March and April 2020 Independent Contractor Misclassification and Compliance News Update   

The last two months have consumed all of us with matters related to COVID-19. This public health emergency has created an anomalous situation virtually no one could have foreseen: legislation being passed at the federal level that treats independent contractors in a similar fashion to employees for purposes of unemployment benefits and paid sick and family leave benefits. Since the inception of this blog almost ten years ago, we have reported on over a dozen bills introduced in Congress addressing independent contractors – and not a single one was seriously considered due to a lack of bipartisanship on Capitol Hill. Yet, in a legislative effort almost as swift as the spread of the Coronavirus itself, two key pieces of federal legislation were passed by Congress and signed into law by the President in the course of only nine days that provided pandemic benefits not only to employees but also to self-employed individuals including gig workers and freelancers.

Many companies that utilize self-employed individuals as part of their business model are concerned that state workforce agencies will eventually use the federal pandemic unemployment assistance law to initiate audits of businesses to determine if such workers who apply for benefits have been misclassified in the past as independent contractors.  For that reason, concerned companies that use independent contractors are treating each notice of a claim for unemployment benefits by any such worker as a potentially problematic legal challenge. Savvy businesses are responding to such claims with comprehensive submissions showing that such workers have been properly classified as independent contractors under the applicable state unemployment law, as we described in our April 7, 2020 blog post.   

Over the past two months, there were relatively few court cases involving independent contractor status, yet two were by the highest state courts in New York and Pennsylvania under each state’s unemployment insurance law. The New York case involved a well-known company in the gig economy and, as a result, the decision attracted national attention. The Pennsylvania case clarified one of the factors in that state’s statutory test for independent contractor status.  Those cases are addressed below.

In the Courts (5 Cases)

POSTMATES COURIER FOUND TO BE ELIGIBLE FOR UNEMPLOYMENT BENEFITS AS AN EMPLOYEE BY NEW YORK’S HIGHEST COURT.  The New York Court of Appeals issued a highly-anticipated decision involving the independent contractor status of a Postmates courier under New York’s unemployment insurance statute.  As we discussed in detail in our March 26, 2020 blog post, while the Court’s opinion is of limited import legally, as a practical matter it may send shockwaves through the gig economy in New York and elsewhere for those who read more into the decision than is warranted.

The Court of Appeals majority did not find that the courier was an employee; rather, it ruled only that there was “substantial evidence in the record to support the [Appeal] Board’s determination” that the courier was entitled to unemployment benefits as an employee of the company.  The history of the case is a classic example of administrative and judicial ping-pong, involving four administrative and judicial reversals. The role of appellate courts in cases of this nature is simply to determine if there was enough evidence in the record to support the Appeal Board’s decision, even if the countervailing evidence was greater. In reversing a lower court’s decision that the New York Unemployment Insurance Appeal Board erred when it concluded that there was substantial evidence in the record supporting employee status of the courier, the Court of Appeals relied upon the three key factors that it felt supported the Appeal Board’s decision: (1) the workers were “low-paid” and unskilled; (2) the couriers had limited discretion over how to do their jobs; and (3) the “nature of the work” (making deliveries) resulted in Postmates “dominat[ing] significant aspects of its couriers’ work” by dictating which customers and where the couriers  deliver to, “effectively limiting the time frame for delivery and controlling all aspects of pricing and payment.”

Judge Rowan Wilson filed a 24-page dissenting opinion, joined by Judge Michael Garcia, criticizing the majority for not undertaking a closer review of the facts and for its reliance on using the “nature of the work” as a new factor in determining independent contractor status. Vega v. Postmates Inc., No. 14, 2020 N.Y. Slip Op. 02094 ( Mar.‎ 26, 2020).

PENNSYLVANIA HIGH COURT CLARIFIES ITS TEST FOR INDEPENDENT CONTRACTOR STATUS UNDER THE STATE’S UNEMPLOYMENT COMPENSATION LAW.  The Pennsylvania Supreme Court has interpreted the second prong of the state’s two-pronged test for independent contractor status under Pennsylvania Unemployment Compensation Law.  The second prong requires a company to establish that the service provider is “customarily engaged in an independently established trade, occupation, profession ‎or business.” ‎ The lower court had held that various individuals working in a salon as nail technicians, babysitters, and cleaners were independent contractors and not employees because they had the right to work for more than one entity; were not limited by the nature of their work for the salon or by their hours to provide services to a single employer; were not dependent on the salon’s existence for ongoing work; and could refuse engagements. In reversing the decision of the lower court, the Supreme Court concluded that the words “customarily engaged” in the second prong requires that an individual be actually involved in an independent trade, occupation, profession, or business in order to establish self-employment.

