June and July 2017 Independent Contractor Misclassification and Compliance News Update

The most notable legal developments during the June/July  period were appellate decisions: one by the Vermont Supreme Court holding that a construction company did not misclassify a carpentry contractor under that state’s unemployment insurance law; the other by the California Court of Appeal, an intermediate level appellate court, affirming a decision by a lower court that home delivery newspaper carriers had been misclassified as ICs by the newspaper that used the delivery carriers’ services.

In the Vermont case, the IC classification was validated because the carpentry contractor was an LLC and not an individual, strongly suggesting that a company is more likely to have its IC classification upheld where the contractor is a business entity and not an individual. Of course, there have been a number of cases where courts have refused to find a legitimate IC relationship even when the contractor does business in the form of a corporation or LLC. See January 14, 2015 blog post (first “takeaway”).

In the California case, the newspaper’s misclassification of delivery carriers was hardly surprising given the lower court’s finding that there was a considerable amount of direction and control included in the IC agreement signed by the carriers as well as in the day-to-day practice by the newspaper. IC misclassification decisions like this one from California highlight the importance of businesses structuring, documenting, and carrying out their IC relationships in a manner that minimizes direction and control over the manner of performing services.  Some companies have chosen to use a process such as IC Diagnostics™ to minimize the likelihood that a court, like the one in California, would be inclined to conclude that workers classified as ICs have been misclassified.

In the Courts (8 cases)

VERMONT SUPREME COURT CLARIFIES UNEMPLOYMENT LAW FOR IC’S OPERATING AS LLC’S. The Vermont Supreme Court has decided that an LLC is a distinct legal entity separate from its members and is not an “individual” for purposes of assessing unemployment taxes. In deciding an appeal from the state Employment Security Board, the Vermont high court found that Bourbeau Custom Homes, a home construction and design company, was not liable for unemployment taxes on monies paid to a carpentry contractor, John Parah Construction LLC, “because an LLC is not an ‘individual’ under the unemployment tax statute and therefore not subject to the ABC test established under [the Vermont statute.]” The Board’s classifications of two other carpenters, an installer of cement siding and a painter, as employees and not independent contractors, were upheld by the court. After publication of the decision in this case, Lindsay Kurrle, Commissioner of the Vermont Department of Labor, issued a News Release on June 23, 2017 stating, “The Vermont Department of Labor is carefully reviewing the decision that was issued today by the Vermont Supreme Court. The classification of independent contractors is an issue the Department is committed to – both ensuring that workers are properly protected, and that businesses who want to utilize independent contractors are doing so with confidence and predictability of how the law is applied. The ruling today sheds an important light on the way the Department will classify LLCs in the future, and provides a level of clarity that we have not had previously.” In Re Bourbeau Custom Homes, Inc., No. 2016-157 (Sup. Ct. Vermont June 23, 2017).

NEWSPAPER’S MISCLASSIFICATION OF HOME DELIVERY CARRIERS AS IC’S UPHELD ON APPEAL. A California appeals court has upheld a lower court’s decision that home delivery newspaper carriers were misclassified as independent contractors by The San Diego-Union Tribune, a newspaper owned by The Copley Press Inc. The complaint alleged wage and hour claims under the California Labor Code, including failure to pay minimum wages and overtime compensation, failure to provide meal breaks and rest periods, and failure to reimburse for business expenses.  The carriers reportedly had signed independent contractor agreements containing provisions that they were required to deliver the newspapers “in a clean, dry, undamaged and readable condition at a time and location” that met the customer’s reasonable requests and expectations, could not work for competitors without consent from The Tribune, were required to obtain accident insurance and bonding, agreed to complete deliveries by specific times on weekdays and weekends, and were required to assemble the papers at  company distribution centers. The appeals court affirmed the lower court’s findings that the independent contractor agreement and the day-to-day operations evidenced the company’s right to control the carriers’ manner and means of delivery.  Although the carriers were awarded $3 million in restitution for mileage expense, the cost of supplies, insurance, bond premiums, and warehouse rent, the appeals court found that the lower court had erred in its calculations and remanded the damages portion back to the court for adjustments. This trial court decision was the subject of a January 24, 2014 post on this blog. It is anticipated that the publisher will seek to appeal this latest decision.  Espejo v. The Copley Press Inc., No. D065397 (Cal. Ct. App. July 7, 2017).

NO CLASS CERTIFICATION IN IC MISCLASSIFICATION CASE FOR BAKED GOODS DISTRIBUTORS. A California federal district judge has denied a motion for class certification in an IC misclassification class action brought under California labor laws by 150 California distributors who delivered baked goods under brands such as Wonder, Tastycake, and Nature’s Own to retail stores, restaurants, fast food businesses, and other customers of Flower Foods, Inc. and its subsidiaries. In denying class certification, the Magistrate Judge concluded that the case was not suitable for class action treatment because individualized issues existed over how to determine which of the 150 distributors personally serviced their routes, including when and for how many hours they worked, and whether the distributors operated distinct businesses, including whether they performed deliveries for other companies. According to the decision, the existence of those issues “prevents common questions of fact or law from predominating and class-wide treatment is not superior to individual actions.” Soares v. Flower Foods, Inc., No. 15-cv-4918 (N.D. Cal. June 28, 2017).

