime compensation, failure to provide meal breaks and rest periods, and failure to reimburse for business expenses.  The carriers reportedly had signed independent contractor agreements containing provisions that they were required to deliver the newspapers “in a clean, dry, undamaged and readable condition at a time and location” that met the customer’s reasonable requests and expectations, could not work for competitors without consent from The Tribune, were required to obtain accident insurance and bonding, agreed to complete deliveries by specific times on weekdays and weekends, and were required to assemble the papers at  company distribution centers. The appeals court affirmed the lower court’s findings that the independent contractor agreement and the day-to-day operations evidenced the company’s right to control the carriers’ manner and means of delivery.  Although the carriers were awarded $3 million in restitution for mileage expense, the cost of supplies, insurance, bond premiums, and warehouse rent, the appeals court found that the lower court had erred in its calculations and remanded the damages portion back to the court for adjustments. This trial court decision was the subject of a January 24, 2014 post on this blog. Espejo v. The Copley Press Inc., No. D065397 (Cal. Ct. App. July 7, 2017).

VERIZON SETTLES IC MISCLASSIFICATION JOINT EMPLOYER CASE INVOLVING STRIKE REPLACEMENTS. Verizon Communications Inc. has reached a settlement with replacement wireline workers hired during the pendency of a strike in a lawsuit brought in a Pennsylvania federal district court alleging class and collective wage and hour independent contractor misclassification claims. According to the complaint, to ensure continuity of services to its customers during a strike by the company’s 36,000 wireless associates who service copper and fiber cabling used for cable TV, telephone and internet, Verizon engaged hundreds of replacement workers. The complaint further alleged that Verizon required the workers to perform services pursuant to Verizon’s policies and procedures, yet did not classify them as employees but rather as independent contractors of three subcontractors, each of whom were sued as co-defendants. The workers claimed that although they typically worked over forty hours each week, they did not receive overtime compensation. Verizon has denied the allegations. The settlement agreement is expected to be filed for preliminary approval by the court in two weeks. A Stipulation of  Dismissal with Prejudice was filed on July 26, 2017 indicating that only the claims against Verizon would be dismissed and that the case caption would no longer include Verizon. Donoghue v. Verizon Communications Inc., No. 16-cv-4742 (E.D. Pa. July 26, 2017).

NO CLASS CERTIFICATION IN IC MISCLASSIFICATION CASE FOR BAKED GOODS DISTRIBUTORS. A California federal district judge has denied a motion for class certification in an IC misclassification class action brought under California labor laws by 150 California distributors who delivered baked goods under brands such as Wonder, Tastycake, and Nature’s Own to retail stores, restaurants, fast food businesses, and other customers of Flower Foods, Inc. and its subsidiaries. In denying class certification, the Magistrate Judge concluded that the case was not suitable for class action treatment because individualized issues existed over how to determine which of the 150 distributors personally serviced their routes, including when and for how many hours they worked, and whether the distributors operated distinct businesses, including whether they performed deliveries for other companies. According to the decision, the existence of those issues “prevents common questions of fact or law from predominating and class-wide treatment is not superior to individual actions.” Soares v. Flower Foods, Inc., No. 15-cv-4918 (N.D. Cal. June 28, 2017).

CREDICO SUED BY SALES MARKETING AGENTS IN IC MISCLASSIFICATION CLAIM.  Sales marketing agents have filed a new, nationwide collective action complaint in New York federal court against direct sales company, Credico (USA) LLC, alleging minimum wage and overtime compensation violations under the FLSA due to alleged misclassification as independent contractors. The collective action complaint alleges that “Credico has perpetrated a nationwide pyramid scheme whereby a network of over 200 companies across the country operate as Credico’s subcontractors, and contract with agents who provide face-to-face marketing services for Credico’s clients.” The agents’ lawsuit claims that Credico and the subcontractors for whom they worked are joint employers because there is allegedly substantial control exercised by Credico (and by the subcontractors) over the agents, who claim that they are employees and not independent contractors. Huffman v. Credico (USA) LLC, No. 17-cv-4242 (S.D.N.Y. June 6, 2017).

