February 2020 Independent Contractor Misclassification and Compliance Law News Update 

This past month was the first month we can recall where there were no legal developments of note involving class action independent contractor misclassification lawsuits, which have become increasingly prevalent.  Instead, the two top cases reported below are decisions by federal appellate courts in single plaintiff IC misclassification lawsuits: one where the U.S. Court of Appeals for the Third Circuit concluded that sales marketers for roofing companies had been misclassified under a Pennsylvania wage payment law, and the other where the Fifth Circuit held that a highly paid legal consultant seeking overtime pay under the federal wage and hour law had been properly classified as an IC.

It is not uncommon for companies to classify highly paid workers as ICs even when the legal basis to support such classification is marginal. Highly paid workers classified as ICs who work a considerable number of hours each week may be motivated to seek overtime under federal or state wage and hour laws because of the potential for recovering a very substantial amount of overtime pay and penalties. Federal law and most state wage laws allow for recovery of 1-1/2  times the regular rate of pay for all hours over 40 in a workweek, going back three, four, or six years (depending on the state), oftentimes with liquidated damages of an additional 100% or more.

Thus, a worker earning $52,000 per year as an IC for a company that claims to work 50 hours a week can argue that he or she is owed 10 hours at time-and-one-half, or $375 per week in additional compensation, times 52 weeks a year, or $19,500 per year, times three (or more) years of unpaid overtime, or $58,500, with 100% liquidated damages, for a total of $117,000, which is more than two years’ compensation. The numbers multiply exponentially for workers who earn more money, claim to work up to 60 hours a week, are in a state with a 4-year or 6-year statute of limitations for wage claims, or are in a state (like Massachusetts) that has a liquidated damages penalty of treble damages.  For example, a worker classified as an IC that earns $75,000 per year as an IC, claims to regularly work 55 hours a week, and is in a state (like New York) with a 6-year statute of limitations for wage claims and a 100% penalty, arguably would claim damages of $506,000. If there is more than one highly compensated individual in that situation, the exposure can quickly amount to a very significant 7-figure number.

Savvy businesses that wish to minimize their misclassification liability exposure to highly-compensated workers whom they classify as ICs have utilized the same type of process as do prudent companies that wish to minimize such exposure to large groups of workers they have classified as ICs. One such process is IC Diagnostics™, which focuses on restructuring, re-documenting, and/or re-implementing IC relationships to enhance compliance with applicable IC laws. This type of process creates a highly customized and sustainable means to reduce an otherwise costly liability risk for IC misclassification for groups of workers classified by companies as ICs as well as highly paid workers that work considerable amounts of overtime.

In the Courts (3 cases)

ROOFING COMPANIES FOUND TO HAVE MISCLASSIFIED SALES MARKETER AS INDEPENDENT CONTRACTOR.  The U.S. Court of Appeals for the Third Circuit has ruled that a sales marketer for three related roofing companies had been misclassified as an independent contractor instead of an employee covered by a Pennsylvania state wage payment law. Plaintiff was engaged by the roofing companies to market and sell their roofing services within a set territory. The companies eventually terminated the sales marketer for allegedly diverting business opportunities away from the companies. Plaintiff sued the companies and their owners for violation of the Pennsylvania Wage Payment and Collection Law due to his alleged misclassification as an independent contractor and for other causes of action. While a federal district court dismissed some of plaintiff’s claims, it concluded that, as a matter of law, the plaintiff was an employee of the companies and not an independent contractor. On appeal, the Third Circuit affirmed the district court’s ruling, concluding that “the economic realities outweigh the terms of the [parties’] agreement” that designated him as an independent contractor.  The Third Circuit based its decision on the facts that the companies exercised control over the plaintiff’s work by assigning tasks to him and communicating the way in which the tasks were to be completed; the companies determined the plaintiff’s work schedule and directed his movements; plaintiff had to give notice before he could take vacation; the plaintiff’s work did not require specialized skills; and the companies provided him with necessary materials and an office. Accurso v. Infra-Red Services, Inc., No. 18-01583 (3d Cir. Feb. 20, 2020).

HIGHLY PAID LEGAL CONSULTANT FOR OIL AND GAS COMPANY FOUND TO BE INDEPENDENT CONTRACTOR.  The United States Court of Appeals for the Fifth Circuit has affirmed a federal district court’s grant of summary judgment in favor of an oil and gas services company, U.S. Shale Solutions LLC, in an action brought by a former $1,000 per day legal consultant alleging that he was not paid overtime in violation of the Fair Labor Standards Act. The company filed a motion for summary judgment with the district court arguing that plaintiff was an independent contractor who was not subject to the FLSA or, alternatively, that he was an exempt employee under either the “practice of law” or the “highly compensated employee” overtime exemptions in the FLSA. In granting the company’s motion, the district court held that although genuine issues of material fact existed with regard to the independent contractor status and practice of law exemption, plaintiff, a former attorney, was exempt from the FLSA’s overtime requirements as a “highly ‎compensated employee.”

On appeal, the Fifth Circuit concluded that it need not determine whether plaintiff fit within the “practice of law” or “highly compensated employee” exemptions because he was an independent contractor as a matter of law.  The company argued that plaintiff worked independently and managed his own workload and schedule; no performance evaluations were conducted; plaintiff invested in his business by providing his own phone and computer, he paid for his own continuing education expenses and purchased home office equipment; plaintiff controlled his opportunity for profit and loss by choosing to accept or reject projects; plaintiff possessed specific skill and initiative due to his legal training; and there was no permanency because plaintiff was free to leave upon 15 days’ notice. Plaintiff claimed that the company controlled his schedule, that he was reimbursed for expenses and travel, that he had no risk of loss, that he had no other source of income as he worked exclusively for the company, and that he was subject to a non-compete restriction. The Fifth Circuit concluded that while some of the factors favored employee status, the factors as a whole weighed in favor of independent contractor status.  In reaching its decision, the court noted that the existence of the non-compete clause in plaintiff’s independent contractor agreement, while supporting employee status, “does not automatically negate independent contractor status.” Faludi v. U.S. Shale Solutions LLC, No. 17-20808 (5th Cir. Feb. 14, 2020).

CALIFORNIA STATE COURT ENJOINS INSTACART FROM “MISCLASSIFYING” ITS SHOPPERS AS INDEPENDENT CONTRACTORS.  A California state court judge has issued a preliminary injunction requiring Maplebear, Inc. d/b/a Instacart from continuing to misclassify its “Shoppers” as independent contractors and not employees.  Instacart has appealed the ruling. According to the complaint filed in September 2019 by the City Attorney of San Diego on behalf of the People of the State of California, Instacart “maintains an unfair competitive advantage by misclassifying its Shoppers and evading long-established worker protections under California law.” By the alleged misclassification, Instacart “avoids paying its Shoppers a lawful wage and unlawfully defers substantial expenses to its Shoppers, including the cost of equipment, car registration, insurance, gas, maintenance, parking fees, and cell phone data usage.”  In granting the preliminary injunction, the Court found that the City Attorney had made a “very plausible” showing of improper classification under the new ABC test for independent contractor status in California, even though the matter was not free from doubt and there was some evidence to the contrary. The court explained that “it is more likely than not that the People will establish at trial that the ‘Shoppers’ perform a core function of defendant’s business; that they are not free from defendant’s control; and that they are not engaged in an independently established trade, occupation or business.” Establishing any one of those would prevent Instacart from satisfying the ABC test.

