October 2017 Independent Contractor Misclassification and Compliance News Update

There were newsworthy developments in a number of cases in the area of independent contractor misclassification during the month of October. Those cases were brought against companies in an array of different industries throughout the country: a security guard company in New Orleans; an architectural firm in New York; a health care staffing company in Florida; a telephone sales and marketing company doing business in Arizona; an on-demand, sharing economy company in California; and a fireworks company in New Jersey.

While the cases seem rather diverse, there is a common thread throughout them all – each of the companies incurred substantial legal fees and distractions by class action or individual plaintiff lawsuits as well as administrative proceedings that are oftentimes avoidable. Many companies have seen fit to minimize their exposure to these types of litigation by enhancing their level of compliance with federal and state independent contractor laws. How?  As noted in the White Paper, “Independent Contractor Misclassification: How Companies Can Minimize the Risk,” there are a number of alternative ways by which businesses can avoid or minimize misclassification liability and the legal fees required to defend these types of judicial and administrative proceedings. Many companies have valid independent contractor relationships but have failed to document or implement the IC relationship in a compliant manner. Because the IC laws vary at the federal level and are oftentimes different from one state to another, there is a compelling need to structure, document, and carry out IC relationships in a state-of-the-art manner, using the types of tools discussed in the White Paper.  By so doing, businesses in most industries can create a customized, sustainable business model that is far less likely to be the subject of IC misclassification challenges and, if challenged, far more likely to demonstrate compliance with the law.

This is the 200th comprehensive blog post published on this site over the past 7-1/2 years.

In the Courts (6 cases)

SECURITY COMPANY SETTLES IC MISCLASSIFICATION CLASS ACTION LAWSUIT FILED BY NEW ORLEANS SECURITY GUARDS. A Louisiana federal district court has granted a motion approving a confidential settlement in a collective action by New Orleans security guards under the federal Fair Labor Standards Act.  The guards suedCrescent City Consulting, LLC for unpaid overtime wages arising from their alleged misclassification as independent contractors and not employees. The guards alleged that “dozens, if not hundreds, of members of the FLSA Collective Plaintiffs”  were affected by the company’s “improper policies and practices.” They claimed that the company had complete control over how, when and where the guards performed their work; set the guards’ work schedules; and required the guards to wear uniforms with the company’s logo. The court concluded that the settlement was “fair and reasonable,” although no details were available regarding the terms of the settlement, which is an unusual occurrence. Koviach v. Crescent City Consulting, LLC, No. 14-2874 SECTION “E” (E.D. La. October 2, 2017).

ARCHITECTURAL FIRM SETTLES LAWSUIT IN NEW YORK ALLEGING IC MISCLASSIFICATION. A federal court in New York approved a proposed settlement of an independent contractor misclassification lawsuit brought under the federal Fair Labor Standards Act and the New York Labor Law by a construction worker who provided services to an architectural firm. The worker testified at his deposition that he was subject to daily and extensive oversight and control by Studio Castellano Architect, P.C., while the company testified that he worked independently on discrete projects subject to minimal supervision. The court approved the settlement as reasonable and fair because the total settlement amount of $60,000 was over half of the maximum possible damages under both statutes. Flores v. Studio Castellano Architect, P.C., No. 15-cv-09158 (S.D.N.Y. October 2, 2017).

FLORIDA HEALTH STAFFING COMPANY FOUND TO HAVE DESTROYED PAY RECORDS OF NURSES IN IC MISCLASSIFICATION CASE BROUGHT BY U.S. LABOR DEPARTMENT.  A Florida health staffing company, Caring First, Inc., has been sanctioned by a federal court for willfully deleting payroll records in an independent contractor misclassification lawsuit brought by the U.S. Department of Labor (USDOL) under the Fair Labor Standards Act on behalf of nurses classified as independent contractors. The court had previously ordered the company to produce such records. In granting the USDOL’s  motion for sanctions, the court found that the company’s owner was aware of the pending litigation yet acquiesced to the weekly deletion of payroll records that she was allegedly aware were pertinent to the litigation.  The court stated that the USDOL had been prejudiced by the willful destruction of the payroll records because it is unable to confirm the amount of back wages the company may owe if the nurses are found to be employees and not independent contractors. Although the court did not order the ultimate sanction of default judgment, it ordered production of the nurses’ paychecks from the company’s bank and will allow the USDOL to recalculate potential back wages based on those paychecks. If the USDOL prevails as to liability at trial, the court ruled, that calculation will be presumed irrebuttably correct, subject to Court approval. Secretary of Labor v. Caring First Inc., No. 15-cv-01824 (M.D. Fla. Oct. 20, 2017).

