The Labor Department’s New Independent Contractor Misclassification Web Page: While It Is Likely To Confound Viewers, It May Prompt Workers to File Complaints and Businesses to Enhance Their IC Compliance

The U.S. Department of Labor earlier today reissued its resources on independent contractor misclassification and grouped them together with resources from other federal and state agencies on the subject. This appears to be the Labor Department’s effort to create a type of one-stop shopping page for government materials on independent contractors.

But there is nothing new here for those seeking information on the subject. Indeed, some of the materials date back over 15 years and other resources are likely to confound and confuse more than elucidate the public on IC misclassification.  The resources include  Labor Department documents with conflicting definitions of independent contractor status as well as a 175-page comparison of unemployment laws that devotes only 4 pages to IC status and a 195-page unemployment study from the year 2000.

In effect, this new website is not a whole lot different than the first few pages of a google search for independent contractors, supplemented with some out of date materials.

The website that the Labor Department used to maintain on the subject was www.dol.gov/misclassifiction.  That website now redirects a search to the new web page at www.dol.gov/featured/misclassification.

What the New Web Page Contains and Why It Confounds

The new web page lists seven different types of resources:

– Pay and Misclassification

– Health and Safety Concerns on the Job

– Unemployment Insurance and Misclassification

– Anti-Retaliation/Anti-Discrimination Rights for Workers

– Federal Taxes and Misclassification

– Health Care and Retirement Benefits

– Resources for State and Federal Governments

The centerpieces of the Labor Department’s new web page are the two links with new graphics. One is called the “Myths about Misclassification,” which we commented about last August in our post, “Misclassification Mythbusters: The Labor Department’s Latest Effort to Crack Down on Independent Contractor Misclassification.” The second is an abbreviated version of the “Myths” web page.

As we noted in our blog post, the “Myths” document when issued was not an accurate restatement of the law.  The Labor Department then took down the web page and re-posted it shortly thereafter with changes that fixed some of the erroneous statements but, even with its revisions, still perpetuated the Labor Department’s mistaken position that the test for IC status under the FLSA is a one-factor test: economic dependence.  This view is in contrast to court cases that hold that no one factor is determinative of IC status, although greater weight is given to the factor whether an employee is economically dependent on the party receiving his/her services.

Perhaps the most confounding statement to workers and businesses in the Labor Department’s materials though is its acknowledgment that “Even if you are a legitimate independent contractor under one law, you may still be an employee under other laws.” Even a sophisticated reader would wonder what an independent contractor is.

What Is the Likely Impact of the New Web Page?

Exactly what the Labor Department hopes for: more recognition by workers that they might possibly be misclassified, which may in turn lead to more reporting and an increased number of complaints and enforcement actions at the state and federal level and more class actions alleging IC misclassification.

If you are reading this blog post and are a business that uses ICs to deliver services or to supplement your workforce, then the Labor Department’s new web page may well serve your interests also.

Businesses that wish to avoid becoming a target for IC misclassification cases should take note that it is not too late to enhance your level of IC compliance. Many companies have chosen IC Diagnostics™ to assist them in determining which of several alternative strategies to undertake in minimizing misclassification exposure. The most commonly used alternative is restructuring, re-documenting, and re-implementing IC relationships.

Many IC agreements designed to withstand a legal challenge may also benefit from a re-evaluation and fine-tuning. The language in some companies’ own IC agreements have even been used against them in some cases to prove that workers classified as ICs have been misclassified and should have been treated as employees.

Some companies have even used this process to better defend against current regulatory proceedings and class action lawsuits. Companies that have been targeted and may have to pay unpaid wages, back taxes, or unemployment or workers’ compensation premiums, as well as  businesses that are considering settlement of IC misclassification lawsuits, should not presume they are somehow precluded from maintaining an IC business model or using ICs to augment their workforce once the case is resolved. Instead, IC Diagnostics™ may provide them with a form of restructuring and re-documentation that meaningfully enhances compliance with IC laws.

Written by Richard Reibstein.

