What the First-Ever Bill Promoting Portable Benefits for Independent Contractors Would Do – And Would Not Do

Independent contractors and other contingent workers are not currently eligible for workers’ compensation, disability benefits, health insurance coverage, and pension benefits under federal and most state laws. This may well change if the two Democratic sponsors of a bill introduced today in Congress are able to get bipartisan support for their legislation to fund a portable benefits study for independent workers. While early commentators have focused on what the bill would seek to accomplish, this blog post will also comment on what the bill does not do, including providing any comfort to businesses that fail to properly classify independent contractors.

The bill, called the “Portable Benefits for Independent Workers Pilot Program Act,” represents a dramatic turn in the approach taken by Democrats in Congress with regard to independent contractors. Now, instead of focusing on sponsoring legislation to curtail the use of independent contractors and crack down on companies that misclassify them, the thrust by these two Democratic members of Congress is to recognize that legitimate independent contractors should be eligible for benefits and be able to carry those benefits from one gig to the next.

The study that the bill would fund, however, would not be completed and reported to Congress until the early fall of 2020, just before the next presidential election is scheduled to occur. In the meantime, this bill, if passed, would not change the test for independent contractor status or afford companies a safe harbor to misclassify W-2 employees as 1099ers – nor will it likely affect state regulators and plaintiffs’ class action lawyers from targeting companies that allegedly engage in IC misclassification.

What the Bill Would Do

The bill introduced today by Senator Mark Warner (D-Va.) and a companion bill introduced today by Representative Suzan DelBene (D-Wash.) would create a $20 million fund for states, local governments, and non-profit organizations to study “broad innovation and experimentation with respect to portable benefits” for independent workers. Two types of grants would be available: $5 million to evaluate and improve the design and implementation of existing models or approaches for providing portable benefits; and $15 million to study the design, implementation, and evaluation of new models or approaches for providing such benefits. Any governmental body or non-profit organization that receives a grant must use it to study an array of benefits and not limit its study to retirement-related benefits only.  Grants will be awarded by the Secretary of Labor, who is directed by the bill to focus on proposed models or approaches that can be “replicated on a large scale or at the national level.”

The types of portable benefits contemplated by the bill are those referred to as “work-related benefits” – those “commonly provided to traditional full-time employees, such as workers’ compensation, skills training, disability coverage, health insurance coverage, retirement saving, income security, and short-term saving.”

The bill is based on the following proposed Congressional findings: that many independent workers such as independent contractors, temporary workers, self-employed, and others who engage in work on a contingent or alternative work arrangement are not eligible for “work-related benefits,” that the number of these independent workers in the U.S. is rapidly expanding, and that “[a]s the population of independent workers grows, it is increasingly important that [such] workers are provided portable benefits.”

The term “portable benefits” is defined to mean work-related benefits “that allow a[n independent] worker to maintain the benefits upon changing jobs,” and includes contributions made by the eligible independent worker and/or by an entity (or multiple entities) for whom the independent worker is performing services.

The Secretary of Labor would award grants for the upcoming fiscal year on a competitive basis to grantees whose proposals would “support broad innovation and experimentation with respect to portable benefits.” Not later than September 30, 2020, the Comptroller General of the United States would evaluate the outcome of the grants and report the results to Congress.

What the Bill Would Not Do

Since 2007, there have been a dozen bills proposed in Congress to address independent contractors. Most were designed to curtail the use of ICs and punish those businesses that misclassified W-2 employees as 1099 contractors.  Those bills, which are listed on a Resource page of this blog, included bills called the Payroll Fraud Prevention Act, Employee Misclassification Prevention Act, and Fair Playing Field Act.  Not a single one of those bills became law.

In stark contrast, though, during the same 10-year period, more than two dozen states passed legislation addressing independent contractors.  Most of these state laws (also listed on a Resource page of this blog) created greater penalties for IC misclassification or sought to curtail the use of independent contractors by making the test for IC status considerably more challenging.  Not all of the state laws, however, were enacted to limit the use of ICs; a few provide safe harbors for businesses using legitimate ICs.

This newly proposed bill by Sen. Warner and Rep. DelBene would not provide a safe harbor, would not change the federal tests for IC status, and would not create penalties for IC misclassification. Rather, instead of addressing the legal status of independent contractors, this new bill responds to an increasing body of literature that confirms that more U.S. workers are finding work in the contingent workforce and that more of those contingent workers are equally if not more content in alternative work arrangements.  As the U.S. Government Accountability Office (GAO) reported in a comprehensive study released in May 2015, 85% of independent contractors “appeared content with their employment type,” and that significantly more independent contractors (57%) were “very satisfied” with their jobs compared to those who held standard full-time employment (45%).

Analysis and Takeaways

In the past, Sen. Warner has been a proponent of creating new laws to rein in the use of independent contractors in the gig economy, as noted in a post earlier today by Caroline O’Donovan of BuzzFeed.  In her article, O’Donovan notes that Sen. Warner had been a frequent proponent of creating a third classification of workers in the U.S., somewhere between employees and independent contractors.

Now, with the changing political landscape in Washington, Sen. Warner seems to have concluded what even former U.S. Labor Secretary Thomas Perez stated publicly: that while some companies misuse the IC classification, “there’s an important place for independent contractors” in the U.S. economy.  Further, Sen. Warner’s bill now effectively acknowledges that because federal laws and almost all state laws permit the use of legitimate independent contractors ,Congress should look for ways to better the economic well-being of those workers who are properly classified as ICs.

There is, nonetheless, one caveat: this bill will not relieve businesses that use ICs from misclassification liability if they fail to structure, document, and implement their IC relationships in a manner that complies with applicable federal and state laws governing the status of workers as independent contractors. As I report each month in my comprehensive update on developments in the courts and before administrative agencies, companies that fail to satisfy the varying federal tests for IC status and a crazy quilt of state law tests for IC status are all too often the subject of multimillion dollar judgments and settlements in class action lawsuits and administrative proceedings.

Many companies have therefore chosen to enhance their IC compliance through a process such as IC Diagnostics™, which examines whether a group of workers would pass the applicable tests for IC status under governing state and federal laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws. One such solution is the restructuring, re-documenting, and re-implementing of  IC relationships in a customized manner that retains a company’s business model. For those companies that seek to retain skilled freelancers, gig workers, and other types of independent contractors to sustain their businesses into the next decade, Sen. Warner’s and Rep. DelBene’s bill may eventually result in a benefits environment that makes such contingent workers even more content with their independent work arrangements than were the respondents in the 2015 GAO report.

Written by Richard Reibstein

Posted in IC Compliance

Limited Impact of New Florida Law Deeming Uber, Lyft and Other Ride-Sharing Drivers As Independent Contractors and Not Employees

On May 9, 2017, Governor Rick Scott of Florida signed the Transportation Network Companies Act (HB 221), which designates drivers for ride-sharing companies in the on-demand or gig economy as “independent contractors” as long as the “transportation network company” meets four criteria that are currently met by Uber, Lyft, and other similar companies. The new law essentially creates a safe-harbor for such ride-sharing companies from liability misclassification of employees as independent contractors under the labor and employment laws in Florida, including laws governing minimum wages, unemployment, workers’ compensation, and workplace discrimination. It does so by creating a new four-pronged test for IC status in this industry – a test that is not the least bit challenging for ride-sharing companies to meet.