TELEPHONE SALES AND MARKETING COMPANY AWARDED SUMMARY JUDGMENT ON BACKUP EMPLOYEE “EXEMPTION” ARGUMENT IN IC MISCLASSIFICATION CASE. A New York federal district court has granted summary judgment in favor of a telephone sales and marketing company in a proposed nationwide class and collective action brought by face-to-face sales agents who alleged that the company misclassified them as independent contractors.  The sales agents brought their claims under the federal Fair Labor Standards Act and Arizona state wage laws.  The court did not, however, rule in favor of the company on the issue of whether the agents were properly classified as ICs. Rather, it ruled that the agents, who gather applications from consumers seeking to enroll in programs offered by Credico’s clients, are exempt from the minimum wage and overtime provisions of the FLSA and Arizona state law under those laws’ outside sales exemption – even if they had been misclassified as ICs. To that end, the court found that the agents’ primary duty was sales, the agents customarily and regularly engaged in that primary duty away from the employer’s place of business, and the agents bore the indicia of outside salespeople including independently soliciting new business in the form of new applications, receiving commission-based compensation, and working free from day-to-day supervision. Vasto v. Credico (USA) LLC, No. 15 Civ. 09298 (S.D.N.Y. Oct. 27, 2017).

LAWYERS IN GRUBHUB IC MISCLASSIFICATION TRIAL MAKE CLOSING ORAL ARGUMENTS. The attorneys in the IC misclassification case brought against GrubHub made their closing arguments on October 30, 2017. As detailed in our blog post that day, the lawyers for each side highlighted what they regarded as the key facts supporting their positions in this case involving the status of a single driver. The plaintiff’s lawyers referred to evidence that GrubHub retained the right to terminate the driver’s engagement at will; drivers were terminated by GrubHub in its discretion and without notice or explanation; the drivers were instructed to be “polite and respectful to businesses and customers;” the drivers were required to use an insulated food delivery bag; the work was closely monitored; GrubHub set the drivers’ rate of pay; and drivers were expected to accept every order and faced negative consequences if they did not. GrubHub’s attorneys focused on evidence that GrubHub did not have a right to control the manner and means by which the driver performed his services; the driver was not supervised as to how he performed his services; the driver provided his own car and other tools; the driver worked when and where he wished to work and was free to work for other delivery services; and the driver could choose any driving route he wished and could wear the clothing of his choice.

Although this is the first gig economy IC misclassification case to be tried in the U.S., we noted in our blog post that the court’s decision is unlikely to be momentous from a legal standpoint. Whatever the judge decides in this non-jury trial, the precedential value of this case is likely to be marginal because cases involving the determination of independent contractor or employee status are fact-specific, whereas this case appears to be in the “gray area” where there are many facts favoring each side’s argument, and where differing facts can lead to different results in cases regarding the proper classification of workers. Lawson v. GrubHub Holdings, Inc., No. 15-cv-05128 (N.D. Cal).

