Independent Contractor Bombshell for California Businesses: California Supreme Court Curtails the Lawful Use of ICs

Earlier today, the California Supreme Court established the Golden State as one of the least hospitable jurisdictions in the nation toward independent contractor status. Abandoning its decades-old common law test used to determine IC status, the California Supreme Court in Dynamex Operations West v. Superior Court (No. S222732), created a new test that is modeled after the so-called ”ABC” test used in Massachusetts, widely viewed as the toughest test in the country for ICs.  This result is particularly surprising in light of recent legislative efforts across the country to regulate, instead of curtail, the increasing use of freelancers and on-demand workers including those in the gig economy.

Many companies that yesterday were in compliance with the IC laws in California may today be out of compliance.  As a result, those companies in both traditional and gig economy industries that lawfully created IC relationships in that state may need to restructure or reclassify their 1099ers in order to remain compliant with California law, as more fully noted in the “Takeaway” section below.

The Court’s Opinion

In its 82-page decision in Dynamex, the California Supreme Court rejected the continued use of its IC test that derived from a 1989 case entitled S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations. That case had established a multi-factor test where no one factor was determinative of IC status. Instead, the California Supreme Court today endorsed in Dynamex a rigid ABC test for the California lower courts to use when determining IC status under various section of the California Labor Code.

The test established today in California reads as follows:

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.

The Court stated that this new Dynamex test will be easier to apply than the Borello multi-factor test, is less susceptible to being circumvented, and will provide an array of statutory labor and employment benefits to more workers in the state than ever before.  The Court did not, however, address whether the new test would apply to claims for expense reimbursement under the California Labor Code, noting in footnote 5 that the plaintiff drivers did not seek appellate review of that aspect of the lower court decision.

Over two dozen states have ABC tests, but almost all of those states’ ABC tests apply only to claims for unemployment or workers’ compensation benefits.  Massachusetts, New Jersey, and Illinois are key exceptions; their ABC tests also apply to wage claims.  Moreover, Massachusetts’ IC test varies from other states’ ABC tests in a critical way: the “B” prong in almost all other states requires the business to establish either that the worker performs work that is outside the usual course of the hiring entity’s business or that the worker performs work “outside of all the places of business of the enterprise for which such service is performed.”

In adopting the Massachusetts test, the Supreme Court of California stated in footnote 23 of its opinion that “In light of contemporary work practices, in which many employees telecommute or work from their homes, we conclude that the Massachusetts version of part B provides the alternative that is more consistent with the broad reach of the … California wage orders.”

Takeaway

While the federal wage and hour law (the Fair Labor Standards Act) and almost all state wage laws continue to adhere to a multi-factor test for IC status, with no one factor determinative, California has today joined Massachusetts as being far more employee-friendly and far less IC-friendly to freelancers and other contingent and gig economy workers who have been paid on a 1099 basis.

A few businesses may seek legislation in California to regulate the use of ICs in their industry rather than have their use of ICs curtailed, as the Dynamex decision is likely to do.  But many other businesses operating in that state will need to reevaluate their use of workers classified as ICs in California and, where necessary, restructure their businesses to comply with this new judicial decision.

While some companies built on an IC model may now wish to reevaluate plans to expand into California, those currently operating in that state as well as other states may wish to use a process such as IC Diagnostics™ to evaluate, structure, document, and implement their IC relationships in a manner that maximizes compliance with IC laws in California and across the country.  That process has become more challenging by today’s decision by the California Supreme Court.

Written by Richard Reibstein

Posted in IC Compliance

Prediction: California Supreme Court Will Re-Affirm Existing Test for Independent Contractor Status

This blog post has been superseded by the post on April 30 entitled “Independent Contractor Bombshell for California Businesses” 

Tomorrow, April 30, 2018, the California Supreme Court is expected to issue a decision in a case that could change the legal test as to whether an individual is an independent contractor or an employee under California’s wage and hour laws. But, as noted below, the Court is most likely to simply re-affirm the test currently used by the California courts in independent contractor misclassification cases.

The case is Dynamex Operations West v. Superior Court (No. S222732)which has been on appeal before the California Supreme Court since January 2015.  The issue in Dynamex is whether, in wage and hour cases in California, the courts in that state should (a) continue to follow the California Supreme Court’s time-honored holding from 1989 in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations; (b) apply the test set forth in the California Supreme Court’s 2010 holding in Martinez v. Combs; or (c) apply a new standard similar to the employee-friendly test set forth in 2015 by the New Jersey Supreme Court in a case called Hargrove v. Sleepy’s LLC.

What are the three tests under consideration?

The Borello test is a multi-factor standard where no one factor is determinative of the outcome as to whether an employee has been misclassified as an independent contractor.

