August 2017 Independent Contractor Misclassification and Compliance News Update

This past month was unusually “slow” in terms of developments in the law of independent contractor misclassification and compliance.  There was no blockbuster court decision or lawsuit filed, although one interesting development is an effort by some FedEx drivers who were not included in prior settlement agreements between the company and drivers, allegedly because they signed IC agreements after the cutoff date defining the class, to seek conditional class certification in a new class action lawsuit against the company.

This legal development highlights the need for businesses that settle class actions to take affirmative steps to enhance their compliance so that they are less likely to be sued in successive lawsuits and, if sued a second (or third) time, to increase their likelihood of success. Companies facing legal challenges, either in court or an administrative proceeding, may wish to consider using an IC compliance process such as IC Diagnostics™ to restructure, re-document, and/or re-implement their IC relationships.

In the case of FedEx, that company has wisely restructured its IC relationships through its Independent Service Provider (ISP) program. As I noted several years ago in an earlier blog post, FedEx Ground undertook a change in its relationship with Ground Division drivers when it implemented an Independent Service Provider (ISP) program where single-route drivers were only offered FedEx Ground routes if they acquired the rights to multiple routes.  This required them to (a) incorporate as a business, purchase from FedEx Ground three or more work areas in the same geographic area, and enter into an agreement with FedEx on an approved ISP arrangement for the work areas; or (b) become an employee driver of an approved FedEx Ground ISP (that is, become an employee driver for another driver that has set up a business as an ISP). Two federal courts of appeal, though, have concluded that drivers with more than one service route may still prevail in an IC misclassification case.

Another state last month joined the majority of states that have enacted laws related to IC misclassification. North Carolina Governor Roy Cooper signed the Employee Fair Classification Act. While the law does not change the test for IC status, it does create a new Employee Classification Section that has been given powers to coordinate enforcement efforts in the state.  The law also requires employers in that state to post a notice informing employees that if they believe they have been misclassified as an independent contractor, they may report the suspected misclassification to the newly created Employee Classification Section. This new law is what I have referred to as “IC-Neutral” legislation: laws that continue to allow businesses to use bona fide ICs, properly classified as such under long-standing state laws, but tighten enforcement efforts or increase penalties on those who intentionally misclassify workers. “IC-Minus” legislation, on the other hand, seeks to curtail the legitimate use of bona fide ICs by, among other things, changing long-standing tests for IC status.

In the Courts (3 cases)

FEDEX DRIVERS IN NEW YORK SEEK CLASS CERTIFICATION IN NEW IC  MISCLASSIFICATION LAWSUIT.  Five New York FedEx Ground Division drivers who had entered into independent operator agreements with FedEx sought conditional certification of their class action IC misclassification claims alleging violations of the New York  Labor Law (NYLL). The drivers stated in their motion that although a class of drivers was certified in a previous case against FedEx to pursue identical wage claims due to alleged misclassification, another 200 or so drivers (including the plaintiffs) were not included in the prior class action that was part of a $240 million class action settlement because they were either hired after the 2007 cutoff date defining the class in the previous lawsuit or they had opted out of that class. The five drivers claim that due to FedEx’s alleged misclassification of them as ICs, the company allegedly deducted amounts from the “wages” of each member of the proposed class in violation of the NYLL. According to the plaintiffs, FedEx had a “categorical policy” of treating all class members as ICs, and that all of the drivers shared the same job title, executed the same Operating Agreement, performed deliveries pursuant to FedEx’s specifications, wore the same uniform, drove trucks bearing the FedEx logo, were supervised by FedEx managers, scanned and tracked every delivery and pick up with FedEx’s scanner equipment, and had every delivery recorded and monitored through FedEx’s software. They also argue that plaintiffs’ claims present a single, underlying legal question common to every proposed member: whether FedEx misclassified all of these workers as independent contractors when they should have been treated as employees for purposes of NYLL sec.193.  FedEx is expected to vigorously oppose the motion. Padovano v. FedEx Ground Package System, Inc., Civ. No. 16-cv-00017 (W.D.N.Y. August 15, 2017).

NLRB FINDS CREWMEMBERS PROVIDING ELECTRONIC CONTENT SERVICES TO NBA TEAM TO BE EMPLOYEES CAPABLE OF BEING UNIONIZED.  The NLRB has held that crewmembers producing electronic content that is displayed on video boards suspended above the court during professional basketball games played by NBA’s Minnesota Timberwolves and Minnesota Lynx are employees under the National Labor Relations Act and, therefore, are subject to being represented by the union that filed a representation petition with the NLRB. For each of the 60 home games played by the team per season, 16 crewmember positions are filled from a roster of 51 individuals including camera operators, engineers, audio/tape operators, technical directors, font operators, directors and replay operators.  Initially, a Regional Director dismissed the petition, concluding that the crewmembers were  properly classified as independent contractors by team’s owner, Minnesota Timberwolves Basketball, LP.  However, the union sought review by the full Board in Washington, D.C., which reversed the Regional Director, concluding that the crewmembers are employees and not ICs, and reinstated the union’s petition for representation.