CREDICO SUED BY SALES MARKETING AGENTS IN IC MISCLASSIFICATION CLAIM.  Sales marketing agents have filed a new, nationwide collective action complaint in New York federal court against direct sales company, Credico (USA) LLC, alleging minimum wage and overtime compensation violations under the FLSA due to alleged misclassification as independent contractors. The collective action complaint alleges that “Credico has perpetrated a nationwide pyramid scheme whereby a network of over 200 companies across the country operate as Credico’s subcontractors, and contract with agents who provide face-to-face marketing services for Credico’s clients.” The agents’ lawsuit claims that Credico and the subcontractors for whom they worked are joint employers because there is allegedly substantial control exercised by Credico (and by the subcontractors) over the agents, who claim that they are employees and not independent contractors. Huffman v. Credico (USA) LLC, No. 17-cv-4242 (S.D.N.Y. June 6, 2017).

DEVELOPMENTS IN RIDE-SHARING INDUSTRY

Arbitration Compelled in Proposed IC Misclassification Class Action in Illinois. Uber has once again prevailed in compelling arbitration in a proposed misclassification class action.  An  Illinois federal court has ruled that drivers providing services to Uber customers using its app must arbitrate their claims where they voluntarily entered into valid agreements containing enforceable arbitration provisions and had not opted out of the arbitration clause when afforded an opportunity to do so. The arbitration provisions that the drivers signed included a class action waiver. The complaint against the company alleged that Uber had denied the drivers wages, tips, overtime pay and business expense reimbursements, allegedly in violation of the Illinois Wage Payment and Collection Act, the Illinois Minimum Wage Law, and the Fair Labor Standards Act (“FLSA”), all arising from their alleged classification as independent contractors. The state claims had been brought on behalf of the plaintiff driver and a proposed class of Illinois drivers, while the FLSA claims had been brought on behalf of the driver and a prospective nationwide collective class (except for California and Massachusetts drivers.) The court held that “[p]ursuant to that arbitration agreement, of which plaintiff did not opt out, the court finds that the arbitrator is responsible for determining the threshold issue of whether plaintiff’s relationship with Uber is that of employee or independent contractor.” In that regard, the district court found enforceable the delegation clause which “is an agreement to arbitrate gateway questions such as ‘whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.’” The court stated that “the operative delegation clause provides that the Arbitration Provision applies to all disputes between plaintiff and defendant, including any disputes arising out of or related to plaintiff’s relationship with Uber.” Olivares v. Uber Technologies Inc., No. 16-cv-6062 (N.D. Ill. July 14, 2017).

New IC Misclassification Lawsuit Twist: Filed Only Against CEO and Chairman of the Board. Uber’s former CEO as well as its current Chairman of the Board were sued individually for alleged independent contractor misclassification by drivers who already had filed lawsuits against the ride-sharing technology company. As more fully discussed in our blog post of June 23, 2017, this new lawsuit might well be an attempt by the plaintiffs’ lawyers to avoid the arbitration provisions in the independent contractor agreements that most Uber drivers have signed with the company. It is likely that the individual defendants will argue that they too are covered by the arbitration provisions, and either a court or arbitrator may one day decide that issue. The basis for the lawsuit against the two individuals is the 2011 California Independent Contractor Law that imposes liability on companies that misclassify workers as independent contractors, but also imposes “joint and several liability” on persons who knowingly advise an employer to misclassify such individuals to avoid employee status. The former CEO and current Board Chairman will likely seek to use an exemption in the joint and several liability provision for anyone “who provides advice to his or her employer.” James v. Kalanick, No. BC666055 (Super. Ct. Los Angeles County, CA June 22, 2017).

North Carolina Federal Court Grants Conditional Certification in Proposed Nationwide Ride Sharing Collective Action by Drivers Who Have Opted Out of Arbitration. A federal court judge in North Carolina has granted a motion by drivers for conditional class certification in a proposed  nationwide collective action against Uber alleging wage and hour violations under the federal Fair Labor Standards Act. The proposed collective action alleges that the company  incorrectly classified the drivers as independent contractors; it seeks to cover “[a]ll natural persons who have worked or continue to work as an Uber Driver anywhere in the United States and have opted out of arbitration.”  By virtue of this decision, drivers who had opted out of the company’s standard arbitration clause would be afforded the opportunity to opt into the collective action.  A spokesman for Uber reportedly stated that the company was “disappointed with this decision, particularly because a Federal District Court recently denied conditional certification in another case” last month in Florida. The court’s order itself noted that  the requirements for conditional certification are “modest.” In cases of this nature, companies have a right at a later point in a litigation to file a motion to decertify the class; at that time, the class representatives are required to meet a rigorous standard if they wish to proceed further in the case as a collective or class action. As an Uber representative reportedly stated: “We look forward to challenging whether this case should proceed as a collective action, as well as litigating the merits of these claims.” Hood v. Uber Technologies, Inc., No. 16-cv-998 (M.D.N.C. July 12, 2017).