The Martinez test, in contrast, focuses not on a worker’s status but rather on the converse: whether a business is the employer of the worker.

Hargrove uses a so-called “ABC” test that was formulated by the New Jersey legislature for IC status in unemployment cases but was also applied just over three years ago to wage and hour disputes by the New Jersey Supreme Court to determine IC status. As discussed in our blog post of January 15, 2015, Hargrove is regarded as employee-friendly because, unlike the Borello test, which looks at multiple factors without giving determinative weight to any, the ABC test presumes employee status unless a business is able to establish each and every one of the ABC factors, which are detailed in that blog post. Thus, all three factors are potentially determinative; even if a business establishes two of the three prongs of the ABC test, the worker is still deemed to be an employee.

Why the Court will likely re-affirm Borello as the test for IC status

The Court held oral argument in Dynamex on February 6, 2018. It is difficult for even the most experienced practitioners to predict how a court may rule based on oral argument. But one of the most important exchanges at the oral argument might be the answer to a question posed by one of the justices to the principal lawyer for the truck driver challenging his classification as an IC: under the Borello test, would the driver be an employee or an independent contractor?

The lawyer for the driver responded without any equivocation: his client, a truck driver providing services to Dynamex, a logistics and transportation company, would be an employee under Borello. This response signified that there would be no need for the California Supreme Court in this case to consider changing the test for IC status in California where a new test would not alter the result. Generally, courts are reluctant to alter long-standing legal standards unless the new standard would change the result.

Regardless of whether, in its upcoming opinion, the California Supreme Court refers  to this key question and answer at oral argument, this colloquy is likely to tilt the Court in the direction of re-affirming Borello as the test for IC status.

Another reason why the Court is likely to maintain the Borello test was also addressed during oral argument.  The lawyer for Dynamex told the Court that each of the factors set forth in the three prongs of the ABC test are already included under Borello.  The lawyer further noted that because the absence of any one of the factors would not be determinative under Borello, a court has the flexibility under that test to give whatever weight it deemed appropriate to each of those ABC factors. Retaining such flexibility may well be regarded by the Court as the most important reason to re-affirm Borello as the test for IC status. This is particularly poignant where the Court noted during oral argument that workers in the gig economy do not fall squarely into legal tests for determining IC status.

The argument that Borello already includes all of the ABC prongs may have been a slight overstatement because the second part of the “B” prong of the ABC test takes into account a factor not expressly considered in Borello.  Prong B provides that the “service is either outside the usual course of the business for which such service is performed [which is similar to one of the Borello factors], or … is performed outside of all the places of business of the enterprise for which such service is performed [which is not a Borello factor].”

While the California Department of Industrial Relations follows Borello, it does not, however, include the location where the services are performed as one of the eleven IC factors it considers in determining IC status.  (See its website page entitled “Independent contractor versus employee.”)  That California government regulators do not even consider the place where the services are performed as a factor in determining IC status may be another reason that may prompt the California Supreme Court not to adopt the ABC test in Hargrove.

It is also noteworthy that in the Dynamex case, the driver might well have performed some of his services at a Dynamex place of business, such as one of its warehouses or other facilities where commercial goods would be loaded onto or transferred to a different transportation vehicle. Under the ABC test, the driver would automatically be an employee if any part of his work was performed at any of those corporate locations (assuming that a court would find that the truck driver’s services were not “outside the usual course of [Dynamex’s] business enterprise” as a logistics and transportation company).

A final reason why the Court is not likely to import the Hargrove decision into California when determining IC status is that the ABC test was issued by a legislative body in New Jersey, not by the courts. To date, no court in any state has adopted an ABC test without a statutory or regulatory underpinning.

What does this mean for businesses using ICs in California and other states?

The tests for IC status differ considerably among various federal laws and even more so under a crazy quilt of state laws across the country. Other states that use an ABC test for wage and hour claims include Massachusetts, Illinois, and New Jersey. Thus, a one-size-fits-all approach to IC compliance may not be feasible for many businesses operating across the country or in several states.

Regardless of the ultimate outcome in Dynamex, companies that wish to enhance their compliance with whatever test is ultimately applied in California, or with the current tests in other states and under federal law, should consider using a process that maximizes their IC compliance. One such process is IC Diagnostics,™ as discussed in the latest White Paper on “How Companies Can Minimize the Risk of IC Misclassification Liability.” That type of process can lead to a customized and sustainable approach to maximizing IC compliance.

Written by Richard Reibstein

Posted in IC Compliance

Uber Scores Big Win in Independent Contractor Misclassification Case

Yesterday, Uber Technologies, Inc. won a watershed case under federal and state wage laws on the issue of whether Uber drivers are independent contractors, as the company has steadfastly maintained. A federal district court in Pennsylvania granted summary judgment in favor of Uber concluding that UberBLACK limousine drivers, as a matter of law, are not employees covered by the federal minimum wage and overtime laws or by Pennsylvania’s minimum wage and wage payment laws.

