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

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

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

Who does the new law cover?

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

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

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

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

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

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

What terms must the written contract contain?

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

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

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

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

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

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

What are the payment obligations under the new law?

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

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

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

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

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

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

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

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

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

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

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

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

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

Are there any other penalties in the law? 

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

Written by Richard Reibstein.

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

Posted in IC Compliance

April 2017 Independent Contractor Misclassification and Compliance News Update

April was a red-hot month for independent contractor misclassification cases. We report below on 11 cases in the courts and two before administrative agencies involving:

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

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

In the Courts (11 cases)

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

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

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

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

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

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

OHIO JURY FINDS INSURANCE AGENTS WERE MISCLASSIFIED AS IC’S IN ERISA CLASS ACTION. Nearly 7,000 insurance agents were misclassified as independent contractors according to an Ohio jury, which rendered an advisory verdict against Wisconsin-based American Family Insurance Company in a class action seeking employee retirement benefits under ERISA. Judge Donald Nugent, who presided over the advisory jury trial, has yet to adopt the jury’s decision and issue a formal ruling. If the judge accepts the jury’s finding in a follow-up decision that is expected in 2-3 months, American Family could be required to fund retirement packages in compliance with ERISA for 6,978 current and former agents nationwide. A lawyer representing the class reportedly stated that the cost to American Family Insurance could approach $1 billion. Companies can typically avoid this type of ERISA exposure for pension benefits when steps that have been approved by the courts are taken by a business in advance of a lawsuit under ERISA. Jammal v. American Family Insurance Co., No. 13-cv-00437 (N.D. Ohio Apr. 18, 2017).

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

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

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

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

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

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

Regulatory and Administrative (2 cases)

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

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

Written by Richard Reibstein.


Posted in IC Compliance

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

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

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

The Second Circuit’s Decision

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

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

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

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

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

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

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

Analysis and Insights

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

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

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

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


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

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

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

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

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

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

Written by Richard Reibstein.

Posted in IC Compliance

February/March 2017 Independent Contractor Misclassification and Compliance News Update

February 2017

[Publisher’s Note: The original February 2017 monthly update was corrupted; accordingly, it is placed in this combined February/March 2017 update of monthly IC developments.]

Three of the seven court cases I report on below in my February 2017 monthly update of IC misclassification cases involve Uber, and each of those cases were victories for the ride-sharing, on-demand company. Although none of the three are legally momentous, all are somewhat helpful to its legal defense, especially in light of prior court and administrative decisions that have been unfavorable to Uber on the merits of its independent contractor defense.

The first case involved an arbitration award in favor of Uber that was issued by a well-regarded former judge, reportedly finding that “the preponderance of the evidence” favored Uber in a claim under California wage laws. While arbitration awards are not generally entitled to precedential value in courts, the award by the arbitrator may signal to other Uber drivers and their lawyers that arbitration may be an unrewarding undertaking, especially if that is their only recourse due to arbitration agreements signed by drivers.

The second involved a Florida administrative unemployment ruling that was affirmed by an appellate court. That case involved a driver for Uber who represented himself at the unemployment hearing and on appeal. It appears that the driver in that case did not seek to follow the roadmap used in other administrative cases involving claims for unemployment and unpaid wages, where the rulings had gone against Uber.

The third case involved a class action lawsuit by drivers and a taxi alliance in New York City where the plaintiffs and the taxi organization agreed with Uber that the lawsuit should be dismissed without prejudice to being re-filed after the U.S. Supreme Court’s issues its decision in three cases pending before it. Those cases present the issue of whether class action waivers in arbitration agreements are valid or whether they otherwise violate federal labor law.

As I commented in my January 2017 update, although Supreme Court guidance will be welcome on this issue, none of these three cases involved the issue of whether an arbitration clause with a class action waiver is enforceable when it affords the party signing it an opportunity to opt-out of the arbitration clause. Thus, unless the Supreme Court does something that it rarely does (i.e., decide a matter not before it at this time), it will not address a key issue facing businesses that use independent contractors: whether an opt-out clause “saves” an arbitration clause with a class action waiver.

Additionally, a newly constituted NLRB (once new members are appointed by a Republican president) may change its view on this issue and conclude that class action waivers do not violate the NLRA. In that event, it is conceivable that the Supreme Court may choose not to decide the issue at all.

Another court case reported below includes the denial of a car service company’s motion to dismiss a class action IC misclassification case brought against a traditional car service company. That decision, however, was hardly surprising: motions to dismiss are too often used and rarely granted.

The monthly update includes yet another IC misclassification case that was conditionally certified as a class action – this time against a large oil company, Chevron. As the court noted in that decision, the burden on plaintiffs’ class action counsel to establish conditional class/collective certification is rather low. This is in contrast to the far greater burden imposed by courts on class and collective action plaintiffs to survive a motion for decertification following the completion, or substantial completion, of discovery.

The update below also includes an IC misclassification case where a group of adult entertainment clubs entered into a novel collective/class action settlement providing for a multi-factor assessment form that would categorize dancers who joined in the lawsuit as employees or ICs. It is unclear whether the adult entertainment clubs considered the value of a motion for decertification of the collective/class in lieu of the costly settlement.

The last three cases in particular highlight the value to companies of taking action to enhance their IC compliance before they become defendants in expensive class or collective action lawsuits. Many companies that wish to genuinely enhance their IC compliance and avoid needless legal challenges have chosen to utilize customized and sustainable compliance methodologies and processes, such as IC Diagnostics™, to minimize their exposure to IC misclassification cases, as described in my White Paper.

