August and September 2019 Independent Contractor Misclassification and Compliance News Update

There were several notable court and administrative cases over the past two months, but they were overshadowed by a legislative matter: the enactment of Assembly Bill 5 in California, which was the subject of our September 11, 2019 blog post entitled “How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law.” That bill, which seems to have been prompted by the California legislature’s desire to reclassify drivers in that state from independent contractors to employees, was enacted with exemptions for over 50 types of workers in an array of industries.

As summarized in “Legislative Developments” below, those exempted will not be subjected to an ultra-strict test for IC status but rather to a more the even-handed test comparable to the standard for IC status in most states and under a variety of federal laws. The California legislature, operating under time constraints so that the bill could become effective on January 1, 2020, rushed through the legislative process and, in so doing, ended up with statutory language that is ambiguous and inconsistent.  The bill also left many other types of workers that were not exempted – yet have for years operated productively as ICs, as well as the businesses that contracted with such workers – wondering why they were not also carved out from the new test and, all of the sudden, have to meet a higher standard to maintain IC status.  At best, they are left to hope that in the next legislative session they will be recognized as warranting an exemption as well.

In the meantime, more and more businesses are seeking to elevate their level of IC compliance both in California and across the country.  Many are using  a process such as IC Diagnostics™, which maximizes compliance with IC laws by restructuring, re-documenting, and re-implementing IC relationships in a customized and sustainable manner consistent with existing business models.

While AB5 dominated the news the past two months, companies in the pharmaceutical and commercial cleaning industries were paying millions of dollars to settle IC misclassification cases, while an adult entertainment business was exhausting its appeals of a multi-million jury verdict for misclassifying exotic dancers. Companies in the fashion and transportation industries appear headed for trial in IC misclassification cases, unless they settle their cases. Companies in the ride-sharing and travel industries, though, successfully obtained orders compelling workers who had brought class actions to arbitrate their cases on an individual basis instead of proceeding in court.

We also report on a major NLRB decision that was the focus of one of our blog posts in September. That federal agency narrowed the law and the remedies for IC misclassification, even though it concluded that a courier company had misclassified delivery drivers as ICs.

In the Courts (9 cases)

PHARMA WHOLESALERS TO PAY $7.5 MILLION TO SETTLE INDEPENDENT CONTRACTOR MISCLASSIFICATION CLAIMS BY DRIVERS.  Two pharmaceutical wholesale distributors, Kinray Inc. and Cardinal Health Inc., have reached a $7.5 million settlement with 115 delivery drivers in a proposed collective and class action lawsuit filed in New York federal court alleging wage and hour violations under the FLSA and New York Labor Law  due to misclassification as ICs, not employees.  The wholesalers supply generic and brand name prescription drugs as well as home health products to independent retail pharmacies and engage the drivers to deliver such goods.

The drivers alleged they consistently worked over 40 hours, and sometimes as much as 80 hours weekly without overtime compensation. In support of their argument that they were employees and not ICs, the drivers claimed that they were subject to credit and background checks; required to report to company warehouses at precise times; mandated  to follow delivery routes and manifests  specifying the identity, location, time and sequence of each stop; subject to discipline for tardiness; and prohibited from dealing directly with the companies’ customers. The settlement, if approved by the court, means that the average recovery per driver, before legal fees and costs, will exceed $65,000. Fernandez v. Kinray Inc., No. 1:13-cv-04938 (E.D.N.Y. Aug. 13, 2019).

PENNSYLVANIA CLEANING FRANCHISOR TO PAY $3.7 MILLION TO FRANCHISEES TO SETTLE IC MISCLASSIFICATION CLAIM. A Pennsylvania federal district court granted final approval of $3.7 million settlement between cleaning franchisor and franchisees in an independent contractor misclassification class action. As we reported in our blog post of June 10, 2019, the settlement involves Jani-King, Inc., the world’s largest commercial cleaning franchisor. Of the 265 class members who received notice of the settlement agreement, about 109 filed claims to date. Under the terms of the settlement, the franchisees will recover $2.4 million with the average individual payout of about $11,000; $1.25 million is earmarked for attorneys’ fees and costs; and $30,000 is designated for service awards to the named plaintiffs.