Instacart argued it would be irreparably harmed if a preliminary injunction were issued because, among other things, it would be required to hire tens of thousands of Shoppers in California; would have to develop rules, protocols, and management teams to monitor the employees’ performance and control their work; and invest in infrastructure such as software and supervisory staff. The court discounted the company’s arguments finding that Instacart had already taken steps to bring itself into compliance with the new Dynamex ABC test and that it seemed that relatively minor additional steps were needed to be in full compliance. Instead, the court agreed that the harms alleged by the People such as unpaid wages, overtime, rest breaks, missed meals and unpaid expenses reimbursements might take months to sort out, and if Instacart’s business survival were truly in jeopardy, the Shoppers might never recoup their monetary losses. California v. Maplebear Inc., No. 2019-00048731 (Cal. Super. Ct. County of San Diego Feb. 24, 2020).

Administrative and Regulatory Initiatives (2 items)

MASSACHUSETTS STAFFING COMPANY ASSESSED PENALTIES FOR MISCLASSIFYING TEMPORARY SCHOOL WORKERS.  Massachusetts Attorney General Maura Healy has assessed penalties against a national staffing and referral agency, Delta-T Group Massachusetts Inc., for misclassifying education workers placed in temporary positions in public and private schools. According to a press release issued by the Attorney General’s Fair Labor Division on February 24, 2020, the Attorney General’s Office began investigating Delta-T after receiving information indicating the company ‎was operating in violation of the state independent contractor statute, and ultimately concluded that the workers were misclassified as independent contractors and not employees. The Attorney General rejected the company’s claim that it was “merely connecting workers to jobs as part of the gig economy.” In addition to agreeing to pay the monetary assessment, the company has agreed to modify its practices to require all school workers who use its services ‎to be treated as employees going forward.‎ The Attorney General commented: “The gig economy can offer workers more flexibility, but it also presents real risks when workers are misclassified and denied important job protections. As a result of our investigation, Delta-T changed its practices and came into compliance with our state laws that protect workers.”

NLRB ISSUES NEW JOINT EMPLOYER RULE, BUT IMPACT ON IC’S IS NEGLIGIBLE.  The National Labor Relations Board has issued a Final Rule on joint employer status under the National Labor Relations Act.  On February 26, 2020, the Board issued an explanation of its final rule, noting that “that the common-law factors relative to determining employee or independent-contractor status are instructive but of limited utility in the joint-employer context.”  The rule’s explanation continues:  “The  Application of those [common-law] factors is appropriate to determine whether a putative employer has the ‘right to control the manner and means by which the product is accomplished,’ and therefore independent-contractor principles assist in determining whether a putative employer has such a ‘right to control.’ But they do not assist in answering the key questions in the joint-employer inquiry: who is exercising that control, when and how.”

Legislative Developments (1 item)

U.S. HOUSE PASSES BILL WITH ABC TEST FOR INDEPENDENT CONTRACTOR STATUS.  On February 6, 2020, the United States House of Representatives passed H.R. 2474, a bill entitled Protecting the Right to Organize Act of 2019 (the “PRO Act”), which would amend the National Labor Relations Act and related labor laws to extend protections to union workers. One of the objectives of the PRO Act is to reduce misclassification of employees as independent contractors, and the bill would seek to serve that interest by adopting a stringent ABC test for determining independent contractor/employee status. The bill would also expand unfair labor practices to include prohibitions against replacement of or discrimination toward workers who participate in strikes; make it an unfair labor practice to require or coerce employees to attend employer meetings designed to discourage union membership; permit workers to participate in collective or class action litigation; allow injunctions against employers engaging in unfair labor practices involving discharge or serious economic harm to an employee; expand penalties for labor law violations; and allow any person to bring a civil action for harm caused by labor law violations or unfair labor practices. The bill is unlikely to pass the Republican-controlled Senate.

This bill, like those in states that are seeking to copy the ABC test that recently became law in California, is yet another ill-conceived effort to minimizing IC misclassification. As noted in our commentary entitled “A Solution to the ‘Five Degrees of Independent Contractor Misclassification,” the preferred means to minimize misclassification, according to the two top Obama Administration labor officials when they were at the U.S. Department of Labor, is increased enforcement of existing laws, not enactment of laws with new tests for IC status.  Laws like AB5, which effectively outlaw otherwise legitimate independent contractors, remove “an important part of our economy,” as the former Administrator of the Wage and Hour Division, David Weil, stated in a press release on November 18, 2013 when he announced a partnership with New York State for increased enforcement efforts of existing laws governing the classification of workers as ICs.

Written by Richard Reibstein

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Posted in IC Compliance

January 2020 Independent Contractor Misclassification and Compliance Law News Update 

While selected states are in the midst of trying to crack down on independent contractor misclassification, the federal government is trying to clear a path and clarify the tests for independent contractor status under various federal laws.  As reported below, New Jersey last month enacted a series of laws that, among other things, increases the penalties for IC misclassification under that state’s current “ABC” test for IC status. The existing “ABC” test in New Jersey was not amended by the Legislature, despite a strong push by some legislators in New Jersey to do so, but it remains a challenging test to meet for some companies using ICs in that state.  Meanwhile, the U.S. Labor Department issued its new joint employer regulation in January 2020, explaining and clarifying that some of the factors previously used by courts and administrative agencies to establish joint employer status are irrelevant to that issue but highly relevant to determinations of IC status.

As we noted in our commentary addressing what we have referred to as the “Five Degrees of Independent Contractor Misclassification,” the New Jersey “ABC” test is not as challenging as the “ABC” test under California’s new AB5 law.  Businesses operating with ICs in New Jersey, however, are now subject to harsher penalties in that state if they do not considerably elevate their level of IC compliance.  Many companies that have committed to enhancing their compliance with state and federal laws governing ICs have used a process such as IC Diagnostics™ to restructure, re-document, and/or re-implement their IC relationships in a customized and sustainable manner to minimize their risks of IC misclassification liability.

Part of a process such as IC Diagnostics™ includes the use of an effective arbitration agreement with a class and collective action waiver that will stand up to attacks from plaintiffs’ class action lawyers. As reported in the first case below, a large nationwide courier company effectively obtained a court order shutting down a class action based on an effective arbitration agreement requiring individual arbitrations instead of a class action.  Plaintiffs’ class action counsel have sought to raise a host of arguments in the recent past seeking to invalidate such clauses. In an article republished on this blog entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in Independent Contractor Agreements,” we provide ten tips as to how to craft such agreements in a manner that overcomes arguments by plaintiffs’ class action lawyers seeking to keep their lawsuits in court.  