MICHIGAN FEDERAL COURT APPROVES $6.55 MILLION CLASS ACTION SETTLEMENT IN ADULT CLUB IC MISCLASSIFICATION CASE. A Michigan federal district court judge overrules objections and approves a $6.55 million nationwide class action settlement between Déjà Vu’s chain of gentlemen’s clubs and 28,177 exotic dancers in a lawsuit alleging misclassification as independent contractors and not employees. The class and collective action suit, filed nine years ago, alleged violations of the FLSA and state wage and hour laws, including failure to pay minimum wage, requiring dancers to split gratuities , and deducting employee wages through rents, fines, and penalties. In exchange for releasing their claims, the dancers will be afforded injunctive relief and either a single cash payment or remuneration in the form of a rent credit or dance fee payment to offset fees charged them by the club. Additionally, the settlement requires the club to provide the dancers with an “Entertainment Assessment Form,” which is described as “a questionnaire designed to ensure that Defendants accurately categorize each dancer as an independent contractor or employee based on the economic realities test.” The injunctive relief also requires the club to offer each class member the opportunity to cancel their current independent contractor status and accept a position as an employee. The settlement provides $1.2 million in attorneys’ fees to class counsel and $100,000 for resolution of California Private Attorneys General Act claims. Doe v. Déjà vu Services, Inc., No. 16-cv-10877 (E.D. Mich. June 19, 2017).

Regulatory and Administrative Actions (5 matters)

SECRETARY OF LABOR WITHDRAWS OBAMA-ERA MISCLASSIFICATION GUIDANCE.  Alexander Acosta, the newly-confirmed Secretary of Labor in the Trump Administration, has withdrawn the U.S. Labor Department’s independent contractor misclassification guidance issued in 2015. As discussed in our June 7, 2017 blog post, Labor Secretary Acosta announced in a News Release that day that he had withdrawn the Labor Department’s formal guidance on two significant issues faced by businesses: independent contractors and joint employment. Although the withdrawal of those items is likely to be portrayed by many as a major shift in enforcement position by the U.S. Labor Department, it is unlikely to change the legal landscape of independent contractor misclassification, which is now waged mostly in private class action lawsuits and administrative proceedings, not by the Department of Labor.

MASSACHUSETTS ATTORNEY GENERAL CRACKS DOWN ON DOOR-TO-DOOR MAGAZINE SALES COMPANY THAT ALLEGEDLY LURED LOW-WAGE EARNING WORKERS INTO THE STATE BUT CLASSIFIED THEM AS IC’S.     Massachusetts Attorney General Maura Healey announces in News Release dated June 5, 2017 that she has assessed a door-to-door magazine sales company, Unified Doers Management Group, LLC, over $150,000 in penalties for independent contractor misclassification, including failure to pay wages in a timely manner, failure to pay the minimum wage, failure to keep accurate records and failure to furnish a pay stub. The Attorney General stated, “This company recruited low-income individuals from across state lines and lured them in with promises of successful jobs in direct sales, only to send them home without a paycheck for their work. This is not acceptable and this action should send a message to companies that if they want to do business in Massachusetts, they need to abide by our laws and treat their employees fairly.” According to the News Release, the investigation revealed that the company recruited young workers and transported them to Massachusetts communities to sell a variety of magazines door-to-door. The company guaranteed that if a job did not work out, they would be given money to return to their homes; however, when sales quotas were not met by the worker, the company terminated its relationship with the worker, leaving them without any earned wages and no way to return home.

NLRB FINDS HIGH SCHOOL LACROSSE REFS TO BE EMPLOYEES, NOT INDEPENDENT CONTRACTORS, IN BID BY UNION. The National Labor Relations Board has issued a decision that lacrosse officials providing referee services for the Pennsylvania Interscholastic  Athletic Association (PIAA) are employees under the National Labor Relations Act and not independent contractors. The PIAA is a non-profit corporation whose primary purpose is to promote uniformity in their interscholastic athletic competitions of its 1,611 member schools in Pennsylvania. The petitioner in the case, Office and Professional Employees  International Union, has sought to represent a unit of 140 officials that officiate at junior and senior high schools lacrosse games within the greater Pittsburgh area. In reaching its decision, the NLRB applied the analysis used in the Board in its FedEx decision, considering ten factors as well as whether the lacrosse official rendered services as an independent business with actual entrepreneurial opportunity for profit and loss. The NLRB concluded that the officials were employees because the PIAA had pervasive control over the means and manner of the work due to its comprehensive set of rules; the officials were not engaged in a distinct occupation or business because they performed their functions in furtherance of  PIAA’s core operations; the PIAA could not function without them; the PIAA tightly controlled the work through mandatory adherence to rules, policies, and procedures that evidenced direction by PIAA; the officials’ skills were integral to the PIAA’s ability to accomplish its core mission; the PIAA controlled the compensation process; the officials did not render officiating services as part of their own enterprise as they were not permitted to hire others to help perform their tasks and they did not control most scheduling or other important business decisions;  and the officials were constrained in their ability to earn more money by PIAA’s limiting each official to one geographic chapter in the state.

This case bears special note for two reasons: First, the FedEx decision on which the NLRB relied has been repeatedly rejected by the D.C. Circuit Court, as noted in my blog post of March 7, 2017. See FedEx Home Delivery, 361 NLRB No. 55 (2014), enf. denied, 849 F.3d 1123 (D.C. Cir. 2017), pet. for rehearing en banc denied, No. 14-1196 (June 23, 2017).  Second, NLRB Chairman Miscimarra filed a sharp dissenting opinion, disagreeing with the NLRB’s majority on three points: (a) whether the NLRB even has jurisdiction over the PIAA to the extent it is a “political subdivision” of the Commonwealth of Pennsylvania; (b) whether the NLRB should, in any event, decline to exercise jurisdiction over state interscholastic sports governing bodies; and (c) that the officials are not employees but rather independent contractors. By the time this case is reviewed by a federal court of appeals, the composition of the NLRB may be changed due to appointments to vacancies by the current Republican Administration; thus, the decision to permit the union to proceed with its petition to represent the lacrosse officials may be overturned by the time the PIAA might otherwise become legally obligated to bargain with the union over terms and conditions of employment for the refs.  Pennsylvania Interscholastic Athletic Association, Inc. and Office and Professional Employees International Union, Petitioner, Case 06-RC-152861 (July 11, 2017).