In the Courts (7 cases)

ARBITRATION AWARD IN FAVOR OF UBER IN IC MISCLASSIFICATION CASE IS “CONFIRMED” BY COURT. A Los Angeles County Superior Court has “confirmed” an arbitrator’s award in favor of Uber in an IC misclassification arbitration. Under California and most state laws, arbitration decisions are not reviewable on the merits of the case and may be “confirmed” in court as a routine matter. The arbitration award that was confirmed in court was issued by former Judge Michael Marcus, a neutral affiliated with ADR Services, Inc. The 50-page arbitration award concluded that the “preponderance of the evidence” showed that Uber drivers have more in common with independent contractors than employees.  As reported by Matthew Blake in the Los Angeles Daily Journal on February 28, 2017, the arbitrator concluded that Uber is entitled under state law “to exercise a finite and restricted measure of control over drivers that keeps the company in the independent contractor realm,” and that under that standard, Uber did not exercise sufficient control over the driver to be deemed his employer. The article states that Uber “is expected to use Marcus’ ruling in the federal misclassification lawsuit that got the Uber litigation ball rolling.” The article also stated that “Uber instantly moved to place the arbitration award in the record of a state court case in which the company and California drivers proposed a . . . settlement regarding labor violations under the state’s Private Attorneys General Act.    The article included a comment by a California “labor expert at UC Irvine School of Law . . . that arbitration ‘has no value as precedent’ . . . [but the confirmation] of the decision lets Uber cite the matter going forward.” Uber Technologies Inc. v. Eisenberg, BS166561 (L.A. Super. Ct. Feb. 21, 2017).

UBER DRIVER FOUND TO BE AN INDEPENDENT CONTRACTOR IN APPEAL OF FLORIDA UNEMPLOYMENT DECISION. A Florida appeals court has upheld a decision of the state’s Department of Economic Opportunity (DEO) that a former Uber driver, representing himself, was an independent contractor and not an employee, thereby rendering him ineligible to receive reemployment assistance under state law. The driver had provided services to Uber’s clients until Uber revoked his access to the driver app based on alleged violations of the company’s user privacy policy. He subsequently filed for reemployment benefits; his claim was initially granted by the Department of Revenue and later reversed by the DEO, leading to this appeal, in which he proceeded on a pro se basis. In affirming the DEO’s decision, the Court made reference to Florida’s common law test for IC status and found that the following supported the determination of IC status: the parties’ independent contractor agreement unequivocally disclaimed an employer-employee relationship; the parties’ actual practice reflected adherence to the terms of the agreement; drivers supplied their own vehicles and controlled whether, when, where, with whom, and how to accept and perform trip requests; drivers could work at their own discretion and were not prohibited from working for Uber’s direct competitors; drivers received Form 1099’s; and drivers were not entitled to fringe benefits. Addressing the unique attributes of the on-demand economy, the Court concluded that, “Due in large part to the transformative nature of the internet and smartphones, Uber drivers like McGillis decide whether, when, where, with whom, and how to provide rides using Uber’s computer programs. This level of free agency is incompatible with the control to which a traditional employee is subject.” McGillis v. Dep’t of Economic Opportunity, No. 3D15-2758 (3d Dist. Ct. of App. Fla. Feb. 1, 2017).

UBER AND TAXI ALLIANCE AGREE TO DISMISS IC MISCLASSIFICATION CASE WITHOUT PREJUDICE PENDING SUPREME COURT REVIEW OF CLASS ACTION ARBITRATION WAIVERS. Uber drivers and the New York Taxi Workers Alliance have agreed to dismiss without prejudice their IC misclassification case while awaiting a decision from the U.S. Supreme Court on whether the National Labor Relations Act precludes enforcement of class action waivers in mandatory arbitration agreements. Uber’s position is that the drivers are bound by an enforceable arbitration agreement that requires them to arbitrate their disputes on an individual basis, while the drivers contend that in light of the class action waiver, the arbitration agreement is unenforceable and violates the NLRA. The parties had first sought an indefinite “stay” of the case, but the judge denied their request, noting that the Supreme Court “may decide the issue, they may not decide the issue.” The new stipulation, now “so ordered” by the court, provides that “in order to conserve the parties’ resources, and in the interest of judicial efficiency, the parties have agreed that this case should be dismissed without prejudice, subject to the terms of a tolling agreement …, pending issuance of the United States Supreme Court’s decision(s) in [Epic Sys. Corp. v. Lewis, No. 16-285, Ernst & Young US, LLP v. Morris, No. 16-300, and NLRB v. Murphy Oil, No. 16-307].” New York Taxi Workers Alliance v. Uber Technologies Inc., No. 16-cv-08299 (S.D.N.Y. Feb. 1, 2017).

CAR SERVICE COMPANY DRIVERS DEFEAT MOTION TO DISMISS IC MISCLASSIFICATION CLASS ACTION. A New York federal court denied a motion to dismiss a motion to dismiss by a car service company, Yellowstone Transportation, d/b/a Yes Car Services, in an independent contractor misclassification class and collective action brought by drivers alleging minimum wage and overtime violations under the Fair Labor Standards Act and the New York Labor Law.  The court examined the complaint, which included allegations that the company controlled the drivers’ work through dispatch orders; the drivers’ relationships with the Company were exclusive; drivers were subject to discipline and/or termination of the relationship if they worked for other car services; drivers’ work was monitored by the company; and as a pre-condition of employment, drivers were required to incorporate companies in their own names. Yellowstone had argued that the drivers’ “Independent Contractor Services Agreements,” purportedly signed by each of the Plaintiffs, established that they were independent contractors and not employees under the FLSA and New York Labor Law. Not surprisingly, the court concluded that in view of the allegations, “it would be premature to consider such documents at this juncture, given that the parties have not even had their initial appearance before the assigned Magistrate Judge yet and no discovery has been conducted whatsoever thus far.” The court added: “Dismissing the action on the grounds that Plaintiffs are independent contractors at this stage of the litigation would be inappropriate.” Gao v. Yellowstone Transportation, Inc., No. 15-cv-07439 (E.D.N.Y. Feb. 15, 2017).

