New Type of Independent Contractor Misclassification Lawsuit: Business vs. Business

It was only a matter of time.  For many years, class action lawyers have filed thousands of lawsuits under wage / hour and other employment laws on behalf of individuals who allege they were employees who have been misclassified as independent contractors. Unions have likewise been prominently involved in challenging companies that use independent contractors, filing petitions with the NLRB seeking to unionize many such businesses. And state government agencies as well as the U.S. Department of Labor have commenced legal proceedings against companies using independent contractors or, like the IRS, subjected them to audits and investigations about whether they have misclassified those workers.

The newest type of legal challenge is by a business that doesn’t use independent contractors, accusing another business that does use them of violating state unfair competition laws.

The new lawsuit alleges unfair competition.  It was recently filed against the largest ride sharing technology company in a federal district court as a class action on behalf of an array of class members alleging violations of the California unfair competition laws.  The proposed class included all persons and entities who earned revenue through pre-arranged ground transportation services, including affiliates throughout the U.S. who obtained revenue for “non-shared” rides in California over the past four years. Diva Limousine, Ltd. v. Uber Technologies, Inc., No. 18-cv-05546 (N.D. Cal. Sept. 10, 2018).

The defendant has not yet responded to the complaint, but it is anticipated that a vigorous defense will be mounted.

Analysis

No state or federal law prohibits the use of independent contractors and, as we have noted in prior blog posts, even the Secretary of Labor and the Wage and Hour Administrator in the past Administration publicly commented that legitimate independent contractors are an important part of the nation’s economy.

While lawsuits between competitors under unfair competition laws are not uncommon, their emergence in the independent contractor realm is a notable development.  The thrust of these types of lawsuits follow the tenor of press releases issued by state officials about companies alleged to have violated employment and independent contractor laws by misclassifying employees as ICs.

Those press releases typically state that companies that misclassify workers as independent contractors unlawfully seek to avoid the higher costs of hiring employees (including payroll and unemployment taxes, workers’ compensation premiums, and state-mandated paid leave or disability benefits) and, by so doing, are “unfairly competing against law abiding companies” that treat as employees workers who provide comparable services.  We have regularly reported on these types of press releases, such as the one issued by the New Jersey Labor Commissioner in August 2018 and a similar one issued previously by the California Labor Commissioner in June 2018.

Some unfair competition laws require only modest pleading requirements in order to survive a motion to dismiss and minimal proof to survive a motion for summary judgment.  However, at a bare minimum such laws require an affirmative showing that the defendant violated certain laws.

Few of the thousands of independent contractor misclassification cases have been litigated to judgment; the overwhelming number of such cases have been settled or dismissed prior to trial – or remain mired in protracted litigation.  When settled, these types of cases almost invariably include a standard non-admission of liability clause and/or a prominent denial of wrongdoing.

Similarly, very few administrative proceedings initiated by regulatory agencies result in admissions by a company that it violated any law; while non-admission clauses are not as universal with administrative agencies as they are in private party litigation, they are rather commonplace.

Thus, this new type of lawsuit will likely require the plaintiff to prove a violation of law – something of a challenging undertaking to say the least, particularly where the issue of misclassification of employees as independent contractors is frequently a matter that is not typically decided on a motion for summary judgment, but rather only at trial.

Further, some companies who have had several lawsuits or administrative proceedings filed against them in the past have secured decisions in their favor in certain cases.  Thus, this unfair competition claim might not be litigated on a clean slate, but rather in the context where prior decisions in favor of a defendant may further complicate the plaintiff’s proof.

In addition, this area of the law dealing with independent contractor misclassification has been evolving and is in flux in many states. As we have discussed in a number of blog posts, the California Supreme Court recently changed the test for independent contractor status in its employee-friendly decision in Dynamex. That decision, which covers some, but not all, types of claims for independent contractor misclassification, undoubtedly prompted this new lawsuit; indeed, the complaint in this newly-filed case specifically referred to Dynamex and quoted a passage from that case. Presumably, the plaintiff’s class action lawyers feel that Dynamex paved the way for this type of lawsuit.  However, the jurisprudence under Dynamex is still developing and may take years before there is clarity as to how the Dynamex test will be applied, including whether it will have retroactive effect.

In addition, many industries are asking the California Legislature to exempt certain types of businesses from the Dynamex decision, including companies in the ride-sharing technology industry. Businesses are also seeking an alteration of the newly-enunciated judicial test for independent contractor status.

Many of the more commonplace lawsuits alleging independent contractor misclassification – those filed by workers in California – include an unfair competition claim, if only to plead a cause of action that has a longer statute of limitations than that applicable to the typical Labor Code and employment claims.  Those cases by workers, though, focus not on unfair competition but rather on the Labor Code and employment law statutes.  In contrast, this new business vs. business sort of lawsuit only includes claims for unfair competition. That claim, though, asserts that the defendant violated the California Labor Code, Unemployment Insurance Code, and Insurance Code “in order to reduce the company’s labor expenses and prices, which in turn harms competition.”

Takeaway

This type of case presages years of litigation in an area of the law that is in flux in California and throughout the country. While the result of these types of actions are uncertain, they signal to companies that use independent contractors as part of their business model that enhancing independent contractor compliance is a sound objective.

Many companies have sought to maximize their compliance with independent contractor laws by using a legal process such as IC Diagnostics™, which examines whether a group of workers not being treated as employees would pass the applicable tests for independent contractor status under governing state and federal laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws. While no solution is without some risk, one of the sustainable alternative solutions that enables many companies to minimize their independent contractor exposure is restructuring, re-documenting, and re-implementing their independent contractor relationships, without adjusting their business models, as described in our White Paper.

Written by Richard Reibstein

Your comments are invited.

 

 

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