The plaintiffs alleged that by misclassifying the cleaning franchisees as independent contractors, Jani-King violated the Pennsylvania Wage Payment and Collection Law when it took improper deductions from their payments for services. According to the franchisees’ complaint, Jani-King solely determined whether the franchisees would be offered work and the nature, scope, frequency, and value of the work to be performed for each client; the cleaning methods and procedures to be used; and the training franchisees would receive. In reaching its settlement, Jani-King agreed to make changes to its business practices, including providing new franchise agreements to class member franchisees wishing to continue doing business with the company. The new agreement eliminates various elements of alleged control: no longer will there be post-termination non-competition agreements; the non-solicitation period regarding Jani-King accounts will be reduced to 12 months; and franchisees may sign new business without paying finder’s fees to Jani-King. Myers v. Jani-King of Philadelphia, Inc., No. 09-1738 (E.D. Pa. Aug. 26, 2019).

$4.6 MILLION JURY VERDICT FOR IC MISCLASSIFICATION UPHELD ON APPEAL AGAINST ADULT ENTERTAINMENT CLUB.  The United States Court of Appeals for the Third Circuit affirmed a $4.59 million jury verdict in favor of a class of exotic dancers who prevailed at trial in an IC misclassification class action.  A federal district court judge had approved the jury’s verdict against 3001 Castor Inc. d/b/a The Penthouse Club of Philadelphia. As we discussed in our blog posts of December 6, 2016 and April 9, 2018, the lawsuit alleged nationwide collective claims under the FLSA to recover unpaid wages, as well as state wage/hour claims due to misclassification as independent contractors.

The jury reportedly found that by obligating the dancers to pay certain fees for shifts worked, the Club violated federal and state wage and hour laws and owed the dancers over $4 million in unpaid wages.  In sustaining the jury’s verdict, the Third Circuit determined that the Club exerted “overwhelming control” over the performance of the dancers, including establishing shift times, checking attendance and assessing late fines, instructing the dancers regarding their physical appearance, dictating the choice of dress and makeup, choosing the music played while the dancers performed, and setting the price/duration of private dances. Verma v. 3001 Castor Inc d/b/a The Penthouse Club, No. 18-2462 (3d Cir. Aug. 30, 2019). This case is an example of what adult clubs should refrain from doing.  Indeed, there are also steps that entertainment emporiums can follow to enhance their IC compliance. As the title of our February 8, 2015 blog post states: “Even an Exotic Dance Club (a.k.a. Strip Joint) Can Comply with Independent Contractor Laws – And Avoid or Defend Against Class Actions.”

APPEALS COURT VACATES DECISION DISMISSING IC MISCLASSIFICATION LAWSUIT BY FIT MODELS, ALLOWING THEIR CLASS ACTION TO PROCEED TO TRIAL. The U.S. Court of Appeals for the Second Circuit has vacated a federal district court’s decision that granted summary judgment in favor of a modeling company in a class and collective action brought by fit models.  The appellate court held that summary judgment was not appropriate because there are material issues of fact in dispute as to the fit model’s classification as an independent contractor.  The plaintiff brought her complaint on behalf of herself and other fit models who are retained based on body proportions so that clothing designers and apparel companies may test the fit of their designs.  She alleges that by misclassifying models as ICs, the modeling service, Model Service LLC d/b/a/ MSA Models, and its owner denied them overtime and minimum wages and made deductions from their wages in violation of the FLSA and New York Labor Law (NYLL).

In 2018, the district court granted the company’s motion for summary judgment on the issue of whether plaintiff was the company’s employee for purposes of the FLSA and NYLL. On appeal, the Second Circuit concluded that “[w]hen drawing inferences in the light most favorable to [Plaintiff], which the district court did not do, a reasonable jury could have concluded that she was [the company’s] employee.” The appeals court also determined that although no one element of the parties’ relationship was dispositive of the FLSA inquiry, there existed genuine disputes regarding control of the plaintiff’s work schedule, whether she had the ability to negotiate her pay rate, and her ability to accept or decline work. Those disputed factors were viewed as “significant” by the appellate court to the extent they relate to the degree of control exerted by the company over the plaintiff and her opportunity for profit – two of the factors considered by the courts when assessing IC/employee status under the FLSA’s economic reality test. The court also stated that it was premature to resolve the question whether plaintiff was an employee under the NYLL. The case, which we first reported on in a July 5, 2015 blog post, was remanded for trial on the misclassification claims.  Agerbrink v. Model Service LLC d/b/a MSA Models, No. 18-1471 (2d Cir. Sept. 24, 2019).