OIL AND WELL SITE DRILLING WORKERS GRANTED CLASS ACTION STATUS IN IC MISCLASSIFICATION CASE AGAINST CHEVRON CORP. A California federal court granted conditional certification of a collective action under the Fair Labor Standards Act brought by well and drill site managers against Chevron Corporation alleging minimum wage and overtime compensation violations due to their alleged misclassification as ICs and not employees. In determining whether the managers’ claims should be conditionally certified at this initial stage, the court applied the rather lenient standard for conditional certification that “there [be] some factual basis beyond the mere averments in their complaint for the class allegations.” In concluding that the managers met that burden, the court found, “The substantial allegations, supported by the declarations submitted by Plaintiffs, indicate that the managers have similar responsibilities working for Chevron, that Chevron treats them as independent contractors, and that these managers are similarly situated with respect to many aspects of their control and employment circumstances, and they are allegedly subject to the same compensation scheme.” The case will now proceed to pre-trial discovery. McQueen v. Chevron Corp., No. 16-cv-02089 (N.D. Cal. Feb. 21, 2017).

NOVEL $6.5 MILLION SETTLEMENT AGREEMENT IN STRIPPERS’ IC MISCLASSIFICATION CASE. An adult entertainment firm, Déjà Vu Services, and its related companies have entered into a novel settlement with exotic dancers who had brought a class action IC misclassification case against the clubs in federal district court in Michigan.  Because some of the dancers may be employees under the Fair Labor Standards Act and others may be independent contractors, the settlement agreement, which received preliminary court approval on February 7, 2017, would create a process to determine each dancer’s status. Under the proposed settlement agreement, dancers would complete an “entertainment assessment form” that lists factors pertinent to the agreed upon test for determining independent contractor versus employee status. The settlement agreement provided for a means to resolve disputed dancer claims where the parties disagreed on their status. Doe v. Déjà Vu Services, Inc., No. 16-cv-10877 (E.D. Mich. Feb. 7, 2017).

MAIL DELIVERY COMPANY SUED FOR MISCLASSIFYING MAILROOM WORKERS AS IC’S. A Florida mail delivery management company has been sued in a proposed class action in federal court in Florida for allegedly misclassifying its mailroom workers employees as independent contractors. The plaintiff alleges that she provided services as a mailroom manager for US Postal Solutions Inc., who she claims misclassified her and other similarly situated workers as independent contractors. She seeks damages for allegedly unpaid overtime under the Fair Labor Standards Act.  The class action also seeks damages under Florida state law for the company’s failure to pay employment taxes. Caballero v. US Postal Solutions, Inc., No. 17-cv-00319 (M.D. Fla. Feb. 23, 2017).

 Administrative and Regulatory Initiatives (1 item)

ALASKA WORKFORCE AGENCY ASSESSES FINES AND PENALTIES AGAINST CONSTRUCTION CONTRACTOR IN WORKERS’ COMP IC MISCLASSIFICATION CASE. The Workers’ Compensation Division of the Alaska Department of Labor and Workforce Development has reportedly assessed $280,000 in fines and penalties against construction company, North Country Services, in the death of a worker found by the workforce agency as having been misclassified as an IC. Alaska is regarded as being one of the more employee-friendly states in the nation in terms of the interpretation of its independent contractor test, both at the administrative and judicial levels, although there is no indication that the construction company had a valid basis for its classification of the deceased worker.  Deborah Kelly, director of the Department’s Labor Standards and Safety Division, stated: “One of the major issues in this case is that [the company] was hiring these young men and calling them independent contractors and not providing them any safety training at all, and not doing [its] due diligence with regard to them. These employees had no construction experience, no training, no preparation.” Labor Commissioner Heidi Drygas commented: “This tragic case illustrates the toll that misclassification can take on workers. If [the deceased worker] had been afforded the protections he deserved as an employee, he would be alive today.”

Written by Richard Reibstein.


March 2017

The past month included significant state and federal appellate court decisions, large settlements of IC misclassification class actions, class and collective action certifications, and two IC misclassification class actions that survived motions to dismiss. Perhaps the most significant court development in the first quarter of 2017 was an appellate court case that was issued by the Connecticut Supreme Court. That decision clarified the “C” prong of the state’s “ABC” test for independent contractor status under that state’s unemployment insurance law. Notably, one year earlier, the Connecticut Supreme Court clarified the “A” prong of the state’s “ABC” test, as I noted in my March 2016 News Update. Both decisions are favorable to businesses that make use of legitimate ICs in that state.

The other key appellate court decision in the IC misclassification arena involves FedEx, which prevailed in its appeal of an NLRB order that it bargain with a local Teamsters union as the representative of a unit of single-route Ground Division drivers. The United States Court of Appeals for the D.C. Circuit, for a second time, rebuffed the NLRB and denied enforcement of the Board’s bargaining order, finding that the single-route drivers are independent contractors under the National Labor Relations Act.

Two well-known IC misclassification class actions settled for substantial sums: Lyft got formal approval from a federal district court judge to settle its class action IC misclassification case with its on-demand ride-sharing drivers for $27 million, while on-demand shopping delivery service Instacart entered into a proposed settlement of its IC misclassification class action with its “shoppers” for $4.625 million. Another IC misclassification class action involving 35 freelancers at The Hollywood Reporter received final court approval for a settlement of $900,000; each freelancer will recover an average of just under $15,000 after legal fees and other costs.

Class certification was granted by courts in three IC misclassification cases: a Tennessee case involving sales representatives of timeshare cancellation services; a Kentucky case involving drivers making pharmaceutical product deliveries; and a Massachusetts case involving drivers making home deliveries of furniture, appliances, and electronic products.