 

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

Posted in IC Compliance

New Uber Ruling Reveals Another Costly IC Misclassification Exposure for On-Demand Companies

Gig economy companies based on an independent contractor model beware.

On December 14, 2016, a federal court in Pennsylvania denied a motion to dismiss an “on-call” wage claim in a class action lawsuit filed against Uber by limousine drivers that claim they were not paid minimum wage and overtime for hours during which they were “logged into” the Uber App. This on-call wage claim is one that, so far, has rarely been made by on-demand workers challenging their classification as independent contractors.

Now that a federal court has issued a ruling allowing this type of claim to proceed, more plaintiffs’ class action lawyers are likely to assert this newfangled legal challenge in IC misclassification lawsuits against businesses using ICs to deliver on-demand services. As noted in our “Takeaway” below, gig economy companies that are paying attention to the IC misclassification landscape can and should take steps to enhance their IC compliance and thereby lower the risk that they will be subject to costly on-call wage and other types of legal claims. After all, a valid IC relationship should beat any and all IC misclassification challenges.

The Decision

The plaintiffs are UberBLACK drivers who are seeking minimum wage and overtime for all hours when they were logged into the Uber App. They claim they are “on call” while logged into the Uber App awaiting a ride request. Uber’s lawyers filed a motion to dismiss this claim, arguing that the drivers alleged no facts to suggest that they were “actually working” within the meaning of the law “just because they were logged in….” Razak v. Uber Technologies, No. 16-cv-573 (E.D. Pa. Dec. 14, 2016).

In his decision, Judge Michael Baylson noted that the U.S. Supreme Court ruled in 1944 that “under certain circumstances, on-call time is compensable.” Judge Baylson then set forth the prevailing law as to what must be alleged in order for “on call” time to be compensable as time worked. The key factor in this factual situation is whether the employee “finds his time on-call…so restricted that it interferes with personal pursuits.”

In denying Uber’s motion to dismiss, the court noted that the amended complaint alleged that drivers were required to wear business attire while working and those who refuse a fare are subject to suspension and termination. In the court’s mind, those allegations were sufficient to plead that the drivers were restricted in their personal pursuits. For that reason, the court ordered expedited discovery regarding the nature and extent of the interference with the drivers’ personal activities.

Analysis

As the court’s decision makes clear, it does not take much for a plaintiffs’ class action counsel to properly plead a viable on-call wage claim where there is some factual basis supporting interference with personal activities, especially where the workers provide on-demand services in person and allege there may be consequences if they don’t accept an engagement. Whether such gig workers can then prove the necessary facts to establish that such interference is sufficient to support a violation of federal or state law, will likely depend in large measure on the nature of the on-demand services provided.

In contrast to drivers and other gig workers who perform services in person, there are other on-demand workers, such as those providing services over the phone or on a laptop or tablet, whose personal activities would not likely be restricted to any meaningful degree if they choose to accept an engagement and perform services while logged onto an app.  Those workers can simply take a break from whatever else they may be doing at the time, even if they allege they had to accept the engagement.

This Uber case illustrates the importance of making the right motions at the right time. Motions to dismiss are oftentimes risky in litigation, as they require a court to make a determination assuming all allegations are factually correct, such as the allegation in this case that the workers classified by Uber as ICs are employees, that they are not paid for all hours they work, that they were restricted in some manner with regard to their personal activities while they were logged into the Uber App, and that they risked suspension or termination if they did not accept an engagement. The notoriety from this court decision denying Uber’s motion will also undoubtedly result in more plaintiffs’ class action lawyers bringing more on-call wage claims against on-demand businesses that use ICs to render services in person to their customers.

Takeaway

Even if workers classified as ICs bring an on-call wage claim and can show that their personal pursuits were significantly interfered with while “on call,” they will enjoy no success in the lawsuit if the business can establish that the workers have been properly classified as independent contractors.

While the number of companies today using ICs to provide services to customers is increasing, especially in the on-demand economy, too few have taken adequate steps to enhance compliance with applicable federal and state IC laws.  This leaves many of those businesses at risk for substantial IC misclassification liability.