This decision, if upheld on appeal, may become a seminal case allowing Uber and other ride-sharing companies to finally breathe easy that their independent contractor business model passes muster under the federal Fair Labor Standards Act and any state wage laws that, like Pennsylvania’s, uses a test for independent contractor status similar to the test under the FLSA.

The overwhelming number of courts that have ruled in the past decade on the issue of whether workers were being misclassified as independent contractors have concluded that the workers were employees, but there have been a number of notable decisions to the contrary, most recently the decision involving GrubHub delivery couriers. All but a handful of the cases finding in favor of a company’s classification of workers as independent contractors have found that the case was a “close” one and a few different facts may well have changed the court’s decision. This case involving Uber, however, was not even close, according to the court’s decision.

Judge Michael Baylson examined six factors that he said “drive this Court’s analysis.”  As more fully discussed below, he found that four of those factors weighed heavily in favor of independent contractor status, whereas only two factors favored employee status and one of those two did not carry much weight while the other factor only slightly favored employee status.

Many businesses, besides those in the ride-sharing industry, that are based in whole or in part on an independent contractor model will likely draw encouragement from Judge Baylson’s decision.  Some may view the ruling, though, as being confined to a particular type of business model where workers operate through their own business entities (as did the plaintiff limousine drivers in this case), have a considerable investment in expensive equipment (their vehicles), and provide services to a competitor or their own private customers (which these limo drivers did).

The decision is also limited to cases where the legal test for independent contractor status is comparable to the test under the federal FLSA.  Not infrequently, some state laws have tests for independent contractor status that are quite different from the test applied in this Uber case.

Nonetheless, there is no question that this decision is an important recognition by the courts that some business models that rely on the use of independent contractors do comply with the federal wage and hour law.

The Decision by Judge Baylson

The case decided yesterday by Judge Baylson is Razak v. Uber Technologies, Inc., No. 16-cv-573 (E.D. Pa. Apr. 11, 2018).  In his decision, the judge first reviewed a number of cases decided by other courts throughout the United States on the issue of independent contractor misclassification.  He then decided the case under six factors identified in the leading case applying the FLSA in the federal circuit covering Pennsylvania: Donovan v. DialAmerica Marketing, Inc.

Right to Control.  The first factor involves “the degree of the alleged employer’s right to control the manner in which the work is performed.”  This is typically the most important factor considered by the courts. The plaintiff asserted that Uber controls drivers by, among other things, being able to terminate a driver’s access to the Uber app, de-activate a driver for canceling trips, block drivers from manipulating lines at major transportation hubs, and limit the number of consecutive hours that a driver may work. The court found that such efforts by Uber were “generally geared towards ensuring safety and quality control.”

The court noted that while Uber “does exercise some control when UberBLACK drivers are Online,” such limited control “does not convert UberBLACK drivers into employees.” The court equated Uber with a homeowner who imposes limited requirements on a plumber or carpenter while in the home, such as not permitting fumes, using certain footwear to protect floors, or not playing loud music while performing services – that type of control, according to the court, does not “suffice to conclude that the carpenter/plumber is an employee.”

In contrast, the court noted that there are significant indications that Uber does not exercise substantial control over the drivers, including the right of drivers to hire subcontractors or helpers, to work for competing companies, to determine their own hours, to accept or reject rides offered to them, to wear anything they want, and to work anywhere they choose.

The court concluded that this factor “weighs heavily in favor of ‘independent contractor’ status.”

Opportunity for profit or loss.  Judge Baylson next examined “the alleged employee’s opportunity for profit or loss depending on his managerial skill.” The court concluded that this factor also “strongly favors a conclusion that UberBLACK drivers are not employees.”

In reaching his conclusion, the judge not only noted that “Plaintiffs themselves have taken advantage of such opportunities through their own respective [limousine] companies,” but that they also had the right not to accept trip requests and, therefore, were “free to make money elsewhere (even while actively remaining Online [with] the Uber app to assess whether, for example, there was any ‘surge’ pricing).”  According to the court, “[t]hese facts strongly indicate that Plaintiffs are independent contractors pursuing their own entrepreneurial opportunities in search for profit.”

In response to the drivers’ argument that Uber’s app determines whether a driver receives a trip request and sets the price for the trip, the court noted that “the ‘profit and loss’ factor does not require that Plaintiffs be ‘solely in control of their profits or losses.’”