Finally, there were two IC misclassification cases where the companies made motions seeking to dismiss the claims – and both motions failed. In one, FedEx Ground was denied a motion to dismiss a new case brought by its Ground Division drivers. It had argued that they were not covered by that state’s “ABC” test for IC status because the drivers had entered into IC agreements through LLCs and corporations. The court, however, found that dismissal was inappropriate and that the drivers will be permitted to show that they were misclassified where they alleged that FedEx required that they incorporate. In the other case, sales representatives selling home security products and services in South Carolina survived a motion for summary judgment and were found to be entitled to try their state law IC misclassification claims to a jury.

Apart from the two appellate court decisions, the takeaway from the other eight IC misclassification class actions is that each of the companies could have averted a lawsuit altogether, settled for far less, or obtained a judgment in their favor – had they simply placed themselves in a far better position from an IC compliance standpoint. The allegations in those cases strongly suggest that the businesses involved did not pay sufficient attention to the importance of structuring, documenting, and implementing their IC relationships in a manner that enhanced their compliance with state and federal laws, such as through the use of IC Diagnostics™, as discussed in my White Paper.

In the Courts (10 cases)

CONNECTICUT SUPREME COURT CLARIFIES APPLICATION OF STATE LAW TEST FOR IC STATUS. The Connecticut Supreme Court has held that the Connecticut test for independent contractor status under the state’s unemployment insurance law does not require that a worker must provide services for more than one employer to be an independent contractor under that law. Rather, that fact is but one factor to be considered in determining if an individual is “customarily engaged in an independently established trade, occupation, profession or business,” which is Prong C of the three-part “ABC” test for independent contractor status for unemployment purposes in Connecticut.  At the underlying hearing in the case, the unemployment referee had determined that Southwest Appraisal Group, LLC, an automotive damage appraisal business that assesses damaged vehicles, had misclassified the appraisers as independent contractors and was therefore liable for unemployment taxes.  That decision was appealed to the Board of Review of the Employment Security Appeals Division, which upheld the Referee’s determination as to three of the appraisers who operated their own legitimate independent businesses but did not actually perform services for any other business besides Southwest. On appeal, the Supreme Court reversed that decision as to the three appraisers. In its decision, the Court reasoned that “just as the mere freedom to provide services for third parties is not by itself dispositive under part C… ‘whether the individual actually provided services for someone other than the employer is [not] dispositive proof of an employer-employee relationship.’”  The court observed that, in making a determination under Prong C of the test, “the totality of the circumstances” must be evaluated in light of many factors, including but not limited to (1) the existence of state licensure or specialized skills; (2) whether the individual holds himself or herself out as an independent business through the existence of business cards, printed invoices, or advertising; (3) the existence of a place of business separate from that of the putative employer; (4) the individual’s capital investment in the independent business, such as vehicles and equipment; (5) whether the individual manages risk by handling his or her own liability insurance; (6) whether services are performed under the individual’s own name as opposed to the putative employer; (7) whether the individual employs or subcontracts others; (8) whether the individual has a saleable business or going concern with an established clientele; (9) whether the performance of services affects the goodwill of the individual rather than the employer; and (10) whether the individual performs services for more than one entity – the one factor that the referee and Board of Review had focused on. Southwest Appraisal Group, LLC v. Administrator, Unemployment Compensation Act, No. SC19651 (Sup. Ct. Conn. Mar. 21, 2017).

FEDEX AGAIN ABLE TO OVERTURN NLRB RULING THAT ITS GROUND DIVISION DRIVERS ARE INDEPENDENT CONTRACTORS. FedEx has succeeded for a second time before the U.S. Court of Appeals for the D.C. Circuit in its challenge to a ruling by the National Labor Relations Board that FedEx Ground Division drivers are not independent contractors but rather employees who can be unionized. As more fully discussed in my March 7, 2017 blog post, this was the second time that the D.C. Circuit denied enforcement of an NLRB decision that, if not reversed, would have required FedEx to bargain with a local Teamsters union as the representative of a bargaining unit of Ground Division drivers. In the first decision by the D.C. Circuit, the court concluded that, as a matter of law, the FedEx drivers were independent contractors under the common-law agency test used to determine independent contractor status under the NLRA. FedEx Home Delivery v. NLRB, 563 F.3d 492 (D.C. Cir. 2009). The court in FedEx I then examined a “non-exhaustive list of ten factors [set forth in the Restatement (Second) of Agency] to consider in deciding whether a worker is an independent contractor” and concluded that the “indicia of independent contractor status ‘clearly outweighed’ the factors that would support employee status.”  The NLRB did not seek Supreme Court review of the FedEx I decision by the D.C. Circuit. In the second proceeding before the NLRB, the company had argued that the decision in FedEx I compelled a similar ruling in the second case.  The NLRB, however, chose to disregard the prior decision by the D.C. Circuit.  In its ruling, the NLRB said it “disagreed with [the D.C. Circuit’s] interpretation of the Act.”  That decision was promptly appealed by FedEx. Now, the appellate court has again reversed the NLRB: “It is as clear as clear can be that ‘the same issue presented in a later case in the same court should lead to the same result.”  The court then stated emphatically: “Doubly so when the parties are the same.” After stating that the NLRB was simply seeking to “nullify this court’s decision in FedEx I,” the court remarked:  “This case is the poster child for our law-of-the-circuit doctrine, which ensures stability, consistency, and evenhandedness in circuit law.” FedEx Home Delivery v. NLRB, No 14-1196 (D.C. Cir. March 3, 2017).