How can such companies minimize the likelihood of an IC misclassification lawsuit or an audit or proceeding by a state or federal administrative agency? One way is through the use of IC Diagnostics™, a process that examines whether a group of workers 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, alternative solutions to enhance compliance with those laws. One of those alternatives involves restructuring, re-documenting, and re-implementing a company’s relationship with its ICs to provide a customized, sustainable solution, including state-of-the-art independent contractor agreements. Such agreements can even include provisions that place the business in the best position possible to defend against on-call wage claims, such as those now facing Uber.

Written by Richard Reibstein.

 

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

Posted in IC Compliance

November 2016 Independent Contractor Misclassification and Compliance News Update

Our news update for last month highlights the fact that IC misclassification lawsuits are happening across the country and in virtually every industry, both in the on-demand economy and in more traditional business sectors. Cases reported below for November 2016 involve misclassification lawsuits prosecuted by administrative agencies and class action lawyers affecting companies and workers located from coast to coast and from the upper Midwest to the Gulf of Mexico. They affect such diverse industries as cable equipment recovery, commercial cleaning, transportation, ride-sharing, and adult entertainment. We also report on articles we have published in the past month on the recently enacted New York City Freelancer law, which imposes hefty liabilities on business that fail to make prompt payment to independent contractors, and the effect of the new Trump Administration on IC misclassification enforcement initiatives at the federal and state level.

We also mention below one of our articles that was published in November entitled “Your Own Agreements Can Be Your Worst Enemy in IC Misclassification Cases.” In each of the cases reported below, the companies involved could each have minimized their likelihood of being sued or maximized their chances of prevailing in the lawsuits brought against them if they had undertaken the type of compliance enhancement process that we have long suggested in this legal blog.

In the Courts (5 cases)

INTERMODAL DRIVERS SEEK FINAL APPROVAL OF $2 MILLION SETTLEMENT IN IC MISCLASSIFICATION CLASS ACTION. Drivers who claim they were misclassified as independent contractors filed a motion seeking the final approval of a California federal district court for their proposed $2 million settlement with Genesis Intermodal Delivery, Inc., a drayage company.  The complaint alleged multiple causes of action against Intermodal including willful misclassification of the drivers as ICs; failure to pay the minimum wage; failure to provide certain meal and rest periods; failure to reimburse expenses; failure to provide complete and accurate wage statements; unfair business practices; and civil penalties pursuant to the Private Attorneys General Act (PAGA). According to the complaint, Intermodal retained and exercised significant control over details of the drivers’ work, including unilaterally setting fees to be paid to drivers for their services and requiring drivers to conduct safety inspections prior to and after deliveries. Under the terms of the proposed settlement, Intermodal would pay the participating members of the class $1.4 million; class counsel would receive fees of $500,000 and costs of $18,000; the class representative would receive $15,000; and the Labor and Workforce Development Agency would receive $10,000 under PAGA. Cabrera v. Genesis Intermodal Delivery, Inc., No. 15-cv-551 (C.D. Cal. Nov. 22, 2016).

MISSISSIPPI SHIPPING COMPANY SUED IN CALIFORNIA BY DRIVERS OF REFRIGERATED TRUCKS. Mississippi-based KLLM Transport, a provider of refrigerated shipping and trucking services nationwide, has been sued in a California federal district court by two drivers seeking to represent a class of drivers in California and Florida alleging that they were misclassified as ICs.  The complaint alleges that KLLM violated various California and Florida wage and labor laws, including failing to pay the minimum wage and overtime compensation, unlawful deductions of business expenses such as fuel, insurance and truck/trailer maintenance, failure to furnish accurate wage statements, and unfair competition. Etienne v. KLLM Transport Services, LLC, No. 5:16-cv-02534 (C.D. Cal. Nov. 14, 2016).

