The past two months were momentous for many companies that engage independent contractors in California to supplement their workforce or to interact with their customers. This applies not only to businesses based in California but also to those based in other states with ICs across the U.S., including in the Golden State. The most important legal development, however, arose in a legal context that does not involve ICs – the U.S. Supreme Court’s decision addressing the legality of employer requirements that their employees to enter into mandatory arbitration agreements with class and collective action waivers.
The U.S. Supreme Court’s decision, by a narrow 5-4 majority, held that employers may lawfully require employees to sign mandatory arbitration agreements with class and collective action waivers. This decision undoubtedly will spur employers to double down on the use of such arbitration agreements, but it is also likely to prompt many businesses to incorporate such arrangements in their IC agreements. While some companies may mistakenly regard the Supreme Court decision as protection from liability under the federal wage and hour laws, the Supreme Court’s decision only limits a litigant’s use of a class and collective action and does not protect companies from individual claims or from audits, investigations, or enforcement proceedings by administrative or regulatory agencies. The best way for companies using ICs to minimize IC misclassification liability is to follow one of the types of alternatives described in our White Paper: restructuring, re-documenting, and re-implementing; reclassifying; or redistributing. In addition, there are compelling reasons for companies to use “opt-outs” in the arbitration provisions of their IC agreements, separate from those reasons discussed in our blog post published last fall on the eve of the Supreme Court’s oral argument on the issue.
In California, the Dynamex case changed dramatically the test for IC status under certain California Labor Code provisions, making it far more challenging for businesses and individuals who wish to utilize independent contractor relationships to lawfully maintain an IC relationship. The new test makes unlawful many IC relationships that were perfectly lawful the day before the Dynamex decision was issued on April 30, 2018. With careful planning in view of the new test for IC status, many companies can still maintain their IC relationships in California, as described in our blog post entitled: “Questions Left Open by Dynamex, and What Companies Can Do to Enhance Their IC Compliance.”
In the Courts (7 cases)
FLOOD OF NEW IC MISCLASSIFICATION LAWSUITS HAS BEGUN AFTER THE CALIFORNIA SUPREME COURT CHANGED ITS TEST FOR IC STATUS. On April 30, 2018, the California Supreme Court, in the Dynamex case, curtailed the lawful use of independent contractors by making the test for IC status under several California laws far more “employee-friendly.” As more fully discussed in our blog post that day, the Court in its Dynamex decision abandoned its long-standing common law test for determining worker status under various sections of the California Labor Code. Instead, it adopted a much stricter test that makes IC status far more challenging for businesses to maintain.
In its 82-page decision, the California Supreme Court rejected the continued use of the multi-factor test as set forth by the Court in its 1989 decision in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations. Rather, it created a three-pronged so-called “ABC” test, each of which prongs a business must meet in order to establish a lawful IC relationship under various provisions of the California Labor Code. As the Court stated: “The [new] ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” Dynamex Operations West Inc. v. Superior Court of Los Angeles County, case no. S222732 (Sup. Ct. Cal. Apr. 30, 2018).
In its wake, the Dynamex decision leaves many questions unanswered. Does the new ABC test apply to expense reimbursement claims or claims brought under the California Private Attorneys General Act? Will the new ABC test apply to matters under the jurisdiction of the California Employment Development Division (EDD) or to workers’ compensation matters? Should Dynamex be applied prospectively, retroactively or otherwise? As observed in our May 10 blog post, these and other questions may take years for the courts to decide.
The California Supreme Court said one of the reasons for this dramatic change in the law was simply to clarify the test and thus to reduce the number of IC misclassification lawsuits. However, as we noted in our May 10 blog post, “what is most likely to follow in the wake of the Dynamex decision is a period of great uncertainty accompanied by a flood of class actions.” And that is precisely what has occurred.