INSTACART SETTLES WITH “SHOPPERS” FOR $4.625 MILLION IN IC MISCLASSIFICATION CLASS ACTION. On-demand grocery delivery service Instacart has agreed to settle for $4.625 million an IC misclassification class action by a class of “shoppers” who shop, purchase, and deliver groceries from grocery stores including Safeway and Whole Foods to customers at their homes and businesses through Instacart’s mobile phone app.  The shoppers alleged that because of their misclassification as independent contractors, they were denied minimum wage and overtime compensation, were not reimbursed for work-related expenses, did not receive proper meal and rest breaks, and did not receive all of the tips left them by customers, as required by federal law and the laws of Colorado, New York, and California. The settlement seeks to cover shoppers who have performed work for Instacart in California, New York, Pennsylvania, Colorado, Illinois, Washington, Indiana, Texas, Georgia, Oregon, Massachusetts, Minnesota, Florida, North Carolina, Virginia, Maryland and New Jersey. Of the $4.625 million, approximately one-third ($1.54 million) will be for attorneys’ fees and costs, $120,000 for administrative costs, $80,000 for claims under the California Private Attorneys General Act, and amounts ranging from $500 to $5,000 for class members. In addition, as part of the proposed settlement Instacart has agreed to modify its app to clarify for customers the difference between service fees and tips; disclose that commercial insurance may be required in certain jurisdictions and that Instacart does not provide it; implement a formal deactivation policy under which shoppers may only be terminated for cause; and create an interface or app that will allow shoppers to obtain more detailed information regarding their work, including information about the tasks they have performed and the money they have received from those tasks. A hearing on the proposed settlement is scheduled for April 19, 2017. Camp v. Maplebear, Inc., d/b/a Instacart, No. BCC652216 (Super. Ct. Los Angeles County Mar. 17, 2017).

LYFT’S $27 MILLION CLASS ACTION SETTLEMENT FINALLY APPROVED IN DRIVER IC MISCLASSIFICATION CASE. A California federal court judge grants final approval of a $27 million class action settlement between ride-sharing company, Lyft, and about 95,000 drivers who claimed they were owed tips and reimbursement of expenses under state law due to their alleged misclassification by Lyft as independent contractors. As discussed in my blog post of March 14, 2017, which we updated on March 17, 2017, the settlement also includes a number of non-economic terms, including: (1) Lyft will no longer be able to deactivate drivers at will, for any reason, and instead will only be able to deactivate drivers for specific reasons or after providing notice and an opportunity to cure; the deactivation will be arbitrable; (2) Lyft will provide additional information about potential passengers to drivers prior to the driver accepting any ride request, which presumably will assist drivers in deciding whether to accept a ride request; and (3) Lyft will create a “favorite” driver option where drivers who are designated by riders as a “favorite” are entitled to certain benefits.  In exchange for those economic and non-economic terms, all class members (except those who have “opted out” of the settlement) waive all existing claims they may have against Lyft arising from their alleged misclassification as independent contractors. The settlement will cover all Lyft drivers who made at least one trip for Lyft in California between May 25, 2012, and July 1, 2016. Although a few class members, a Teamsters Union local and the “Uber Lyft Teamsters Rideshare Alliance” had filed objections to the settlement primarily because it allows Lyft to maintain its classification of the drivers as independent contractors and does not require Lyft to reclassify them as employees, the federal judge who approved the settlement rejected those objections. Had the drivers been reclassified as employees, federal labor laws would permit the Teamsters to unionize those drivers. The judge’s order states: “The agreement is not perfect. And the status of Lyft drivers under California law remains uncertain going forward. But the agreement falls within a range of reasonable outcomes given the benefits it achieves for drivers and the risks involved in taking the case to trial.” Cotter v. Lyft Inc., No. 13-cv-04065 (N.D. Cal. March 16, 2017).

COURT APPROVES CLASS ACTION SETTLEMENT OF IC MISCLASSIFICATION CLAIM BY ENTERTAINMENT PUBLISHING FREELANCERS. A California state court judge has approved a $900,000 settlement of a class action lawsuit filed by freelancers against Prometheus Global Media, LLC, an entertainment publishing company that publishes The Hollywood Reporter, Billboard, Adweek, and Backstage.  The freelancers, who included an assistant editor for social media and a video coordinator, alleged that the company willfully misclassified “freelancers” as independent contractors and thereby denied them wage and hour rights and protections under the California labor laws. Under the terms of the proposed $900,000 settlement, each of the 35 class members will receive approximately $15,000 (totaling about $520,000), and the balance of approximately $380,000 will be earmarked for attorneys’ fees and other costs. As discussed in my October 3, 2013 blog post, the freelancers sought allegedly unpaid overtime, pay for rest and meal breaks that were not provided, reimbursement of expenses, and penalties for failing to issue itemized wage statements and failing to make timely wage payments. The complaint had alleged that the freelancers were treated the same as employees in that they were expected to work Monday through Friday from 9 a.m. to 5 p.m.; were provided with their own work space, computer, company e-mail address, and direct dial phone number; were required to attend meetings; were directed by a supervisor and manager; and were subject to discipline. Simpson v. Prometheus Global Media LLC, No. BC522638 (Super. Ct. Los Angeles County, Mar. 22, 2017).