PENNSYLVANIA FEDERAL COURT DENIES MOTION TO DECERTIFY CLASS OF EXOTIC DANCERS IN IC MISCLASSIFICATION CLASS ACTION. A Pennsylvania federal court denies the motion by an adult entertainment club seeking to decertify a conditional class of exotic dancers and grants the dancers’ motion for final FLSA collective action certification and partial certification of the state law claims.  The action brought against 3001 Castor, Inc. d/b/a The Penthouse Club includes nationwide collective claims under the FLSA to recover unpaid wages, as well as state claims including failure to pay minimum wage and overtime compensation under Pennsylvania law. The court found that the dancers are not paid an hourly wage and that the Club paid the dancers nothing to perform on stage. The club argued that the monies received by the dancers from patrons were wages, but the court concluded they were tips. Additionally, the court found that the dancers were required 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. As to the FLSA claims, 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. Verma v. 3001 Castor, Inc., d/b/a The Penthouse Club, No. 13-3034 (E.D. Pa. Nov. 29, 2016).  This case is an example of what adult clubs should refrain from doing; there are also steps that entertainment emporiums can follow to enhance their IC compliance. As the title of our February 8, 2015 blog post states: “Even an Exotic Dance Club (a.k.a. Strip Joint) Can Comply with Independent Contractor Laws – And Avoid or Defend Against Class Actions.”

LYFT’S $27 MILLION IC MISCLASSIFICATION SETTLEMENT LIKELY TO RECEIVE FINAL APPROVAL FROM THE COURT. Lyft’s $27 million settlement proposal is likely to receive final approval from a California federal district judge in a highly-publicized IC misclassification class action brought on behalf of California drivers who claim they were not properly reimbursed for fuel and other expenses, paid the full amount of their tips, or paid overtime and minimum wages. At a hearing last week, Judge Chhabria reportedly considered objections by a few drivers to the proposed settlement, forms of notice, and a provision releasing future FLSA claims, but he reportedly did not appear to view those objections as fatal to the proposed settlement. As we noted in our prior blog posts of May 9, 2016 and July 6, 2016, preliminary approval of the proposed $27 million class action settlement was granted by the court in June 2016 after the original $12.25 million settlement proposal was flatly rejected by the court as woefully inadequate. The original settlement proposal provided that the average payment to the drivers would be modest, well under $1,000 per driver. In rejecting that proposal in April of this year, Judge Chhabria stated that “[t]he modest nonmonetary relief set forth in the agreement does not come close to making up for…serious defects in the monetary aspect of the settlement.” Most importantly, the judge concluded that “[t]he drivers were…shortchanged by half on their reimbursement claim alone.” In June, though, the judge found that the new $27 million proposal adequately addressed the flaws in the original proposal. To date, 84,000 class members have submitted claims in response to the class notices. Cotter v. Lyft Inc., No. 13-cv-4065 (N.D. Cal. Dec. 1, 2016).

FIVE UBER IC MISCLASSIFICATION CLASS ACTIONS STAYED PENDING APPELLATE REVIEW OF UBER’S ARBITRATION CLAUSE. Five Uber class action lawsuits were temporarily stayed until at least February 2, 2017 by California federal court judge on November 21, 2016, pending review by the U.S. Court of Appeals for the Ninth Circuit regarding the validity of Uber’s arbitration clause with a class action waiver. The Ninth Circuit is currently addressing the issue of whether to reverse the federal district court’s decision certifying a class of about 240,000 drivers in California and Massachusetts who claim they were misclassified by Uber as ICs. Plaintiffs’ counsel reportedly argued that some non-class issues were ripe for trial and that thousands of drivers were not bound by the arbitration provisions, but Judge Chen disagreed and issued the stay. O’Connor v. Uber Technologies, Inc., No. 13-cv-3826 (N.D. Cal. Nov. 21, 2016).