In the Courts (3 cases)

COURIER COMPANY SUCCESSFULLY COMPELS ARBITRATION WHERE AGREEMENT DELEGATES ARBITRABILITY TO THE ARBITRATOR TO DECIDE. A Georgia federal court granted a motion to compel individual arbitration of DoorDash drivers’ proposed class action claims where they did not elect to opt out of the arbitration provision in their independent contractor agreements, which contained a provision delegating the issue of arbitrability to the arbitrator. According to the class action complaint, the drivers alleged breach of contract by DoorDash, fraudulent inducement, and unjust enrichment because the company retained monies that were allegedly intended as tips for the plaintiffs. DoorDash moved to compel arbitration of the drivers’ individual claims under the Federal Arbitration Act. The drivers conceded that the independent contractor agreements were valid contracts, but argued that the FAA was inapplicable because the drivers fall within the exemption for transportation workers engaged in interstate commerce. The court granted the motion, noting that the independent contractor agreement expressly provided that the issue of exemption from the FAA was to be decided by the arbitrator. The class action waiver was enforceable, according to the court, because its terms were “clearly and comprehensibly written;” enforcement of the waiver would “not have the effect of immunizing” DoorDash from claims for unlawful behavior; the drivers had the opportunity to opt out of the arbitration provision including the class action waiver; and there was no claim by the drivers that the arbitration clause was unconscionable or in any manner limited the remedies that would be available in court. Webb v. DoorDash Inc., No. 19-cv-00665 (N. D. Ga. Jan. 9, 2020).

CALIFORNIA COURT REJECTS IC MISCLASSIFICATION SETTLEMENT AS INEQUITABLE TO ONE SET OF INSURANCE INDUSTRY CLASS MEMBERS.  A California federal district court has denied granting final approval to a $5.75 million proposed class action settlement between an insurance company and a class of 6,500 insurance salesperson trainees and agents. In their class action complaint against a life insurance company, the trainees and agents alleged wage and hour violations under the California Wage Orders and the Labor Code, the Private Attorneys General Act (PAGA), and unlawful business practices including misclassification of the trainees/agents as independent contractors and not employees. Among other things, the trainees/agents allege that they underwent training that lasted a week or more during which time they did not earn a commission and were not otherwise paid, and did not receive the minimum wage, overtime compensation, reimbursement for business expenses, or statutory meal and rest breaks. The federal court found that certification of the class for settlement purposes was appropriate. In considering whether the proposed settlement was “fair, reasonable, and adequate,” the court concluded that there was adequacy of representation, arms-length negotiations, and adequacy of relief, but that the trainees were not being treated equitably relative to the agents in terms of the funds being allocated to that segment of the class, particularly where the court found that the trainees’ claims were stronger than the claims of the agents.  Joh v. Am. Income Life Ins. Co., 18-CV-06364 (N. D. Cal. Jan. 9, 2020).

TRUCKERS OBTAIN PRELIMINARY INJUNCTION AGAINST ENFORCEMENT OF CALIFORNIA’S NEW IC MISCLASSIFICATION LAW.  A California state court granted a motion for a preliminary injunction that enjoined the State from enforcing California’s new IC misclassification statute, AB5, against motor carriers in California.  The basis for the motion to enjoin enforcement of the new law is that AB5 and the so-called ABC test for IC status that is codified in the new statute is preempted by the Federal Aviation Administration Authorization Act when applied to motor carriers in the trucking industry.

The defendants who obtained the injunction in an enforcement action by the State of California are a group of motor carriers that operate trucking and drayage companies serving the ports of Los Angeles and Long Beach.  The motor carriers use the services of independent owner-operator truck drivers to transport cargo short distances to and from the ports. The Los Angeles City Attorney’s Office filed suit in January 2018 against the companies alleging that the truckers were misclassified as independent contractors and not employees. The court concluded that the new California ABC test for IC status is preempted when applied to motor carriers because Prong B of the test – that the worker performs work that is outside the usual course of the hiring entity’s business – essentially prohibits motor carriers from using independent owner-operator contractors for its core transportation-related services, and that prohibition would have an impermissible direct or indirect effect on motor carrier prices, routes, and services.  The court concluded that the requirements of the ABC test in the Dynamex court decision and AB5 that codified Dynamex into law “clearly run afoul of Congress’ 1994 determination in the [FAAAA] that a uniform rule endorsing use of non-employee independent contractors … should apply in all 50 states to increase competition and reduce the cost of trucking services.” State of California v. Cal Cartage Transportation Express LLC, No. BC689320 (Super. Ct. L.A. County Cal. Jan. 8, 2020)

Administrative and Regulatory Initiatives (1 item)

U.S DEPARTMENT OF LABOR’S NEW JOINT EMPLOYER RULE WILL IMPACT INDEPENDENT CONTRACTOR MISCLASSIFICATION CLAIMS. On January 13, 2020, the U.S. Department of Labor released a new regulation setting forth its test for determining joint employer status under the Fair Labor Standards Act (FLSA). While the new rule did not expressly focus on the test for IC status, it made many references to its IC status test and will undoubtedly have an impact on certain types of IC claims – those where a business, which contracts with a third party company to provide services that are performed by workers classified as ICs, will also be liable under the joint employer doctrine if the third party is found to have misclassified the workers. As more fully discussed in our blog post of January 13, 2020, the new regulation makes it clear that the “economic realities” test for IC status under the FLSA rests on a different foundation than the test for joint employer status. The new rule clarifies that economic dependence, while relevant to a determination of IC status, has no relevance as to whether two or more companies are a worker’s joint employer. Whereas IC status generally focuses on the actions of the worker, joint employment status under the new regulation focuses on the actions of the potential joint employer. Additionally, unlike IC tests that focus on the right to control (even if not actually exercised), the new joint employer test requires the actual exercise of a factor establishing control.

Legislative Developments (2 items)

NEW JERSEY ENACTS SERIES OF NEW LAWS CRACKING DOWN FURTHER ON IC MISCLASSIFICATION.  New Jersey Governor Phil Murphy signed into law six bills that aim to crack down on IC misclassification by employers in that state. The six-bill legislative package, an outgrowth of the Governor’s misclassification task force, includes new laws that: permit the Department of Labor and Workforce Development to post to a list on its website of those persons found to be in violation of any State wage, benefit, or tax law and prohibit them from contracting with a public body until the liability for violations have been resolved to the satisfaction of the commissioner ‎(S.4226)‎; allow the State Treasury to share with the state Labor Department any information such as tax returns, audit files, or other reports to assist in the investigation of New Jersey wage, benefit, or tax law violations ‎(S.4228)‎; allow stop work orders to be issued against violators of wage and hour laws, including misclassification of employees as ICs (A.5838); provide an administrative “misclassification penalty” of up to a maximum of $250 per misclassified employee for a first violation and up to a maximum of $1,000 per misclassified employee for each subsequent violation (A.5839); impose joint liability for client employers and labor contractors, who violate any provision of New Jersey wage, hour, or tax laws including those concerning the misclassification of workers as ICs ‎(A.5840)‎; and require employers to post notices for employees about employee misclassification, including the prohibition against employers misclassifying employees as ICs and the standard that is applied by the state Labor Department to determine whether a worker is an employee or an independent contractor. In a press release issued on January 20, 2020, the Governor stated: “We cannot build a stronger and fairer economy without strong workplace protections that ensure fairness for employees. I am proud to sign these bills today to curb this unethical and illegal practice that hurts our working families and exploits New Jersey’s workers.” Notably, the package of bills did not include a controversial Senate bill (S.4204) intended to codify the New Jersey Supreme Court’s 2015 decision establishing an ABC test for determining IC status in that state.