SALES REPRESENTATIVES OF SERVICE COMPANY ASSISTING TIME SHARE OWNERS TO CANCEL INVESTMENTS GRANTED CLASS ACTION STATUS IN IC MISCLASSIFICATION CASE. A Tennessee federal district court has granted conditional certification of a collective action brought under the Fair Labor Standards Act by sales representatives alleging that Wesley Financial Group, LLC, a company that assists individuals in modifying or cancelling their ownership interests in timeshares, has misclassified them as independent contractors and not employees.  The sales reps, who called prospective customers to determine whether they were interested in engaging Wesley’s services, were paid a percentage of any fee generated from a timeshare owner whom they successfully referred to the Company. The class action alleges that by misclassifying them as independent contractors, Wesley engaged in violations of the federal minimum wage and overtime provisions. In granting conditional class certification, the Court noted that the standard that applies at the initial stage of a collective action under the FLSA requires only that a class representative need only “make a ‘modest factual showing’ demonstrating that she and potential class members are ‘similarly situated,’” which the court held to be satisfied by the plaintiff’s declaration that all sales reps were subject to the same unlawful pay policy of being treated as independent contractors. Burgess v. Wesley Financial Group, LLC, No. 16-CV-01655 (M.D. Tenn. Mar. 16, 2017).

PHARMACEUTICAL PRODUCT DELIVERY DRIVERS GRANTED CONDITIONAL CLASS CERTIFICATION IN IC MISCLASSIFICATION. A Kentucky federal district court has granted conditional certification of an FLSA collective action brought by delivery drivers against King Bee Delivery, LLC, a company that provides pharmaceutical product delivery services to pharmacies and hospitals in Kentucky, Ohio, and Indiana.  The drivers allege that King Bee violated the overtime provisions of the FLSA when it misclassified the drivers as independent contractors.  In granting the certification motion, the court concluded that the drivers made “the modest factual showing” that their “position is similar, not identical, to the positions held by the putative class members.” The court based its conclusion on evidence that the drivers performed similar duties, adhered to similar schedules, and followed similar rules as do other delivery drivers working for the company. Although the drivers had also brought claims for unlawful deductions for GPS trackers, uniforms, and other fees under the Kentucky Wage and Hour Act, the court granted the company’s motion to dismiss those claims because they amounted to nothing more than conclusory allegations. Williams v. King Bee Delivery, LLC, No. 15-cv-306 (E.D. Ky. Mar. 14, 2017).                      

DRIVERS FOR MASSACHUSETTS APPLIANCE, FURNITURE, AND ELECTRONIC HOME DELIVERY COMPANY GRANTED CLASS ACTION CERTIFICATION IN IC MISCLASSIFICATION CASE. A Massachusetts federal district court has granted conditional class certification to delivery drivers in their IC misclassification class action brought against Spirit Delivery & Distribution Services, a logistics company specializing in appliance, furniture and electronic home delivery.  The drivers alleged violations of the Massachusetts independent contractor wage law.  The company sought to avoid class certification by arguing that the state law is preempted by the Federal Aviation Administration Authorization Act (FAAAA).  While the court agreed that the FAAAA preempts the second prong of the “ABC” test under the Massachusetts independent contractor law (that “the service is performed outside of the usual course of business of the employer”), the other two prongs of the ABC law were not.  In granting conditional class certification, the court found, among other things, that the drivers’ allegation that the Company’s system wide policy of misclassifying the drivers as ICs in violation of the state law satisfied the commonality requirement and that the injuries arise from the same events and course of conduct as those of the proposed class members. Vargas v. Spirit Delivery & Distribution Services, Inc., No. 13-cv-12635-TSH (D. Mass. Mar. 24, 2017).

FEDEX GROUND FAILS IN EFFORT TO DISMISS IC MISCLASSIFICATION WAGE PAYMENT CLAIM IN NEW JERSEY BY GROUND DIVISION DRIVERS, WHERE THEY WERE REQUIRED TO OPERATE THROUGH SEPARATE LLC’S AND CORPORATIONS. In 2016, FedEx resolved most of its remaining IC misclassification lawsuits by Ground Division drivers, as I noted in my  blog post of October 24, 2016. But new cases have been filed against the courier giant, including one pending in federal court in New Jersey alleging that FedEx violated state consumer protection laws, common law, Consumer Fraud Act, and the New Jersey Wage Payment Law when it misclassified drivers as independent contractors instead of employees. The amended complaint in the case alleges that FedEx engages approximately 300 truck and van drivers in New Jersey and requires some drivers to create limited liability companies (LLCs) or corporations and enter into an Operating Agreement with drivers through their business entities for particular Ground Division routes.  Although the plaintiffs acknowledged that FedEx represents to the drivers that they can “be [their] own boss,” “grow [their] own business,” have “sole control” over their businesses, and enjoy a proprietary and entrepreneurial interest in the delivery routes, the drivers allege that FedEx treats them as employees by regulating or controlling vehicle appearance, vehicle maintenance, liability insurance, driver reports, driver uniforms, driver service areas, the prices charged for services, route schedules, electronic equipment used, forms for paperwork, and approval of substitutes and assistants. To that end, the drivers allege that FedEx ensures drivers are following those requirements by actively monitoring how drivers operate their vehicles, carry packages, and complete paperwork. FedEx filed a motion to dismiss all of the claims in the complaint and succeeded in part: the court dismissed all of the state statutory and common law complaints except for the New Jersey Wage Payment Law claim. FedEx argued that the drivers could not bring a claim under the state’s wage law because their companies, not them personally, are not parties to the Operating Agreements, and the law only protects “persons” and not business entities. Federal District Judge Robert B. Kugler, however, rejected that argument.  He stated that courts “are obliged to look behind contractual language to the actual situation – the status in which parties are placed by relationship that exists between them.”  He further stated that a court “must analyze beyond the contract formed between Defendant and the corporate entities formed by Plaintiffs in order to determine whether Plaintiffs were employees.” Carrow v. FedEx Ground Package Systems, Inc., No. 16-cv-3026 (D.N.J. Mar. 30, 2017).

