Author: Richard Reibstein Esq.

The U.S. Labor Department has been playing musical chairs in its approach to classifying workers as independent contractors or employees under the federal Fair Labor Standards Act since the middle of the Obama Administration.  But the regulatory initiatives by the Obama, Trump, and Biden administrations have little impact on the legal landscape of independent contractor law.  In 2015, when the Administrator of the Wage and Hour Division of the Obama Administration’s Labor Department issued an Administrator’s Interpretation, our blog post was titled: “The Labor Department’s New Guidance on Independent Contractor Misclassification Is Nothing New Legally.” Five years later, when the Labor Department under the Trump Administration issued a proposed regulation that was finalized just before the onset of the Biden Administration, our blog post bore the heading “Much Ado About (Almost) Nothing.”  And when the Biden Administration issued a rule withdrawing the prior administration’s regulation, our blog post was called “Independent Contractor Misclassification Ping Pong.” Last month, the Labor Department notified the public that it plans to issue yet another regulation on this issue.  When issued, it too will have little legal significance because the U.S. Department of Labor does not decide FLSA cases, only the courts do.  Indeed, the federal courts have been doing so for decades, developing their own versions of the so-called “economic realities test” for independent contractor status, based on a standard first enunciated by the U.S. Supreme Court many years ago.

Since the inception of this blog in 2010, we have reported on independent contractor misclassification class actions filed against hundreds of companies in scores of industries. Yet some industries seem to have been targeted in particular. As we stated in a guest blog published in Fortune in June 2015 and entitled “Is Your Company on the Independent Contractor Hit List,” we provided a short hit list of industries that were under attack in these types of cases, including janitorial; staffing; transportation, courier, and trucking; cable installation; oil and gas; landscaping; and ride sharing. Only a few industries have been immune from these types of legal challenges in lawsuits or workforce and tax agency audits and proceedings, as can be seen in our monthly review of legal developments in this area of the law over the past decade. For that reason, businesses in a vast array of industries have utilized a process such as IC Diagnostics (TM) to enhance their compliance with federal, state, and local independent contractor laws.

Three industries suffered setbacks last month in independent contractor misclassification cases, while another targeted industry targeted scored a success.  As we have reported in many prior blog posts, class action lawyers who regularly pursue IC misclassification cases have had in their crosshairs, for over a decade, a number of industries including home health care, franchise, and food manufacturing and distribution businesses.  One of the cases reported below involves a court decision granting summary judgment against a Florida home health care company and in favor of a home health aide / companion where the court found that the company misclassified the aide as an independent contractor.  Another case relates to a franchisor of tool distributorships that settled with California franchisees for $15 million.  A third case pertains to a $23 million settlement between a large baked goods manufacturer and those who distribute its products to grocery stores in Maine.  A logistics company serving as a freight forwarder broker, however, was successful in decertifying a class action by drivers in New York.  Prudent companies in each of those and other industries can and should take steps to minimize their exposure to these types of lawsuits by using a process to restructure (even if only modestly), re-document, and re-implement their independent contractor and franchisee relationships in a manner that not only substantially minimizes the likelihood of such lawsuits but also, if sued, reduces considerably the amounts for which such lawsuits are oftentimes settled. One process used by many companies is IC Diagnostics (TM). That process includes the use of state-of-the-art arbitration clauses with class action waivers, which may not have been deployed by some or all of the companies in the four cases below.

One of last month’s legal developments on which we report below is a decision by a federal court in New Jersey that should serve as a reminder to companies: arbitration clauses need to be drafted well in order to succeed.  New Jersey courts for many years have been perhaps the most finicky in the country when reviewing language informing their workers that they are waiving their rights to have a court or jury decide their claims. As we observed in a 2021 blog post, plaintiffs’ class action lawyers bringing independent contractor misclassification claims have succeeded on occasion in punching holes in arbitration clauses with class action waivers. As we remarked in an extensive blog post on the subject in 2018: “Whether an arbitration agreement in an independent contractor or employment setting will bar a class action depends as much on the wording in the arbitration clause as the applicable law, which is in flux and continues to evolve. That reality strongly suggests that existing arbitration clauses used in independent contractor agreements should be reexamined and updated periodically in tandem with the company’s effort to enhance its compliance with laws governing the use of independent contractors.”  Companies seeking to elevate their IC compliance and avoid class action misclassification lawsuits by the use of arbitration agreements with class action waivers have effectively used a process such as IC Diagnostics (TM) to accomplish these objectives.