NEW YORK CITY LAW PROTECTING INDEPENDENT CONTRACTORS FROM DISCRIMINATION AND HARASSMENT GOES INTO EFFECT.  The protections for employees in New York City from employment discrimination and workplace harassment that are set forth in the New York City Human Rights Law now extend to independent contractors and freelancers effective January 11, 2020. An amendment to the New York City Human Rights Law provides that ICs and freelancers are not only protected from discrimination and harassment under that law, but also have the right to receive reasonable accommodations for needs related to disabilities, pregnancy, lactation, religious observances, and status as victims of domestic violence, sexual offenses, or stalking. In a 2-page Guidance issued by the NYC Commission of Human Rights on January 13, 2020, the Commission answers questions related to the amendment. Specifically addressed are the requirement that certain employers must provide sexual harassment prevention training to ICs who work more than 80 hours in a calendar year and for at least 90 days; that employers will be liable for discriminatory acts committed by ICs and freelancers under certain circumstances; and that apps and platforms may be liable if they engage in discrimination against an IC who uses the platform. Prior to the passage of the amendment, the publisher of this blog was quoted on the new law in a September 12, 2019 article by John Herzfeld in Bloomberg Law’s Daily Labor Report, stating: “The Council bill, by ensuring that freelancers shouldn’t be subject to discrimination by a company that utilizes them to further its business, is consistent with a growing trend in the city and the state to give additional protections to freelancers and independent contractors.” Finding the bill to be vastly “overbroad,” this blog’s publisher added: “It goes [well] beyond only a company’s decisions to retain or let go an independent contractor, and encompasses everything in between: their compensation, promotion, benefits, and other terms and conditions or privileges of employment.”

Other Noteworthy Matters (1 item)

A REVIEW OF INDEPENDENT CONTRACTOR MISCLASSIFICATION AND COMPLIANCE LAW OVER THE PAST DECADE. In our January 2, 2020 blog post entitled “The Past Decade of Independent Contractor Misclassification and Compliance Law,” the publisher of this blog reviewed the last ten years of legal developments in this area of the law.  The article addressed (1) the progression of legislative developments over the past ten years, culminating with the recent enactment of the AB5 law in California; (2) the now commonplace occurrence of eight-figure settlements of IC misclassification cases; (3) the successes by some companies defending against IC misclassification class actions and regulatory challenges; (4) the dramatic impact of the key court decisions in Dynamex, Epic Systems, and New Prime on the litigation of claims against companies utilizing an IC business model; and (5) administrative and regulatory developments and how they have been changed from the Obama to Trump Administrations in Washington, D.C.  The blog post was based on an article by the publisher that was published in Bloomberg Law Reports on January 2, 2020.

Written by Richard Reibstein

Posted in IC Compliance

New Joint Employer Rule Will Impact Independent Contractor Misclassification Claims

Many companies that operate their businesses on an independent contractor model or supplement their workforce with ICs may be wondering if they will be impacted by the U.S. Department of Labor’s final rule on joint employer status, which was informally released today.  They are likely asking, “Does this final rule have any bearing on independent contractors?”  The answer is yes.

The Labor Department’s final joint employer rule issued earlier today does not set forth a new test for independent contractor status under the Fair Labor Standards Act. Nevertheless, it will have an important impact on one aspect of IC law:  whether a business that contracts with another company, which is found to have engaged in IC misclassification, will also be liable under the joint employer doctrine.  Under the final rule, the likelihood of such exposure will be considerably reduced.

Different Tests for IC Status and Joint Employer Status

The test for independent contractor status under the FLSA has been well established by U.S. Supreme Court decisions.  That test is commonly referred to as the “economic realities” test and it focuses on factors that relate to the worker’s economic dependence on the purported employer.  The final regulation makes it abundantly clear that the test for IC status is different than the test for joint employer status.  In particular, the final rule clarifies that economic dependence, while relevant to a determination as to whether a worker is an employee or IC, has no relevance as to whether two or more employers are the worker’s joint employer.  In one of the key pronouncements of the final rule, the Labor Department states: “Whether the employer is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability under the [FLSA].”

The proposed rule had identified three example of factors related to economic dependence that some courts had used in determining joint employer status.  The new rule makes is clear that while those factors may be relevant to determining IC status, they are wholly irrelevant in determining joint employer status.  The final rule identified a fourth factor that may be pertinent to IC status but should not be used in determining joint employer status.  Those four factors are:

(1) where the worker performs a specialty job or a job that otherwise requires special skill, initiative, judgment, or foresight;

(2) where the worker has the opportunity for profit or loss based on his or her managerial skill;

(3) where the worker invests in the equipment or materials required to perform the work or the employment of helpers; and

(4) the number of contractual relationships, other than with the potential joint employer, that the potential joint employer has entered into to receive similar services.

Whereas IC status generally focuses on the actions of  the worker, joint employer status under the final rule focuses on the actions of the potential joint employer.

New Test for Joint Employer Status

For joint employer determinations, the final new rule establishes a four-factor balancing test.  The rule focuses on whether the potential joint employer exercises or controls one or more of the following four “control factors” –

  • hires or fires the workers found to be employees;
  • supervises and controls their work schedules or conditions of employment to a substantial degree;
  • determines their rates of pay and methods of payment; and
  • maintains their employment records.

Unlike IC tests that focus on the right to control – which can be established through contractual provisions, even those that are unexercised – the final joint employer test depends on the actual exercise of at least one of the above ”control factors.”   This is one of the underlying principles of the final rule – and is a meaningful change.

Many federal courts had determined a company’s joint employer status under the FLSA based on the rights it reserved – even if it never exercised such rights.

If the courts give deference to this final regulation, no longer will they give the same weight to unexercised rights under a contract.  This will result in fewer findings of joint employer status under the FLSA.

As the final rule states: “The potential joint employer’s ability, power, or reserved right to act in relation to the employee may be relevant for determining joint employer status, but such ability, power, or right alone does not demonstrate joint employer status without some actual exercise of control.”

Under the standard articulated today by the U.S. Department of Labor, joint employer status is a far less likely result for companies that utilize the services of workers under a contractual relationship with a third party.    

Types of Situations in Which Joint Employer Liability Can Arise in an IC Misclassification Case

As mentioned in many of our monthly blog posts about new and pending cases, it is commonplace for plaintiffs’ class action lawyers to sue multiple parties when filing class and collective actions asserting independent contractor misclassification.