HOME SECURITY COMPANY FAILS TO DISMISS IC MISCLASSIFICATION CLASS ACTION BY SALES REPRESENTATIVES. A South Carolina federal court has denied a motion for summary judgment filed by AVSX Technologies, a company that sells, installs, and services home security systems, in a class action IC misclassification lawsuit by sales representatives selling AVSX products and services.  The sales reps (who became employees of AVSX at a later point in time) claim that the company violated the FLSA and the South Carolina Wage Payment Act by treating them as ICs instead of employees.  The sales reps claim damages for allegedly unlawful holdbacks of amounts retained by the Company for any security contracts that are cancelled by the consumers and allegedly unlawful chargebacks against their commissions, as well as the company’s failure to provide them with benefits and restitution for the tax burden imposed on the sales reps due to their classification as 1099ers. In defending against the motion for summary judgment, the sales reps introduced evidence of the company’s right to and exercise of control over the sales reps’ performance by the use of contract forms provided by the company, who allegedly set the prices, terms, and conditions of sale; the company’s furnishing of company shirts, IDs, marketing materials, company iPads, cell phones, and vehicles; and the company’s right to terminate the sales reps at any time with or without cause. The company argued that the sales reps set their own schedules, determined potential clients, set their own geographic boundaries, did not have an office provided by the Company, were not required to attend meetings, and signed contracts specifying that they were independent contractors. The Court concluded that summary judgment should be granted in favor of the company on the FLSA claims, as that law does not address holdbacks, chargebacks, benefits, or tax burdens.  The Court, however, denied summary judgment for the claims under the state wage payment law on the holdback claims, finding that those claims could be brought under the state law if the sales reps had been misclassified as independent contractors.  It concluded that the facts submitted by both sides on the motion for summary judgment demonstrated that there existed a genuine issue of material fact that needed to be tried to a jury regarding the employment status of the sales reps.  As the court stated, “a reasonable jury could find that Plaintiffs were employees regardless of the contracts that they signed.” Sill v. AVSX Techs., LLC, No. 16-cv-0555 (D.S.C. Mar.17, 2017).

Regulatory and Enforcement Initiatives (1 item)

WISCONSIN REPORTS RECOVERY OF $1.1 MILLION IN UNPAID UNEMPLOYMENT INSURANCE TAXES, PENALTIES, AND INTEREST FOR IC MISCLASSIFICATION IN 2016. Wisconsin’s enhanced enforcement of IC misclassification laws since mid-2013 resulted in recovery of $1.1 million of unpaid unemployment insurance taxes, penalties and interest in 2016. According to the State of Wisconsin 2017 Report to the Unemployment Insurance Advisory Council, issued on March 15, 2017, Unemployment Insurance auditors identified a total of 8,613 misclassified workers in 2016.  The Report also notes that the Department of Workforce Development has produced educational videos to instruct employers how to properly classify a worker as an employee or an independent contractor and how to prepare for a tax appeal hearing. The Report projects that the Department has committed to conducting a total of 650 worker classification field investigations in 2017. Scott Manley, Unemployment Insurance Advisory Council Member, stated, “The UI system is funded by employers and intended to help workers in need. Protecting those funds from waste, fraud and abuse is an important mission.”

Written by Richard Reibstein.


Posted in IC Compliance

Spoiler Alert: Rulings Expected on Uber and Lyft Independent Contractor Settlements

Judges in California will likely soon issue rulings affecting two ride-sharing companies, Uber and Lyft. Those connected with the Lyft case will be pleased because it is expected that a federal district court judge in San Francisco will formally approve a $27 million settlement in an independent contractor misclassification case against Lyft. In contrast, those involved in the Uber case pending in a state court in Los Angeles will have to accept a judicial setback when the judge handling that case is expected to formally disapprove of a $7.75 million settlement of so-called PAGA claims asserted on behalf of hundreds of thousands of Uber drivers. But, as noted below, that will not displease the plaintiffs’ lawyers involved in other Uber class action IC misclassification cases.

The Lyft Settlement Being Approved

Lyft had originally entered into a proposed agreement to settle its drivers’ IC misclassification claims for $12.25 million, but Judge Vince Chhabria rejected that settlement as inadequate, as more fully detailed in my March 15, 2016 blog post.  Following the rejection of that proposed settlement, the parties returned to Judge Chhabria with a proposed settlement of $27 million.

Objections to the higher proposed settlement were filed by a few class members, a Teamsters local, and the “Uber Lyft Teamsters Rideshare Alliance,” nicknamed ULTRA. Those objections were principally aimed at the fact that the settlement allows Lyft to maintain its classification of the drivers as independent contractors and not reclassify them as employees. If the drivers were reclassified, federal labor laws would permit the Teamsters to unionize the drivers; otherwise, as independent contractors, they remain ineligible for union representation.

According to Shannon Liss-Riordan, the lead counsel for the drivers, those that drove the most will be receiving thousands of dollars. So far, approximately 95,000 Lyft drivers have reportedly elected to participate in the settlement.

In addition to the financial terms of the settlement, the principal terms include:

  • Lyft will no longer be able to deactivate drivers at will, for any reason, and instead will only be able to deactivate drivers for specific reasons or after providing notice and an opportunity to cure. Drivers deactivated will be able to arbitrate their deactivation, with Lyft paying for the fees of arbitration. (Evidently, the drivers may have to pay their own legal fees if they choose to hire counsel to represent them at the arbitration.)
  • Lyft will provide additional information about potential passengers to drivers prior to the driver accepting any ride request, which presumably will assist drivers in deciding whether to accept a ride request.
  • Lyft will create a “favorite” driver option where drivers who are designated by riders as a “favorite” are entitled to certain benefits.
  • In exchange for the above, all class members (except those who “opt out” of the settlement) will waive all existing claims they may have against Lyft arising from their alleged misclassification as independent contractors.

The settlement will cover all Lyft drivers who made at least one trip for Lyft in California between May 25, 2012, and July 1, 2016. The case is Cotter v. Lyft Inc., No. 13-cv-04065 (N.D. Cal.).