OAKLAND CONSTRUCTION COMPANY ASSESSED $3.5 MILLION FOR IC MISCLASSIFICATION. The California Labor Commissioner’s Office has assessed an Oakland, California construction company, Attic Pros, $3.5 million in allegedly unpaid wages and penalties for labor law violations allegedly due to misclassification of 119 workers. In a News Release dated July 25, 2017, Labor Commissioner Julie A. Su stated: “This is an egregious case of wage theft, with workers misclassified and denied a just day’s pay. My office enforces California’s labor laws to stop employers willing to cheat their employees of their pay as a means to gain an unfair advantage over their law-abiding competitors.”  According to the News Release, the investigation by the Labor Commissioner’s Office was triggered by notice it received of a proposed Private Attorneys General claim.  The Labor Commissioner determined that the employees worked 10-14 hour days up to six days per week and were paid a daily rate regardless of the actual number of hours worked, resulting in their allegedly being paid less than the minimum wage due to employees. The company was ordered to pay $191,400 in unpaid minimum wages, $321,000 in unpaid overtime wages, $191,400 in liquidated damages on unpaid minimum wages, $1,405,350 in waiting time penalties, and $1,481,600 in civil penalties for minimum and overtime wage violations, wage statement violations, and employee misclassification.  Decisions by the Labor Commissioner’s Office are subject to appeal.

NEW YORK STATE UNEMPLOYMENT APPEAL BOARD FIND RIDE-SHARING DRIVERS TO BE EMPLOYEES FOR UNEMPLOYMENT PURPOSES. A New York State Administrative Law Judge has upheld three initial determinations by the New York Department of Labor that the three drivers providing services to riders using the Uber ride-sharing app, as well as all others similarly situated in New York, are employees and not independent contractors. The ALJ found that although there were some indicia of the drivers’ independence – the drivers “set their own work schedule; selected their work areas; were not obliged . . . to report their absences or other leaves; and were not provided fringe benefits . . . – facts supported a determination that the drivers were, on balance, employees under the New York unemployment insurance law.  The ALJ found that the company “exercised sufficient supervision and control over substantial aspects of their work as Drivers. Uber has reportedly stated that it plans to appeal the decision. A spokesperson for the company stated: “We are confident we will prevail — the Department of Labor has already ruled that several drivers are independent contractors and a federal court has deemed all black car drivers to be independent contractors,” adding that the ALJ did not permit other drivers to testify in the proceeding, leaving three drivers “hand-picked” by the New York Taxi Workers Alliance to make the case. According to the company, it was “denied our due process rights in this matter.” Uber Technologies, Inc., ALJ Case No. 016-23858 (June 9, 2017).

Legislative Initiatives (2 matters)

NEW GIG ACT OF 2017 INTRODUCED IN U.S. SENATE. U.S. Senator John Thune (R-S.D.) introduced the New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017 (S. 1549) on July 13, 2017. According to a Press Release issued by Senator Thune’s office that same day, this legislation addresses the classification of workers as independent contractors or employees and creates a safe harbor for those who meet a set of objective tests that would qualify them as ICs, both for income and employment tax purposes. The  safe harbor is reportedly intended to ensure that the service provider (worker) would be treated as an independent contractor and not an employee; the service recipient (customer) would not be treated as the employer; and in the gig economy context where an internet platform or app facilitates the transactions and payments, that third party would also not be treated as the employer. The proposed objective tests involve three areas: the relationship between the parties, the location of the services or means by which the services are provided, and a written contract. The bill will preserve the existing common law test for determining IC/employee status for those workers who do not meet the objective criteria needed for the safe harbor.  In addition, the bill proposes various reporting rules and provisions for retroactive reclassification where service providers or service recipients mistakenly believe they qualify for the safe harbor but fail to meet one or more of the objective criteria. Senator Thune stated in the Press Release that, “Today’s fast-growing ‘gig economy’ has made it easier for people to offer unique services, like home repair and cleaning, child care, food delivery, or ride sharing, through easy-to-use mobile applications that can be opened with a simple swipe of a finger. While these gig economy companies have created thousands of new jobs, they’ve also faced new challenges when it comes to how the service providers are classified by the IRS.”

It is notable that this proposed legislation has received scant attention, and even if it gains traction in Congress, it would only apply to the test for independent contractor status for certain “gig” workers under the tax laws enforced by the Internal Revenue Service; it would have no application to the test for IC status under the federal wage and hour law (the Fair Labor Standards Act), the National Labor Relations Act, or any other federal law – and of course no application to IC laws in any of the 50 states.