For example, retailers have been sued as joint employers under the FLSA when they contract with delivery companies that in turn retain drivers and installers as ICs to deliver and/or install the retailer’s purchases.  Similarly, companies providing cable or telephone services have been sued as joint employers when they use a third party to engage personnel classified as 1099ers to sell services or install equipment.  Even the federal government has been sued as a joint employer, most recently by a dental hygienist retained as a 1099er by a government contractor that provides dental services at a federal prison.

In contrast, joint employer liability generally should not be an issue where workers classified as ICs provide services directly to the business that engages them or to customers of the business. In that instance, there is generally no “second company” involved that may be jointly liable together with the company that has retained the workers.  For those businesses, the final rule on joint employer liability would not be applicable.

Takeaways

The final joint employer regulation only applies to lawsuits brought under the FLSA; it has no impact on independent contractor misclassification liability under state wage and hour laws.  While this final rule will minimize the likelihood of joint employer liability for IC misclassification under the FLSA, companies would be wise to minimize their exposure under that law and state wage laws by enhancing their level of independent contractor compliance.

How can businesses do so? Many have resorted to a process such as IC Diagnostics™, whereby companies are able to restructure, re-document, and re-implement their IC and business relationships in a manner that considerably enhances their compliance with federal and state IC laws.  Those companies that have already undergone a process such as IC Diagnostics are more likely to avoid joint employer liability, as the process includes re-documenting contracts with any other company that engages ICs directly.

Written by Richard Reibstein

Posted in IC Compliance

November and December 2019 Independent Contractor Misclassification and Compliance Law News Update

Our combined news update provides guidance for companies that utilize independent contractors on what not to do.  The first lesson involves a company’s waiver of its best argument for compelling arbitration of an IC misclassification claim.  As we pointed out in our blog post analyzing the U.S. Supreme Court’s decision last year in Oliveira v. New Prime, Inc., that decision may have limited impact because, unlike the Federal Arbitration Act that excludes interstate transportation workers from the arbitration provisions of the FAA, state arbitration laws can provide an alternative basis for compelling arbitration.  New Prime, though, never sought to compel arbitration under the applicable state arbitration law, leading to a court decision that it waived its right to assert the applicability of the state arbitration law and therefore could not use its “get out of jail” card.  This case reinforces the importance of including state arbitration laws (in addition to the FAA) in a motion to compel arbitration at an early time frame or , like New Prime, a company may be found to have waived this valuable defense.

The second lesson involves a case in Florida where a company wisely put into effect an arbitration clause but failed to draft it in an effective manner, limiting it to claims by the workers’ corporate entities but not disputes with the workers themselves.  As we pointed out in an article published by Bloomberg Law’s Daily Labor Report about drafting effective arbitration agreements with class action waivers, these types of contractual provisions should be drafted with care and anticipate arguments by plaintiffs’ class action lawyers that the agreement does not cover the dispute or is unconscionable.

The final lesson derives from a court’s rejection of an $11.5 million settlement of an IC misclassification class action: even when the amount of the settlement is very substantial, the settlement terms must anticipate court concerns about the terms including whether the settlement fund is reasonable, the waiver is overbroad, and the suitability of the class representatives.  Otherwise, there is a higher likelihood that the proposed settlement will not be approved.  Indeed, the greater the settlement amount, the more likely the proposed settlement will be more closely scrutinized by a court.

In the Courts (7 cases)

WAIVER OF STATE ARBITRATION LAW IMPERILS TRANSPORTATION COMPANY.   A Massachusetts federal court has held that trucking company, New Prime, Inc., waived its right to compel arbitration under the Missouri Uniform Arbitration Act (MUAA) of a trucker’s class and collective action claims alleging violations of the federal Fair Labor Standards Act and Missouri Minimum Wage Law.  New Prime, Inc. (the defendant in the Supreme Court case that was the subject of one of our prior blog posts) attempted on three occasions to compel arbitration of those wage and hour claims under the Federal Arbitration Act (and not the MUAA) but failed.  Only after the Supreme Court concluded that the FAA exempted from arbitration all workers who are involved in interstate transportation including independent contractors did New Prime seek to compel arbitration under the MUAA. The court stated that New Prime “wants a fourth bite of the arbitration apple.” In concluding that New Prime waived its right to arbitrate under the Missouri law, the court determined that New Prime had knowledge of the existing right to arbitrate; acted inconsistently with that right; and prejudiced the truckers opposing arbitration. The court also found that the truckers suffered prejudice because a timely motion to compel arbitration under the MUAA could have saved the truckers, including the opt-ins, and the Court, unnecessary time and expense. Thus, any company seeking to compel arbitration under state law must do so promptly and take no steps that may constitute a waiver of the state arbitration law.  Oliveira v. New Prime, Inc., No. 15-10603 (D. Mass. Dec. 9, 2019).

ANOTHER FED EX GROUND IC MISCLASSIFICATION CLASS ACTION CERTIFIED IN NEW JERSEY.  After settling independent contractor cases from around the country for hundreds of millions of dollars and despite changing its business operations, FedEx Ground is facing a new round of IC class actions, including one in federal court in New Jersey where a judge has granted class certification to drivers alleging violations of the New Jersey Wage Payment Act. The drivers claim that FedEx wrongfully withheld from the drivers’ wages amounts for workers’ compensation, employment taxes, and business expenses such as vehicle insurance and maintenance. The three named plaintiffs contracted with FedEx in their own corporate names under Operating Agreements that FedEx no longer uses.  The plaintiffs alleged that FedEx made deductions from drivers’ pay for workers’ compensation insurance, accident insurance, “business support” expenses, and liability insurance. The amended complaint also alleges that FedEx controls the drivers by requiring them to display the FedEx logo on their vehicles; wear approved uniforms; allow FedEx personnel to ride with them to gather data regarding the drivers’ routes; meet the FedEx “Standard of Service”; accept FedEx’s determination of the size and composition of the routes; accept the formula for payment of the drivers that FedEx established; and carry scanners while making deliveries.  A previous motion for class certification had been denied by the court because the drivers failed to provide any analysis, guidance or methodology to determine whether proposed class members experienced the same allegedly improper wage deductions. Carrow v. FedEx Ground Package Systems, Inc., No. 16-3026 (D.N.J. Dec. 26, 2019).

JANI-KING PREVAILS TO LIMITED EXTENT IN IC MISCLASSIFICATION CLASS ACTION IN CONNECTICUT.  A federal court in Connecticut has granted summary judgment to Jani-King, the largest commercial cleaning franchisor, on the “unjust enrichment” claims in an IC misclassification lawsuit brought by over 100 cleaning franchisees. The court, however, declined to award summary judgment with regard to the franchisees’ claim that Jani-King unlawfully classified them as independent contractors under the Connecticut’s ABC test for IC status.  Under the three-pronged ABC test in Connecticut for assessing independent contractor/employee status, the franchisees submitted evidence of Jani-King’s control over “nearly every aspect” of the franchisees’ cleaning services; argued that the customers’ homes constituted Jani-King’s places of business; and provided evidence that the franchisees did not have independent business enterprises in the commercial cleaning context outside of their work for Jani-King. The court concluded that the evidence submitted was sufficient to raise genuine issues of fact precluding a grant of summary judgment as to the misclassification issue. As we reported in this blog, Jani-King recently settled a similar case brought under Pennsylvania law for $3.7 million.  Mujo v. Jani King Int’l Inc., No. 3:16-cv-1990 (D. Conn. Dec. 21, 2019).

