This past month was relatively uneventful in the area of independent contractor misclassification and compliance news, if one regards a $16.5 million settlement as unremarkable. But the amount of the settlements in IC misclassification cases appears to be increasing substantially. This $16.5 million settlement involves a very large logistics company sued in a class and collective action by about 850 drivers. What is consequential about the settlement is not just its total sum but also the amounts to be paid individually to each of the drivers, averaging $14,000 per driver (with a high of $138,700).
While the total amount of this settlement is extraordinarily high for an IC misclassification case, it is not the highest we have seen. Last March, we reported on a $100 million settlement in an IC misclassification case involving 20,000 owner-operator drivers, with the average settlement about $5,000 per class member. The settlement amount in this new case last month nearly triples that amount per driver.
Nonetheless, the $14,000 per class member award, while on the high side in terms of settlement payments per class member in IC misclassification cases brought by drivers, pales in comparison to the amount payable per class member in at least one non-driver case. Last month, we reported on a settlement between an oil and natural gas exploration and production company and a group of 82 oilfield technicians who received on average $40,000 per class member.
The large amounts of the settlements in IC misclassification cases leads to the conclusion that plaintiffs’ class action lawyers are pursuing these types of cases with very high-dollar potential exposure.
Because of these types of developments, an increasing number of companies that operate with an IC business model or use numerous ICs to supplement their workforce are resorting to a process such as IC Diagnostics™ to enhance their compliance with IC laws – even in states like California and Massachusetts where the tests for IC status are the most challenging. The evolution of IC litigation also explains why companies, as part of an IC Diagnostics process, are upgrading their IC agreements’ arbitration clauses in a state-of-the-art manner to ensure that their class action waivers in those provisions are as effective as possible and provide them with maximum protection from costly class and collective action lawsuits.
In the Courts (5 cases)
LOGISTICS COMPANY’S $16.5 MILLION SETTLEMENT WITH DRIVERS ALLEGING IC MISCLASSIFICATION IS APPROVED BY COURT. A California federal district court has preliminarily approved a $16.5 million settlement of collective and class action claims brought by delivery drivers against XPO Logistics, Inc., one of the largest transportation and logistics companies in the world. The lawsuit alleged that XPO violated the federal Fair Labor Standards Act and California state wage and hour laws by misclassifying them as independent contractors and not employees. According to the drivers, XPO provides delivery services to retail merchants like Home Depot, Lowe’s, Macy’s, Ethan Allen, and Pottery Barn; those companies contract with XPO to provide the delivery and basic installation services attendant to newly purchased appliances and removal of old appliances from their customers’ homes in California. The drivers claimed, among other things, that XPO reserved the rights to determine the locations where the drivers pick up and drop off merchandise assigned to them; control the order and timing of deliveries; require the drivers to wear XPO uniforms and follow customer service standards; determine the year and branding of the vehicles driven by the drivers; unilaterally determine the fees to be received by the drivers; and require the drivers to follow specific methods regarding how to move and install appliances and interact with customers.
The settlement, reached on behalf of approximately 847 current and former delivery drivers, includes a fund of almost $12 million in awards, which consisted of approximately $70 for each day worked by a class member plus an additional $2.50/workday to those who opted in to the FLSA collective action. Estimated payments to drivers range from as low as $70 to as high as $138,700, with an average of approximately $14,000 per driver. The settlement further provides $4,125,000 (25% of the gross settlement fund) for plaintiffs’ counsel’s fees and expenses, a $24,000 PAGA allocation, settlement administration costs not to exceed $50,000, and up to $102,500 for class representative service awards. A hearing to consider whether the settlement should be granted final approval by the court is scheduled for October 16, 2019. Carter v. XPO Logistics, Inc., No. 3:16-cv-01231 (N.D. Cal. June 27, 2019).
$6.6 MILLION SETTLEMENT WITH EXOTIC DANCERS UPHELD BY FEDERAL COURT OF APPEALS. Over the objections of four class members, the U.S. Court of Appeals for the Sixth Circuit has upheld a federal district court’s approval of a $6.6 million settlement reached in a worker misclassification suit between class of 28,177 exotic dancers and Déjà Vu dance clubs. In their nationwide class and collective action complaint, the dancers claimed that Déjà Vu Consulting, its affiliate dance clubs, and the clubs’ owner violated the federal Fair Labor Standards Act and Michigan wage and hour laws by “intentionally misclassif[ying] class members as independent contractors, refus[ing] to pay minimum wage, unlawfully requir[ing] employees to split gratuities, and unlawfully deduct[ing] employee wages through rents, fines and penalties.” The settlement was approved by the federal district court in June 2017 and provided for $1 million towards a general settlement fund; $4.5 million towards a secondary pool of settlement remuneration; $900,000 in attorneys’ fees; and $100,000 to resolve all Private Attorneys General Act claims against Déjà Vu clubs in California. The settlement also included a requirement that every club provide its current dancers with an Entertainer Assessment Form to determine whether the dancer should be classified as an employee or independent contractor.