In the Court’s mind, it is not enough that the individual has a right to engage in an independent business or trade.  The Court stated, “Having determined that the phrase ‘customarily engaged’ requires actual, rather than hypothetical, involvement in an independent trade or business, we are careful to emphasize that our interpretation does not equate ‘actual involvement’ to a requirement that an individual ‘actually perform his or her services’ for third parties during a given time period.” The Court further stated that “an individual can be an independent contractor who ‘is simply satisfied working for a single client or at a single location’ depending on the circumstances.”  But in that instance, the words “customarily engaged” requires that the individual be shown “in some way [to be] actually involved in an independently established trade or business.” The Court then gave some examples, such as where an individual actively holds himself out as an independent business through the use of business cards or other forms of advertising.  It concluded by holding that the record contained insufficient evidence that the individuals performing nail or cleaning services “were holding themselves out as having their own businesses or otherwise indicated that they were actually involved in an independently established business.”  A Special Touch v. Commonwealth of Pennsylvania, No. 30 MAP 2019 (Sup. Ct. Pa. Apr. 22, 2020)‎.

Publisher’s note:  Pennsylvania’s test for independent contractor status under its unemployment compensation law is an abbreviated form of the so-called ABC test, where the B prong is missing.  Thus, we typically refer to Pennsylvania as having an AC test for unemployment compensation purposes.  The C prong is oftentimes interpreted differently from one state to another, and the interpretation by the Pennsylvania Supreme Court of the language in that prong is a bit different than the manner in which other states construe such words.

HEALTH CARE COMPANY UNABLE TO DISMISS INDEPENDENT CONTRACTOR MISCLASSIFICATION CASE.  A Pennsylvania federal court has denied a health care company’s motion to dismiss a proposed collective and class action complaint brought by prison therapists under the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act due to the alleged misclassification of the therapists as independent contractors and not employees. PrimeCare Medical, Inc. provides services to inmates in correctional facilities throughout Pennsylvania. According to the allegations in the complaint, all of the therapists provide the same mental health services such as conducting mental health assessments of inmates, determining risks of inmate suicide, facilitating admissions, and developing educational programs. The complaint further alleges that the company maintains control, oversight and discretion over the operation of the medical services within the correctional facilities. The company made a motion to dismiss the complaint, arguing that the allegations lacked requisite factual specificity and were impermissibly vague. In rejecting the company’s argument, the court concluded that the complaint adequately defined the class of employees the plaintiff seeks to represent; the complaint specified how the therapists are similarly situated by describing their job duties; and the complaint sufficiently alleged that the company misclassified the therapists as independent contractors and improperly exempted them from overtime compensation. Moore v. PrimeCare Medical, Inc., No.19-cv-106 (W. D. Pa. Mar. 16, 2020).

COMMERCIAL CLEANING COMPANY GETS SECOND CHANCE TO COMPEL ARBITRATION OF INDEPENDENT CONTRACTOR MISCLASSIFICATION CLASS ACTION.  The United States Court of Appeals for the Third Circuit has remanded back to the district court for further consideration a motion to compel arbitration of a class action lawsuit brought by two named plaintiffs that each purchased their own commercial cleaning franchise from Coverall North America, Inc. (CNA) through a “master franchisee,” Sujol, LLC d/b/a Coverall of Southern New Jersey. Both plaintiffs entered into agreements with Sujol, but CNA was not a party to either agreement. The plaintiffs commenced a proposed class action against CNA and Sujol in New Jersey state court, alleging that the companies violated the New Jersey Wage Payment Law (NJWPL) by misclassifying them as independent contractors and making unlawful deductions from their wages.