Administrative and Regulatory Initiatives (1 item)

MINNESOTA CABLE EQUIPMENT RECOVERY COMPANY CONSENTS TO JUDGMENT; LABOR DEPARTMENT CONCLUDES IT MISCLASSIFIED MARKET CONTRACTORS AS IC’S. Following an investigation by the Wage and Hour Division of the U.S. Department of Labor in Minneapolis, a now-defunct Minnesota cable equipment recovery company, Cable Equipment Services, Inc., has entered into a consent order in court to settle an IC misclassification suit under the FLSA for $350,000.  According to a News Release issued by the Labor Department on November 10, 2016, the company violated overtime, minimum wage and recordkeeping requirements of the FLSA with regard to 41 market contractors and drivers that were misclassified as ICs and who recovered cable equipment for TimeWarner, Comcast, and Charter Communications.  David King, district director for the Wage and Hour Division in Minneapolis stated: “Far too often, employers misclassify workers as independent contractors when the law defines them as employees. In this case, Cable Equipment Services denied workers overtime, minimum wage, and access to employee benefits, unemployment insurance and the payment of federal and state taxes on their behalf. In these instances, not just the workers, but the whole economy loses. We are committed to rooting out misclassification and, as this case shows, will continue to use every enforcement tool available to us to achieve that goal.” Of the $350,000 to be paid to the workers, $196,000 represents unpaid minimum wage and overtime compensation and $153,000 constitutes liquidated damages. Perez v. Cable Equipment Services, Inc., No. 15-cv-416 (D. Minn. Nov. 7, 2016).

On the Legislative Front (1 item)

BUSINESSES ACROSS THE COUNTRY THAT USE IC’S MAY BE IMPACTED BY A NEW NYC FREELANCER LAW. New York Mayor de Blasio signed into law the “Freelance Isn’t Free Act” (No. 1017-2015) on November 16, 2016.  That bill was the subject of an article we published in the New York Law Journal on November 3, 2016, shortly after the New York City Council passed the bill, and the second in a comprehensive blog post on November 16, 2016, the day the Mayor signed the bill into law. 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 with 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. The law covers any contract between a freelance worker and a “hiring party” that has a value of $800 or more. Although the new law has laudable objectives, it is likely to have unintended but serious consequences for both New York City-based independent contractors and for businesses that retain them. For example, there is a provision awarding double damages for failure to pay for services on a timely basis even if the service recipient has a good faith belief that the services were not completed or performed in a satisfactory manner or that payment is not due for a host of other legitimate reasons. As we noted in the blog post: “Because of the absence of a good faith defense to the double damages penalty in the law, unintended adverse consequences are likely once the new law goes into effect. Some companies will undoubtedly choose to only use independent contractors with mailing addresses outside of New York City. As a result, independent contractors with New York City mailing addresses would lose potential work. Meanwhile, businesses that continue to use independent contractors associated with New York City, especially companies operating there, will be at risk for lawsuits from freelancers seeking double damage awards, even where there is a legitimate dispute as to whether the work met the contract specifications.”  The blog post offers a number of tips for businesses who contract with ICs, especially ICs with NYC mailing addresses, to the extent such businesses may be covered by this new law.

Other Noteworthy Items (2 items)

EVEN IF A TRUMP ADMINISTRATION IS LESS AGGRESSIVE IN IC MISCLASSIFICATION ENFORCEMENTS, MOST STATES ARE LIKELY TO CONTINUE THEIR CRACKDOWNS. In our blog post of November 10, 2016, which is a reprint of our article published in the Class Action and Employment sections of Law360, we discussed how over the past eight years, the Obama Administration made IC enforcement initiatives a priority, including the development of joint/coordinated enforcement efforts between the U.S. Department of Labor and the state labor departments. Currently, 35 state labor departments have signed a Memorandum of Understanding with the U.S. Labor Department, and over half of the states currently have Republican governors.  Thus, regardless of whether the new Administration dials down its enforcement efforts in this area, it is unlikely that state labor departments will be any less aggressive in their crackdown on IC misclassification, as this issue enjoys bipartisan support in most states.