The first two lawsuits were filed only eight days after the Dynamex decision was issued. They were brought against companies that have previously defended themselves against IC misclassification lawsuits: Postmates and Lyft. Both complaints assert claims by drivers / couriers for failure to pay business expenses, failure to pay minimum wage, and failure to pay overtime compensation. The lawsuits expressly rely on the Dynamex ABC test, alleging that neither company can establish that the drivers / couriers perform services outside each company’s usual course of business – the “B” prong of the ABC test. Lee v. Postmates Inc., No: CGC-18-566394 (Super. Ct. San Francisco County May 8, 2018); Talbot v. Lyft, Inc., No. CGC-18-566392 (Super. Ct. San Francisco County May 8, 2018).
U.S. SUPREME COURT UPHOLDS THE USE OF MANDATORY ARBITRATION AGREEMENTS WITH CLASS AND COLLECTIVE ACTION WAIVERS. Although the trio of cases decided May 21, 2018 by the U.S. Supreme Court regarding the legality of mandatory arbitration agreements containing class and collective action waivers did not arise in the context of an IC misclassification case, the decision by the Supreme Court is equally applicable to that type of case as well. Just as many employers in recent years have included such clauses in their employment agreements, many businesses have included such clauses in their IC agreements. In a closely-watched 5-4 decision, Justice Neil Gorsuch delivered the majority opinion that class and collective action waivers that are part of arbitration agreements are governed by the Federal Arbitration Act and are not rendered illegal by the National Labor Relations Act. Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP, et al. v. Morris, et al., No. 16-300, National Labor Relations Board v. Murphy Oil USA. Inc. et al., No. 16-307 (U.S. Sup. Ct. May 21, 2018).
As noted in a prior blog post published just before the Supreme Court heard oral argument on these three cases, many companies have concluded that an arbitration clause with a class and collective action waiver is all they need in order to protect themselves from workplace liability. Those companies are mistaken. Such clauses can only protect against a claim being asserted as a class or collective action (assuming the arbitration agreement is properly drafted). As stated in the blog post: “They don’t provide any defense to a claim that employees were properly paid or that workers classified as independent contractors are not misclassified employees who allegedly are owed overtime, minimum wages, employee benefits, expense reimbursement, or other workplace benefits available to employees.” The blog post also noted that arbitration agreements with class and collective action waivers are not binding on governmental regulators; therefore, they are “wholly ineffective at forestalling federal and state regulatory agencies from conducting audits or initiating and maintaining enforcement proceedings under employment and independent contractor laws.” Therefore, the importance of enhancing compliance with employment and independent contractor laws and not relying on an arbitration clause with a class and collective action waiver “cannot be overstated.”
RIDE-SHARING GIANT PREVAILS IN IC MISCLASSIFICATION CLAIM BY DRIVERS UNDER FEDERAL AND PENNSYLVANIA LAW. On April 11, 2018, a Pennsylvania federal district court judge granted summary judgment in favor of Uber Technologies and against UberBLACK limousine drivers, concluding that, as a matter of law, the drivers are not employees covered by the federal minimum wage and overtime laws or by Pennsylvania’s minimum wage and wage payment laws. In reaching his decision that the drivers were ICs, Judge Michael Baylson considered six factors. He found that four favored IC status (right to control, opportunity for profit and loss, investment, and permanence of relationship) and two that favored employee status, although the court stated that one of the two factors (the absence of special skills) did not carry much weight and the other (integration of the services with the company’s business) only slightly favored employee status. Razak v. Uber Technologies, Inc., No. 16-cv-573 (E.D. Pa. Apr. 11, 2018). As noted in our blog post of April 12, this decision, if upheld on appeal, could become a seminal determination allowing Uber and other ride-sharing companies to rest comfortably knowing that their IC business models satisfy the federal Fair Labor Standards Act (FLSA) and similar state IC tests.
ON-DEMAND APP-BASED FOOD DELIVERY SERVICE SUCCEEDS IN COMPELLING ARBITRATION OF IC MISCLASSIFICATION CLAIMS. The United States Court of Appeals for the Fifth Circuit has affirmed a lower court’s decision granting DoorDash’s motion to compel arbitration of the claims of dashers (drivers who make deliveries from certain restaurants to customers of DoorDash), without addressing their class certification motion. This suit was filed by a dasher against DoorDash alleging violations of the FLSA due to their alleged misclassification as ICs. Additionally, the dasher moved for collective certification of a nationwide class of similarly situated individuals. The district granted the motion to compel without first deciding the collective certification issue. On appeal, the Fifth Circuit affirmed, stating: “We continue to hold that arbitrability is a ‘threshold question’ to be determined ‘at the outset,’ a holding consistent with the ‘national policy favoring arbitration.’” The appellate court found there was a valid agreement to arbitrate , rejecting the dasher’s arguments that the contract was illusory because DoorDash never signed the agreement, never delivered it, and retained the ability to unilaterally modify it. Edwards v. DoorDash, Inc., No. 17-20082 (5th Cir. Apr. 25, 2018).
