July 2018 Independent Contractor Misclassification and Compliance News Update

Last month was notable for a number of judicial and administrative decisions against companies defending independent contractor misclassification claims.  In one case, the plaintiff seeks to use the company’s statements in its filings with the U.S. Securities and Exchange Commission to establish IC misclassification.  This strategy is an example of why companies using ICs should closely review their public statements, including websites and marketing materials, to minimize the likelihood their own words are not used against them. Ideally, public statements should tend to support a genuine independent contractor relationship. Indeed, making effective revisions to public statements is an integral part of maximizing IC compliance, as discussed in our White Paper; it can, however, be a challenging undertaking.

In another case, the plaintiffs sought to establish employee status by relying on company ID badges and uniforms they claimed they were required to use and wear as well as insurance they alleged they were obligated to carry.  These are commonplace factors upon which plaintiffs’ class action lawyers focus in arguing that their clients have been misclassified.  Some judicial decisions, though, have held that requiring such ID badges and uniforms do not indicate employee status in selected industries, and that requiring a contractor to carry minimum insurance, particularly involving motor vehicles, is not inconsistent with IC status.

Two cases involved aggressive defense motions to dismiss claims for inadequate pleading, but in both cases the courts ultimately allowed the cases to proceed.  Another case involved a ride sharing industry; in that case, the New York Unemployment Insurance Appeal Board affirmed a decision that drivers were employees under the New York unemployment insurance law, not independent contractors.  That decision, unless reversed on appeal, is limited to unemployment insurance law in that state.

Perhaps the most significant case last month was the first reported decision in California addressing the retroactive application of the new employee-friendly “ABC” test, which was enunciated by the California Supreme Court in its April 30, 2018 decision in the Dynamex case.  That new standard replaced the prior test first articulated by the California Supreme Court in 1989 in the Borello case. A Superior Court judge in Orange County, California concluded that Dynamex should be applied retroactively.  The retroactivity of Dynamex will undoubtedly be subject to appellate review.

As we noted in our May 10, 2018 blog post entitled “Questions Left Open by Dynamex and What Companies Can Do To Enhance Their IC Compliance,” retroactive application of the ABC test to the period prior to April 30, 2018 would likely invite due process challenges by employers, who had long understood Borello to be the law by which their IC relationships were governed. The question of retroactivity depends upon considerations of fairness and public policy. As we stated in that blog post, “Given that Borello has long been understood as the applicable test by both businesses and individuals as well as California agencies such as the Division of Labor Standards Enforcement, there are compelling grounds for stakeholders to argue that they reasonably relied upon Borello as good law and that this change in the law was not foreseeable.”

While the legal landscape has certainly changed following Dynamex, some businesses and individuals that wish to enter into or maintain an independent contractor relationship can still do so.  In our blog posts dealing with the Dynamex decision, we note that by using a process such as IC Diagnostics,™ some businesses can restructure and re-document their independent contractor relationships instead of reclassifying contractors as employees.

In the Courts (5 cases)

STOCK PHOTO REVIEWERS SUE SHUTTERSTOCK FOR IC MISCLASSIFICATION.  A content reviewer providing services to Shutterstock, Inc., a nationwide company that offers high quality, royalty free stock photos, music and video for many applications like websites, blogs, and films, has sued the company in California state court.  The plaintiff seeks to represent a class of content reviewers alleging overtime, meal, rest period and other violations of the California Labor Code and Wage Orders of the Industrial Welfare Commission due to alleged independent contractor misclassification.

In support of the proposed class action, the plaintiff quotes from Shutterstock’s 10-k filing with the U.S. Securities and Exchange Commission, which provides in part: “Generally, we provide our content under a royalty-free non-exclusive license and each piece of content available for license has been vetted by a team of reviewers to ensure that it meets our standards of quality and can be appropriately licensed for commercial or editorial use.” (Emphasis added.) The plaintiff also claims, among other things, that she and all other stock photo reviewers are employees because they are not free from the control and direction of Shutterstock in the performance of their content review work; the work done by the reviewers is within the usual course of Shutterstock’s business; and the reviewers not customarily engaged in an independently established business. Included among the many allegations purportedly evidencing direction and control are Shutterstock’s expectation that the reviewers will follow the company’s detailed written standards; its alleged requirement that they escalate issues to supervisors via a proprietary Shutterstock system; and the claim that the company provides resources to reviewers to perform specific tasks. Call v. Shutterstock, Inc., No. SCV-262841 (Super. Ct. County of Sonoma, Cal. July 20, 2018).