ARBITRATION AGREEMENT WITH IC’S CORPORATE COMPANY DOES NOT BIND WORKER TO ARBITRATION.  A Florida federal court has refused to compel arbitration of plaintiffs’ individual claims where the arbitration clause contained in the Independent Contractor Agreement was expressly limited to disputes between the plaintiffs’ corporate entities and the defendant company, Eagle Painting. A collective action was filed on behalf of a class of painters against the painting company alleging that the company failed to provide overtime compensation in violation of the Fair Labor Standards Act due to misclassification of the painters as independent contractors and not employees. Conditional certification was granted and at least two individuals opted in as individual plaintiffs. Subsequently, the defendant requested that the court compel arbitration of those two claims pursuant to the terms of the Independent Contractor Agreements executed by each one. The Agreement provided the following relevant language: “Contractor and Company agree that final and binding arbitration will be the exclusive means of resolving any disputes between Contractor and Company…” In denying the company’s motion to compel arbitration, the court stated that the Agreements explicitly defined the terms “Contractor” as each of the painters’ respective corporations and “Company” as the Defendant, Eagle Painting. Because the arbitration clause was expressly limited to disputes between the plaintiffs’ corporations and the company, the court found that the workers’ individual claims were not subject to arbitration. The court stated:  “Had the parties intended to bind the Plaintiffs individually, the Agreements could have expressly stated as such. However, the Agreements do not, and, therefore, Plaintiffs have not agreed to arbitrate their individual claims.” Garcia v. J&J, Inc., No. 19-cv-60728 (S.D. Fla. Nov. 8, 2019).

CALIFORNIA TRUCKING ASSOCIATION CHALLENGES AB5 AND SECURES TEMPORARY RESTRAINING ORDER FOR ITS MEMBERS.  Seven weeks before California’s AB5 law took effect, the California Trucking Association (CTA) challenged the legality of Assembly Bill 5 (AB5), which took effect in California on January 1, 2020.  The CTA alleges that AB5 violates the Supremacy Clause and Commerce Clause and that the new state ABC test for independent contractor/employee status set forth in AB5 is preempted for their members by the Federal Aviation Administration Authorization Act (FAAAA). The lawsuit filed in a California federal court seeks declaratory and injunctive relief prohibiting the application and enforcement of California’s new, restrictive test for determining worker status under AB5, a law we have commented upon frequently and was the subject of a recent commentary published in Law360 and republished in this legal blog. CTA alleges in its amended complaint that the trucking industry has relied upon the owner-operator model for decades and its “ability to contract with independent contractors is necessary because of the demand for, duration of, and volume of trucking services by individual motor carriers fluctuates significantly.” CTA claims that prior to the California Supreme Court’s Dynamex decision, which AB5 sought to codify in the state’s Labor Code, it was lawful for CTA’s members who contracted with owner-operators to treat them as independent contractors and not employees for purposes of California’s labor laws.  With the new statute’s adoption of the Dynamex ABC test for IC status, each CTA member that continues to use individual owner-operators to provide services to their customers must treat these workers as employees and provide them with all of the protections afforded to California employees.

One of the main thrusts of the CTA lawsuit is that Prong B of the ABC test “is expressly preempted by the FAAAA because the requirement that motor carriers treat all drivers as employees and the concomitant de facto prohibition on motor carriers contracting with independent owner-operators to perform trucking services in California directly impacts the services, routes, and prices offered by CTA’s motor-carrier members to their customers.”  This same argument has succeeded in before the First Circuit but failed before the Third Circuit, creating the likelihood that the U.S. Supreme Court may eventually rule on whether the FAAAA preempts the most challenging prong of the ABC test.  California Trucking Association v. Becerra, No. 3:18-cv-02458 (S.D. Cal. Nov. 12, 2019). Just hours before the new law was set to take effect, Judge Roger Benitez granted a temporary restraining order and set a date, January 14, 2020, for a hearing on the CTA’s request for a preliminary injunction.

POSTMATES’ $11.5 MILLION SETTLEMENT OF IC MISCLASSIFICATION CLASS ACTION REJECTED BY COURT.  A California state court has refused to approve Postmates’ $11.5 million settlement with a proposed class of approximately 380,000 couriers who are claiming that they were misclassified as independent contractors and not employees.  The court issued a “tentative ruling” identifying sections of the proposed settlement agreement that require further explanation. Postmates is an on-demand delivery service that offers clients delivery from restaurants and stores by couriers engaged by Postmates to make the requested deliveries. The court stated, “Significant concerns are present both by what is contained in the language of the settlement and what facts are missing from the motion [for preliminary approval of class settlement.]”  Included among the further information sought by the court was: the maximum value of all the class claims and PAGA claims or the bases for their valuation; declarations from the named plaintiffs setting forth the basic material facts about their employment to demonstrate their adequacy to represent a settlement class; justification by the named plaintiffs for the reasonableness of their proposed settlement discount; and justification for the broad release of claims and for the plaintiffs’ additional release of claims without proper compensation.  Rimler v. Postmates Inc., No. CGC-18-567868 (Super. Ct. County of San Francisco Nov. 21, 2019).

CALIFORNIA SUPREME COURT TO DECIDE RETROACTIVITY OF DYNAMEX.  The California Supreme Court will decide the issue of the retroactivity of its Dynamex decision upon request of the U.S. Court of Appeals for the Ninth Circuit. As we discussed in our prior blog post of August 8, 2019, the U.S. Court of Appeals for the Ninth Circuit withdrew its prior decision to apply Dynamex retroactively in an independent contractor misclassification case and placed the question of retroactivity squarely before the California Supreme Court. On November 20, 2019, the California high court agreed to address that question. We noted in our prior blog post of June 10, 2019 that the Ninth Circuit had held that the California Supreme Court’s decision in Dynamex applied retroactively to an 11-year class action lawsuit brought against a nationwide janitorial cleaning business, Jan-Pro International Franchising, Inc., by franchisees who claimed they were misclassified as independent contractors. The Dynamex decision, which post-dated the district court’s decision in Jan-Pro, adopted a strict form of the “ABC” test for determining whether workers are independent contractors or employees for claims brought under the state’s wage orders. The issue of the retroactivity of Dynamex is likely to be influenced by the passage of AB5, which codified Dynamex and went into effect on January 1, 2020. Vazquez v. Jan-Pro Franchising International, Inc., No. S258191 (Cal. Sup. Ct. Nov. 20, 2019).