DRIVERS FOR COURIER SERVICE ARE NOT ENTITLED TO SUMMARY JUDGMENT IN MASSACHUSETTS IC MISCLASSIFICATION CLASS ACTION.  A Massachusetts federal district court has denied a motion for summary judgment by a driver making deliveries for Google Express through transportation logistics company, Dynamex Operations East, LLC in a proposed IC misclassification class action.  However, the court did certify a class of approximately 100 drivers. In the court complaint, the driver alleges individual, class, and collective claims on behalf of himself and other drivers under the FLSA and the Massachusetts wage and hour laws due to the alleged misclassification of the drivers as independent contractors. Dynamex contracted with Google Express to provide drivers to perform same-day delivery services allowing customers to place orders online from retailers like Target, Walgreens, and Staples. The drivers contracted directly with another company that Dynamex used to supply drivers for Google Express deliveries, and were paid as independent contractors by the other company.

In ruling on the driver’s summary judgment motion, the court applied the Massachusetts three-prong ABC test.  It concluded that under Prong A, the court “does not find as a matter of law that Dynamex exercised actual control over the…drivers.” There was no discussion of Prong B inasmuch as the First Circuit has held that Prong B is pre-empted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA) when applied to entities such as Dynamex that arrange for product deliveries. The court did not consider Prong C. In denying summary judgment, the Court found many contradictions between the documentary evidence and deposition testimony of the parties related to recruitment, equipment, deductions from pay, ability to terminate the relationship, assignment of shifts, and communication with the drivers, all of which, the court said, would have to be resolved at trial.   Ouadani v. Dynamex Operations East Inc., No. 1:16-cv-12036 (D. Mass. Sept. 13, 2019).

TRAVEL CONSULTANTS MUST ARBITRATE THEIR IC MISCLASSIFICATION CLAIMS.  A federal district court in Washington state has granted the motion to compel arbitration filed by an online travel management company in a proposed collective action brought on behalf of travel consultants.  The consultants provide customer communications services for clients of Expedia Group, Inc. and Egenia, LLC.  Those two companies together ‎operate an online travel management company. The plaintiff and the companies never entered directly into either an employment or independent contractor agreement. Egenia contracts with another company, WSOL LLC, which provides telephone, email, and call center and business processing support. WSOL contracted with the plaintiff to provide customer assistance to travelers via chat, email, and phone.

The operative issue involved the plaintiff’s independent contractor agreement with WSOL that included specific references to her relationship with Egenia as well as a broad arbitration provision, a clause delegating authority to the arbitrator to make certain determinations, and a class action waiver. The complaint alleged that Expedia violated the Fair Labor Standards Act by failing to pay the travel consultants overtime compensation due to their alleged misclassification as independent contractors. In opposition to Expedia’s motion to compel arbitration, the plaintiff argued among other things that, even if a valid arbitration clause existed, Expedia and Egenia may not enforce it as non-signatories to the Agreement.  The court was not persuaded; it held that Expedia and Egenia were third-party beneficiaries to the independent contractor agreement’s arbitration provision and were therefore able to compel arbitration based on the arbitration clause contained in plaintiff’s agreement with WSOL.  Krause v. Expedia Group., Inc., No. 2:19-cv-00123 (W. D. Wash. Sept. 17, 2019).

RIDE-SHARING COMPANY SUCCEEDS IN COMPELLING ARBITATION OF WARN ACT CLASS ACTION.  A former driver providing transportation services to customers of Uber Technologies may not litigate in court his proposed class action claims under the Worker Adjustment and Retraining Notification Act. The driver alleged that the company violated the WARN Act when it ceased operations in Austin, Texas without providing WARN Act notice to drivers at least 60 days in advance of the closing. According to the complaint, in May 2016, after losing a public referendum to repeal an ordinance requiring transportation network companies like Uber to make changes in their manner of operation, Uber chose to terminate immediately its business operations in Austin. The driver contended that he and the other potential class members are employees of Uber who were entitled to WARN notice as “affected employees;” if they were independent contractors, however, the WARN Act would not apply.