MISSOURI CARPET CLEANING TECHNICIANS GIVEN SECOND CHANCE TO PROCEED WITH THEIR IC MISCLASSIFICATION CLASS ACTION. A Missouri federal court has denied a second motion to dismiss a proposed class action IC misclassification lawsuit brought by carpet cleaning technicians alleging wage and hour violations of the FLSA and Missouri Minimum Wage Law.  The cleaners allege that they were misclassified as independent contractors and not employees by the defendant, ProSteam Carpet Care LLC, a business offering residential and commercial cleaning of carpeting, flooring, and upholstery.  ProSteam had prevailed in a prior motion to dismiss because the cleaners had failed to set forth sufficient facts to support their overtime claims, but the court allowed the cleaners to amend their complaint. Their amended complaint included specific weeks for which they allegedly worked over 40 hours and did not receive overtime compensation, and also alleged specific facts regarding how certain company policies were purportedly applied in practice. In denying the motion, the court found that the cleaners had now sufficiently alleged facts to avoid dismissal of the complaint.  Wegat v. ProSteam Carpet Care LLC, No. 16-cv-1931(E.D. Mo. July 31, 2018).

DRIVERS FOR NORTH CAROLINA LOGISTICS COMPANY AVOID DISMISSAL OF THEIR IC MISCLASSIFICATION CLASS ACTION.  A North Carolina federal court has denied a motion to dismiss by transportation logistics company, Express Courier International, Inc., of a proposed IC misclassification class action by drivers seeking unpaid minimum wages and overtime compensation under the FLSA.  In permitting the drivers to proceed with their lawsuit, the court determined that they alleged facts that established a wage and hour violations that “nudge[s] their claim[s] from conceivable to plausible.” The court held that it was sufficient that the drivers alleged they worked over 40 hours per week and the company was aware of it yet failed to pay the drivers overtime wages, and that the drivers’ self-incurred vehicle-related expenses caused their pay to drop below the minimum wage rate.  The drivers also alleged that the company’s branch managers were in charge of drivers, assigned routes, and had authority to terminate drivers.  They also alleged that the company dictated what ID badges and uniforms the drivers had to wear, the insurance required to be carried by the drivers and the method of tracking and communication to be used.  Allen v. Express Courier Int’l, Inc., No. 18-cv-00028 (W.D.N.C. July 25, 2018).

NEW YORK UNEMPLOYMENT INSURANCE APPEAL BOARD RULES THAT DRIVERS PROVIDING SERVICES TO CUSTOMERS OF RIDE SHARING TECHNOLOGY COMPANY ARE EMPLOYEES, NOT INDEPENDENT CONTRACTORS.  Drivers providing services to customers of Uber are entitled to unemployment insurance benefits according to a recent New York Unemployment Insurance Appeal Board decision. In upholding the determinations of an Administrative Law Judge at the New York Department of Labor, the Appeal Board concluded that “Uber exercises sufficient supervision, direction or control over the three claimants and other similarly situated Drivers.” The Board found that control was exercised through Uber’s in-person assistance at its Hubs where drivers are screened; required drivers to view an onboarding video containing essential information; and drivers are required to take Uber’s roadmap test.  In addition, the Board also rested its decision on the following: Uber’s Driver App that is provided by Uber to  the drivers and contains information set up by Uber; by Uber setting the fares charged to riders, the rates of pay received by the drivers, and the music, tipping and deactivation policies; by Uber providing in-person support to drivers and monitoring their performance, including by using the ratings results provided by riders; and by providing a detailed handbook, fielding complaints and communicating trips’ most efficient routes.

Uber had argued that the controls were mandated by the Taxi and Limousine Commission – an argument that the courts in New York have recognized in the past – but the Appeal Board determined that Uber exercised or reserved the right to exercise control beyond regulatory mandates.  In its decision, the Appeal Board chose not consider the abundance of factors in support of IC status, focusing instead on the factors supporting employee status. In the Matter of Uber Technologies, Inc.,  N.Y. Unemployment Insurance Appeal Board No. 596722 (July 12, 2018).

DYNAMEX DECISION APPLIED RETROACTIVELY BY A CALIFORNIA COURT. A California state court has issued a ruling that the “ABC” test for determining independent contractor / employee status, which was enunciated by the California Supreme Court in April 2018 in the Dynamex case, will apply retroactively to Private Attorneys General Act (PAGA) claims in a case brought by exotic dancers against a gentlemen’s club, Imperial Showgirls.  The court stated that, “Even though Dynamex established a new standard for evaluating independent contractor/employee issues (at least as to claims brought under the IWC [Industrial Wage Commission] wage orders), it did not state that the decision applied only prospectively.” In reaching its decision, the Court reasoned that given the age (13 years) of the claims in the Dynamex case, “the lack of such a pronouncement [about retroactivity] suggests that the decision should apply retroactively.”