Four dancers objected to the settlement. The district court overruled their objections, and the Sixth Circuit (with one of the three judges dissenting in part) affirmed the district court’s decision. In so doing, the Sixth Circuit concluded that, contrary to the objections, the district did not abuse its discretion in finding that the tangible benefits afforded to class members as a result of the settlement agreement outweigh the value of the volatile claims that the Dancers released. Cabrera v. Déjà Vu, No. 17-1801 (6th Cir. June 3, 2019).
D.C. CIRCUIT FINDS REFEREES IN PENNSYLVANIA ARE INDEPENDENT CONTRACTORS, NOT EMPLOYEES, UNDER THE NLRA. The U.S. Court of Appeals for the District of Columbia Circuit reversed a decision by the National Labor Relations Board that high school lacrosse referees were employees covered by the National Labor Relations Act. Instead, the court found the referees to be independent contractors and thereby exempt from the protections of the NLRA. As discussed more fully in our blog post of August 7, 2017, the NLRB had issued a decision that lacrosse officials providing referee services for the Pennsylvania Interscholastic Athletic Association were employees under the NLRA 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, sought to represent a unit of 140 officials that officiated at junior and senior high schools lacrosse games within the greater Pittsburgh area.
After the PIAA refused to bargain with the Union, it petitioned the D.C. Circuit for review of the Board’s holding. On appeal, the D.C. Circuit reversed the Board on the grounds that it “failed to adequately account for the strength of the two aspects of this relationship that most strongly favor independent-contractor status: the few times on which PIAA actually pays the officials [as compared to the many games for which the officials are paid by the schools] and the short duration of their employment.” The court further identified other factors that supported IC status, although not as strongly as the payment and duration factors – the skill and expertise needed to be a lacrosse referee, the fact that the referees had to provide their own equipment, and the parties’ understanding of their relationship as ICs as evidenced by the PIAA Constitution and Bylaws, the Officials’ Manual, and registration/application materials. A few factors were identified by the D.C. Circuit as favoring employment status, but found that they were “not as strongly as those that point to classifying them as independent contractors.” Those factors included that the referees were part of PIAA’s regular business, and there was a “mixed bag” of control and supervision. Ultimately, in finding the referees to be ICs, the court stated, “Indeed, ‘almost every state court decision involving an amateur sports official’s employment status’ has come to the same conclusion.” Pennsylvania Interscholastic Athletic Association, Inc. v. NLRB, No. 18-1037 (D.C. Cir. June 14, 2019).
TWO NEW JERSEY APPELLATE COURT DECISIONS DIFFER ON COMPELLING ARBITRATION OF INTERSTATE TRANSPORTATION DRIVERS’ IC MISCLASSIFICATION CLAIMS. Two decisions by appellate courts in New Jersey reached different results as to whether delivery drivers can be compelled to arbitrate their claims for IC misclassification. In the first case, plaintiff drivers sued in state court alleging that Strategic Delivery Solutions, a freight broker and forwarder that arranges for the local delivery of pharmaceutical products and general merchandise to its customers, violated the New Jersey Wage and Hour Law and Wage Payment Law due to their misclassification as independent contractors and not employees. Each driver signed an Independent Vendor Agreement that provided that the law of the state of the residence of the vendor would govern the agreement – in this instance, New Jersey law. The agreement also contained an arbitration provision and class action waiver. SDS filed a motion to dismiss the complaint and to compel arbitration of the claims on an individual basis, not as a class. The drivers, relying on the recent U.S. Supreme Court decision in New Prime, Inc. v. Oliviera, which extended the reach of the FAA transportation exemption to independent contractor agreements as well as employment agreements, argued that they were exempt from arbitration, as was the driver in the New Prime case under the interstate transportation worker arbitration exemption. The trial court granted SDS’s motion to dismiss and found the drivers’ agreement to arbitrate and the class action waivers were clear, unambiguous, valid and enforceable. Following an appeal by the drivers, the New Jersey Appellate Division vacated the order of dismissal and reinstated the complaint, concluding that the trial court had failed to determine whether the drivers were engaged in transportation services in interstate commerce and therefore exempt under the FAA. In addition to remanding that issue to the lower court, the appeals court included another wrinkle: it held that even if the trial court found that the drivers were engaged in interstate commerce and were exempt under the FAA, they would still be subject to the New Jersey Arbitration Act (“NJAA”) which does not include an exemption for interstate transportation workers.