DEVELOPMENTS IN RIDE-SHARING INDUSTRY

Arbitration Compelled in Proposed IC Misclassification Class Action in Illinois. Uber has once again prevailed in compelling arbitration in a proposed misclassification class action.  An  Illinois federal court has ruled that drivers providing services to Uber customers using its app must arbitrate their claims where they voluntarily entered into valid agreements containing enforceable arbitration provisions and had not opted out of the arbitration clause when afforded an opportunity to do so. The arbitration provisions that the drivers signed included a class action waiver. The complaint against the company alleged that Uber had denied the drivers wages, tips, overtime pay and business expense reimbursements, allegedly in violation of the Illinois Wage Payment and Collection Act, the Illinois Minimum Wage Law, and the Fair Labor Standards Act (“FLSA”), all arising from their alleged misclassification as independent contractors. The state claims had been brought on behalf of the plaintiff driver and a proposed class of Illinois drivers, while the FLSA claims had been brought on behalf of the driver and a prospective nationwide collective class (except for California and Massachusetts drivers.) The court held that “[p]ursuant to that arbitration agreement, of which plaintiff did not opt out, the court finds that the arbitrator is responsible for determining the threshold issue of whether plaintiff’s relationship with Uber is that of employee or independent contractor.” In that regard, the district court found enforceable the delegation clause which “is an agreement to arbitrate gateway questions such as ‘whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.’” The court stated that “the operative delegation clause provides that the Arbitration Provision applies to all disputes between plaintiff and defendant, including any disputes arising out of or related to plaintiff’s relationship with Uber.” Olivares v. Uber Technologies Inc., No. 16-cv-6062 (N.D. Ill. July 14, 2017).

New IC Misclassification Lawsuit Twist: Filed Only Against CEO and Chairman of the Board. Uber’s former CEO, Travis Kalanick, and its current Chairman of the Board, Garrett Camp, were sued personally for independent contractor misclassification by drivers who already had filed lawsuits against the ride-sharing technology company. As more fully discussed in our blog post of June 23, 2017, this new lawsuit might well be an attempt by the plaintiffs’ lawyers to avoid the arbitration provisions in the independent contractor agreements that most Uber drivers have signed with the company. It is likely that Messrs. Kalanick and Camp will argue that they too are covered by the arbitration provisions, and either a court or arbitrator may one day decide that issue. The basis for the lawsuit against the two individuals is the 2011 California Independent Contractor Law that imposes liability on companies that “willfully” misclassify workers as independent contractors, but also imposes “joint and several liability” on persons who knowingly advise an employer to misclassify such individuals to avoid employee status. The former CEO and current Board Chair will likely seek to use an exemption in the joint and several liability provision for anyone “who provides advice to his or her employer.” James v. Kalanick, No. BC666055 (Super. Ct. Los Angeles County, CA June 22, 2017).

North Carolina Federal Court Grants Conditional Certification in Proposed Nationwide Ride Sharing Collective Action by Drivers Who Have Opted Out of Arbitration. A federal court judge in North Carolina has granted a motion by drivers for conditional class certification in a proposed  nationwide collective action against Uber alleging wage and hour violations under the federal Fair Labor Standards Act. The proposed collective action alleges that the company misclassified the drivers as independent contractors; it seeks to cover “[a]ll natural persons who have worked or continue to work as an Uber Driver anywhere in the United States and have opted out of arbitration.”  By virtue of this decision, approximately 18,000 drivers who had opted out of Uber’s standard arbitration clause would be afforded the opportunity to opt into the collective action.  A spokesman for Uber reportedly stated that the company was “disappointed with this decision, particularly because a Federal District Court recently denied conditional certification in another case” last month in Florida. The court’s order itself noted that  the requirements for conditional certification are “modest.” In cases of this nature, companies have a right at a later point in a litigation to file a motion to decertify the class; at that time, the class representatives are required to meet a rigorous standard if they wish to proceed further in the case as a collective or class action. As an Uber representative reportedly stated: “We look forward to challenging whether this case should proceed as a collective action, as well as litigating the merits of these claims.” Hood v. Uber Technologies, Inc., No. 16-cv-998 (M.D.N.C. July 12, 2017).