THE CAUTIONARY TALE OF JANI-KING: FRANCHISEES CAN BE MISCLASSIFIED EMPLOYEES. In an article we authored in the November 2016 issue of HR Specialist entitled “Your Own Agreements Can Be Your Worst Enemy in IC Misclassification Cases,” we analyzed Williams v. Jani-King of Philadelphia, No.15-2049 (3d Cir. Sept. 21, 2016), citing it as an example of how poorly drafted independent contractor agreements and other corporate documents can be the kiss of death when defending against an IC or franchisee misclassification class action.  In the article, as well as our blog post of September 23, 2016, we reported that the U.S. Court of Appeals for the Third Circuit affirmed a federal district court ruling that cleaning franchisees could proceed with their class action for IC misclassification against Jani-King under the Pennsylvania wage and hour laws. The Third Circuit used Jani-King’s own franchise agreement and written policies and manuals to uphold the lower court’s finding that Jani-King retained sufficient direction and control over the manner in which the franchisee cleaners were required to perform their services to warrant the certification of the case as a class action. Although not determining the merits of the case, the appellate court found many factors set forth in the company’s franchise agreement and franchise policies that supported the lower court’s decision to allow the case to proceed on a class-wide basis, including provisions affording Jani-King the right to control the franchisees’ communications with customers, how the cleaners must address customer complaints, what franchisees can wear, the types of records the cleaners must keep, how the franchisees must advertise, Jani-King’s right to inspect the work of the cleaners, the franchisor’s right to control assignments of the cleaners, its right to change the policies and procedures that franchisees must follow, and the right to terminate the franchise agreements at any time.  This case confirmed that, all too often, companies that use ICs and franchisees can be their own worst enemies in terms of drafting documents that needlessly accord them the right to direct or control the performance of the workers.

Written by Richard Reibstein.

Compiled by Janet Barsky, Managing Editor. 

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

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Posted in IC Compliance

Businesses Everywhere Take Note: NYC Independent Contractor Law Will Have Impact Well Beyond the City

Regardless of where a company is headquartered, it likely contracts with one or more independent contractors who live or work in New York City. If your company does so, take note. Earlier today, November 16, 2016, Mayor de Blasio signed into law the Freelance Isn’t Free Act (No. 1017-2015).  The new law gives independent contractors a right to sue for double damages if they are not  provided with a written contract with 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. Although the new law has laudable objectives, it is likely to have unintended but serious consequences for both New York City-based independent contractors and for businesses that retain them.

Perhaps the most striking aspect of the new law is the provision awarding double damages for failure to pay for services on a timely basis even if the service recipient has a good faith belief that the services were not completed or performed in a satisfactory manner or that payment is not due for a host of other legitimate reasons. This penalty provision is all the more striking in view of the provisions in the New York Labor Law, which covers employees but not independent contractors. Although that statute grants double damages for non-payment of wages to an employee (as do many other state wage laws and the federal Fair Labor Standards Act), an employer is at least afforded a defense to the double-damages penalty if it can prove a good faith basis for believing that it did not owe the employee the wages in question. No such defense is available, however, under this new law covering independent contractors.

In an article we authored that was published in the New York Law Journal shortly after the New York City Council passed the bill, we called on the Mayor to send the bill back to the City Council to add a good faith defense to the double damages provision of the new law and fix what we viewed as other defects in the bill. That prompted a response published in the New York Law Journal from the principal sponsor of the bill, but his defense of the measure did not address the absence of a good faith defense. The Mayor signed the bill as passed by the City Council.

The Main Features of the New Law

Who is covered?

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. There are three exclusions to the definition of “freelance worker”: sales representatives (as defined in section 191-1 of the New York Labor Law); licensed practicing lawyers; and licensed medical professionals.

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 nothing more than one person providing services.  Indeed, it is commonplace for one-person businesses 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 covered 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.

The party retaining the services of freelancers of the freelance worker is labeled in the law as the “hiring party.” That term excludes governmental agencies.

The law does not say if it covers freelance workers who reside in New York City but provide services to customers outside the city; whether it covers work performed in New York City in whole or in part by a non-city resident for a company that has an office in New York; or if it only covers contracts where one of the parties lists their mailing address in New York City. The 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.

What must the contract provide?