Investment.  The third factor is “the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers.”  The Plaintiffs conceded that the drivers’ purchase or lease of their own expensive vehicles is “strong evidence that they are not employees,” but argued that Uber deducts money from the drivers for “vehicle finance payments.”

The court noted, though, that merely because a driver chooses to lease a vehicle from Uber “does not convert Uber into an employer under the FLSA.”  This factor, according to the court, “strongly favors independent contractor status.”

Special skills.  The fourth factor is “whether the service rendered requires a special skill.” The court concluded that driving is not a special skill.  Nonetheless, the court held that “while this factor weighs in favor of finding the Plaintiffs are ‘employees,’ it does not carry much weight.”

Relationship permanence.  The next factor is “the degree of permanence of the working relationship.”  The court concluded that UberBLACK drivers “have basically complete freedom regarding how long they wish to serve in this capacity and the hours in which they serve.”  As a result, the court found that  “there is no permanence of the working relationship whatsoever, unless a driver wants it.”  Thus, the court held, this factor also “weighs heavily in favor of independent contractor status.”

Integration of service.  The last factor is “whether the service rendered is an integral part of the alleged employer’s business.”  The court found that while Uber could not conduct this part of its business without the drivers, “UberBLACK is only one of the many services that Uber provides through its Uber app.”  The court found that this factor favored employee status, “but only to a slight degree.”

Based on the above analysis, Judge Baylson concluded that the drivers had not met their burden to show that they are employees and that Uber is their employer.

Analysis and Takeaway

This case involved three drivers who had “opted out” of the arbitration provisions in Uber’s independent contractor agreement.  They brought this case on behalf of themselves and as the representatives of other Uber drivers who opted out.

Lawyers representing workers in independent contractor misclassification cases in the ride-sharing industry may now be more likely to sue under state laws where the test for independent contractor status differs from the test under the FLSA.

This decision in favor of Uber is, of course, subject to appeal.  If upheld on appeal, it will likely be cited as legal authority by businesses that rely on workers treated as independent contractors.

But even if affirmed on appeal, plaintiffs’ class action lawyers are likely to try to distinguish the facts in their cases from those in this UberBLACK decision.  While that may take some fancy legal work in cases arising in the ride-sharing industry, it may not require nearly as much effort in other industries where the business models differ considerably from Uber’s.

Decisions like this one are also not binding on state regulatory agencies including those enforcing state laws covering unemployment, workers’ compensation, minimum wage, and wage payments.

What can businesses learn from this decision? Uber has been the subject of multiple lawsuits over the recent past alleging independent contractor misclassification. During the same time, it has enhanced its independent contractor agreements and tweaked the structure of its business model. In other words, it has been proactive in seeking to minimize its exposure to independent contractor misclassification claims.

One way in which companies that use 1099ers have sought to minimize this type of  legal exposure is through a process such as IC Diagnostics™, which seeks to restructure, re-document, and re-implement independent contractor relationships in a manner than enhances compliance with independent contractor laws.

For those businesses that have yet to upgrade their independent contractor compliance, this win by Uber should be a positive signal that they, too, can structure, document, and implement their independent contractor relationships in a lawful manner.

Written by Richard Reibstein

Posted in IC Compliance

Insurance Industry Now Being Targeted for Independent Contractor Misclassification Lawsuits 

Independent insurance sales agents have been treated as independent contractors for decades. But recently, class action lawyers have begun to target insurance companies with claims that insurers have misclassified these sales agents as ICs instead of employees. These lawsuits allege that insurance companies have violated wage and hour, employee benefit, discrimination, and wage payment laws that protect employees.

What can insurance companies do to minimize any such IC misclassification liability and, correspondingly, maximize their compliance with federal and state IC laws?

Before answering those questions, we will review two of the more recent cases affecting the insurance industry to provide you an idea of the types of IC misclassification challenges that are facing insurers.

Class Action Lawsuit Seeking Overtime Compensation.

This past March, a Texas federal court judge denied a motion to dismiss an IC misclassification class action brought against Texas Farm Bureau Casualty Insurance Company and other insurers that sought to quickly bring to an end an independent insurance agent’s proposed collective action seeking overtime under the Fair Labor Standards Act. Ferguson v. Tex. Farm Bureau Bus. Corp., No. 17-CV-111 (W.D. Tex. Mar. 20, 2018).

In this case, the agent alleged that he and other similarly situated agents had been misclassified by the Texas Farm Bureau (TFB) and affiliated defendants as independent contractors. The insurers argued on their motion to dismiss that the plaintiff was not covered by the FLSA because he had entered into independent contractor agreements with the insurers in the name of his corporation, Chris Ferguson Insurance Services, Inc., for whom he was the sole shareholder and president. The court rejected the insurers’ argument that a person cannot be an employee for purposes of the FLSA simply because “the putative employer acquired the person’s labor through a contract with a business entity rather than the person.”