While it has been suggested this new law insulates ride-sharing companies from legal claims alleging independent contractor misclassification, it actually has only limited impact on such claims. Why? Because this new Florida law does not preempt or eliminate the federal wage and hour laws and other U.S. labor and employment statutes, which are not affected by this new law. Indeed, the tests for IC status under those federal laws remain unchanged.

The new Florida law, which takes effect on July 1, 2017, covers an array of matters pertaining to ride-sharing companies besides the independent contractor rules. It includes a ban on local governments and airports imposing their own taxes, fees, or requirements on transportation network companies (TNCs); requiring insurance for TNCs and TNC drivers; mandating TNCs to implement zero-tolerance drug and alcohol use policies; requiring a TNC to conduct background searches of drivers; and requiring TNCs to establish nondiscrimination policies in regards to riders and enforcing such policies with drivers. Those characteristics of the new Florida law are beneficial to the public and the ride-sharing industry.

What does it take to establish IC status under the new law? Not much. The new Florida law provides in relevant part as follows:

“A TNC driver is an independent contractor and not an employee of the TNC if all of the following conditions are met: (a) The TNC does not unilaterally prescribe specific hours during which the TNC driver must be logged on to the TNC’s digital network. (b) The TNC does not prohibit the TNC driver from using digital networks from other TNCs. (c) The TNC does not restrict the TNC driver from engaging in any other occupation or business. (d) The TNC and TNC driver agree in writing that the TNC driver is an independent contractor with respect to the TNC.”

It is commonly understood that all four of those conditions are met by most if not all ride-sharing companies operating in Florida or will be met by July 1, 2017. Thus, while existing claims under the state’s labor and employment laws will not likely be extinguished as of July 1, 2017, the new law will bar such claims on and after that date by drivers for ride-sharing companies in Florida.

But such companies will continue to be covered by federal laws including the Fair Labor Standards Act, which governs minimum wages and overtime. That federal law has been one of the statutes on which many class action lawsuits against Uber and other ride-sharing companies have been brought. Ride-sharing companies operating in Florida will, however, be free from claims by drivers for state unemployment and workers’ compensation benefits; there are no federal counterparts for those laws.

What does that mean for ride-sharing companies operating in Florida with regard to IC misclassification claims? Again, not much. As I reported in my blog post of March 5, 2017, Uber has already been sued in a lawsuit brought under the Fair Labor Standards Act seeking a national collective action for allegedly misclassifying drivers as ICs. However, in response to Uber’s renewed motion to compel arbitration pursuant to the agreement to arbitrate that the plaintiff driver had signed, a federal magistrate judge issued a Report and Recommendation granting Uber’s motion. Lamour v. Uber Technologies, Inc., No. 16-Civ-21449 (S.D. Fla. Mar. 1, 2017). While the magistrate judge’s decision is not final, it is likely to be adopted by the district court judge. Unless overruled on appeal, federal wage and hour claims against Uber in Florida will not be subject to a class or collective action but rather to individual arbitrations.

All on-demand companies, including those in the ride-sharing industry, who rely upon independent contractors can take steps to minimize the likelihood that they will be targets of future claims for IC misclassification – whether brought in court under applicable federal or state wage and hour laws or by state or federal workforce regulators. As detailed in my White Paper, companies can minimize IC misclassification exposure by structuring, documenting, and implementing their IC relationships in a manner than enhances compliance with applicable legal tests for IC status.

One way to accomplish this is through the use of a process such as IC Diagnostics™.  While this type of process cannot ensure that all businesses using ICs will be able to attain a higher level of compliance, an overwhelming number of companies based on a 1099 model or utilizing a large number of 1099ers can maximize their likelihood of avoiding legal challenges to their independent contractor relationships, and do so in a customized and sustainable manner.

While it is ideal for businesses to maximize IC compliance before they are targeted in an IC misclassification audit or administrative or court proceedings, the fundamentals of a process such as IC Diagnostics™ can also be valuable in defending new and existing legal challenges to a company’s IC classifications.

Written by Richard Reibstein.

Posted in IC Compliance

New York City’s First-in-the-Nation Independent Contractor Law Takes Effect Next Week

On May 15, 2017, a first-in-the-nation law regulating the relationship between independent contractors and those who retain their services goes into effect in New York City. Regardless of where a company is headquartered, it will likely enter into contracts with one or more independent contractors who live or work in New York City. The new law, called the Freelance Isn’t Free Act, gives independent contractors a right to sue for double damages if they are not provided with a written contract containing specified terms and are not paid by the date provided in the agreement or, if not so specified, within 30 days after completion of services under the contract. As I commented in our November 16, 2016 blog post after the law was enacted, while the new law has laudable objectives and many positive attributes, it is unclear as to whom it covers and whom it regulates. Further, it may well have unintended yet serious consequences for some New York City-based independent contractors and for businesses that retain them, as described below.

In anticipation of the May 15, 2017 effective date of the Freelance Isn’t Free Act, the New York City Department of Consumer Affairs (which is the agency responsible for enforcing the new law) has created a webpage found at https://www1.nyc.gov/site/dca/about/freelance-isnt-free-act.page. The webpage includes a link to a flyer entitled “Protecting NYC’s Freelance Workers.” The flyer contains useful information for both independent contractors and businesses. The Department promises further information and forms on or after May 15.

Who does the new law cover?

The law is not particularly clear as to whom it covers, whom it protects, and whom it regulates.

First, the Freelance Isn’t Free Act defines a “freelance worker” as “any natural person or organization composed of no more than one natural person, whether or not incorporated or employing a trade name, that is hired or retained as an independent contractor by a hiring party to provide services in exchange for compensation.” See Section 20-927 of the Administrative Code of the City of New York. Thus, this law aims to protect freelancers operating in the form of a one-person operation (other than licensed practicing lawyers and medical professionals as well as “sales representatives,” who are specifically excluded from the new law). The definition of “freelance worker” would include independent contractors operating on their own who provide services to on-demand companies or their customers in the gig economy, such as Uber, Lyft, Via, InstaCart, Postmates, Homejoy, TaskRabbit, Handy, Homepolish, and the like.

While some independent contractors hold themselves out as individuals, many individuals operating as limited liability companies (LLCs) or under trade names do not disclose that they are actually only single-individual operations. Presumably, many freelancers are reluctant to disclose they are one-person businesses. Indeed, it is commonplace for single-person shops to have websites proclaiming that “we” have done this or that, or that “our” services include this or that. Without disclosure by a freelancer that he or she is a one-person operation, many companies that retain the services of individual freelancers operating as LLCs or under trade names may have no idea they are or may be regulated by this new law.

The law also does not make clear if a freelance worker who has one or more employees, helpers, or subcontractors is considered a “freelance worker” under the law, particularly if the independent contractor discloses to the service recipient that he or she “partners” with others. The main City Council sponsor has commented in writing, after passage of the bill, that it does not cover independent contractors who employ other workers, but that post-passage comment does not have the force and effect of law. If the law is ultimately construed not to cover freelance businesses simply because they use one or more other people to help the freelancer to render services in whole or in part, then the application of the new law will protect a far smaller group of independent contractors than originally anticipated. Further, “freelancer workers” who retain others to assist in rendering services may well lose protections of the law by the simple act of delegating any task to a helper.