NEW JERSEY COURT FINDS PYROTECHNICIANS TO BE IC’S UNDER NEW JERSEY LAW. A New Jersey state appellate court has reversed a decision of a state unemployment agency, finding pyrotechnicians for Garden State Fireworks, Inc. are independent contractors under the New Jersey test for IC status.  New Jersey courts apply a three-part “ABC” test for IC status, where all three prongs must be satisfied to establish non-employee status.  The court found in favor of the company on Prong A, which requires that the individual has been and will continue to be free from control and direction over the performance of the services in contract. The court found that this Prong was in fact satisfied because the company only provided the technicians with supplies, but otherwise gave them virtually complete control over the performance of the fireworks displays. The court also ruled that the company had satisfied Prong B, which requires a showing that the services are outside of either the employer’s usual course of business or all of the employer’s places of business, because the pyrotechnicians’ work was conducted entirely outside of the company’s primary facility. The court also found that the company met the elements of Prong C, which requires that the individual be customarily engaged in an independently established trade, occupation, profession or business. The court reasoned that Prong C is satisfied “when a person has a business, trade, occupation or profession that will clearly continue despite termination of the challenged relationship.” The court continued: “If the person is so ‘dependent on the employer’ that upon ‘termination of that relationship’ he would ‘join the ranks of the unemployed,’ then the prong would not be satisfied.” In this case, the pyrotechnicians were all either retirees or had full-time employment outside of the services they performed for the fireworks company. They did not rely on the company as their primary source of income and only performed services for the company during one or two weeks each year. Based on those facts, the court found that the pyrotechnicians would not be unemployed following the conclusion of their services with the company. Garden State Fireworks, Inc. v. New Jersey Department of Labor and Workforce Development, 2017 WL 4320819 (Super. Ct. N.J.).

Legislative Action (2 items)

NEW GIG ACT INTRODUCED IN HOUSE. On October 27, 2017, U.S. Representative Tom Rice (R-S.C.) introduced the New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017 (H.R. 4165), which mirrors the Senate bill of the same name (S.1549) previously introduced on July 13, 2017 by U.S. Senator John Thune (R-S.D.).  As noted in our prior blog post reporting on the bill, this legislation addresses the classification of workers as either independent contractors or employees and creates a safe harbor for income and employment tax purposes where the workers meet a set of objective tests. 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 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 would 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.”

In introducing the NEW GIG ACT, Rep. Rice stated, “The NEW GIG Act serves to bolster this booming sector of our economy while reducing the complexity in worker classification that exists today.”       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 tax purposes and have no application to the test for IC status under the federal Fair Labor Standards Act, the National Labor Relations Act, or any state IC laws. Thus, it could create situations where workers were ICs under federal tax laws but employees under federal and state labor and employment laws.

PORT DRIVERS IC MISCLASSIFICATION BILL INTRODUCED IN CONGRESS. U.S. Representative Grace Napolitano (D-Cal.) introduced the Port Drivers’ Bill of Rights Act of 2017 (H.R. 4144) in the House of Representatives on October 26, 2017. This bill focuses on a particular industry where IC misclassification is perceived by some legislators to be prevalent. The bill states that it is the sense of Congress that truck drivers, including drayage drivers, have the right not be misclassified as independent contractors and “denied” legal protections, benefits and pay; to enjoy a basic standard of living; to be covered by federal, state and local labor and employment laws; to be included in workplace safety and health laws; to be free from “exploitative” truck lease or rental arrangements; and to bargain collectively for better wages and working conditions.  The bill seeks to have the Secretary of Transportation, in consultation with the Secretary of Labor, establish a Truck Leasing Task Force to examine truck leasing agreements entered into by drayage drivers and create a report regarding the impact of those agreements on take-home pay of truckers and whether changes in regulations may be warranted to protect the ability of drivers to earn a living wage. Rep. Napolitano and her co-sponsors claim there is a need for this bill due to independent studies that have repeatedly documented the low pay and “rampant worker misclassification in the port drayage and intermodal industries,” the many decisions issued by the California Labor Commissioner awarding over 400 port drivers in excess of $40 million in back pay due to wage and hour violations, and the 15 unfair labor practice strikes that have occurred over the past three years to protest misclassification, involving picketing that delayed cargo delivery and created congestion at the ports. In view of the Republican majority in both houses of Congress, this bill is unlikely to gain traction.

By Richard Reibstein

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