The insurers also argued on their motion to dismiss that, as a matter of law, the plaintiff was an independent contractor. The court noted that the test for employee status under the FLSA is based on “the economic realities of the parties’ relationship.” The court then denied that portion of the motion, stating that the agent had alleged in his complaint sufficient facts to withstand the motion to dismiss: he alleged he had worked exclusively for the insurers for 12 years, was issued TFB business cards, had a TFB email address, and was “closely supervised” by TFB management. In those circumstances, the court stated, the plaintiff had “alleged sufficient facts to plausibly allege employee status under the [FLSA’s] economic realities test.”

Class Action Lawsuit for Employee Benefits.

Currently on expedited appeal to the U.S. Court of Appeals for the Sixth Circuit is a district court’s decision in favor of an insurance sales agent’s class action seeking pension and other employee benefits. Jammal v. American Family Insurance Company, No. 17-4125 (6th Cir.). The decision being appealed held that the insurance sales agents of American Family Insurance Company (AFIC) are employees and not independent contractors for purposes of ERISA.

In addition to the brief filed by AFIC in January 2018, three “friend of the court” briefs were filed by the U.S. Chamber of Commerce, the American Council of Life Insurers, and the Property Casualty Insurers Association of America, all supporting reversal of the July 31, 2017 decision by a federal judge in the U.S. District Court for the Northern District of Ohio.

The appellate briefs in support of AFIC’s position argue that, prior to the issuance of this court decision, almost all federal courts had held that insurance agents are independent contractors. The briefs argue that the federal judge in Ohio failed to properly apply the U.S. Supreme Court’s  Darden test for IC status under ERISA.

The briefs focus on a number of alleged errors by the district court, including not giving sufficient weight to: (1) the terms of the agreements between AFIC and the insurance agents, affording agents the right to determine the manner and means used to perform their services; (2) the financial relationship between the parties and their tax treatment, including the agents’ declaration to the IRS that they were self-employed and thus able to deduct their own business expenses; (3) the agents’ investment in and management of their own offices including their right to hire assistants; (4) the agents’ opportunity for profit by growing their own businesses; and (5) the level of skill required of insurance agents operating in a highly regulated and specialized field.

The plaintiff agents filed their appellate brief in March. The brief argues that in “real life,” the agents do not have the rights they are provided in the contract.  The plaintiffs also seek to portray AFIC as an “outlier in the insurance agency context and beyond,” claiming it has an “unfair advantage over its competitors and all others who follow the law on independent contractor status.”  That position, though, seems to be at odds with the position of the U.S. Chamber of Commerce and the two insurance industry associations that filed “friend of the court” briefs in favor of AFIC.  In addition, the plaintiffs did not refer the court to any evidence in the record as to how other insurers’ practices differed from AFIC’s.

The plaintiffs’ brief includes a highly technical argument:  because of the expedited nature of the appeal, AFIC is not permitted to challenge the factual findings of the district court and is “limited to challenging the district court’s legal conclusions.”

Finally, two “friends of the court” filed briefs: Public Justice, P.C., and the AARP. Public Justice argues that the U.S. Chamber of Commerce presented an “oversimplified depiction of the economic landscape” regarding workers classified as ICs.  The AARP likewise sought to highlight the benefits of employee status and characterize IC status as one that “has contributed to lower job quality in some industries and led to a decrease in worker financial resilience” – which seems to be contrary to a comprehensive government report released in May 2015 on the contingent workforce that found that 85% of independent contractors “appeared content with their employment type.”

What Can A Company in the Insurance Industry Do To Minimize IC Misclassification Liability?

The test for IC status is different under ERISA than it is under the FLSA, and the tests under those federal laws differ from the tests for IC status under many state laws.  Regardless of the test, though, the keys to enhancing IC compliance under all of these state and federal laws is to validate the structure, documentation, and implementation of the IC relationship.  Does the IC agreement as drafted maximize IC compliance, or can and should the IC relationship be restructured or re-documented to improve the likelihood of successfully defending an IC misclassification lawsuit?

Even more important, however, is to determine whether the IC relationship is being implemented in practice consistent with the structure and documentation of the relationship.  For example, if the IC agreement states that independent insurance sales agents decide their own hours, decide how to perform their services, and determine where they will provide insurance sales services, is that what is happening on a daily basis in actual practice?

What are the consequences if a carrier does not structure, document, and implement its IC relationships with sales agents in a manner that enhances compliance? The results can be costly, such as what happened to one of the country’s Fortune 500 companies, FedEx. The wording of its IC agreement covering Ground Division drivers was held by two federal appellate courts as creating an employment relationship as a matter of law.  As a result, FedEx was forced to settle several dozen IC misclassification cases for nearly $500 million in the past several years.