NEW YORK CITY RELEASES REGULATIONS IMPLEMENTING ITS INDEPENDENT CONTRACTOR PAYMENT PROTECTION LAW. The New York City Department of  Consumer Affairs (DCA) has published its final rules, effective July 24, 2017, implementing the Freelance Isn’t Free Act, the first-in-the-nation independent contractor payment protection law. (The final rules can be found at the following link, after the text of the Act.)  As discussed more fully in our blog posts of November 16, 2016 and May 9, 2017, New York City’s Freelance Isn’t Free Act went into effect on May 15, 2017.  It is the only law in the nation regulating the relationship between independent contractors and those who retain their services, requiring that IC agreements provide minimal terms, and protecting ICs from non-payment of their fees. Introducing the rules on its website, the DCA states: “These rules clarify provisions in the law, establish requirements to implement and meet the goals of the law, and provide guidance to covered hiring parties and protected freelance workers.”  The Rules provide, among other things,  for an expansion of the term “adverse action” to include actions taken not only “by a hiring party, but by their actual or apparent agent or any other person acting directly or indirectly on behalf of a hiring party”; that a freelance worker is entitled to the protections of the Act regardless of immigration status; that a freelance worker may establish a claim for retaliation where the worker shows that the exercise or attempt to exercise any right under the Act was a motivating factor for an adverse action; that agreements entered into between the worker and the hiring party shall not include any prospective waivers or limitations of rights under the Act; and that if the contract includes a waiver or limitation regarding the worker’s right to participate in or receive money/other relief from any class, collective, or representative proceeding, such term shall be void. The new Rules, however, fail to address or clarify a number of uncertainties in the law that have been pointed out in the above blog posts, such as whether the law applies to independent contractors who provide services in New York City but do not use a mailing address in the City; whether it applies to service recipients who contract for services with a non-New York City independent contractor; whether a freelancer loses the protections of the law if he or she uses one or more helpers or subcontractors to assist in any manner with the services provided; and when services are deemed complete, which initiates a service recipient’s payment obligation.

By Richard Reibstein

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Posted in IC Compliance

Uber’s Former CEO and Current Chairman of the Board Sued Personally for Independent Contractor Misclassification – Is This an Effort by the Drivers to Circumvent Uber’s Arbitration Agreements?

Yesterday, the lawyers representing drivers who have sued Uber in California commenced another lawsuit on behalf of drivers alleging that the company misclassified them as independent contractors instead of employees. This lawsuit, though, is not against the company itself; rather, it is against Travis Kalanick, the former CEO and a current Board member, and Garrett Camp, the Chairman of the Board of Uber Technologies, Inc.

It also appears that this new lawsuit may well be an attempt by the drivers to avoid the arbitration provisions in the independent contractor agreements that most Uber drivers have signed with Uber – much the same way that Gretchen Carlson sought to avoid the arbitration provisions in her employment agreement with Fox News when she decided to only sue Roger Ailes personally. Undoubtedly, Kalanick and Camp will likely argue that they are covered by the Uber arbitration clause, and it will be up to a court (or an arbitrator) to decide that issue.

The case is James v. Kalanick, No. BC666055 (Super. Ct. Los Angeles County, CA, June 22, 2017), and is assigned to Judge Maren E. Nelson.

The California Law in Question – Does It Apply?

The law under which the individual defendants are being sued is the California Independent Contractor Law, enacted in 2011.  (Cal. Labor Code § 226.8)  It prohibits “willful misclassification” of employees as independent contractors.  That law contains a provision that not only imposes liability on companies who are found to have “willfully” misclassified workers as ICs, but also imposes “joint and several liability” on persons who knowingly advise an employer misclassify such individuals to avoid employee status.  (Cal. Labor Code § 2753)  However, that law exempts from liability anyone “who provides advice to his or her employer.” It is likely, therefore, that the former CEO will argue that he is exempt from joint liability, and the current Chairman of the Board will likely make the same argument in his role as a Board member, even if Uber was not technically his “employer.”

The law is unclear as to whether “advisors” can be jointly liable with a business they “advise” unless the company is also sued, and in this latest lawsuit the company was not sued.

The California Independent Contractor Law requires “willful” misclassification, which is defined to mean “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” That is a higher standard than that imposed by the laws under which Uber has currently been sued and may be quite challenging for the plaintiffs to prove.

Whether or not this case is litigated on the merits – in court or in front of an arbitrator –both individual defendants would likely argue that neither engaged in any misclassification and especially not “willful” misclassification. Indeed, the issue of whether Uber drivers are employees or independent contractors is one where the courts have concluded that there are cogent factual arguments in favor of independent contractor status while at the same time there are facts in favor of employee status. That is the reason why a federal district court denied summary judgment in another case involving the company, finding that there were material issues of fact that had to be decided by a jury.  Essentially, this may be one of those types of IC misclassification cases in the “gray” area, although lawyers for both sides would presumably contend that the facts overwhelmingly favor their respective positions.

Takeaways for Other Businesses Using Independent Contractors in California and Elsewhere

Companies that find themselves in the “gray” area, and there are tens of thousands of such companies around the country, may wish to evaluate their current degree of IC compliance and then take steps to considerably enhance their level of compliance.

Some companies have chosen to accomplish this through a process such as IC Diagnostics,™ which offers alternatives to businesses that wish to minimize their exposure to independent contractor misclassification liability. One such alternative is restructuring, re-documenting, and re-implementing a company’s IC relationships in a manner that elevates a business’s level of compliance, consistent with the underlying business model, in a customized and sustainable manner. This is typically the preferred methodology chosen, as it can often be accomplished with little or no additional operating costs.