MASSACHUSETTS RIGID IC MISCLASSIFICATION STATUTE DOES NOT APPLY TO WORKERS’ COMPENSATION CLAIMS. The Massachusetts Supreme Judicial Court held that the proper test for determining independent contractor / employee status for purposes of determining eligibility under the state’s workers’ compensation law is the 12-factor MacTavish-Whitman test and not the more restrictive three-factor “ABC” test under the Massachusetts Independent Contractor Statute. The workers’ compensation claimant was a newspaper delivery agent for Publishers Circulation Fulfillment, Inc., a company that provides home delivery services for newspaper publishers and pays agents to deliver newspapers to subscribers. While providing services to the company, the claimant suffered injuries and filed a claim for workers’ compensation benefits.
The Massachusetts high court stated that although the Independent Contractor Statute contains a cross-reference to the workers’ compensation statute, “the language does not supplant the MacTavish-Whitman analysis, but merely notes that when the facts of a given case demonstrate a misclassification of a worker as an independent contractor under [the Independent Contractor Statute], the penalties of the [workers’ compensation law] are applicable.” The Court continued: “[The Independent Contractor Statute does not apply to a determination whether an individual is eligible for workers’ compensation benefits.” In affirming the reviewing board’s substantive decision that the claimant was an independent contractor, the court agreed that “[i]n working for [the company], the claimant was allowed to expand her business to deliver newspapers and other items for other companies; supplied all necessary instruments to complete her job at [the company], including using her own vehicle to make deliveries; hired substitutes to complete the job; purchased her own independent contractor work insurance; and filed taxes as an independent contractor.” Camargo’s Case, No. 12368, 479 Mass. 492 (Sup. Jud. Ct. May 10, 2018).
Administrative and Regulatory Actions (2 matters)
NLRB TO DECIDE IF IC MISCLASSIFICATION IS AN UNFAIR LABOR PRACTICE. The NLRB has received numerous Amici Curiae (Friends of the Court) briefs regarding under what circumstances, if any, the Board deem an employer’s act of misclassifying employees as independent contractors to be a violation of Section 8(a)(1) of the National Labor Relations Act (NLRA). As we noted in our September monthly news update, the Administrative Law Judge (ALJ) in Velox Express, Inc., 15-CA-184006 (Sept. 25, 2017), decided that misclassification alone can constitute an unfair labor practice under the NLRA. In Velox, an unfair labor practice charge was filed by a courier / driver against Velox, a medical courier service, alleging IC misclassification. The ALJ determined that the drivers were employees and not independent contractors because Velox controlled how its drivers carried specimens, directed how they should ensure that pickups were complete and prompt, and prevented drivers from finding their own substitutes. The ALJ also concluded that Velox committed an unfair labor practice in violation of Section 8(a)(1) due to the misclassification of the workers as ICs, and restrained and interfered with their ability to engage in protected activity under Section 7 of the NLRA.
The Board issued a Notice and Invitation on February 15, 2018 for interest groups to share their views with the NLRB on the above misclassification issue. In response to the NLRB’s invitation, a joint brief was filed by Massachusetts, Pennsylvania, Connecticut, Illinois, Maryland, Minnesota, New Jersey, New Mexico, New York, Oregon, Virginia, and Washington in support of the General Counsel’s request to affirm the ALJ’s decision that IC misclassification alone constituted an unfair labor practice. The States “urge[d] the Board to consider the threat misclassification poses to the States, their treasuries, and their residents.” They also argued that IC misclassification not only results in the denial of the most basic statutory protections, such as the right to be paid a minimum wage and to be paid on time, but it also denies workers the right “to form unions, collectively bargain and engage in concerted activity in the workplace for mutual aid and protection without fear of reprisal.”