Second, the party retaining the freelance worker is labeled in the law as the “hiring party.” In a somewhat anomalous situation, under this law a freelance worker may also become a “hiring party” if he or she (or his or her LLC or business) retains another “freelance worker” to assist in rendering services.

Finally, as noted below, the new law only requires that the contract set forth each party’s “mailing address,” not where the services are to be performed or where the services will be used. Does the law only cover contracts where one of the parties lists their mailing address in New York City? The law is also unclear as to whether it regulates “hiring parties” who retain freelance workers with mailing addresses in New York City yet provide services to customers outside the city. Does a business using a freelance worker become a “hiring party” if any part of the work for which it contracts is performed in New York City? These concerns may lead prudent businesses to assume the new law is applicable in each of those circumstances.

What terms must the written contract contain?

The law covers any contract between a freelance worker and a “hiring party” that has a value of $800 or more, by itself or when aggregated with all contracts between the parties over the prior 120 days. The law requires the parties’ contract to be “reduced to writing” and the “written contract” to include at least the following five terms:

  • the parties’ names and mailing addresses,
  • an itemization of services to be provided,
  • the “value of services to be provided pursuant to the contract,”
  • the rate and method of compensation, and
  • the date when the “hiring party” must pay the contracted compensation or the “mechanism by which such date will be determined.”

See Section 20-928. Such terms are commonly negotiated these days in a series of emails or other electronic communications. The City Council committee report on the bill indicates that such electronic communications may suffice as a “written contract,” but that is not apparent on the face of the new law.

As mentioned earlier, the Department of Consumer Affairs has created a webpage for the Freelance Isn’t Free Act. The webpage links to a flyer entitled “Protecting NYC’s Freelance Workers,” which provides basic useful information and resources to the public about the law.  The flyer also states that “model [freelance] contracts that comply with the law” will be created.  Although no specific date is given in the flyer as to when such model contracts will be released to the public, the Department of Consumer Affairs has stated to us in a telephone communication that a model contract will be available the week of May 15, 2017.

It will be interesting whether the Department’s model freelance contract will limit itself to the specific requirements set forth in the new law or expand the subject matters of the contract to add key contract terms beyond those five terms mentioned in the freelance law. The new law provides that the Director of the Department’s Office of Labor Standards “may by rule require additional terms to ensure that the freelance worker and the hiring party understand their obligations under the contract.”

I hope the Director adds contract terms that will tend to minimize disputes. As noted in the next section addressing payment obligations, one such term should include a contract provision requiring presentation of an invoice upon completion of all or any part of the services that activates the “hiring party’s” obligation to pay the amount(s) specified in the parties’ contract. Other terms recommended for “hiring parties” to include in the written agreement are discussed below in the “Takeaways” section.

What are the payment obligations under the new law?

The law provides that the contracted compensation shall be paid to the freelance worker either by the date such payment is due under the terms of the contract, or “if the contract does not specify when the hiring party must pay the contracted compensation or the mechanism by which such date will be determined,” no later than 30 days after completion of the freelance worker’s services under the contract, “[e]xcept as otherwise provided by law.” See Section 20-929.a.

When services are “complete” is by no means a simple inquiry. For example, are services “completed” if the services to be provided are unclear or ambiguous to one of the parties? What if a customer believes the deliverable is unsatisfactory, expects the independent contractor to make corrections or revisions, or asks for additional services that the independent contractor agrees to provide at the same or an added price?

Many of these types of common questions could be avoided if the law had mandated a freelance worker to submit a final invoice for work before payment is required to be made, but the law has no such requirement. Many service recipients have internal accounting procedures requiring presentation of an invoice before payment can be processed, but that common requirement (and expectation) is not routinely specified when an independent contractor is retained. If the law required a final invoice or a demand for payment, presentation of such an invoice or demand would likely prompt communications from the service recipient if it had any questions about whether the services were completed or if payment is due.

The law also includes a provision that once a freelance worker has commenced performance under the contract, “the hiring party shall not require as a condition of timely payment that the freelance worker accept less compensation than the amount of the contracted compensation.” See Section 20-929.b. This section of the law, though, fails to include any reference to the service recipient having a good faith belief that the freelance worker has not fully or satisfactorily performed all of the contracted services. Further, it may prohibit a “hiring party” from negotiating a reduced payment despite a genuine question about the quality of the services provided.

What are the penalties for non-payment, partial payment, or late payment?

The law allows a freelance worker to bring a civil action “for damages” if he/she is not paid the full amount due under the contract or not paid such amount in the time required under the law. See Section 20-933.a. If the freelancer prevails, he/she shall not only be awarded damages but also reasonable attorney’s fees and costs. See Section 20-933.b.1. Those provisions are similar to laws protecting employees from non-payment of wages.

The most problematic aspect of the new law is a provision whereby a freelance worker who prevails on a claim for late payment or non-payment “is entitled to an award of double damages . . . .” See Section 20-933.b.3. While this provision appears to be similar to the New York Labor Law, which protects employees from non-payment of wages, the new law does not offer any defense to double damages, unlike the law covering employees. Under Section 198.1-a. of the Labor Law (which does not cover independent contractors), a good faith belief that payment was not due negates any right to double damages.

If a freelance worker prevails in court on a claim for non-payment under this new law, the business retaining the freelancer will be ordered by a court to pay not only the freelancer’s legal fees, but also twice what the freelancer can prove is owed – no matter how genuine and legitimate a company’s dispute may be regarding whether the services were completed or were satisfactory, whether the freelancer breached his/her duties under the contract, how much money is owed, or when the payment was due. This could conceivably be a very large sum.

A reading of the Committee Report accompanying the bill suggests that this “double-or-nothing” feature in the law may well have resulted from the absence of any testimony from the public other than “from freelance workers and their advocates.” Parties to a freelance contract may therefore wish to include a special clause negating this anomalous double damages provision if the “hiring party” has a legitimate dispute, but it remains to be seen if a court will permit such a provision.

Because of the absence of a good faith defense to the double damages penalty in the law, it may result in an unintended adverse consequence: some companies may choose to only use independent contractors with mailing addresses outside of New York City. In that event, New York City independent contractors will likely lose opportunities for potential work.

Are there penalties for failure to enter into a “written contract”?

If the “hiring party” failed to enter into a “written contract,” the law imposes a modest amount of “statutory damages” – a mere $250. See Section 20-933.b.2(a).  A freelance worker can only prevail on that claim, though, if he/she “requested a written contract before the work began.” See Section 20-933.a.5 (emphasis added).