After the case was removed to federal court, both CNA and Sujol made a motion to compel arbitration under the Federal Arbitration Act.  The district court concluded that the incorporation of the American Arbitration Act’s Rules in Silva’s agreement did not satisfy the clarity needed for delegation of questions of arbitrability to an arbitrator because the rules were not clear, at least to an “unsophisticated parties” such as the plaintiffs.  The district court also found that the arbitration agreement did not cover NJWPL claims and that CNA could not invoke the arbitration clause because it was not a third-party beneficiary of the agreement with Sujol. On appeal by CNA and Sujol, the Third Circuit disagreed with the district court and found that the incorporation of the AAA Rules in Silva’s arbitration clause constituted clear and unmistakable evidence that the parties agreed to delegate arbitrability. The Third Circuit also vacated the district court’s order that CNA was not a third-party beneficiary of the contract’s arbitration clause, concluding that further discovery was needed as to CNA’s rights in both plaintiffs’ agreements. Richardson v. Coverall North America, Inc., Nos. 18-3393 & 18-3399 (3d Cir. Apr. 28, 2020)‎.

RIDE-SHARING COMPANY’S VICTORY IN INDEPENDENT CONTRACTOR MISCLASSIFCATION CASE VACATED.  UberBlack drivers claiming they had been misclassified as independent contractors succeed before the United States Court of Appeals for the Third Circuit in vacating summary judgment previously issued against them by a federal district court in their collective and class action lawsuit under the federal Fair Labor Standards Act and Pennsylvania wage and hour law. Each of the named plaintiffs owned and operated independent transportation companies and entered into a Technology Services Agreement with Uber. Uber filed a motion for summary judgment, arguing that the plaintiffs were independent contractors and not employees under the FLSA and Pennsylvania law. Applying the six-part test utilized by the Third Circuit in Donovan v. DialAmerica Marketing, Inc., the district court agreed with Uber, concluding that, on balance, because four of the six factors favored IC status, the drivers were independent contractors and not employees.

On appeal, a three-judge panel of the Third Circuit vacated the lower court’s decision, finding that there are genuine issues of material fact regarding a number of the six factors that the lower court found to be in favor of independent contractor status. Regarding the “right to control” factor, which the district court found had favored the company, the Third Circuit found that, among other things, the evidence was not conclusive as to whether Uber exercises control over drivers. As to the factor concerning opportunity for profit or loss depending on managerial skill, the district court found in favor of the company, concluding that the drivers can drive for competitors and their own private clients and can ‎determine when, where, and how to use the Driver App to generate more profits.  The Third Circuit, however, found there were other material facts indicating a genuine dispute over that factor, including that the company decides the fare, whether to refund or cancel a passenger’s fare, which driver receives a trip request, and determines the driver’s territory, which is subject to change without notice. Finally, the Third Circuit held that there were genuine issues of material fact over the factor that examines the degree of permanence of the working relationship. As a result, the case may now proceed to the trial phase. Razak v. Uber Technologies Inc., No. 18-1944 (3d Cir. Mar. 3, 2020).

Legislative Initiatives

FEDERAL COVID-19 LEGISLATION AFFECTING INDEPENDENT CONTRACTORS.  Both of the two major bills passed by Congress and signed into law by the President included benefits typically limited to employees but expanded to also include self-employed individuals. As discussed more fully in our blog post of March 26, 2020, pandemic unemployment assistance has been made available to independent contractors under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, and paid sick and family leave has been made available to independent contractors under the Families First Coronavirus Response Act (“FFCRA”).  Under the CARES Act, enacted into law on March 27, 2020, self-employed individuals will be entitled to pandemic unemployment assistance if they are able and willing to work or telework for pay, but are unable to do so due to a broad range of reasons related to the COVID-19 pandemic.  Pandemic unemployment assistance is available not only if such independent contractors are “unemployed” but also if “partially unemployed,” and are available retroactive from January 27, 2020 through December 31, 2020. ‎

Under the FFCRA, enacted on March 18, 2020 and effective April 1, 2020, both paid sick time under the Emergency Paid Sick Time Act, and expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act is available not only to employees, but also to eligible self-employed individuals.  The FFCRA defines such individuals in Section 7002(b) and 7004(b) of the law as a person who “regularly carries on a trade or business . . . and would be entitled to receive paid leave . . . if the individual were an employee of an employer (other than himself or herself).” Paid sick leave is available to independent contractors for up to ten days where unable to work or telework because the individual is subject to a government quarantine or order of isolation related to COVID-19; has been advised by a health care provider to self-quarantine; or is experiencing symptoms of Coronavirus and is seeking medical attention.