MICHIGAN FEDERAL COURT APPROVES $6.55 MILLION CLASS ACTION SETTLEMENT IN ADULT CLUB IC MISCLASSIFICATION CASE. A Michigan federal district court judge overrules objections and approves a $6.55 million nationwide class action settlement between Déjà Vu’s chain of gentlemen’s clubs and 28,177 exotic dancers in a lawsuit alleging misclassification as independent contractors and not employees. The class and collective action suit, filed nine years ago, alleged violations of the FLSA and state wage and hour laws, including failure to pay minimum wage, requiring dancers to split gratuities , and deducting employee wages through rents, fines, and penalties. In exchange for releasing their claims, the dancers will be afforded injunctive relief and either a single cash payment or remuneration in the form of a rent credit or dance fee payment to offset fees charged them by the club. Additionally, the settlement requires the club to provide the dancers with an “Entertainment Assessment Form,” which is described as “a questionnaire designed to ensure that Defendants accurately categorize each dancer as an independent contractor or employee based on the economic realities test.” The injunctive relief also requires the club to offer each class member the opportunity to cancel their current independent contractor status and accept a position as an employee. The settlement provides $1.2 million in attorneys’ fees to class counsel and $100,000 for resolution of California Private Attorneys General Act claims. Doe v. Déjà vu Services, Inc., No. 16-cv-10877 (E.D. Mich. June 19, 2017).

Regulatory and Administrative Actions (5 matters)

SECRETARY OF LABOR WITHDRAWS OBAMA-ERA MISCLASSIFICATION GUIDANCE.  Alexander Acosta, the newly-confirmed Secretary of Labor in the Trump Administration, has withdrawn the U.S. Labor Department’s independent contractor misclassification guidance issued in 2015. As discussed in our June 7, 2017 blog post, Labor Secretary Acosta announced in a News Release that day that he had withdrawn the Labor Department’s formal guidance on two significant issues faced by businesses: independent contractors and joint employment. Although the withdrawal of those items is likely to be portrayed by many as a major shift in enforcement position by the U.S. Labor Department, it is unlikely to change the legal landscape of independent contractor misclassification, which is now waged mostly in private class action lawsuits and administrative proceedings, not by the Department of Labor.

MASSACHUSETTS ATTORNEY GENERAL CRACKS DOWN ON DOOR-TO-DOOR MAGAZINE SALES COMPANY THAT ALLEGEDLY LURED LOW-WAGE EARNING WORKERS INTO THE STATE BUT CLASSIFIED THEM AS IC’S.     Massachusetts Attorney General Maura Healey announces in News Release dated June 5, 2017 that she has assessed a door-to-door magazine sales company, Unified Doers Management Group, LLC, over $150,000 in penalties for independent contractor misclassification, including failure to pay wages in a timely manner, failure to pay the minimum wage, failure to keep accurate records and failure to furnish a pay stub. The Attorney General stated, “This company recruited low-income individuals from across state lines and lured them in with promises of successful jobs in direct sales, only to send them home without a paycheck for their work. This is not acceptable and this action should send a message to companies that if they want to do business in Massachusetts, they need to abide by our laws and treat their employees fairly.” According to the News Release, the investigation revealed that the company recruited young workers and transported them to Massachusetts communities to sell a variety of magazines door-to-door. The company guaranteed that if a job did not work out, they would be given money to return to their homes; however, when sales quotas were not met by the worker, the company terminated its relationship with the worker, leaving them without any earned wages and no way to return home.

NLRB FINDS HIGH SCHOOL LACROSSE REFS TO BE EMPLOYEES, NOT INDEPENDENT CONTRACTORS, IN BID BY UNION. The National Labor Relations Board has issued a decision that lacrosse officials providing referee services for the Pennsylvania Interscholastic  Athletic Association (PIAA) are employees under the National Labor Relations Act and not independent contractors. The PIAA is a non-profit corporation whose primary purpose is to promote uniformity in their interscholastic athletic competitions of its 1,611 member schools in Pennsylvania. The petitioner in the case, Office and Professional Employees  International Union, has sought to represent a unit of 140 officials that officiate at junior and senior high schools lacrosse games within the greater Pittsburgh area. In reaching its decision, the NLRB applied the analysis used in the Board in its FedEx decision, considering ten factors as well as whether the lacrosse official rendered services as an independent business with actual entrepreneurial opportunity for profit and loss. The NLRB concluded that the officials were employees because the PIAA had pervasive control over the means and manner of the work due to its comprehensive set of rules; the officials were not engaged in a distinct occupation or business because they performed their functions in furtherance of  PIAA’s core operations; the PIAA could not function without them; the PIAA tightly controlled the work through mandatory adherence to rules, policies, and procedures that evidenced direction by PIAA; the officials’ skills were integral to the PIAA’s ability to accomplish its core mission; the PIAA controlled the compensation process; the officials did not render officiating services as part of their own enterprise as they were not permitted to hire others to help perform their tasks and they did not control most scheduling or other important business decisions;  and the officials were constrained in their ability to earn more money by PIAA’s limiting each official to one geographic chapter in the state.