The law, however, seems to include a potentially crushing amount of statutory damages if the independent contractor can prove not only that he/she did not receive a written contract upon request, but also was not paid the fees earned on a timely basis. Under Section 20-933.b.2(b), a freelance worker “shall be awarded statutory damages equal to the value of the underlying contract” for the failure to provide a written contract “in addition to the remedies specified in the [law]” for a late, partial, or non-payment of fees. In other words, an argument may be made in these circumstances that the freelancer is entitled to up to three times the value of the contract if no contract was provided upon request and no fees had been paid, even if the fees were not paid in whole or in part due to a legitimate, good faith dispute over whether payment was due. The language in the new law on this matter is unclear. For that reason, “hiring parties” will be well served by including some of the contractual provisions suggested below.

Are there any other penalties in the law? 

The law also prohibits retaliation against a freelance worker for exercising his/her rights under this law, including denying a freelancer “a work opportunity” or “future work.” See Section 20-930.  Statutory damages for retaliation shall be “equal to the value of the underlying contract for each violation arising under this [law].” See Section 20-933.b.4.

If a “hiring party” chooses not to engage a particular independent contractor again because of a legitimate belief that the services were not satisfactorily performed, that business may arguably be subject to a sizeable penalty if that type of common business decision is deemed to be retaliation under the language of this law. This places an enormous burden on a company to justify its reasons for no longer doing business with an independent contractor if the contractor has exercised some right under this new law.

The law also authorizes the Corporation Counsel of the City of New York to file a lawsuit against a business where “reasonable cause exists to believe that a hiring party is engaged in a pattern or practice of violations of this [law].” See Section 20-934.a.  A “hiring party” may be subject in such an action to a civil penalty of up to $25,000. See Section 20-934.b.

Are there any other provisions in the new law of note?

The new law provides a statute of limitations for claims: two years for claims alleging a failure of a “hiring party” to offer an independent contractor a “written contract” and six years for claims alleging non-payment of fees or retaliation. See Section 20-933.a.2. & a.3.

The law states that it has no effect on other laws; parties may still resort to common law breach of contract claims or claims under any applicable federal or state statute. See Section 20-935.b. It also provides that no provision of the law should be construed as providing a determination about the legal classification of any individual “as an employee or independent contractor.” See Section 20-935.d.

The law provides an administrative complaint procedure for freelancers who choose to address their complaints about unpaid or late fees to the Director of the New York City Office of Labor Standards instead of or before filing a lawsuit. See Section 20-931.a.  The flyer issued by the Department of Consumer Affairs states that a complaint form will be available from the Office of Labor Policy and Standards by May 15, 2017.

The complaint procedure is only available to freelance workers if they have not commenced a lawsuit against the “hiring party” under the law, or filed a claim or complaint with another administrative agency such as the New York State or the U.S. Department of Labor. See Section 20-931.c.1.  The Director is not, however, empowered to issue any determinations, citations, fines, or penalties.

The law enables the Director to facilitate an exchange of legal positions between the parties. See Section 20-931.a.  That exchange of views may serve to resolve complaints.  If, however, a “hiring party” fails to respond to the Director’s communication seeking that party’s response to the complaint within 20 days after receiving notice from the director, the new law provides that such failure “creates a rebuttable presumption in any civil action pursuant to this [law] that the hiring party committed the violations alleged in the complaint.” See Section 20-931.d.

The Director is also required under the law to establish a “navigation program” providing assistance and information to the public about the law. See Section 20-932.a. The Director has already included on the webpage a great deal of the information required to be made available to the public.


Until the courts issue decisions regarding the jurisdictional coverage of the freelancer payment law or unless the City Council clarifies the issue of coverage through some legislative amendment, companies may have to assume that the new law will apply to them if there is any connection to New York City – such as where the contractor lives or works, where the company operates, or where an independent contractor’s services are deployed in whole or in part.

To comply with the Freelance Isn’t Free Act, prudent companies will clearly specify the five required terms in their independent contractor agreements, including the parties’ proper names and mailing addresses, a detailed scope of services or deliverables, amount(s) payable under the agreement including any interim payments (and how payment is to be determined if not a fixed fee), and interim and final completion and payment dates (or how such dates are to be determined). This basic requirement is critical for any businesses that contract with many independent contractors in New York City, such as on-demand companies in the gig economy; the failure to include any of the required terms could lead to class action lawsuits.

In addition, it would be prudent for businesses retaining freelancers and other types of independent contractors to consider including some or all of the following provisions in the parties’ written contract:

  • No payment is due until the contractor has submitted a formal invoice for payment to a specified person or persons within the company, sent in a manner likely to get the attention of the recipient (such as by mail or overnight courier service).
  • Payment is due within a specified number of days within which invoices are typically paid by the company. If a business typically pays invoices within 45 days after presentation, it would be wise to include a clause that payment shall be sent by the company within 60 days after receipt of the invoice from the contractor.
  • A representation as to whether the independent contractor has any employees, helpers, or partners and, if operating under a trade name, whether the contractor is an individual or an enterprise with more than one employee or helper.
  • No interim or final payment(s) is (are) due if, in the good faith discretion of the business, the freelance worker has not fully or satisfactorily performed all of the contracted services.
  • Neither party has any obligation to continue the relationship after completion of the engagement or consider the other party in connection with future services.

This first-in-the-nation law focuses attention on the issue of independent contractors, which raises the threshold question: have the “freelance workers” been properly classified as independent contractors, or are they actually employees who have been misclassified under a state or federal law?  Issues of independent contractor compliance and misclassification are prevalent, most recently in the digital, gig and on-demand economies. On the one hand, the New York City Council is seeking to promote legitimate independent contractor relationships and require businesses that engage freelancers to pay them on a full and timely basis. On the other hand, state and federal agencies for years have been targeting companies that allegedly misclassify employees as independent contractors; so, too, have plaintiffs’ class action lawyers.

So where does that leave companies who use independent contractors to supplement their workforce, provide specialty services, or render services to the company’s customers? Such businesses would be wise not only to meet the minimum requirements of the Freelance Isn’t Free Act, but also to structure, document, and implement their independent contractor relationships in a manner that enhances compliance with federal, state, and city independent contractor laws.

Some companies have chosen to use methodologies such as IC Diagnostics™, which examines whether workers being treated as freelancers, 1099ers, and/or on-demand gig workers would pass the applicable tests for independent contractor status under an array of applicable laws, and then offers a number of practical and customized alternative solutions to enhance compliance with those laws. For companies already using independent contractors, the process includes re-structuring and re-documenting the independent contractor relationship in a thorough, practical, and sustainable manner, articulated within an agreement containing state-of-the-art provisions that maintain the key components of the company’s business model.

The model contract to be issued by the director of the Department of Consumer Affairs will likely be, by its very nature, a short and abbreviated independent contractor agreement. In contrast, state and federal tests for independent contractor status may implicate several dozen factors to determine whether a group of workers are employees or independent contractors. Form or template agreements are typically ill-fitting, oftentimes contain inapplicable provisions, and only address a fraction of the many factors that support a legitimate independent contractor relationship.

Written by Richard Reibstein.

Portions of this blog post are reprinted with permission from an article in the Spring 2017 issue of Employee Relations Law Journal entitled “New York City Freelancer Law May Have Nationwide Impact on Independent Contractor Relationships.” 