Administrative and Regulatory Initiatives (2 matters)

MASSACHUSETTS ATTORNEY GENERAL REACHES “LANDMARK SETTLEMENT” WITH GIG ECONOMY COMPANY TO RECLASSIFY IC’S.  The Office of Massachusetts Attorney General Maura Healy reportedly reached a “landmark settlement” with Stynt, a Boston-based company that provides a digital platform for healthcare workers who wish to search, apply, and get hired for short- and long-term staffing opportunities posted by thousands of dental and medical practices nationwide. It was further reported that as of January 1, 2020, those who chose to use Stynt’s platform will be treated as employees and not independent contractors. This settlement is likely to cause repercussions throughout other gig economy businesses in Massachusetts.

VIRGINIA RELEASES TASKFORCE REPORT ON WORKER MISCLASSIFICATION.  Virginia Governor Ralph Northam has released the final report of the Inter-Agency Taskforce on Worker ‎Misclassification and Payroll Fraud, outlining recommendations intended to promote fair pay, workplace protections, and benefits. According to a News Release issued by ‎the Office of the Governor on November 22, 2019, the Taskforce determined that ‎approximately 214,000 Virginia employees are currently misclassified as independent ‎contractors by their employers, and that Virginia is deprived of an estimated $28 million in ‎tax revenues each year due to such misclassification. Among other remedies, the Taskforce ‎recommends increased education about worker misclassification for employers and employees, formally adopting and continuing to apply the IRS test for determining worker status; creation of a private right of action that permits misclassified workers to sue for wages, lost benefits, taxes, and attorneys’ fees; additional funding for ‎investigations into possible wrongdoing; and harsher penalties for businesses that illegally ‎misclassify their workers. Governor Northam stated: “It’s clear that misclassification is ‎robbing Virginia workers of the pay, benefits, and protections they have earned. These concrete ‎policy changes will make a tremendous difference for thousands of Virginians and their ‎families, and I look forward to working with the General Assembly to turn these ‎recommendations into law.”

Other Noteworthy Matters

FIVE DEGREES OF INDEPENDENT CONTRACTOR MISCLASSIFICATION.  In our December 17, 2019 blog post entitled, “A Solution to the ‘Five Degrees of Independent Contractor Misclassification,’” written by the publisher of this blog, “independent contractor misclassification” is described as a phrase that is “misunderstood, misapplied, and misused – constantly.” The blog post was based on the commentary that appeared in Law360 on December 16, 2019.  The commentary describes in detail how there are at least five different degrees of IC misclassification: unpardonable, uninformed, unprepared, unintentional, and unjust. Given the state of affairs in California involving fall-out from the new Assembly Bill 5 (AB5), which was signed into law on September 18, 2019 and is effective January 1, 2020, the commentary cautions that legislative efforts to deter and eliminate unpardonable IC misclassification, as well as uninformed and unprepared misclassification, may also sweep in all forms of unintentional misclassification and may even unjustly outlaw IC relationships that have for years been legitimate and lawful under almost all state and federal laws.  The commentary suggests that instead of other state legislatures seeking to change existing law in a manner that would effectively eliminate legitimate ICs, legislators should seek greater enforcement of existing laws in lieu of changing the tests for IC status. That suggestion was informed in part by studies and reports that an overwhelming number of ICs would prefer not to be converted into employees but would rather remain as ICs.

 

Posted in IC Compliance

The Past Decade of Independent Contractor Misclassification and Compliance Law

Ten years ago, when we began a legal blog dedicated to independent contractor compliance and misclassification, the landscape of the law involving ICs was quite different than today – although a great deal remains unchanged.  We summarize below over 250 comprehensive blog posts published over the past ten years dealing with legislative, judicial, and administrative developments that have shaped this key niche area of the law.

Today, the gig economy’s reliance on the independent contractor business model grabs a great deal of attention from lawmakers, regulators, and class action lawyers.  But turn the clock back ten years and the same story was making headlines – not with an entire industry but rather with a single company that was caught in the crosshairs of some of the same class action lawyers that are now involved in litigating the gig economy IC misclassification cases.  That first poster child for IC misclassification claims was FedEx Ground, and our first substantive post in 2010 was “FedEx Ground Suffers a Setback in Illinois.”  FedEx ultimately paid nearly $500 million in settlement costs to resolve dozens of cases brought against it by drivers for its Ground Division.

While a few courts and administrative agencies found that FedEx Ground was in compliance with IC laws, the company was found to have violated state IC laws in large part because the very contract it drafted for drivers needlessly included clauses that retained the right to direct and control them – enough control for two federal appellate courts to conclude that FedEx Ground had misclassified the drivers as a matter of law.

Companies in the gig economy have not yet suffered IC misclassification setbacks anywhere near what FedEx Ground experienced.  But the prolonged course of legal attacks on businesses using ICs illustrates the need for companies in the sharing economy, as well as more traditional industries, to put into place an effective strategy using available tools to enhance compliance with state and federal IC laws.  That is the subject of our “Takeaway” below.

A decade of legislative developments culminating with AB5

Back in 2010, we began tracking and collecting for our readers a host of bills that were introduced in Congress to crack down on IC misclassification.  One of the early bills was the Payroll Fraud Prevention Act,  We first reported on this bill in a blog post in 2011, followed by posts in 2013, 2014, and 2015 when the bill was reintroduced with virtually identical language.  Despite no likelihood of passage, the bill was reintroduced in 2017 and was the subject of hearings on the “future of work” in the fall of 2019.

During that ten-year period, although a dozen or so bills regulating ICs were introduced in Congress, not a single bill involving ICs was passed by Congress, and none is likely in the current political climate in Washington, D.C.

While Congress has had no legislative accomplishments in the past decade, legislative accomplishments nonetheless occurred at the state level.  One of the major developments over the past ten years has been the rise in state legislation involving independent contractors.  Some states have passed laws cracking down on industries where IC misclassification was found to be prevalent, such as the construction industry, as we reported in blog posts dealing with new laws in New York and Pennsylvania targeting that industry. We have also published blog posts commenting on new state laws that seek to curtail the use of ICs, penalize willful misclassification, impose greater penalties for misclassification of ICs, and create misclassification task forces.  In contrast to these types of legislation, a few states have passed legislation that accommodates legitimate independent contractor relationships or even encourages IC relationships.

The most meaningful law enacted in the past ten years involving independent contractors is undoubtedly the recent passage in California of Assembly Bill 5 (AB5), effective January 1, 2020.  That law sought to codify into a statute the California Supreme Court’s decision in the Dynamex case, which adopted a so-called “ABC” test that severely limits the use of ICs.  AB5 has created IC convulsions throughout the state.

Legal challenges to AB5 are being filed by transportation companies and their industry associations, a ballot initiative is being proposed to overturn the legislation, some companies are converting ICs to employees, other companies are terminating relationships with workers previously regarded as ICs, and other companies are just going out of business instead of risking enormous legal liability if workers treated as ICs are found to have been misclassified.