Companies whose IC compliance is already at a high level can also benefit considerably by some restructuring, re-documentation and/or re-implementation of their IC relationships. The IC legal landscape has been for many years and remains in flux.  Structures and agreements that once seemed safe may contain legal cracks that need repair.  Take, for example, FedEx, a company with top in-house and outside counsel.  Its independent contractor agreement, which may at one time have been regarded as state-of-the-art, was recently found by two federal appellate courts to have created an employee relationship with its Ground Division drivers, instead of the IC relationship for which it was intended to establish.

Other alternatives may include reclassification (either voluntarily or through a governmental program or arrangement) or redistribution through the use of a knowledgeable fee-based workforce management firm. These alternatives, though, can involve a considerable cost – and they are not risk-free if not accomplished in an effective manner.

Another way in which such companies in the “gray” area (as well as those already at a high level of IC compliance) can seek to minimize the likelihood of class action lawsuits is with a state-of-the-art arbitration clause with class action waiver, drafted in a manner that avoids the legal issues presently under review by the U.S. Supreme Court.

Written by Richard Reibstein

Posted in IC Compliance

May 2017 Independent Contractor Misclassification and Compliance News Update

This update of May 2017 developments in the area of independent contractor misclassification and compliance highlights three key legislative developments: the enactment of two new laws (one in New York City and the other in Florida) and the introduction of a bill in Congress.  As discussed below, these legislative initiatives (unlike many prior bills that have been enacted by state legislatures over the past ten years) are not efforts to crack down on companies that misclassify employees as ICs, but rather legislative acknowledgements that legitimate independent contractors play an important role in the U.S. economy and should be protected under the law.  How? These legislative initiatives seek to guarantee ICs a right to collect their fees, provide funding for studies to determine how ICs can enjoy workplace benefits they can carry from one gig to another, and simplify the test for IC status in one industry that has been the subject of dozens of IC misclassification lawsuits.

These legislative developments, of course, do not mean that plaintiffs’ class action lawyers and state workplace agencies have lessened their efforts to challenge companies alleged to have misclassified employees as independent contractors. Indeed, this May update includes court cases and regulatory enforcement actions against companies that allegedly mistreated workers by classifying them as ICs in violation of state or federal law.  For businesses that use workers whom they classify as ICs, the need for compliance with existing independent contractor laws has not diminished.  Many companies using ICs that wish to enhance their compliance with IC laws have chosen to take steps to minimize the likelihood of legal challenges by using a process such as the one more fully described in our White Paper.

In the Courts (3 cases)

PRO FOOTBALL CHEERLEADERS WIN PARTIAL SUMMARY JUDGMENT THAT THEY WERE MISCLASSIFIED AS IC’S BY TWO COMPANIES FOUND TO BE THEIR JOINT EMPLOYER.  In 2014, the Buffalo Jills cheerleaders sued the National Football League, the Buffalo Bills professional football franchise, and other companies alleging that the defendants had misclassified them as independent contractors in violation of the state labor laws, including the minimum wage law. The cheerleaders claimed that they were not paid for all hours worked for each season, were not reimbursed for business expenses in a timely fashion, and had unlawful deductions taken from their pay. In addition, they alleged that the Bills football team and others exercised direction and control over the cheerleaders by requiring them to attend all pre-season, regular, and post-season home football games; attend and participate in all practices, rehearsals, photo sessions, and meetings; participate in a youth cheerleading program; follow a Buffalo Jills handbook; and be subject to monitoring of their activities and behavior, with disciplinary consequences for noncompliance. A New York State court last month granted partial summary judgment in favor of former members of the Jills, concluding that, as a matter of law, Cumulus Radio Company and Stejon Productions Corporation, which reportedly managed the Buffalo Jills under an agreement with the Buffalo Bills, were joint employers of the cheerleaders. The court, however, denied summary judgment as to whether the Buffalo Bills football team was also a joint employer, concluding that there were questions of material fact that remained to be tried regarding the role of the football team in relation to the services provided by the Jills.  Jaclyn S. v. National Football League, No. 804088/2014 (Sup. Ct. Erie County N.Y. May 18, 2017).

FEDERAL COURT AFFIRMS AUTHORITY OF CALIFORNIA LABOR COMMISSIONER TO AWARD OVER $950,000 AGAINST CARTAGE COMPANIES.  A California federal court has upheld the authority of the California Labor Commissioner to issue a decision and award of $958,000 to five port and rail truck drivers due to their misclassification as independent contractors by XPO Cartage Inc.  The amounts for each driver ranged from just under $100,00 to nearly $300,000 as reimbursement for expenses and unlawful deductions, as well as attorneys’ fees and costs. According to a News Release issued by the California Department of Industrial Relations on May 23, 2017, the federal judge ruled that the cases were not pre-empted by the Federal Aviation Administration Authorization Act and that all five drivers were entitled to reimbursements described above. California Labor Commissioner Julie A. Su stated: “The United States District Court’s decision in this case vindicates the rights of five employees who have sought for years to recoup the deductions unlawfully withheld from their wages due to being misclassified as independent contractors. My office is dedicated to ensuring workers are paid what they are due under the law and ensuring workers are properly classified.” Alba v. XPO Cartage, Inc., No. 15-cv-6059 (May 16, 2017).