Although the federal government has provided a much needed form of “unemployment” relief for freelancers, gig workers, and other independent contractors, state agencies have for the most part failed to conform their online processes to expedite such benefits to “self-employed individuals.” Instead, most state workforce agencies require independent contractors to apply for unemployment benefits as employees, and then, only when denied after they are determined to be non-employees, are they able to proceed with the process to submit documentation that they are self-employed and have suffered a loss of income.

As a result, companies are receiving requests for information from state workforce agencies about individuals they regard as independent contractors but have no choice but to apply for benefits as if they are employees. Businesses must be mindful that not responding in an effective manner to an unemployment claim notice about a worker regarded by the company as an independent contractor will likely lead to a finding that the claimant is an employee of that business.  Such a finding can create enormous potential legal risks and liabilities for companies that have not been paying unemployment and payroll taxes on the fees paid to individuals treated as independent contractors.  As we remark in our blog post of April 7, 2020, businesses should take a six-step approach to responding to such claims.

VIRGINIA ENACTS FOUR LAWS INTENDED TO COMBAT INDEPENDENT CONTRACTOR MISCLASSIFICATION.  Virginia Governor Ralph Northam signed into law four sets of bills intended to combat worker misclassification. A 2012 report of the Joint Legislative Audit and Review Commission estimated that at least ‎‎214,000 Virginians were misclassified as independent contractors by their employers. ‎ A news release issued by the Office of the Governor on April 12, 2020 described the following new laws.

  • House Bill 984 and Senate Bill 894 (signed into law on March 10 and effective July 1, 2020) create a private cause of action for a misclassified worker to bring a civil action for damages against his or her employer for failing to properly classify the worker if the employer had knowledge of the individual’s ‎misclassification. Damages may be awarded for wages, salary, employment benefits ‎(including expenses incurred by the employee that would otherwise have been covered by ‎insurance or other compensation lost to the individual), and reasonable attorneys’ fees and costs ‎incurred in bringing the action. The law also provides that an individual who ‎performs services for a person for remuneration shall be presumed to be an employee unless it is ‎shown that the individual is an independent contractor as determined under the Internal Revenue ‎Service guidelines.
  • ‎House Bill 1199 and Senate Bill 662 (also signed into law on March 10 and effective July 1, 2020) protect employees or independent contractors from employer retaliation. Retaliation would include discharging, disciplining, threatening, discriminating against, or penalizing an employee or ‎independent contractor or taking other retaliatory action regarding an employee or independent contractor’s compensation, terms, conditions, location, or privileges of employment, because the employee or independent contractor reported misclassification or is requested or subpoenaed to participate in an investigation, hearing, or inquiry. Companies found to have engaged in retaliatory action will be subject to a civil penalty up to the value of the employee’s lost wages.
  • House Bill 1407 and Senate Bill 744 (signed into law on April 6 and effective January 2, 2021) authorize the Department of Taxation to oversee ‎investigations into suspected cases of worker misclassification and levy penalties as ‎appropriate. The law provides that ‎if an individual performs services for an employer for ‎remuneration, that individual shall be ‎considered an employee of the party that pays that ‎remuneration unless such individual or his ‎employer demonstrates that such individual is ‎an independent contractor. The Department shall ‎determine whether an individual is an ‎independent contractor by applying Internal Revenue ‎Service guidelines.‎ Failure of an ‎employer to properly classify an ‎individual as an employee may result in civil penalties of ‎up to $1,000 per misclassified individual for a first offense, up to ‎‎$2,500 per ‎misclassified individual for a second offense, and up to $5,000 per misclassified ‎‎individual for a third or subsequent offense.‎
  • House Bill 1646 (also signed into law on April 6 and effective July 1, 2020) requires contractors to properly classify all workers as employees or independent contractors. This law gives the Board of Contractors the ability to sanction contractors who are found to have intentionally misclassified workers.

By Richard Reibstein

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