Posted in IC Compliance

April 2017 Independent Contractor Misclassification and Compliance News Update

April was a red-hot month for independent contractor misclassification cases. We report below on 10 cases in the courts and two before administrative agencies involving:

  • seven-figure proposed class action settlements with couriers providing services to three on-demand delivery companies (PostMates, DoorDash, and InstaCart);
  • court approvals of a nine-figure settlement between drivers in 19 states and one of the largest overnight courier companies (FedEx) and a seven-figure settlement between a group of San Francisco adult entertainment clubs and their exotic dancers;
  • court decisions that black car drivers in New York City and freight haulers in Illinois are valid independent contractors;
  • a court decision in Texas that litigation support workers may proceed with their class action alleging IC misclassification;
  • a decision striking down an IC misclassification claim against UberEats for insufficient pleading;
  • a new class action lawsuit filed against an on-demand food delivery service in Florida;
  • an NLRB decision that distributors for a baking company are valid independent contractors; and
  • a decision by the California Labor Commissioner that four drivers for a cartage company operating in the ports of Los Angeles and Long Beach are each collectively entitled to over $200,000 as a result of being misclassified as independent contractors.

These cases cut both for and against companies classifying individuals as independent contractors, demonstrating that when done right, certain workers can legitimately be classified as ICs, but when not done right in the estimation of a court, the costs can be rather dramatic: $227 million in settlements by one company using independent contractors in 19 states, and a jury verdict which, if adopted by the court, may impose IC misclassification liability against an insurance carrier in the hundreds of millions of dollars. While most companies do not face this type of extraordinary exposure in the event of IC misclassification, seven- and eight-figure exposure is becoming commonplace for large and medium-size businesses. For this reason, companies that wish to continue to use ICs can and should take certain prescribed steps in a state-of-the-art manner to avoid or minimize misclassification exposure, as fully discussed in my White Paper.

In the Courts (10 cases)

POSTMATES REACHES AGREEMENT WITH ITS COURIERS TO SETTLE IC MISCLASSIFICATION CASE FOR $8.75 MILLION. Couriers who deliver food, merchandise, and other consumer goods for Postmates, an on-demand delivery service based in metropolitan areas within 28 states, have reached a proposed $8.75 million settlement with the company in their nationwide IC misclassification class action. The lawsuit alleged violations of the federal Fair Labor Standards Act as well as wage and hour laws for those couriers who made deliveries in New York, California, and Massachusetts. The proposed settlement includes an allocation of $100,000 for claims under the California Private Attorneys General Act (75% of which will be paid to the state) and attorneys’ fees of up to 25% of the settlement fund. In addition to the monetary terms, Postmates agreed to the following non-monetary provisions: the couriers’ IC agreements can only be terminated for specified material breaches, those terminated will have a right to appeal their terminations to an arbitrator, the company will arrange for third-party occupational accident insurance for bicycle couriers at the courier’s expense, and Postmates will accept and consider feedback received through a dedicated email address. Singer v. PostMates, Inc., No. 15-cv-01284-JSW (N.D. Cal. Apr. 28, 2017).

FED EX’S $227 MILLION IC MISCLASSIFICATION SETTLEMENT WITH THOUSANDS OF GROUND DIVISION DRIVERS IS APPROVED BY COURT. As I reported in my blog post of June 16, 2016, FedEx Ground reached a proposed settlement agreement with its Ground Division drivers in 19 states to resolve their independent contractor misclassification claims, and on April 28 and May 1, 2017, U.S. District Court Judge Robert L. Miller approved the settlements totaling $227 million. Several dozen lawsuits had been consolidated in a multidistrict proceeding assigned to Judge Miller in the U.S. District Court for the Northern District of Indiana. In December 2010, Judge Miller granted summary judgment in favor of FedEx Ground in 42 IC misclassification lawsuits brought by drivers across the country. His decision, however, was overturned in two appeals heard by the U.S. Court of Appeals for the Ninth Circuit and the Seventh Circuit, as reported in this blog. Following the Ninth Circuit decision, FedEx entered into a settlement agreement for $228 million with drivers in California and following the Seventh Circuit decision, FedEx entered into a settlement initially reported at $240 million for 20 states. That is the group of cases that Judge Miller just approved the settlement covering 19 states for $227 million. FedEx reached a separate settlement with drivers from Oregon for $15 million. These settlements are in addition to separate settlements that FedEx reached with several Attorneys General including those in Maine, New York, Montana, and Massachusetts. The agreed upon settlements covered drivers in Alabama ($3.2 million), Arizona ($4.95 million), Georgia ($4.94 million), Indiana ($33.95 million), Kansas ($20 million), Louisiana ($5.25 million), Maryland ($9.4 million), Minnesota ($8.3 million), New Jersey ($25.5 million), New York ($42.9 million), Ohio ($8.35 million), Pennsylvania ($23 million), Rhode Island ($1.6 million), South Carolina ($3.1 million), Tennessee ($12.25 million), Texas ($8.9 million), Utah ($2.4 million), West Virginia ($3.575 million), and Wisconsin ($5.55 million). Attorneys’ fees and legal expenses of $67.4 million are included in the above amounts. FedEx Ground Package System, Inc. Employment Practices Litigation, No. 05-MD-527-RM (N.D. Ind. Apr. 28 and May 1, 2017).

FedEx now uses a different business model based on Independent Service Providers (ISPs). The company has refined that stratagem since I first reported on the ISP program, where Ground Division drivers must become incorporated under state law instead of being organized as sole proprietorships, partnerships, or other unincorporated entities, deliver packages on their own and with their own employees on several different routes, and treat their personnel including themselves as employees. Both the Ninth and Seventh Circuit applied their decisions, however, to single and multi-route drivers, and a requirement that drivers become incorporated in order to avoid independent contractor laws has not met with universal acceptance by the courts.

COURT APPROVES $5 MILLION SETTLEMENT IN IC MISCLASSIFICATION CLASS ACTION BY EXOTIC DANCERS. A $5 million settlement in an IC misclassification case was preliminarily approved by a California federal court in a class and collective action alleging IC misclassification by class of approximately 4,700 exotic dancers against nine San Francisco nightclubs. Under the terms of the $5 million settlement agreement, dancers may elect to receive cash payments ranging from $350 and $800 depending upon their length of service. The remainder will be allocated as attorneys’ fees and expenses, payments under the California Private Attorneys General Act, and enhancement payments for named plaintiffs. The nightclubs also agreed to make changes to their business practices that will result in a direct financial benefit in excess of $1 million to class members. Although objectors to the proposed settlement argued, among other things, that the recovery is inadequate in comparison to settlements reached in similar cases and that the non-monetary relief of changing the clubs’ business practices was “inconsequential,” the court disagreed and found that the recoveries were adequate to justify preliminary approval given other comparable settlements and the “litigation risk in wage-and-hour cases.” The court further stated that “the changed business practices – which locally are almost industry-wide (this settlement covers 10 out of the apparently 12 such nightclubs in San Francisco) – will allow an alternative business model for the industry, providing employees with a guaranteed hourly rate, commissions, and benefits, among other changed practices. And preliminarily, there is an economic value that attaches to this portion of the settlement.” Roe v. SFBSC Management, LLC, No. 14-cv-03616 (N.D. Cal. Apr. 14, 2017).  