UBER DRIVERS DENIED RIGHT TO CONSOLIDATE THEIR NORTH CAROLINA, TENNESSEE, AND FLORIDA IC MISCLASSIFICATION SUITS.  Drivers for Uber in Florida who had opted out of their arbitration agreements with the ride-sharing company were dealt a setback by a federal multidistrict litigation panel, which refused to grant their request to consolidate two other IC misclassification lawsuits in North Carolina and Tennessee with their IC lawsuit in Florida.  Uber and the plaintiffs in the two other states opposed the motion to consolidate the cases, each of which included claims under state laws. In denying the motion to centralize the three cases in Florida, the panel held that state-specific issues and the fact that the cases were in different procedural stages militated against consolidation in a single multidistrict litigation.  The panel suggested instead that voluntary coordination by the plaintiffs was preferable to a multidistrict consolidated proceeding. The decision last month was similar to the panel’s decision in 2016 to consolidate IC misclassification lawsuits in 17 other federal courts. Rojas v. Uber Technologies Inc., No. 16-cv-23670 (S.D. Fla.), MDL No. 2784 (May 30, 2017).

Regulatory Initiatives and Administrative Matters (1 matter)

IDAHO REPORTS IC MISCLASSIFICATION FINES OF $240,000 IN 2016.  The Idaho Department of Labor assessed fines in 2016 of $240,000 against employers found to have misclassified workers as independent contractors. As reported in a May 9, 2017 article published by the Idaho Business Review, a total of 2,489 ICs were reclassified as employees by 524 Idaho employers. Ryan Linnarz of the Idaho Industrial Commission reportedly stated that, “Courts tend to favor employee/employer relationships when there is a dispute over a classification, so it is important to make sure you know what to look for when you want to hire an independent contractor.”

Legislative Initiatives (3 matters)

FLORIDA ENACTS RIDE-SHARING LAW WITH RELAXED TEST FOR IC STATUS.  On May 9, 2017, Florida governor Rick Scott signed the Transportation Network Companies Act (HB221), which designates drivers for ride-sharing companies in the on-demand or gig economy as “independent contractors” as long as the “transportation network company” (“TNC”) meets four criteria that are currently met by Uber, Lyft, and other similar companies.  As discussed more fully in our blog post of May 11, 2017, this law essentially creates a safe-harbor for ride-sharing companies from liability due to misclassification of employees as independent contractors under the labor and employment laws in Florida, including laws governing minimum wages, unemployment, workers’ compensation, and workplace discrimination. The law creates a four-pronged test for IC status in this industry: first, the TNC may not unilaterally prescribe specific hours during which the driver must be logged on to the TNC’s digital network; second, the TNC may not prohibit the driver from using digital networks from other TNCs; third, the TNC may not restrict the driver from engaging in any other occupation or business; and fourth, the TNC and driver must agree in writing that the driver is an independent contractor with respect to the TNC.

NEW YORK CITY LAW PROTECTING INDEPENDENT CONTRACTOR FEE PAYMENTS GOES INTO EFFECT WITH DOUBLE DAMAGES PROVISIONS.  NYC’s Freelance Isn’t Free Act went into effect on May 15, 2017.  It is the first law in the nation regulating the relationship between independent contractors and those who retain their services and protecting ICs from non-payment of their fees. The new law gives independent contractors a right to sue for double damages if they are not provided with a written contract containing specified terms and are not paid by the date provided in the agreement or, if not so specified, within 30 days after completion of services under the contract. 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 parties’ contract is to be “reduced to writing” and the “written contract” must include at least the following five terms: the parties’ names and mailing addresses, an itemization of services to be provided, the value of services to be provided pursuant to the contract, the rate and method of compensation, and the date when the “hiring party” must pay the contracted compensation or the “mechanism by which such date will be determined.” As we commented in our blog posts of November 16, 2016 and May 9, 2017, while the new law has laudable objectives and many positive attributes, it is unclear as to precisely whom it covers and whom it regulates. Further, as described in those blog posts, the new law may well have unintended yet serious consequences for some New York City-based independent contractors and for businesses that retain them. We also noted in those blog posts that businesses would be well served to include certain contractual provisions in their written IC agreements that, while not required by the new law, would better protect companies from the law’s double damages penalty.

PORTABLE BENEFITS BILL FOR IC’S INTRODUCED IN CONGRESS.  On May 25, 2017, two identical bills were introduced in Congress to better serve individuals who earn a living as independent contractors.  The bill, called the “Portable Benefits for Independent Workers Pilot Program Act,” which was introduced by Senator Mark Warner (D-Va.) and Representative Suzan DelBene (D-Wash.), would create a $20 million fund for states, local governments, and non-profit organizations to study “broad innovation and experimentation with respect to portable benefits” for independent workers.  The term “portable benefits” is defined to mean work-related benefits “that allow a[n independent] worker to maintain the benefits upon changing jobs,” and includes contributions made by the eligible independent worker and/or by an entity (or multiple entities) for whom the independent worker is performing services. These benefits would be those “commonly provided to traditional full-time employees, such as workers’ compensation, skills training, disability coverage, health insurance coverage, retirement saving, income security, and short-term saving.” Under the bill, two types of grants would be available: $5 million to evaluate and improve the design and implementation of existing models or approaches for providing portable benefits; and $15 million to study the design, implementation, and evaluation of new models or approaches for providing such benefits. Grants will be awarded by the Secretary of Labor, who is directed by the bill to focus on proposed models or approaches that can be “replicated on a large scale or at the national level.” As we noted in our May 25, 2017 blog post, instead of focusing on sponsoring legislation to curtail the use of independent contractors and crack down on companies that misclassify them, the thrust of this proposed legislation by the two Democratic members of Congress is to recognize that legitimate independent contractors serve an important place in the U.S. economy and should be eligible for benefits and be able to carry those benefits from one gig to the next.