What should a company in the insurance industry do?  Some companies have chosen to use a comprehensive process, such as IC Diagnostics™, assessing dozens of factors bearing on a sales agent’s IC status to minimize IC misclassification exposure.

One final note:  IC agreements containing arbitration provisions with class action waivers can provide some level of protection against most class actions brought by private litigants.  While such provisions are not applicable to governmental agencies conducting audits, investigations, or administrative proceedings, their inclusion in IC agreements is favored by many insurers. There is, however, a question about the enforceability of mandatory arbitration agreements with class action waivers.  Although that issue is currently pending before the U.S. Supreme Court, there are ways to draft such arbitration provisions to increase their enforceability.

Written by Richard Reibstein and Alan Levin

Edited by Janet Barsky

This blog post was published in the InsureReinsure Blog on April 10, 2018 and is reprinted here with permission from Locke Lord LLP.

Posted in IC Compliance

March 2018 Independent Contractor Misclassification and Compliance News Update

Last month, half of the cases that came to our attention in the area of independent contractor misclassification and compliance involved interesting issues concerning arbitration – and lessons for companies seeking to limit class action lawsuits by those they classify as ICs.

The first case involved an IC agreement that included a class action waiver but did not include an agreement to arbitrate. Companies that have had a less than favorable experience with arbitration, where there are  minimal rights to appeal an unfavorable award, but wish to include a class action waiver in their IC agreements, should take note: a class action waiver may only be enforceable if accompanied by an arbitration clause.

The second case involved two arbitration clauses arising in the health care context: the first in a physician’s employment agreement with a medical center and the second in the physician’s IC agreement with the hospital, entered into after she had been converted from W-2 to 1099 status. In response to the medical center’s motion to compel arbitration, the physician argued that the arbitration clause in the IC agreement was narrower in scope than the clause in her employment agreement and did not cover her retaliation claims. The physician also argued that the arbitration clauses did not cover the hospital’s administrator, whom she sued for fraud.  While the court eventually rejected both arguments in an extensive opinion, better drafting of the arbitration clauses could have negated these arguments and simplified the hospital’s effort to compel arbitration.

The third case involved the an argument by a janitorial franchisee, who signed a franchise agreement containing an arbitration clause, that the franchisor, a cleaning services company, had waived its right to arbitrate the franchisee’s IC misclassification claim. At the same time it made a motion to compel arbitration, the franchisor chose to make a motion to dismiss, attaching documents that were outside the four corners of the pleadings.  The lower court concluded that the franchisor had waived its right to compel arbitration by its action in making a motion to dismiss, but an appellate court reversed, concluding that because the lower court did not rule on the motion to dismiss on the merits or rely on the additional materials submitted, the franchisor had not waived its right to arbitrate the dispute.  The lesson for other companies seeking to compel arbitration: just move to compel and avoid superfluous litigation that can potentially waive your right to arbitrate.

While more and more companies are including arbitration clauses with class action waivers in IC agreements, it is critical to draft them well and effectively enforce them. As we noted in our October 1, 2017 blog post commenting on the next day’s oral argument before the U.S. Supreme Court in a case involving the enforceability of arbitration agreements with class action waivers, there are ways to draft such clauses that can circumvent arguments by those seeking to negate their effectiveness.

Arbitration clauses with class action waivers, even those drafted well, are not a cure-all for companies that seek to insulate their use of independent contractors from legal attack. Such clauses can protect against a claim being asserted as a class or collective action; they don’t, however, provide a defense to a claim that employees were not properly paid or that workers classified as independent contractors were not misclassified and allegedly are owed overtime, minimum wages, employee benefits, expense reimbursement, or other workplace benefits available to employees.

Further, arbitration agreements with class action waivers are not binding on governmental regulators and 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. Hence, the importance of enhancing compliance with employment and independent contractor laws cannot be overstated.  And some state laws have been interpreted, at least at present, as not being susceptible to arbitration. One example is California’s Private Attorneys General Act (PAGA).

Businesses that wish to minimize potential workplace liability exposure from independent contractors can, of course, conduct an internal workplace audit. Such internal audits are typically most effective at determining that a group of workers paid on a 1099 basis do not satisfy the applicable tests for independent contractor status; they do not ordinarily provide companies with the tools needed to enhance their compliance with independent contractor laws. Businesses that wish to fortify their independent contractor compliance can use a proprietary process such as IC Diagnostics™ that enables them to consider alternative ways to minimize misclassification liability, including restructuring, re-documenting, and re-implementing their independent contractor relationships.