“LEGAL GOBBLEDYGOOK” CAUSES COURT TO REJECT DOOR DASH’S $5 MILLION SETTLEMENT OF IC MISCLASSIFICATION CLASS ACTION. A California judge has refused to grant preliminary approval to a $5 million proposed settlement reached between DoorDash, an on-demand food delivery service, and almost 40,000 delivery drivers known as “dashers” in a class action lawsuit alleging violations of state wage and hour laws as well as the California Private Attorneys General Act. In reviewing the terms of the proposed settlement, the judge reportedly stated, “This looks like legal gobbledygook that no rational DoorDash [courier] could understand.” Under the proposed settlement, the class members would share $3.5 million plus an additional $1.5 million in four years or when DoorDash goes public, is profitable for a full year, or is bought by another company at double its current valuation. The judge reportedly stated that the language of the proposed release evidently included 25 labor law statutes and the agreement did not contain detailed explanations as to how certain calculations were made.  He also advised the parties that he needed more information regarding how this settlement would impact pending litigations against DoorDash in other jurisdictions. Marciano v. DoorDash Inc., No. CGC15548101 (Super. Court, County of San Francisco Apr. 10, 2017).

INSTACART’S $4.6 MILLION SETTLEMENT OF IC MISCLASSIFICATION CLASS ACTION BY DRIVERS IS DELAYED BY COURT. A California judge has delayed its preliminary approval of a proposed $4.6 million settlement of an IC misclassification class action brought against on-demand grocery delivery company, Instacart, by class of 31,000 “shoppers” who shop, purchase, and deliver groceries from grocery stores to customers at their homes and businesses through Instacart’s mobile phone app.  As discussed in my April 3, 2017 blog post, the shoppers alleged that because of their misclassification as independent contractors, they were denied minimum wage and overtime compensation, were not reimbursed for work-related expenses, did not receive proper meal and rest breaks, and did not receive all of the tips left them by customers, as required by federal law and the laws of Colorado, New York, and California. The settlement seeks to cover shoppers who have performed work for Instacart in California, New York, Pennsylvania, Colorado, Illinois, Washington, Indiana, Texas, Georgia, Oregon, Massachusetts, Minnesota, Florida, North Carolina, Virginia, Maryland and New Jersey. At the preliminary approval hearing on April 19, 2017, the court reportedly advised the parties that it needed additional clarifying information, including the estimated average settlement payout. The court reportedly also required Instacart to inform those individuals seeking to become “shoppers” that they will be required to obtain commercial automobile insurance and directed the parties to “remove language stating [Private Attorneys General Act] claims will be released even by class members who opt out.” Camp v. MapleBear, Inc., d/b/a Instacart, No. BC652216 (Super. Ct. Los Angeles County Apr. 19, 2017).

ILLINOIS FREIGHT HAULERS HELD TO BE INDEPENDENT CONTRACTORS, NOT EMPLOYEES. An Illinois federal district court has dismissed a proposed class action by freight haulers seeking damages for allegedly being misclassified as ICs by Risinger Bros. Transfer, Inc., a trucking company. The amended complaint alleged, among other things, that  Risinger failed to pay the statutorily-required minimum wages and made unlawful deductions and withholdings from their wages, in violation of the federal Fair Labor Standards Act.  The freight haulers also alleged violations of the Truth in Leasing Act and the Internal Revenue Code by purposefully misclassifying Plaintiffs as independent contractors and willfully filing fraudulent information returns. In concluding that the freight haulers were not  misclassified as ICs, the court found the balance of factors weighed in favor of IC status, including (1) the contracts and leases between the parties afforded the haulers vast control over the ways in which they performed their work, such as the right to hire their own drivers and not engage in the work themselves, the ability to select, purchase, lease, or finance their own equipment, and the right to use their equipment to haul freight for other carriers; (2) the haulers had the opportunity for profit or loss depending on their skill; (3) the haulers made an investment in equipment, materials, and/or employees of their own; (4) they possessed business acumen, diligence, and managerial skills, as well as the special skill of driving commercial trucks; (5) there were fixed termination dates for the leases of the trucks to operate; and (6) the haulers were not economically dependent on Risinger as they could provide services to other carriers. The court stated that “[t]hey were responsible for their own profitability in a way that suggested that they were entrepreneurs, not simply truck drivers.” Derolf v. Risinger Bros. Transfer, Inc., No. 16-cv-1298 (C.D. Ill. Apr. 21, 2017).

BLACK CAR DRIVERS FOR NEW YORK CAR SERVICE COMPANY ARE FOUND TO BE VALID INDEPENDENT CONTRACTORS. The U.S. Court of Appeals for the Second Circuit has held that black car drivers who drive customers for a New York City car service firm are independent contractors and not employees under federal and state wage and hour laws. As discussed more fully in my blog post dated April 13, 2017, the Second Circuit affirmed a district court’s grant of summary judgment in favor of Corporate Transportation Group (“CTG”), the owner of a black car company and its related affiliates, where the drivers claimed they had been misclassified as ICs and were due unpaid overtime and other damages. On appeal, the Second Circuit addressed the “economic reality” of the drivers’ relationship with CTG. The Second Circuit noted that some of the drivers elected to purchase a franchise, either directly from CTG or on the secondary market, while others opted to rent a franchise; there were wide variations in the price of franchises and associated fees; the terms of the franchise agreements were for substantial durations, some even indefinite duration, subject to termination only for breach of the terms of the agreement; the drivers were free to drive and, in many circumstances, drove for competitors or for personal clients, and in some cases chose not to drive at all or permitted other individuals to drive for them; the drivers “invested heavily” in their driving businesses; the drivers could choose how much to work and when, where, and how often to work (if at all); CTG did not require drivers to notify it when they intended to not work; the drivers were free to accept or reject “job offers” when they registered with the CTG dispatcher and they reached the front of the queue; and the drivers’ fees from income from fares reflected wide disparities due to the frequency that they provided services and duration they chose to work each day.

The drivers argued that CTG negotiated rates with clients and charged a per-ride fee to drivers; that CTG maintained a roll of corporate clients seeking transportation services; and that CTG exerted influence over the drivers by enforcing the CTG Rulebook (which CTG was required to do by virtue of the rules of the NYC Taxi and Limousine Commission). The court concluded: “In short, the economic reality was that Plaintiffs, with the assistance of CTG and as a ‘subscriber to [its] services,’ operated like small businesses; they decided to affiliate with [CTG] based on their perceived economic interests, and not those of CTG.” Saleem v. Corporate Transportation Group, Ltd., No. 15-88 (2d Cir. April 12, 2017).