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:

  • the parties’ names and mailing addresses,
  • an itemization of services to be provided,
  • the “value of services to be provided,”
  • 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. Frequently, such terms are negotiated these days in a series of emails or other electronic communications that can collectively constitute a legally binding contract. 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.

What are the payment obligations?

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. Questions often arise, however, as to whether and when a service provider’s services are “complete.” 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, any questions in the mind of the service recipient about whether the services were completed and payment is due would likely be the subject of further communications between the parties.

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.

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.

In addition, under the new law, a freelance worker who prevails on a claim for late payment or non-payment “is entitled to an award of double damages, injunctive relief and other such remedies as may be appropriate.” See Section 20-933.b.3. (emphasis added).  This is similar to the New York Labor Law, which protects employees from non-payment of wages, but unlike New York law applicable to employees, it does not provide any defense to double damages.  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 to pay the freelancer twice what the freelancer can prove is owed – no matter how genuine and legitimate a company’s dispute may be over whether the services were completed or were satisfactory, or whether the freelancer breached his/her duties under the contract, or how much money is owed, or when payment is due. This could conceivably be a very large sum.  A reading of the Committee Report accompanying the bill suggests that this anomaly in the law may well have resulted from the absence of any testimony from the public other than “from freelance workers and their advocates.” We hope the City Council will amend this law to align it with most state and federal wage laws providing this double damages defense.

What are the penalties for failure to enter into a “written contract” upon request?

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.

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 that he/she 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.

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 award 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.

Other Provisions of the New Law

The 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 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 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. Under the navigation program, the director is required to make available to the general public “model contracts” on the website of the Office of Labor Standards. See Section 20-932.b.

The law only requires that a written contract contain the five terms listed in the bullets above. The law, however, authorizes the director to issue a rule to “require additional terms to ensure that the freelance worker and the hiring party understand their obligations under the contract.” We hope the director adds contract terms that will tend to minimize disputes. 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.

The law takes effect 180 days after the mayor’s signature and applies only to contracts entered into on or after the effective date of the law – although the director has the authority before then to issue rules contemplated by the new law.

How Should Companies Prepare for the Freelancer Law While Minimizing Independent Contractor Misclassification Claims?

Freelancers and other 1099ers are often retained by a multitude of managers throughout a company without any involvement by the human resources department or legal counsel’s office. The law unrealistically expects all managers who have authority to engage an independent contractor to know that they may be required by law to include certain specific terms in a “written contract” with any independent contractors they retain, if there is some connection to New York City. Unfortunately, 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, we suggest that companies clearly specify the key terms of 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).

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 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 ordinance also focuses attention on the issue of independent contractor compliance and misclassification, especially in the digital, gig or on-demand economy. 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 are targeting companies that misclassify employees as independent contractors and are seeking to dissuade businesses from using independent contractors. This dichotomy is reflected in published statements by two leading federal regulators: U.S. Labor Secretary Thomas Perez, who has stated that “there’s an important place for independent contractors [in our economy], but I also believe that there’s ample evidence that that’s been abused,” and Dr. David Weil, the Administrator of the Wage and Hour Division of the U.S. Labor Department, who has stated that “the use of independent contractors [is] not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy.”

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 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, 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 New York City Office of Labor Standards will 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.

Conclusion

Because of the absence of a good faith defense to the double damages penalty in the law, unintended adverse consequences are likely once the new law goes into effect. Some companies will undoubtedly choose to only use independent contractors with mailing addresses outside of New York City. As a result, independent contractors with New York City mailing addresses would lose potential work. Meanwhile, businesses that continue to use independent contractors associated with New York City, especially companies operating there, will be at risk for lawsuits from freelancers seeking double damage awards, even where there is a legitimate dispute as to whether the work met the contract specifications. Finally, the courts, already over-burdened, are likely to see a wave of lawsuits, many of which would never be brought if the bill promoted payment protections for freelancers without providing an inducement to file lawsuits where windfall recoveries are available.

Written by Richard Reibstein.

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

This blog post was originally published by Pepper Hamilton LLP as a Client Alert on November 16, 2016 by Richard Reibstein, Janet Barsky, and Jessica Rothenberg.