In the Courts (6 cases)

CLASS ACTION WAIVER IN AN IC AGREEMENT NOT SUFFICIENT TO FORESTALL CLASS AND COLLECTIVE ACTIONS WHERE IC AGREEMENT DID NOT INCLUDE AN ARBITRATION CLAUSE.  An Ohio federal court has denied a motion by U.S. Cargo and Courier Service, LLC, a diversified carrier that provides high-value, low-cost ground delivery/courier services and logistics solutions, to dismiss a proposed  collective action under the Fair Labor Standards Act by delivery drivers claiming that they were misclassified as independent contractors and not employees. The company had argued, among other things, that the drivers’ class and collective claims should be dismissed because the drivers had signed independent contractor agreements with the company in which they waived their rights to class certification. In rejecting that argument, the court concluded that class action waivers without an arbitration provision are invalid. Specifically, the court relied on a prior decision by the U.S. Court of Appeals for the Sixth Circuit that “employees cannot waive their FLSA rights [to assert claims in a collective action] where there is no ‘contrary congressional command,’ such as the presence of an arbitration agreement.”  It continued: “[W]ithout an arbitration provision or any other countervailing federal policy that outweighs the policy articulated in the FLSA [conferring employees the right to litigate on a collective basis],” any waiver of employees’ collective action rights is invalid.”

The court also granted the drivers’ motion for conditional certification of their collective action after applying the “modest plus test,” which “requires an elevated factual showing, something beyond what is alleged in the pleadings and otherwise advancing the ball down the field beyond the pleadings.” In satisfying the standard, the drivers showed they were similarly situated to proposed class members through declarations stating that they and the proposed class members’ claims are unified by a common fact-based theory that they have been misclassified as independent contractors; all of the drivers were required to comply with the company’s appearance standards including wearing a uniform selected by the company and purchased through a specific supplier; all drivers were paid in accordance with the mileages and stops within their assigned routes at a rate determined by the company; and all of the drivers signed the same  independent contractor agreement.  Hall v. U.S. Cargo & Courier Service, LLC, No. 16-cv-330( S.D. Ohio Mar. 9, 2018).

PHYSICIAN CLAIMING SHE WAS CONVERTED TO INDEPENDENT CONTRACTOR REQUIRED TO ARBITRATE HER EMPLOYMENT DISCRIMINATION AND OTHER CLAIMS.  A Mississippi federal court has compelled arbitration of a claim by a physician, who was re-classified as an independent contractor, that she was discriminated against by a medical center because of her age and gender, was subjected to retaliation, wrongful termination, and intentional interference with her contracts with the hospital, and was defrauded by the medical center and a hospital administrator. The physician provided services to North Mississippi Medical Center’s Emergency Department. Initially, the physician was classified as an employee of the medical center and executed an employment agreement that contained an arbitration clause that survived the termination of the agreement. The medical center later changed its business model, terminated all employment contracts, and offered the physician an independent contractor agreement, which (like the employment agreement) also contained an arbitration clause. The medical center made a motion to compel arbitration of all of her claims.  The physician argued that at least one of her claims – the one alleging retaliation – was not covered by the arbitration clause, which only covered claims that “arise under or relate to” the contract; she also argued that that the scope of the language of the arbitration clause in the IC agreement was narrower than the scope of the clause in the employment agreement. The court found that even the more narrow clause covered all of her claims, drawing on other provisions in the IC agreement that covered the retaliation claim.  The physician also argued that she should not be required to arbitrate her fraud and intentional interference with contract claims against the administrator as he was not a party to the arbitration agreement. The court rejected that assertion, concluding that where a party’s claims against a non-signatory to an arbitration agreement involve actions taken by an agent of a signatory to the agreement, the non-signatory can also enforce the arbitration clause.  Begole v. N. Miss. Med. Ctr., Inc., No. 17-cv-33 (N.D. Miss. Mar. 23, 2018).

CLEANING SERVICES FRANCHISOR SUCCEEDS IN VACATING NO-ARBITRATION ORDER IN IC/FRANCHISEE MISCLASSIFICATION CLAIM. A Massachusetts appellate court has vacated a lower court’s order denying a motion by janitorial services company, Jan-Pro Franchising International, Inc. to compel arbitration of claims brought against it by a franchisee for allegedly misclassifying him as an independent contractor and violating his rights under the state’s wage Act. The lower court had held that Jan-Pro had waived its right to compel arbitration, and Jan-Pro appealed the decision.  On appeal, the court stated:  “[t]he essential question is whether, under the totality of circumstances, the defaulting party acted ‘inconsistently’ with the arbitration right.” In ruling in favor of Jan-Pro that it had not waived its right to arbitrate, the Court considered several factors including that Jan-Pro communicated its intention to seek arbitration even before this particular franchisee had sued; reiterated that intention continuously; and never filed a counterclaim or took discovery before filing the motion to compel arbitration.  The appellate court also noted that although Jan-Pro had sought to dismiss the case on the merits and had attached materials outside the pleadings to its motion, the trial court did not refer to those materials or rule on the merits of the motion to dismiss.  Brandao v. Jan-Pro Franchising International Inc., No. 17-P-636 (Mass. App. Ct. Mar. 22, 2018).