The gentlemen’s club had argued that the Dynamex decision does not apply to PAGA claims since such claims are based on Labor Code violations, not violations of wage orders. In rejecting that argument, the Court concluded that although the PAGA claims in the dancers’ case were all based on alleged violations of the Labor Code (such as failure to pay all wages owed, including minimum wage; failure to provide meal breaks, rest breaks and accurate itemized wage statements; failure to reimburse all expenses; improper deductions from wages; and failure to permit the dancers to retain gratuities), an applicable wage order also covered each of the violations except for the gratuity claim. Because all but the gratuity claim were “rooted in the wage orders,” the Court ruled that the Dynamex ABC test should apply to each such claim.  Johnson v. VCG-IS LLC, d/b/a Imperial Showgirls and  International Entertainment Consultants, Inc., No. 30-2015-00802813 (Super. Ct. Orange County, Cal. July 18, 2018).

Administrative & Regulatory Initiatives (2 matters)

NAIL SALON ASSESSED $1.2 MILLION FOR MISCLASSIFYING WORKERS.  The California Labor Commissioner’s Office has issued a $1.2 million citation to Young’s Nail Spa for allegedly misclassifying 36 workers as independent contractors, failing to pay overtime compensation, and failing to provide proper meal and rest breaks. According to the Labor Commissioner’s press release issued on July 30, 2018, an investigation was initiated through a complaint filed in accordance with the Private Attorneys General Act (PAGA). In the press release, the Labor Commissioner stated that the citation amount included $670,000 payable to workers and $572,000 in civil penalties. Of the total due to workers, $126,702 was for minimum wage violations plus $17,375 in interest, $144,076 for liquidated damages, $118,825 for failure to pay overtime, $92,492 for not providing final paychecks as required by law, $87,155 for improperly paid rest periods, $65,312 for not providing proper itemized wage statements, and $18,103 for meal period violations. The civil penalties included $207,887 for failure to maintain valid workers’ compensation insurance, $160,000 for misclassifying workers as independent contractors, $104,000 for not providing proper wage statements and $100,300 for penalties associated with the wage violations.

U.S. LABOR DEPARTMENT ISSUES GUIDANCE ON IC STATUS OF CAREGIVERS AND NURSES REFERRED BY HOME CARE REGISTRIES.  The U.S. Department of Labor issued detailed guidance to its field staff in its Wage and Hour Division to assist them in determining if and when caregiver and nurse registries are deemed to be employers under the FLSA. As more fully discussed in our blog post of July 13, 2018, the guidance was issued in the form a Field Assistance Bulletin entitled “Determining Whether Nurse or Caregiver Registries are Employers of the Caregiver.” The types of registries covered by the Bulletin are those that facilitate matches or referrals between clients and caregivers. The Bulletin provides that such registries may engage in many actions that should not be regarded as indicative of an employment relationship, including but not limited to conducting background screening; verifying credentials of potential workers; matching a client’s threshold preferences with a potential caregiver;  informing the client and caregiver about typical rates in the local area to serve as a benchmark for negotiations; handling payroll services; and compliance with mandatory requirements of the law. Likewise, the Bulletin identifies actions that may result in a finding of employer status such as interviewing a prospective caregiver to determine if he or she is “likeable” or will “work well with a particular client”; determining whether one caregiver is likely to “do a better job” than another caregiver; setting policies that require a caregiver to provide services in a particular way; requiring a caregiver to accept a job with a particular client; visiting the home to monitor a caregiver’s behavior; conducting performance evaluations of the caregiver; and setting policies for a caregiver’s time off from work. The Bulletin notes that field staff should use a “totality of the circumstances” evaluation to determine whether an employment relationship exists between a registry and a caregiver.

As noted in our blog post, the Labor Department’s assessment misses the mark in at least one key respect. The Bulletin states that a registry’s decision to terminate a caregiver “for failing to comply with the requirements and standards established by the industry, the client, or the law” indicates that the registry may be an employer of the caregiver. This view is contrary to many court decisions under the FLSA involving a variety of industries.

Written by Richard Reibstein

Compiled by Janet Barsky

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