A joint Amicus Curiae brief was also filed by the Coalition for a Democratic Workplace and U.S. Chamber of Commerce, taking the position that the Board should decline to revisit or revise the existing standard – that both misclassification and some additional unfair labor practice are required before finding a violation of the Act – and it should reject the “novel theory” that IC misclassification alone is enough. They also argued that “the concept of an unfair labor practice requires that an employer take some additional steps beyond simply taking a legal position regarding the classification of a worker in order for liability to attach under the Act.” They further noted that in December 2017, current NLRB General Counsel Peter Robb formally rescinded a previously-issued guidance in support of a “misclassification-as-violation” theory. Velox Express, Inc., 15-CA-184006 (Sept. 25, 2017).
In our August 30, 2016 blog post entitled NLRB General Counsel Creates a “Misclassification-Plus” Unfair Labor Practice, we commented that the NLRB’s General Counsel not only was seeking to expand the law by alleging that IC misclassification alone would violate the NLRA, but in the process seemed to be overlooking Section 8(c) of the NLRA. That time-honored “free speech” section provides: “The expressing of any views, argument, or opinion, or the dissemination thereof, whether in written, printed, graphic, or visual form, shall not constitute or be evidence of an unfair labor practice under any of the provisions of this Act, if such expression contains no threat of reprisal or force or promise of benefit.” It is likely, given the current composition of the NLRB, that the Board will rule that the mere misclassification of an individual as an IC is not an unfair labor practice.
NEW JERSEY CREATES IC MISCLASSICATION TASK FORCE. New Jersey Governor Phil Murphy signed an Executive Order on May 3, 2018, establishing the Employee Misclassification Task Force to address independent contractor/employee misclassification. Executive Order No. 25 provides for the establishment of a Task Force charged with providing advice and recommendations to the Governor’s office on strategies and actions to combat employee misclassification, which the Governor says has deprived the State of New Jersey of over $500 million in tax revenue every year. The Task Force will examine and evaluate existing IC misclassification enforcement efforts by executive departments and agencies; develop best practices to increase coordination of information and enforcement; develop recommendations to foster compliance with the law, including by educating employers, workers, and the public about misclassification; and review existing laws and procedures related to misclassification. As posted on his website, Governor Murphy stated, “The exploitation of workers is not only unethical – it is illegal. In New Jersey, we promote fairness, fight against discrimination, and work to end unfair labor practices. I am proud to take this step forward to end a practice that creates an unfair advantage over companies that play by the rules and hurts our working families.”
Other Newsworthy Developments
TWO INDUSTRIES – OIL AND GAS, INSURANCE – HAVE BECOME PRIME TARGETS FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION CLASS ACTION LAWSUITS.
In our blog post of May 4, 2018, we highlighted four recent cases within the oil and gas industry: a Colorado rig welder brought a class action for IC misclassification against a modest-sized oil exploration and production company, Whiting Petroleum; California well site drilling managers sued a large energy company, Chevron Corp., for misclassifying them as ICs; oil field workers monitoring wells settled their IC misclassification case against J&A Services LLC, an Oklahoma oil patch company, for $2 million; and Texas welders for a Chinese oil rig company, Honghua America LLC, sued the company for IC misclassification in violation of the Fair Labor Standards Act and settled for an undisclosed amount.
In our blog post of April 11, 2018, we noted that class action lawyers have also been targeting insurance companies. In one case, a Texas judge denied a motion to dismiss an independent contractor misclassification class action brought against Texas Farm Bureau Casualty Insurance Company and other insurers by insurance agents claiming unpaid overtime compensation under the FLSA. In another case, which is currently on expedited appeal to the U.S. Court of Appeals for the Sixth Circuit, the district court decided in favor of an insurance sales agent’s class action seeking pension and other employee benefits. The decision being appealed held that insurance sales agents of American Family Insurance Company (AFIC) are employees and not independent contractors for purposes of ERISA.
Written by Richard Reibstein
Compiled by Janet Barsky
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