CABLE TECHNICIANS GRANTED CONDITIONAL CLASS CERTIFICATION IN IC MISCLASSIFICATION CLAIM.  Michigan cable technicians have been given the go-ahead by a federal district court to proceed with their IC misclassification lawsuit on a collective basis under the federal Fair Labor Standards Act.  The action seeks minimum wage and overtime compensation allegedly unpaid to the cable technicians as “employees” under the FLSA.  They  claim that they were misclassified as independent contractors by Piron, LLC and Reynolds Quality Installations, Inc., which provided cable installation and repair services to Aero Communications, Inc. and a nationwide cable provider. According to the plaintiffs, they shared the same positions, duties, performance expectations, equipment, and technology, and were subject to the same discipline procedures.  The court noted that in seeking conditional certification as a collective action, after which the plaintiffs would be permitted to provide formal notice of the lawsuit to other cable technicians, “the plaintiff must only ‘make a modest factual showing’ that [the plaintiff] is similarly situated to the other employees he [or she] is seeking to notify.” Applying that fairly lenient standard, the court found that “the plaintiffs had presented sufficient evidence that individuals who Piron and Reynolds Installations [allegedly] jointly employed to perform cable technician services . . . were not paid minimum wage or overtime wages” which they were allegedly due.  Ali v. Piron, LLC, No. 17-cv-11012 (E.D. Mich.  Mar. 16, 2018).

INSURANCE COMPANIES DENIED MOTION TO DISMISS INSURANCE AGENT’S CLASS ACTION FOR IC MISCLASSIFICATION.  A Texas federal court has adopted a Magistrate Judge’s report and recommendation denying a motion to dismiss by a group of insurance companies seeking to dispose of an independent insurance agent’s proposed collective action seeking overtime under the Fair Labor Standards Act. The agent alleged that he and other similarly situated agents were misclassified as independent contractors.  The insurance companies argued that the plaintiff was not covered by the FLSA because he entered into an independent contractor agreement with Texas Farm Bureau Casualty Insurance Company (TFB) and other related insurance companies in the name of his corporation, Chris Ferguson Insurance Services, Inc., for whom he was the sole shareholder and president. The court rejected the companies’ argument that a person cannot be an employee for purposes of the FLSA simply because “the putative employer acquired the person’s labor through a contract with a business entity rather than the person.”  The carriers also argued in their motion to dismiss that, as a matter of law, the plaintiff was an independent contractor. The court denied that portion of the motion as well, stating that the agent had alleged in his complaint sufficient facts to demonstrate employee status: he had worked exclusively for the TFB Defendants for 12 years, was issued TFB business cards, had a TFB email address, and was “closely supervised” by TFB management. Ferguson v. Tex. Farm Bureau Bus. Corp., No. 17-CV-111 (W.D. Tex. Mar. 20, 2018).

$4.59 MILLION JURY VERDICT IN FAVOR OF EXOTIC DANCERS APPROVED BY COURT IN IC MISCLASSIFICATION TRIAL.  A Pennsylvania federal judge approved a  jury’s verdict of $4.59 million in favor or a class of exotic dancers in suit brought against 3001 Castor Inc. d/b/a The Penthouse Club of Philadelphia, an adult entertainment club.  The lawsuit alleged nationwide collective claims under the FLSA to recover unpaid wages, as well as state wage/hour claims due to misclassification as independent contractors. The jury reportedly found that by obligating the dancers to pay certain fees for their shifts worked, the Club violated federal and state wage and hour laws and owed the dancers over $4 million in unpaid wages.  As we reported in our blog post of December 6, 2016, the Pennsylvania federal court had denied a motion by the Club seeking to decertify the case as a class action. The court determined that the dancers were similarly situated because all worked in the same location; all were advancing similar misclassification claims; all sought the same form of relief; and all were paid nothing by the Club and shared similar employment circumstances. The Club had argued on the merits that the monies received by the dancers from patrons were wages, but the court concluded they were tips. Additionally, the Club was found to have violated the FLSA by requiring the dancers to rent stage time from the Club for each shift; provide designated tips to the disc jockey, “house mom,” and podium host; and pay fines for violations of house rules. Verma v. 3001 Castor Inc., No. 13-cv-03034 (E.D. Pa. Mar. 23, 2018).

Written by Richard Reibstein

 

 

Compiled by Janet Barsky

 

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