This case bears special note for two reasons: First, the FedEx decision on which the NLRB relied has been repeatedly rejected by the D.C. Circuit Court, as noted in my blog post of March 7, 2017. See FedEx Home Delivery, 361 NLRB No. 55 (2014), enf. denied, 849 F.3d 1123 (D.C. Cir. 2017), pet. for rehearing en banc denied, No. 14-1196 (June 23, 2017).  Second, NLRB Chairman Miscimarra filed a sharp dissenting opinion, disagreeing with the NLRB’s majority on three points: (a) whether the NLRB even has jurisdiction over the PIAA to the extent it is a “political subdivision” of the Commonwealth of Pennsylvania; (b) whether the NLRB should, in any event, decline to exercise jurisdiction over state interscholastic sports governing bodies; and (c) that the officials are not employees but rather independent contractors. By the time this case is reviewed by a federal court of appeals, the composition of the NLRB may be changed due to appointments to vacancies by the current Republican Administration; thus, the decision to permit the union to proceed with its petition to represent the lacrosse officials may be overturned by the time the PIAA might otherwise become legally obligated to bargain with the union over terms and conditions of employment for the refs.  Pennsylvania Interscholastic Athletic Association, Inc. and Office and Professional Employees International Union, Petitioner, Case 06-RC-152861 (July 11, 2017).

OAKLAND CONSTRUCTION COMPANY ASSESSED $3.5 MILLION FOR IC MISCLASSIFICATION. The California Labor Commissioner’s Office has assessed an Oakland, California construction company, Attic Pros, $3.5 million in allegedly unpaid wages and penalties for labor law violations allegedly due to misclassification of 119 workers. In a News Release dated July 25, 2017, Labor Commissioner Julie A. Su stated: “This is an egregious case of wage theft, with workers misclassified and denied a just day’s pay. My office enforces California’s labor laws to stop employers willing to cheat their employees of their pay as a means to gain an unfair advantage over their law-abiding competitors.”  According to the News Release, the investigation by the Labor Commissioner’s Office was triggered by notice it received of a proposed Private Attorneys General claim.  The Labor Commissioner determined that the employees worked 10-14 hour days up to six days per week and were paid a daily rate regardless of the actual number of hours worked, resulting in their allegedly being paid less than the minimum wage due to employees. The company was ordered to pay $191,400 in unpaid minimum wages, $321,000 in unpaid overtime wages, $191,400 in liquidated damages on unpaid minimum wages, $1,405,350 in waiting time penalties, and $1,481,600 in civil penalties for minimum and overtime wage violations, wage statement violations, and employee misclassification.  Decisions by the Labor Commissioner’s Office are subject to appeal.

NEW YORK STATE UNEMPLOYMENT APPEAL BOARD FIND RIDE-SHARING DRIVERS TO BE EMPLOYEES FOR UNEMPLOYMENT PURPOSES. A New York State Administrative Law Judge has upheld three initial determinations by the New York Department of Labor that the three drivers providing services to riders using the Uber ride-sharing app, as well as all others similarly situated in New York, are employees and not independent contractors. The ALJ found that although there were some indicia of the drivers’ independence – the drivers “set their own work schedule; selected their work areas; were not obliged . . . to report their absences or other leaves; and were not provided fringe benefits . . . – facts supported a determination that the drivers were, on balance, employees under the New York unemployment insurance law.  The ALJ found that the company “exercised sufficient supervision and control over substantial aspects of their work as Drivers,” including the following findings by the ALJ: the company showed the drivers a video that depicted how its app worked; as a transportation company, the claimants’ role as drivers was a crucial aspect of the company’s operation; the contract between the company and the claimants was not arms’ length; the company remained involved with the means by which the drivers provided transportation services; claimants were restricted to use vehicles deemed acceptable by the company, requiring compliance with a list of suitable vehicles that exceeded the governing Taxi and Limousine Commission’s regulations; drivers had no input in determining the fares charged to riders; drivers could not accept cash from riders under the company’s app; and drivers could not negotiate their fees with the company.  Uber has reportedly stated that it plans to appeal the decision. A spokesperson for the company stated: “We are confident we will prevail — the Department of Labor has already ruled that several drivers are independent contractors and a federal court has deemed all black car drivers to be independent contractors,” adding that the ALJ did not permit other drivers to testify in the proceeding, leaving three drivers “hand-picked” by the New York Taxi Workers Alliance to make the case. According to the company, it was “denied our due process rights in this matter.” Uber Technologies, Inc., ALJ Case No. 016-23858 (June 9, 2017).