A day after the SDS decision, another panel of the New Jersey Appellate Division reviewed a similar case alleging IC misclassification by delivery drivers who delivered Health Express Corporations’ pharmaceutical products in and around New Jersey. The drivers had signed contracts with the company that included an arbitration clause providing that the agreement was to be governed by the FAA. Prior to the issuance of the Supreme Court’s New Prime decision, the lower court has issued an order compelling arbitration. Following the issuance of New Prime, the Appellate Division granted the drivers permission to reinstate the appeal based on a change in the law. In reversing the lower court, the appeals court concluded that the drivers’ contract with the company constituted a “contract of employment” under the interstate transportation exemption to the FAA, stating: “Consequently, the FAA cannot govern the arbitration agreement, as contemplated by the parties. The inapplicability of the FAA to the parties’ arbitration agreement undermines the entire premise of their contract. Because the FAA cannot apply to the arbitration, as required by the parties, their arbitration agreement is unenforceable for lack of mutual assent.”
Unlike the SDS case, neither the company nor the panel of appellate judges addressed or mentioned the New Jersey Arbitration Act (“NJAA”), which would have required arbitration in this case. Thus, the conflict in rulings may be attributed to a difference in how the companies’ lawyers litigated the two cases. Colon v. Strategic Delivery Solutions, LLC, No. A-2378-17T4 (N.J. Super. Ct. App. Div. June 4, 2019); Arafa v. Health Express Corp., No. A-1862-17T3 (N.J. Super. Ct. App. Div. June 5, 2019).
Other Newsworthy Matters (2 items)
PRIVATE EQUITY FIRMS PROVIDED WITH GUIDANCE AS TO HOW TO CONDUCT DUE DILIGENCE OF A PORTFOLIO COMPANY’S POTENTIAL FOR IC MISCLASSIFICATION LIABILITY. Private equity firms were the focus of an article entitled “How to Evaluate Portfolio Companies for Independent Contractor Misclassification Liability,” published June 18, 2019 in Private Equity Law Reports. The publisher of this legal blog together with Matthew Kane, General Counsel and Chief Compliance Officer of Z Capital Group, LLC, wrote an article as guest authors for PELR discussing the array of IC misclassification claims that have been brought as class and collective action lawsuits, the materiality of the risks, the abundance of multi-million dollar settlements in these types of cases, how to value the potential risk of IC misclassification liability, and what post-closing steps can be taken generally to minimize such risk. Our blog post of July 1, 2019 provides an elaboration of the steps that private equity firms can encourage their new portfolio companies to undertake to maximize compliance with IC laws.
PUBLISHER QUOTED IN INSURANCE PUBLICATION DEALING WITH INSURANCE AGENT EXEMPTION TO NEW CALIFORNIA BILL CODIFYING THE DYNAMEX TEST FOR IC STATUS. The Financial Times’ June 12, 2019 publication of Life Annuity Specialist included an article entitled, “Insurers Watch as California Moves to Tighten Independent Contractor Rules.” The article by Arthur D. Postal reports on the insurance industry’s interest in Assembly Bill 5, a bill that has passed the California Assembly and has now moved to the California Senate. As discussed more fully in our blog post of June 10, 2019, AB5 proposes to codify the California Supreme Court’s decision in the Dynamex case creating an ABC test for purposes of classifying workers as employees or ICs. The newly-enunciated ABC test made it far more challenging for businesses to classify workers as independent contractors in California. With regard to the insurance industry, AB5 currently includes an exemption for licensed insurance agents, among other categories of workers listed as exempt. Without that exclusion for licensed insurance agents, Alan Levin of Locke Lord LLP stated in the article that the proposed legislation would potentially “shake the foundations” of how insurance policies are distributed and serviced in the state. The publisher of this blog was also quoted as follows: “This is the most important issue facing the insurance industry at this time. Insurance companies cannot be complacent and count on past decisions to apply to them, especially when class action lawyers are targeting the industry and continuing to bring misclassification cases.” He added that the full implication of the bill is unclear, because the “B” prong of the ABC test has not been litigated in California.
Written by Richard Reibstein
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