Uber filed a motion to compel individual arbitration of the driver’s claims. With the parties in agreement that the driver had signed Uber’s arbitration agreement and did not opt-out, the “key disagreement pertains to whether the Court should enforce the Arbitration Agreement and order Plaintiff to individually arbitrate his claims or find the class action waiver in the Arbitration Agreement unenforceable because it conflicts with the WARN Act.” At a hearing on the issue, both parties agreed that it would be inappropriate for the Court to decide the issue whether the driver was an IC or an employee given that the arbitration provision clearly and unmistakably provided that the arbitrator must decide all disputes including the enforceability, revocability, or validity of the arbitration provision. The court concluded: “If the arbitrator determines that Plaintiff is properly classified as an Uber employee – such that Plaintiff would qualify for the protections of the WARN Act – the arbitrator must send the case back to this Court for a determination whether the Class Action Waiver is valid in light of the WARN Act. If the arbitrator determines that Plaintiff is properly classified as an independent contractor, the arbitrator may retain jurisdiction over the rest of the case since the WARN Act would not impede arbitration under that circumstance.” Johnston v. Uber Technologies, Inc., No. 16-cv-03134 (N. D. Cal. Sept. 16, 2019).

TRUCKING COMPANY FACES CLASS ACTION LAWSUIT BY DRIVERS ALLEGING OVERREACHING IN CONNECTION WITH THEIR IC MISCLASSIFICATION CLAIM.  A group of Illinois trucking companies face a new proposed class action lawsuit by drivers, most of whom are recent immigrants, claiming wage and hour violations of the Illinois Wage Payment and Collection Act and common law fraudulent inducement, misrepresentation and concealment due to their alleged misclassification as ICs and not employees. According to the class action complaint, the companies, Patriot Transport Inc. and Expeditor Systems Inc., “implemented their exploitative scheme in full knowledge that most of the truck drivers they hired would take the job offered, not complain about underpayment of wages, and not seek any recourse in court or otherwise with government authorities.”

The complaint further alleges that the drivers “had low English language proficiency and lacked legal sophistication,” and the companies required them to comply with instructions dictated by written and unwritten policies, procedures and directives regarding the drivers’ duties; imposed supervision; mandated  certain insurance;  required advance notice of intended time off; prohibited the drivers from having their own customers; ordered them to use company vehicles with company branding; and prohibited them from negotiating any matters or bargains with customers or brokers. Tlenchiyev v. Patriot Transport, Inc., No. 2019CH09186 (Cir. Ct. Cook County, IL Aug. 8, 2019).

RIDE-SHARING COMPANY SUED IN MASSACHUSETTS FOR IC MISCLASSIFICATION. Drivers for San Francisco-based on-demand ride-sharing company, Lyft, Inc., have filed a class action complaint in Massachusetts federal court alleging that Lyft violated the state’s wage and hour laws by requiring the drivers to pay business expenses, failing to pay them at least a minimum wage, and failing to pay overtime premiums  for hours worked in excess of forty per week due to their alleged misclassification as independent contractors. According to the complaint, among other things, Lyft allegedly requires drivers to follow its policies and rules that, they claim, controls the drivers’ work performance; retains the right to terminate drivers at any time in its discretion; assigns particular rides to drivers; does not require drivers to possess any advanced skills; sets the rate of pay for drivers, which it can change it at its sole discretion; monitors drivers’ performance; and may suspend or terminate drivers who do not accept enough rides, cancel too many rides, do not maintain high customer satisfaction ratings, or do not take the most efficient routes.  It is anticipated that the company will make a motion to compel arbitration and vigorously defend the claims. Cunningham v. Lyft, Inc., No. 1:19-cv-11974 (D. Mass. Sept. 17, 2019).

Administrative and Regulatory Actions (1 case)

NLRB FINDS COURIERS WERE MISCLASSIFIED AS INDEPENDENT CONTRACTORS, BUT REJECTS ARGUMENT THAT MISCLASSIFICATION IS A “STAND-ALONE” VIOLATION OF THE LAW.  As we discussed in detail in our blog post of August 29, 2019, the National Labor Relations Board has held that a courier services company misclassified drivers as independent contractors, not employees protected under the National Labor Relations Act.  The Board also ruled the company violated the NLRA when it terminated its relationship with one of the couriers because of her activities raising group complaints about the company’s classification of drivers. With one member dissenting, the NLRB refused to conclude, however, that the company’s act of misclassifying the couriers as ICs was, standing alone, a violation of the NLRA.  It also rejected the argument that it should issue an order mandating that the courier company reclassify its drivers as employees and notify them that they are not ICs.  As we noted in our blog post, the Board’s decision on the “stand-alone” issue was dictated by the “free-speech” provisions of the NLRA as well as public policy considerations. Velox Express, Inc., 368 NLRB No. 61 (Aug. 29, 2019).