ON DEMAND FOOD DELIVERY SERVICE SUED BY DRIVERS IN IC MISCLASSIFICATION CLASS ACTION. Doorstep Delivery, an on-demand food delivery service conducting business in 117 cities nationwide, has been sued in a proposed IC misclassification class and collective action in a Florida federal district court on behalf of drivers alleging minimum wage and overtime violations under federal and state laws. According to the company’s website, “With Doorstep Delivery, you can now order food from your favorite restaurant with a few swipes of your finger on our app or mobile website, a few clicks on your computer, or a quick call to our professionally trained call center.” The drivers then fulfill these food delivery orders. The complaint alleges that Doorstep directs the delivery drivers’ work in detail, instructing drivers where to report for their shifts and how to dress; imposes requirements regarding handling of food and timeliness of deliveries; retains the right to terminate the drivers at will; does not allow the drivers the opportunity to reject jobs; requires drivers to bear the expense of renting equipment including insulated bags, a Doorstep car topper to display on their cars, a pizza bag, and soda trays; deducts fees from drivers for occupational accident insurance, administrative fees, and Doorstep delivery marketing fees; and does not reimburse the drivers for the costs of fuel, owning or leasing a car, maintenance of the vehicle, and cellular data costs. The lawsuit alleges that, as a result of the costs incurred by the drivers and the deductions made by Doorstep, the drivers’ weekly compensation falls below the federal minimum wage. Additionally, drivers allegedly have regularly worked more than 40 hours per week, yet did not receive overtime compensation. Roberson v. Restaurant Delivery Developers, LLC, No. 17-cv-00769 (M.D. Fla.). 

UBER EATS IC MISCLASSIFICATION LAWSUIT NOT PLEADED SUFFICIENTLY BY DRIVER SEEKING CLASS ACTION STATUS. A Florida federal judge has struck down a second amended complaint filed against UberEATS, an on-demand food delivery service, by a driver seeking to represent 1,000 drivers in a proposed IC misclassification class action lawsuit under the FLSA. The judge found that plaintiff’s allegations were “not obviously connected to any particular cause of action” and characterized the amended complaint as a “shotgun pleading.” Accordingly, the judge ordered that the plaintiff file a third amended complaint that identifies which allegations support which claims for relief by April 24th or his case will be dismissed. Crespo v. Uber Technologies Inc., No. 17-cv-00187 (M.D. Fla. Apr. 10, 2017).

LITIGATION SUPPORT WORKERS CERTIFIED AS CLASS IN TEXAS IC MISCLASSIFICATION CASE. A Texas federal district court conditionally certified a class of litigation support workers who were classified as ICs by The Document Group, Inc. (TDG) and allegedly denied overtime compensation for hours worked over forty in a workweek in violation of the FLSA. The workers provide copying, scanning, organizing, and storing of records for law firm clients of TDG. The class members not only claim that TDG determines where, when, and how the workers perform their work, they also allege that they rely on TDG for their work, are not permitted to hire other workers to help them, have no opportunity for profit or risk of loss, do not provide any material portion of their required equipment or any of the necessary products to perform their work, do not incur operating expenses for rent, payroll, marketing, or insurance, work exclusively for TDG because they work up to 14 hours per day for the company, and do not maintain independent places of business. Vaughn v. Document Grp. Inc., No. 16-CV-3578 (S.D. Tex. Apr. 20, 2017).

Regulatory and Administrative (2 cases)

NLRB FINDS DISTRIBUTORS FOR BAKING COMPANY TO BE IC’S AND THEREFORE MAY NOT BE UNIONIZED. The Regional Director for the Boston Region of the National Labor Relations Board has denied the petition of a Teamsters local union seeking to represent a unit of 48 distributors/drivers who contract with Bimbo Foods Bakeries Distribution, LLC to distribute bakery products out of a depot in Massachusetts.  In denying the petition, the Regional Director concluded that the distributors are independent contractors and not employees under the National Labor Relations Act. In the decision, the Regional Director noted that under Bimbo’s contractual relationships with the distributors, Bimbo provides them with the distribution rights to sell Bimbo products in a specific designated area; and the distributors operate their own businesses in which they purchase bakery products from Bimbo and distribute those products to customers within the surrounding area.  The Regional Director also noted that the following factors supported IC status: Bimbo does not exert sufficient control over the distributors given that the distributors themselves determine how much product to order, how often to order it, how much to sell and deliver to customers, what days and hours to work, whether to hire helpers, and whether to attend meetings or orientations. The Regional Director further noted that the distributors are prohibited from identifying themselves with Bimbo or its products, except as provided in an advertising agreement; the distributors are engaged in their own separate businesses; there is no supervisory or disciplinary system for distributors; there are no mandatory trainings, personnel policies, handbooks, sales quotas, or requirements for sales reports; the distributors provide their own vehicles and are responsible for all related costs such as maintenance, fuel and insurance; they are compensated based on the success or failure of their efforts and the value of their routes; they intended the relationship with Bimbo Foods to be that of an independent contractor; and they have significant entrepreneurial opportunity with regard to the operation of their business including the right and ability to work for other entities, have a proprietary interest in the work, and exert control over important business decisions involving their independent businesses. According to the Regional Director, these factors outweighed those that the union asserted were indicative of employee status:  there is no special skill required to be a distributor; the contracts were for ten-year or indefinite terms; the distributors’ work is part of the regular business of Bimbo Foods; and the distributors and Bimbo Foods are in the same business. Bimbo Foods Bakeries Distribution, LLC and Teamsters Local Union No. 633 of New Hampshire, No. 01-RC-193669 (NLRB Region 1 Mar. 31, 2017).

FOUR PORT AND RAIL DRIVERS TO RECEIVE $855,000 FOR IC MISCLASSIFICATION BY XPO. The California Labor Commissioner issued on April 14, 2017 a monetary award of $855,000 to four port and rail drivers working for XPO Logistics, a subsidiary of XPO Cartage, for their misclassification as ICs. XPO specializes in moving goods to and from the ports of Los Angeles and Long Beach.  The Labor Commissioner concluded that each of the four drivers was an employee and not an IC because XPO retained pervasive control over the drayage operation as a whole.  For example, XPO obtained clients, clients paid XPO directly, XPO determined rates to be paid to the workers with no rights for negotiation, XPO controlled work assignments and workers’ schedules, GPS was used by XPO to monitor the workers’ locations, workers were required to follow XPO guidelines and rules, and workers could not use their trucks to perform services for other companies.  The Labor Commissioner also noted that the workers did not hold themselves out as having a separate and distinct business or have their own customers; XPO supplied the trucks by arranging for the truck leases; the workers made no investment in the equipment or materials needed to transport goods; the workers had no opportunity for profit or loss; and permanency of the relationship existed. The awards included, reportedly for the first time, compensation for “non-productive time,” such as time spent inspecting the truck, waiting for dispatch and scanning in paperwork at days’ end. They also received compensation for unpaid hours, liquidated damages, expenses, deductions, and meal and rest breaks. Since 2011, port truckers have filed over 800 claims with the California Division of Labor Standards Enforcement, with about 300 resulting in determinations by the Labor Commissioner that the drivers were employees and not ICs.  Approximately 200 are still awaiting hearings and 300 were either settled or transferred to the courts. To date, approximately $36 million has been awarded as a result of employee misclassification. Gaitan v. XPO Cartage, Inc., Nos. 05-66467 KR, 05-66468 KR, 05-66595 KR, 05-66694 KR (Cal. Labor Comm’r Apr. 14, 2017).

Written by Richard Reibstein.