In reaching its 2-1 decision (with Chairman Miscimarra dissenting), the NLRB majority found that the team’s owner controlled the content that was displayed during each game, which of the available crewmembers will report for each game, what role each crewmember will occupy within the crew, the time and place where each crewmember must report, and whether a crewmember will be removed from the roster and barred from future work.  The NLRB majority also found that the team owner supplied all of the necessary production equipment and instrumentalities such as cameras, cables, instant replay machines, headsets, sound and broadcasting, and the video boards. The NLRB’s decision also relied on the potentially long-term working relationship with the team’s owner; the crew’s work being part of the regular business of the owner; the owner being in the same business as the crewmembers; and the fact that crewmembers do not operate as part of an independent business or have any entrepreneurial opportunity. Although the Board considered factors that favored IC status, the Board determined that those factors did not render the crewmembers to be ICs. Chairman Miscimarra filed a lengthy dissent, concluding that the crewmembers “are independent contractors based on the distinct skills they possess, the fact that they are paid on a per-game basis, their freedom to take other work, and the fact that Timberwolves Basketball does not control the details of their work or supervise them.”  Minnesota Timberwolves Basketball, LP, 365 NLRB No. 124 (August 18, 2017).

NEW JERSEY APPELLATE COURT FINDS ADULT ENTERTAINMENT CLUBS DID NOT SATISFY STATE’S “ABC” TEST FOR EXOTIC DANCERS.  A New Jersey appeals court has found that exotic dancers are employees of gentlemen’s club, JPRC, Inc. t/a Liquid Assets, and were misclassified as independent contractors under the state’s “ABC” test for IC status.  As the court describes in its decision, beginning in 2003 the club unilaterally restructured its relationship with the dancers whereby the discontinued its practice of paying wages to the dancers and began to charge them a small fee for the right to “perform” for compensation in the form of tips that customers gave them and fees the dancers charged customers for “private dances.” In affirming the decision of the Commissioner of the Department of Workforce and Development that the dancers were employees, the appeals court found that the club’s advertising, with its focus on erotic entertainment featuring “over 20 girls daily,” belied its claim that the dancers were merely incidental or peripheral to the club’s business of serving food and drink.  The court also concluded that the club presented little evidence concerning the alleged independent contractor status of the dancers. The court concluded, “ Petitioner’s ability to unilaterally impose a new mode of operation on its existing employees – for the avowed purpose of enabling petitioner to avoid paying unemployment taxes – did not demonstrate the dancers’ independence as ‘contractors.’”  JPRC Inc. v. New Jersey Department of Labor and Workforce Development, No. A-1736-15T2 (App. Div. N.J. Aug. 4, 2017).

Regulatory and Administrative Actions (1 matter)

CALIFORNIA LABOR COMMISSIONER TARGETS CONSTRUCTION CONTRACTOR FOR IC MISCLASSIFICATION.  A Glendale, California construction company has been sued by the California Labor Commissioner in Los Angeles Superior Court alleging that Calcrete Construction, Inc. “willfully misclassified” 175 workers as independent contractors. According to a News Release issued by the California Department of Industrial Relations on August 14, 2017, an investigation beginning in October 2016 revealed that the company allegedly forced its workers to sign contracts that they were independent contractors and then used staffing agencies to pay the workers. The lawsuit seeks $6.3 million in unpaid wages and penalties for overtime, waiting time, unpaid sick leave, and liquidated damages, as well as statutory penalties for alleged willful misclassification. Labor Commissioner Julie A. Su stated in a press release: “It is illegal for employers to use subcontractors to distance themselves from the obligation to pay workers, and we will use every tool to dissuade employers from this scheme. This lawsuit aims to recover the money these misclassified workers should have been paid . . . .”

Legislative Initiatives (1 matter)

NORTH CAROLINA CREATES SPECIAL EMPLOYEE CLASSIFICATION UNIT TO COMBAT IC MISCLASSIFICATION.  North Carolina Governor Roy Cooper signed the Employee Fair Classification Act (SB 407) on August 11, 2017, creating by law the Employee Classification Section within the North Carolina Industrial Commission. Previously, on December 18, 2015, former Governor McCrory had issued Executive Order No. 83 establishing the Employee Classification Section. The new law, which becomes effective December 31, 2017, authorizes the Employee Classification Section to receive complaints of employee misclassification; investigate reports of employee misclassification; coordinate with other state agencies and District Attorneys’ offices in the prosecution of employers and individuals who fail to pay civil assessments or penalties; provide information about each report of misclassification to the Department of Labor, the Division of Employment Security, the Department of Revenue, and the Industrial Commission to facilitate investigation of potential statutory violations; educate employers, employees and the public about employee misclassification; and report annually to the Governor and Joint Legislative Commission on Governmental Operations.

While none of the foregoing legislative initiatives impact companies that use independent contractors, there is one provision of the law that effects every employer in North Carolina: they must post a notice that includes the following language: (1) Any worker who is defined as an employee under the law shall be treated as an employee unless the individual is an independent contractor; (2) any employee who believes that the employee has been misclassified as an independent contractor by the employee’s employer may report the suspected misclassification to the Employee Classification Section within the Industrial Commission; and (3) the physical location, mailing address, telephone number, and e-mail address where alleged incidents of employee misclassification occurred may be reported to the Employee Classification Section within the Industrial Commission. Notably, the new law does not change the test for employee or independent contractor status; that test remains essentially a “common law” test, which is generally regarded as the test most friendly to IC status.  Nor does the new law increase penalties for IC misclassification.

Written by Richard Reibstein

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