Legislative Developments (2 new laws)

CALIFORNIA AB5 ENACTED WITH OVER FIFTY EXEMPTIONS; MORE CLARIFICATIONS EXPECTED.  Assembly Bill 5 (AB5), which codifies the California Supreme Court’s Dynamex decision that was issued in April 2018, was signed into law by California Governor Gavin Newsom on September 18, 2019 and becomes effective January 1, 2020.  As we discussed in our detailed September 11, 2019 blog post entitled “How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law,” Dynamex created a so-called ABC test requiring companies to satisfy each of three strict criteria in order to establish independent contractor status, dramatically changing decades of settled law in California.  Prior to Dynamex, IC status was determined in that state by applying a multi-part test issued 30 years earlier by the California Supreme Court in the Borello case, which weighed and balanced a number of factors.  Essentially, Dynamex instantly turned tens of thousands of businesses in scores of industries that were operated for years in compliance with settled law into companies that, overnight, might well be operating outside of the law.

Prior to the AB5 legislative initiative, all businesses in California were covered by the Dynamex decision for so-called “wage order” claims.  However, Dynamex did not cover “non-wage order” claims, such as causes of action for overtime and reimbursement of expenses. Although AB5 began as a legislative effort to codify Dynamex for both wage order and non-wage order claims (as well as claims under the unemployment and disability benefits laws in California), it became a lobbying exercise whereby over 50 industries and types of businesses have been exempted from the ABC test in Dynamex. For those companies fortunate enough to have been carved out of the harsh ABC test, AB5 statutorily re-establishes the multi-factor test in Borello for both wage and non-wage claims. Some of the businesses carved out of AB5 are: licensed insurance agents; certain professionals (physicians and surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, and accountants); referral agencies connecting clients with service providers  in the following industries that meet all of 10 specific ‎requirements: graphic design, photography, tutoring, event planning, ‎minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog ‎walking, dog grooming, web design, picture hanging, pool cleaning, and yard cleanup; and certain professional service providers in the following occupations that meet all of six specific requirements: marketing contractors, human resources administrators, travel agents, graphic designers, grant writers, fine artists, enrolled tax agents, payment processing agents, still photographers, photojournalists, freelance writers, publication editors, and newspaper cartoonists.

An exemption from AB5 is not a “get-out-of-jail-free” card; those businesses carved out from the Dynamex ABC test still must abide by the multi-factor Borello test.  Many businesses in industries that obtained a carve-out will still be governed by the ABC test (and not Borello) if they are unable to satisfy any of up to a dozen specific requirements.  The publisher of this blog was quoted in Law360 on September 11, 2019 stating, “There are probably 150 industries that lobbied, and 50 were successful,” and those industries that failed this go-round will likely make another attempt in a “cleanup bill” in the 2020 legislative session, which could yield more exemptions and clarify other exemptions that were added in haste after legislative hearings had concluded.

NEW YORK CITY BROADLY EXPANDS HUMAN RIGHTS LAW TO INDEPENDENT CONTRACTORS.  On September 12, 2019, the New York City Council passed a bill (Intro No. 136-A) by a vote of 47-3‎ ‎expanding the New York City Human Rights Law’s anti-discrimination protections to independent contractors and freelancers. The bill, sponsored by Councilman Brad Lander, is due to take effect in December 2019 after the Mayor signs it into law, as is expected shortly.  This additional protection for independent contractors and freelancers follows other enactments that have expanded safeguards for ICs, such as the 2017 Freelance Isn’t Free Act. Councilman Lander said, “Closing the loophole that left independent contractors without sufficient recourse for ‎discrimination or harassment builds on the Council’s ambitious work to win protections for gig-‎economy workers.” Likewise, Caitlin Pearce, Executive Director of the Freelancers Union, reportedly posted, “This is huge news for NYC’s 1.3 million independent workers, who may face harassment and discrimination in the workplace with fewer protections or paths for recourse than traditional employees.” Regarding the expansion of protections to ICs and freelancers, the publisher of this blog was quoted in Bloomberg Law’s September 12, 2019 Daily Labor Report as follows: “The Council bill, by ensuring that freelancers shouldn’t be subject to discrimination by a company that utilizes them to further its business, is consistent with a growing trend in the city and the state to give additional protections to freelancers and independent contractors.” But, finding the bill “overbroad,” this blog’s publisher said: “It goes beyond only a company’s decisions to retain or let go an independent contractor, and encompasses everything in between: their compensation, promotion, benefits, and other terms and conditions or privileges of employment.”

Written by Richard Reibstein

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