Legislative Initiatives (2 matters)

NEW GIG ACT OF 2017 INTRODUCED IN U.S. SENATE. U.S. Senator John Thune (R-S.D.) introduced the New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017 (S. 1549) on July 13, 2017. According to a Press Release issued by Senator Thune’s office that same day, this legislation addresses the classification of workers as independent contractors or employees and creates a safe harbor for those who meet a set of objective tests that would qualify them as ICs, both for income and employment tax purposes. The  safe harbor is reportedly intended to ensure that the service provider (worker) would be treated as an independent contractor and not an employee; the service recipient (customer) would not be treated as the employer; and in the gig economy context where an internet platform or app facilitates the transactions and payments, that third party would also not be treated as the employer. The proposed objective tests involve three areas: the relationship between the parties, the location of the services or means by which the services are provided, and a written contract. The bill will preserve the existing common law test for determining IC/employee status for those workers who do not meet the objective criteria needed for the safe harbor.  In addition, the bill proposes various reporting rules and provisions for retroactive reclassification where service providers or service recipients mistakenly believe they qualify for the safe harbor but fail to meet one or more of the objective criteria. Senator Thune stated in the Press Release that, “Today’s fast-growing ‘gig economy’ has made it easier for people to offer unique services, like home repair and cleaning, child care, food delivery, or ride sharing, through easy-to-use mobile applications that can be opened with a simple swipe of a finger. While these gig economy companies have created thousands of new jobs, they’ve also faced new challenges when it comes to how the service providers are classified by the IRS.”

It is notable that this proposed legislation has received scant attention, and even if it gains traction in Congress, it would only apply to the test for independent contractor status for certain “gig” workers under the tax laws enforced by the Internal Revenue Service; it would have no application to the test for IC status under the federal wage and hour law (the Fair Labor Standards Act), the National Labor Relations Act, or any other federal law – and of course no application to IC laws in any of the 50 states.

NEW YORK CITY RELEASES REGULATIONS IMPLEMENTING ITS INDEPENDENT CONTRACTOR PAYMENT PROTECTION LAW. The New York City Department of  Consumer Affairs (DCA) has published its final rules, effective July 24, 2017, implementing the Freelance Isn’t Free Act, the first-in-the-nation independent contractor payment protection law. (The final rules can be found at the following link, after the text of the Act.)  As discussed more fully in our blog posts of November 16, 2016 and May 9, 2017, New York City’s Freelance Isn’t Free Act went into effect on May 15, 2017.  It is the only law in the nation regulating the relationship between independent contractors and those who retain their services, requiring that IC agreements provide minimal terms, and protecting ICs from non-payment of their fees. Introducing the rules on its website, the DCA states: “These rules clarify provisions in the law, establish requirements to implement and meet the goals of the law, and provide guidance to covered hiring parties and protected freelance workers.”  The Rules provide, among other things,  for an expansion of the term “adverse action” to include actions taken not only “by a hiring party, but by their actual or apparent agent or any other person acting directly or indirectly on behalf of a hiring party”; that a freelance worker is entitled to the protections of the Act regardless of immigration status; that a freelance worker may establish a claim for retaliation where the worker shows that the exercise or attempt to exercise any right under the Act was a motivating factor for an adverse action; that agreements entered into between the worker and the hiring party shall not include any prospective waivers or limitations of rights under the Act; and that if the contract includes a waiver or limitation regarding the worker’s right to participate in or receive money/other relief from any class, collective, or representative proceeding, such term shall be void. The new Rules, however, fail to address or clarify a number of uncertainties in the law that have been pointed out in the above blog posts, such as whether the law applies to independent contractors who provide services in New York City but do not use a mailing address in the City; whether it applies to service recipients who contract for services with a non-New York City independent contractor; whether a freelancer loses the protections of the law if he or she uses one or more helpers or subcontractors to assist in any manner with the services provided; and when services are deemed complete, which initiates a service recipient’s payment obligation.

By Richard Reibstein

Your comments are invited.

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INVITATION TO UPLOAD CONTENT: Readers may contribute to this repository of newsworthy matters by sending an e-mail to the publisher (through the About the Publisher page on this blog) with any recent:

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