Posted in IC Compliance

Black Car Drivers in New York City Held Independent Contractors By Federal Court of Appeals

While Uber has dominated the headlines when it comes to whether drivers on their on-demand, ride-sharing platforms are independent contractors or employees, similar battles are being waged elsewhere in the car service industry. One such battle that has received considerable attention involves a class and collective action lawsuit brought under federal and state law against a traditional car service company and drivers who have chosen to invest in and become franchisees of that business.  Few independent contractor misclassification cases will have stronger facts demonstrating IC status than this case, so it was hardly surprising that the U.S. Court of Appeals for the Second Circuit affirmed the district court’s grant of summary judgment in favor of the car service company.  What was somewhat surprising is that the U.S. Department of Labor filed a “friend of the court” brief arguing that the district court had erred, where there are so many other cases currently pending in the courts with far stronger facts indicating that workers allegedly have been misclassified as ICs.

In this blog post, I review the court decision, provide an analysis and insights, and offer five takeaways.

The Second Circuit’s Decision

The decision in Saleem v. Corporate Transportation Group Ltd., No. 15-88-cv, was issued yesterday, April 12, 2017. The case involves black-car drivers in the greater New York City area who brought a class and collective action under New York Labor Law (NYLL) and the federal Fair Labor Standards Act (FLSA) asserting claims against Corporate Transportation Group (CTG), the owner of a black-car “base license,” and their affiliated entities.  The drivers claimed that they had been misclassified as independent contractors instead of employees and sought allegedly unpaid overtime and other damages.  CTG made a motion for summary judgment, and federal district court judge Jesse Furman granted the motion on both the federal and state wage claims.

On appeal, the Second Circuit Court of Appeals addressed what the court referred to as the ultimate question – the “economic reality” of the drivers’ relationship with CTG. Before undertaking that analysis, the Second Circuit noted that:

  • some of the drivers elected to purchase a franchise, either directly from CTG or on the secondary market, while others opted to rent a franchise;
  • there were wide variations in the price of franchises and the fees associated with using them;
  • the terms of the franchise agreements were for substantial durations, some even indefinite duration, subject to termination only for breach of the terms of the agreement;
  • the drivers were free to and in many circumstances did indeed drive for competitors or for personal clients, and in some cases chose not to drive at all or permitted other individuals to drive for them, without violating their franchise agreements;
  • the drivers “invested heavily” in their driving businesses;
  • the drivers had ultimate schedule flexibility – they could choose how much to work and when, where, and how often to work (if at all);
  • CTG did not require drivers to notify it when they intended to work or not work, and made no effort to coordinate drivers’ schedules;
  • the drivers were free to accept or reject “job offers” when they registered with the CTG dispatcher and they reached the front of the queue; and
  • the drivers’ fees from fares reflected wide disparities in gross earnings due to the frequency that they provided services and duration they chose to work each day.

In an effort to persuade the Second Circuit to reverse the district court judge and allow the drivers to present their case to a jury, the drivers argued that CTG negotiated rates with clients and charged a per-ride fee to drivers; that CTG maintained a roll of corporate clients seeking transportation services; and that CTG exerted influence over the drivers by enforcing the CTG Rulebook (which CTG was required to do by rules of the NYC Taxi and Limousine Commission). The drivers also argued that the case should turn on CTG’s “power to control” the performance of services rendered by the drivers, not whether CTG exercised control.

The Second Circuit was unmoved; it stated that “Whatever ‘control’ CTG exerted over negotiated fares and its rolls of institutional clients, Plaintiffs retained ‘viable economic status that [could] be [and was] traded to other [car companies].’” The court also stated that while the monitoring and enforcement of the Rulebook constituted a “degree of control over Plaintiffs’ conduct,” CTG “wielded virtually no influence over other essential components of the business, including when, where, in what capacity, and with what frequency Plaintiffs would drive.”

In the view of the Second Circuit, the limited control exercised by CTG did not impact the drivers’ opportunity for profit and loss, which “was determined by the drivers to a greater degree than [it was by CTG].” In its final footnote, the court also rejected the drivers’ argument that “power to control” should govern, not the exercise of control.

The court then concluded: “In short, the economic reality was that Plaintiffs, with the assistance of CTG and as a ‘subscriber to [its] services,’ operated like small businesses; they decided to affiliate with [CTG] based on their perceived economic interests, and not those of CTG.” The court therefore held: “The district court therefore properly found them to be independent contractors as a matter of law.”

Analysis and Insights

Many of the facts in this case are similar to the facts in the Uber and Lyft cases, but there are some key differences. One of the most meaningful differences is that the drivers in this black car case either purchased their franchises on the secondary market or directly from CTG (paying varying amounts of franchise fees up to as much as $60,000), or they rented their franchises for $130 to $150 per week.

Another key factor not found in the standard Uber or Lyft contracts is that the agreement with drivers cannot be terminated except for breach of the terms of the agreement.

The court also noted that, “whatever ‘the permanence or duration’ of Plaintiffs’ affiliation with CTG, both its length and the ‘regularity’ of work was entirely of Plaintiffs’ choosing.”

The Second Circuit cautioned, though, that its decision has a “narrow compass.” It remarked that the facts pointed out by the drivers may, in other cases, lead to a different result: “[W]e do not here determine that it is irrelevant to the FLSA inquiry that [CTG] provided Plaintiffs with a client base, that [CTG] charged fees when Plaintiffs utilized [CTG’s] referral system, or that [CTG] had some involvement, if limited, in rule enforcement among franchisees. We conclude only that assessing the totality of the circumstances here . . . , undisputed evidence makes clear as a matter of law that these Plaintiffs were not employees of [CTG]. In a different case, and with a different record, an entity that exercised similar control over clients, fees, and rules enforcement in ways analogous to [CTG] here might well constitute an employer within the meaning of the FLSA.”


What takeaways does this decision by the Second Circuit offer those companies that make use of independent contractors in their business?

First, the facts matter to the courts. Cases finding individuals in a particular industry to be misclassified as ICs have little precedential value where the facts are distinguishable in meaningful ways.  Likewise, as this court noted, decisions finding these drivers to be independent contractors does not mean all car service drivers are ICs.

Second, laws and regulations matter. Courts typically do not regard as direction and control a company making sure that all applicable laws are followed.  Here, the Taxi and Limousine Commission issued rules and required CTG to enforce them for the protection of the public.

Third, there are few if any cases where there won’t be at least some facts favoring employee status, but that does not mean the individuals are employees and not ICs. As the court noted in this case, there was some degree of control exercised, but that level of control was overwhelmed by the facts demonstrating independence.

Fourth, agreements matter. In this case, the court made reference to selected provisions in the parties’ agreement that weighed heavily in favor of independent contractor status, such as the provision that the agreement could not be terminated by CTG unless a driver breached its terms.

Fifth, it appears that CTG anticipated that it may be sued in the future for IC misclassification, and it undertook steps to structure, document, and implement its relationships with drivers to increase its chances of withstanding such a legal challenge. One such process that some companies may use is IC Diagnostics™, which examines whether a group of workers who are not being treated as employees would pass the applicable tests for IC status under governing state and federal laws, and then offers a number of practical, customized, and sustainable solutions to enhance compliance with those laws. One such alternative under IC Diagnostics™ is the process of restructuring, re-documenting, and re-implementing IC relationships to minimize misclassification liability. 

Written by Richard Reibstein.

Posted in IC Compliance