Posted in IC Compliance

Trump’s Impact on Independent Contractor Misclassification: States will Likely Increase Enforcement After Feds Dial Down Theirs

This article was published in the Class Action, Commercial Contracts, Corporate, Employment, and Public Policy sections of Law360 on November 10, 2016. © Copyright 2016, Portfolio Media, Inc., publisher of Law360. It is republished here with permission.

In the past eight years, the Obama Administration has spearheaded enforcement initiatives on independent contractor misclassification through the U.S. Department of Labor and the IRS. That crackdown, however, seemed to be focused on the low-hanging fruit – companies that often had little or no defense to the claim that they were misclassifying employees as ICs. In contrast, private class action lawyers focused and continue to focus on more challenging cases or larger or more well-known companies, like Uber, FedEx, Amazon, Macy’s, Lowe’s, DirecTV, BMW, Google, Sleepy’s, and Jani-King, to name just a few. During that same period, Congress did not pass a single bill to address the issue of independent contractor classification.

During that time, though, one of the federal government’s initiatives in this area has had significant traction: its program of entering into joint/coordinated enforcement efforts with the states. Since the U.S. Department of Labor announced its “Misclassification Initiative” in September 2011, 35 state labor departments have signed a Memorandum of Understanding (MOU) with the U.S. Department of Labor. Of those 35 states, 18 currently have Republican governors: Alabama, Arkansas, Florida, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Nebraska, New Mexico, North Carolina, Oklahoma, South Dakota, Texas, Utah, Wisconsin, and Wyoming.

Thus, it is fair to say that at the state level, IC misclassification is viewed as a non-partisan priority. Why is that? Because while some companies that retain legitimate ICs on a 1099 basis, a fairly sizeable percentage of companies that pay certain workers on a 1099 basis either (a) do not structure or document their IC relationships in a manner that complies with IC laws, or (b) have no bona fide basis for issuing a Form1099 to such workers. In both of those situations, the states are shortchanged on unemployment insurance contributions and workers’ compensation premiums, and lose the benefit of employee income tax withholdings.

In contrast to Congress, which has passed no IC misclassification legislation in the past eight years (or at any time previously), many state legislatures have passed bipartisan legislation designed to curtail IC misclassification. Those new laws increased penalties for IC misclassification, made the test for IC status more stringent, or have established state task forces to combat IC misclassification.

While it is likely that the U.S. Department of Labor may dial down somewhat their enforcement efforts in this area when a Republican administration takes over the White House and appoints a new Secretary of Labor, there is no reason to expect that state labor departments will be any less aggressive in their efforts to crack down on IC misclassification If anything, many state labor departments, especially those in states with Democratic Party governors, are likely to double down on their enforcement efforts if they feel that the U.S. Labor Department is backing away from the joint enforcement initiatives begun under the Obama Administration. Likewise, state legislatures will likely continue on their current path of passing legislation that curbs IC misclassification, particularly affecting those industries where IC misclassification is regarded as prevalent.

Takeaways

Companies using ICs to supplement their workforce or render services to their customers, should not view Donald Trump’s election as an opportunity to misclassify employees as ICs. Rather, such companies should expect the states to continue their crackdown on the misclassification of 1099ers and other types of ICs that legally should be treated as W-2 employees. Such businesses should also anticipate that plaintiffs’ class action lawyers will continue to target companies that fail to structure, document, and implement their IC relationships in a manner that complies with applicable IC laws.

What should companies that use ICs do, especially businesses in the on-demand, gig, and digital economies? As we have stated in other blog posts, businesses that utilize ICs would be wise to focus on enhancing their compliance with applicable IC laws. Businesses interested in enhancing their compliance with IC laws can do so in a variety of ways, as detailed in our White Paper on minimizing IC misclassification risks, including the use of IC Diagnostics™.  This process assesses IC compliance under applicable law, restructures and re-documents the IC relationship in a more compliant manner, and then implements the IC relationship in a customized and sustainable fashion.

Written by Richard Reibstein.

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

Posted in IC Compliance