[Updated 3/17/17:  On March 16, 2017, Judge Chhabria approved the parties’ $27 million settlement.]

The Uber Settlement Being Rejected

Uber has been sued around the country, including California. The principal case in that state is the O’Connor case, which is pending before Judge Edward Chen in federal court in San Francisco. O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal.). That case seeks damages for allegedly unreimbursed automobile, cell phone, and other expenses and includes a claim under the California Private Attorney General Act (“PAGA”).  Under PAGA, private litigants sue in place of the State and seek recovery for monies that would have been owed to the State if the government had conducted the lawsuit instead of private litigants. In a PAGA lawsuit, the private litigants keep a smaller portion of the recovery while the State receives the larger portion.

Another California case against Uber is pending in Los Angeles Superior Court before Judge Maren E. Nelson.  Price v. Uber Technologies Inc., No. BC554512 (Super. Ct. Los Angeles County). That lawsuit also asserts PAGA claims that overlap with those being sought in the federal case pending in San Francisco. Counsel for Uber and the class representatives in the Los Angeles case had submitted to the judge a proposed $7.75 million settlement of the PAGA claims.

Judge Nelson is likely to formally reject the proposed settlement, reportedly noting (among other concerns) that she wished to make sure the settlement in her Los Angeles case would not adversely affect the rights of drivers in the San Francisco case. Many Uber drivers have filed objections to the proposed settlement, which may pay each of the many hundreds of thousands of Uber drivers only a few dollars each, after payment of their attorneys’ fees.

Judge Nelson also reportedly told the lawyers for the drivers and Uber that she needed more information about the financial fairness of the proposed settlement, and was also seeking information on the PAGA claims from the California agency in charge of such claims.

Notably, lawyers for plaintiffs in other PAGA lawsuits against Uber have made known their objections to the proposed settlement in court filings. Those lawyers cite issues as to both the modest amount of the settlement and the impact of the settlement on their lawsuits against Uber.

In the San Francisco case, Judge Edward Chen last rejected a $100 million proposed settlement. As noted in my August 18, 2016 blog post, Judge Chen rejected that  settlement in large part because of his objections to the amount allocated to the PAGA claims.  He mentioned that the State agency in charge of such claims had estimated the value of the PAGA claims at $1 billion.

As I have noted in prior blog posts, Uber has received mixed results in legal challenges brought against it around the country, winning and losing some cases brought by individual drivers before administrative agencies and arbitrators.

Analysis and Takeaways

Uber and Lyft have dominated the headlines in defense of their independent contractor relationships with drivers and efforts to settle a bevy of class action lawsuits brought against them. Both companies had hoped to win their California class actions by making motions for summary judgment. But both were dealt setbacks two years ago when two separate federal judges denied their motions and set down those cases for trial. No trials have been held in either of those cases, both of which have now been the subjects of proposed settlements.

As I noted in my September 18, 2014 blog post entitled “Silicon Valley Misclassification,” I observed that tech companies that use the 1099 “on demand” business model were at risk if they “do not take care to structure, document, and implement their independent contractor relationships in a manner consistent with federal and state IC laws.”

That does not mean, however, that on-demand and other companies using independent contractors cannot prevail on IC misclassification claims.  To the contrary, the court’s decision in the Uber summary judgment opinion pointed to two recent cases where courts in California found workers to be independent contractors as a matter of law.  As Judge Chen noted, even though some factors may have “cut in favor of employee status,” courts will still find IC status when “all of the factors weighed and considered as a whole establish that [an individual] was an independent contractor and not an employee.”

So, how does a company avoid class action IC misclassification cases or, if sued, prevail in the lawsuit and secure a judgment that its 1099ers are legitimate ICs?

While Uber and Lyft can afford costly class action settlements, most other on-demand start-ups can’t. And investors don’t wish to pour money into business models that are future targets of class action lawyers and workforce agency regulators.  As I noted in my March 12, 2015 blog post on the courts’ denial of the motions for summary judgment by Uber and Lyft, many new and existing companies have resorted to IC Diagnostics™ to enhance their level of IC compliance and determine whether a group of 1099ers would pass the applicable tests for IC status under governing state and federal law.  That proprietary process also offers a number of practical, alternative solutions to enhance compliance with those laws, including: restructuring, re-documenting and re-implementing the IC relationship; reclassifying 1099ers as W-2 employees; and redistributing 1099ers – as more fully described in my White Paper on the subject.

Companies that wish to retain an IC business model generally opt for restructuring, re-documenting, and re-implementing their IC relationships. While not all companies can eliminate their control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their IC relationships to comply with federal and most state IC laws. The IC Diagnostics™  process provides the means to stress-test the IC relationship. If it can be effectively restructured to comply with IC laws, the next step in the process is re-documentation.  What seems like a simple act of dotting your i’s and crossing your t’s, though, is anything but; indeed, many IC statutes and most judicial and administrative decisions in this area are often counter-intuitive.

In my August 29, 2014 blog post entitled “Earthquake in the Independent Contractor Misclassification Field,” I noted that FedEx Ground lost a key case because of its misplaced reliance on an IC agreement and its policies and procedures that were good, but not good enough.  As I stated in that blog post: “IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”  For most businesses using ICs as part of their business model or to supplement their workforce, it is never too late to restructure and re-document their IC relationships.

The implementation of a legitimate IC relationship is also essential. Even when a company’s contractual provisions are drafted in a manner intended to be consistent with IC laws, a company’s failure to strictly follow contractual limitations on direction and control can lead to an adverse ruling. There is no reason, though, why a company committed to complying with IC laws cannot, when exercising both rigor and restraint, implement and carry out in practice an enhanced IC relationship.

Written by Richard Reibstein.



Posted in IC Compliance