Does the strict ABC test set forth in the Massachusetts independent contractor law apply to the relationship between a franchisor and its franchisee where the franchisor must also comply with the FTC’s Franchise Rule?  That was the question that the U.S. Court of Appeals for the First Circuit in Boston asked the Massachusetts Supreme Judicial Court to answer in an appeal of a lawsuit brought by a group of store managers who claimed that 7-Eleven had misclassified them as independent contractors instead of employees. The Massachusetts high court ruled earlier today, March 24, that the FTC’s Franchise Rule only governs disclosures by franchisors to franchisees, not the manner in which franchisors control the performance of franchisees, and therefore does not preempt the state’s independent contractor statute.  But while the franchise industry argued that such as decision will be the death-knell of franchising in Massachusetts and other states for individuals who wish to own and operate a franchise, the decision will not likely have the doomsday effect that the franchising industry predicted.  Why?  Because with the proper structuring, documentation, and implementation of the franchise relationship, franchisors should be able to classify individual franchisees as independent contractors, even in Massachusetts, as we discuss below.

Late last week, the National Labor Relations Board last week issued a Complaint and Notice of ‎Hearing that could, if successful, make the act of misclassifying workers as independent contractors ‎a violation of the National Labor Relations Act. The complaint was issued despite a time-honored ‎statutory defense available to companies that likely will prevent the NLRB from succeeding in its ‎efforts to support organizing efforts by the Teamsters seeking to represent drivers in the ‎intermodal, drayage, cargo, last mile, and logistics industries. ‎

This past month, the most notable lawsuit alleging independent contractor misclassification was an ERISA claim.  ERISA lawsuits by workers alleging independent contractor misclassification can potentially expose companies to enormous liability.  For example, in 2017 a federal district court entered a judgment following a jury trial involving ERISA claims by insurance agents seeking damages under several types of ERISA plans. That judgment reportedly would have imposed liability upon the insurance company defendant in the hundreds of millions of dollars, but it was reversed on appeal in January 2019 by the U.S. Court of Appeals for the Sixth Circuit.  The defendant argued that the agents were independent contractors and not employees, and the appellate court agreed.  That approach is but one way to defend against ERISA lawsuits by workers classified as independent contractors.  Another way is to argue that the workers, even if they are employees, were excluded from eligibility as participants in the ERISA plans. That was the thrust of a successful defense last month in an ERISA lawsuit brought by a worker classified as an independent contractor.  The court held that even if the worker was a common law employee and not an independent contractor, he did not allege he was an eligible participant in the plans in question.  This result teaches companies to buttress the language in their ERISA plans to exclude those they classify as independent contractors.  As we note in our blog describing the IC Diagnostics (TM) process, the language needed to exclude such workers is neither straightforward nor intuitive.  But companies that take steps to ensure that eligibility language in each ERISA plan is drafted in an effective manner, consistent with judicial precedent, can eliminate exposure to IC misclassification liability under ERISA, even if the workers can ultimately establish they were misclassified.

Federal and local officials in Washington, D.C. took steps last month to gear up their counter-attacks against independent contractor misclassification, but companies that have taken meaningful steps to enhance their compliance with applicable federal, state, and local independent contractor laws remain unlikely to become a target for an enforcement action. Why?  Because governmental crackdowns like those described below by the U.S. Department of Labor and the Attorney General for the District of Columbia typically focus on companies that are relatively easy marks, such as those that have taken minimal measures to comply with independent contractor laws.  In contrast, government agencies are far less likely to use their limited resources to target companies that have developed state-of-the-art agreements for individuals engaged as independent contractors.  For that reason, a number of more sophisticated companies have utilized a compliance process such as IC Diagnostics (TM) to structure, document, and implement their independent contractor relationships in a customized and sustainable manner designed to minimize misclassification liability.

Perhaps the most significant development involving independent contractor compliance and ‎misclassification issues in December 2021 received relatively scant attention: a detailed empirical ‎study based on survey results of a cross-section of Americans entitled “The State of Gig Work in ‎‎2021.” The study was undertaken by Pew Research Center, a non-partisan think tank. One of its ‎most important conclusions involves the self-perception of gig workers: “65% see themselves as ‎independent contractors, while 28% view themselves as employees.” Another key conclusion is ‎that almost twice as many Americans support maintaining the status quo in government ‎regulation of companies using gig economy workers. These and other results of the study are ‎likely to influence federal and state legislators who may consider changing existing laws ‎governing independent contractors. The study confirms that an overwhelming percentage of ‎freelancers and other gig workers want legislators and government agencies to take a hands-off ‎approach and leave existing independent contractor laws intact. These and other conclusions of ‎the study are discussed in more depth below.‎