Written by Richard Reibstein.

Posted in IC Compliance

Labor Department Withdraws Independent Contractor Misclassification Guidance Issued in 2015: What Does this Mean for Businesses Using ICs?

Earlier today, the U.S. Department of Labor issued a short, 3-sentence News Release where the recently-confirmed Labor Secretary, Alexander Acosta, announced that he has withdrawn the Labor Department’s formal guidance on two key issues facing businesses: joint employment and independent contractors.  The first guidance on joint employment, which was issued in 2016, had caused an uproar in the business community, especially in the area of franchisors alleged to be joint employers with franchisees.  The independent contractor guidance was issued on July 15, 2015 in an Administrator’s Interpretation.  It was not controversial; in fact, while it was portrayed by many commentators as a dramatic move by the Department of Labor to crack down on businesses that misclassify employees as independent contractors, it did not actually make any meaningful changes in the Labor Department’s legal position.

This action today by the Labor Secretary Acosta is likely to be portrayed by many as a major shift in enforcement position of the U.S. Labor Department.  It is, however, unlikely to change the legal landscape of IC misclassification, which is now waged mostly in private class action lawsuits and state administrative proceedings – not by the Department of Labor.

The decision by Secretary Acosta to withdraw the IC guidance should not be viewed as a signal to businesses that the U.S. Labor Department will now abandon its enforcement efforts against companies that are flagrantly violating the federal labor laws or exploiting low-paid workers, but it may signal that the Labor Department will not expend its limited resources against those companies that have done little more than fail to structure and document their IC relationships in a compliant manner.

When the 2015 Administrator’s Interpretation was issued, I published a blog post that undertook a comprehensive comparison of the content of the new Interpretation with the Labor Department’s previously stated position on IC misclassification. In that blog post, I expressed the view that the Administrator’s Interpretation was simply a restatement of its long-standing six-factor test, which had resided in one form or another on the Labor Department’s website for many years (and is still there today).  I noted, however, that those six factors were not the only factors that the courts consider in determining IC status under the federal wage and hour law; instead, as the Labor Department had acknowledged on its website in an understated manner, “[t]he Supreme Court has indicated that there is no single rule or test for determining whether an individual is an employee or independent contractor for purposes of the FLSA” and “the courts look at the totality of the working relationship . . . , meaning that all facts relevant to the relationship between the worker and the employer must be considered.”

I concluded that “[a]lthough advocates of expanded employee rights will undoubtedly laud the Labor Department for its bold action in announcing the new guidelines, they should readily acknowledge that nothing in the law has really changed.” I added: “Indeed, this new Interpretation cannot change the law; it simply sets forth the Labor Department’s position on the test used by the courts in determining independent contractor status under the federal overtime and minimum wage laws.” My takeaways in that blog post were two-fold: first, the Interpretation was an oversimplification of the law; and second, there remained no reason why most businesses using ICs could not utilize strategies and tools to restructure, re-document, and re-implement their IC relationships in a manner that enhanced compliance with the law, as articulated by the legislature and the courts.

The withdrawal of the 2015 guidance on IC misclassification was expected once a new Labor Secretary was nominated by the President and confirmed by Congress. In the blog post shortly after the election, I addressed the impact of President Trump’s election on IC misclassification, concluding that “while it is likely that the U.S. Department of Labor may dial down somewhat their enforcement efforts in this area when the 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.”

My conclusion was based on the fact that 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. I also observed that during the eight years of the Obama presidency, one of the federal government’s initiatives in this area had significant traction with state workforce agencies: the Labor Department’s program of entering into joint/coordinated enforcement efforts with the states. I noted that since the U.S. Department of Labor announced its “Misclassification Initiative” in September 2011, 35 state labor departments had signed a Memorandum of Understanding (MOU) with the U.S. Department of Labor. Of those 35 states, most if not all will  likely continue enforcement of their IC laws.

I also commented in that post-election blog post that the Obama Administration’s Labor Department had mostly 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.

My “Takeaway” in that blog post offered some practical advice for companies that currently were using or planned to use ICs to supplement their workforce or render services to their customers – don’t view Mr. Trump’s election as an opportunity to misclassify employees as ICs. Rather, I stated, such companies should expect legal challenges to continue (a) from state workforce agencies, who will likely continue their crackdown on the misclassification of 1099ers and other types of ICs that legally should be treated as W-2 employees; and (b) from plaintiffs’ class action lawyers, who will continue to target companies that fail to structure, document, and implement their IC relationships in a manner that complies with applicable IC laws.

I concluded by noting that businesses (especially those in the on-demand, gig, and digital economies) that utilize ICs would be wise to focus on taking steps to enhance their compliance with applicable IC laws. Companies interested in enhancing their compliance with IC laws can do so in a variety of ways, such as one of those detailed in my White Paper on minimizing IC misclassification risks, including the use of  a process such as IC Diagnostics™.  That is a process that assesses IC compliance under applicable law and offers alternative approaches to enhancing IC compliance, including restructuring and re-documenting the IC relationship in a more compliant manner, and implementing the IC relationship in a customized and sustainable fashion.

Written by Richard Reibstein

Posted in IC Compliance

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

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

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

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

What the Bill Would Do

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

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

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

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

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

What the Bill Would Not Do

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

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

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

Analysis and Takeaways

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

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

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

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

Written by Richard Reibstein

Posted in IC Compliance