Despite the view by many companies that AB5 spells the end of ICs in California, we have noted that companies using an IC business model may still be able to operate lawfully in California after AB5 becomes effective.  We have also commented that other states should refrain from enacting laws with ABC tests like California’s AB5, even though it carves out over 50 industries from the Dynamex ABC test in a series of exemptions, some of which have been characterized as “opaque” and “ambiguous.”

The absence of legislation at the federal level has undoubtedly created an impetus for state lawmakers to pass a number of new IC laws.  This has contributed to the enactment of a crazy quilt of state laws with vastly different tests for IC status from one state to the next.  Differences in state IC laws has made it extremely challenging for companies operating on a nationwide basis to maintain a high level of compliance with IC laws.  As noted in the Takeaway, though, there are tools that companies can use to enhance their compliance with this wide-ranging array of state and federal IC laws.

Multi-million-dollar IC misclassification settlements were rare in 2010, but are now commonplace

The first seven-figure settlement in the area of IC misclassification involved FedEx Ground, which agreed to pay $3 million in a July 2010 settlement with the Attorney General of Massachusetts to resolve claims that it misclassified Ground Division drivers.  Shortly thereafter, FedEx settled similar claims with the Attorney General of Montana for $2.3 million.

The first multi-million-dollar settlement of a class action lawsuit alleging IC misclassification involved 3P Delivery Inc., settling with drivers from Oregon and Washington in October 2010 for $2.25 million.

The earliest gig economy settlement of an IC misclassification case took place in January 2013, when kgb USA, a text message and internet information provider, settled a lawsuit brought by the U.S. Department of Labor for $1.3 million.

Later in 2013, the first of many IC misclassification settlements in the adult entertainment area was reached between exotic dancers and Penthouse Executive Club, which agreed to pay the dancers and their lawyers $8 million.  Since that time, adult entertainment clubs have been targeted for IC misclassification lawsuits and have entered into dozens of seven-figure settlements with dancers.

The first eight-figure IC misclassification settlement in the past decade was reached in January 2014 by Copley Press, publisher of the San Diego Tribune, which agreed to pay $11 million to settle claims by a class of 1,200 paper carriers.

The first reported IC misclassification settlement in the retail economy was with Lowe’s in May 2014, when it settled with home improvement contractors for $6.5 million.  Other retailers have been sued, such as Macy’s, J.C. Penney, Sears, and Hope Depot, leading to other multi-million-dollar IC misclassification settlements in this industry.

Logistics and delivery companies have been targeted repeatedly as class action defendants in IC misclassification cases, and the amounts of settlements in those cases are often very substantial. For example, XPO Logistics settled one of many IC misclassification cases against it for $16.5 million.

By mid-decade, the first nine-figure settlement in an IC misclassification case was reached, when FedEx settled a class action with Ground Division drivers for $228 million.  This settlement followed on the heels of a decision by the U.S. Court of Appeals for the Ninth Circuit, which held that FedEx had misclassified those drivers in California as a matter of law.  That decision was one of first published decisions by an appeals court on the merits of an IC misclassification claim.

Since 2016, the gig economy has become the main target of plaintiffs’ class action lawyers in IC misclassification cases.  In early 2016, two ride-sharing companies announced that they had reached large settlements with drivers in California and Massachusetts:  $12.5 million in the case of Lyft and between $84 million and $100 million in the case of Uber Technologies. The federal courts overseeing those settlements, however, rejected both as being legally inadequate.  This prompted Lyft to recalibrate its settlement parameters and settle its California class action in June 2016 for $27 million.

Uber, though, chose to reevaluate its defense strategy and adopt an even more vigorous litigation approach, together with a greater reliance on arbitration agreements with class action waivers. Eventually, Uber chose to resolve most of its IC misclassification cases in the first and second quarters of 2019 (just before it issued its Initial Public Offering), settling its California and Massachusetts class actions along with about 60,000 individual arbitrations for approximately $175 million.

Nine-figure settlements were not limited to FedEx and Uber: Swift Transportation announced in March 2019 that it reached a $100 million settlement with 20,000 owner-operators.

Gig economy companies have been sued regularly for IC misclassification, including such household names as Postmates, Instacart, DoorDash, GrubHub, Handy, and many others, some of which have settled cases for sizeable seven-figure amounts.

There has been virtually no industry using ICs that is immune from an IC misclassification lawsuit, and the list would go on for pages.  Just taking one letter from the alphabet, “C”, IC misclassification lawsuits have been brought by cable television installers, cheerleaders, chiropractors, cell phone sales agents, convenience store franchisees, and cleaning contractors and custodians.

Some companies have prevailed in IC misclassification class actions and regulatory challenges

Some companies have successfully defended against IC misclassification cases.  American Family and Northwest Mutual have withstood challenges to their IC business model for insurance agents.

While some oil and gas companies have settled IC misclassification cases for considerable amounts, at least one has withstood that type of legal challenge by directional drilling consultants.

High school referees have been found to be properly classified as ICs, black car drivers have succeeded, as have distributors for a baked goods company.

The list of those who have succeeded are a lot shorter than the list of those who have settled IC misclassification cases, because the legal fees alone to defend these types of lawsuits can approach the cost of settling them.

Three Court Cases in the Past Two Years Have Already Had a Dramatic Impact on IC Misclassification Cases: Dynamex, Epic, and New Prime

The decision that has caused an earthquake in California independent contractor circles was Dynamex, issued by the California Supreme Court on April 30, 2018Overnight, it changed close to three decades of settled law in California that had been based on the 1989 California Supreme Court decision in the Borello case, which had set forth a non-exhaustive list of factors that the courts should consider in determining if a worker was an IC or employee.  In Dynamex, the California Supreme Court created a so-called ABC test where all three prongs must be met to establish IC status.

Many companies – from mom-and-pop shops to the largest gig economy companies – had invested in and built their businesses in reliance on Borello, only to have the highest court in the state change the test for IC status in a manner that severely restricts the use of ICs.  As noted above, the Dynamex decision prompted the California legislature to pass AB5, which was signed by the Governor and is effective January 1, 2020.  While AB5 was designed to “codify” Dynamex into the California Labor Code, it exempted more than 50 industries from the ABC test and allows them to continue to qualify for IC status under Borello.

Rather than simplify the law, which the California Supreme Court sought to do by enacting a three-part test, litigation resulting from Dynamex and AB5 will likely complicate the legal landscape in California and consume a great deal of attention in the next year or two – and maybe a number of years thereafter.

The second noteworthy decision in the past decade was issued in May 2018 by the U.S. Supreme Court in the Epic Systems Corp. case.  That opinion upheld mandatory arbitration agreements, including those with class action waivers, imposed on workers by companies. Epic Systems has dramatically changed the landscape of IC misclassification class actions, prompting motions to compel arbitration and reducing considerably the cost of settlements in these types of cases.

In a commentary entitled “Ten Tips for Drafting Arbitration Agreements with Class Action Waivers in Independent Contractor Agreements,” which was published by Bloomberg BNA Daily Labor Report on November 8, 2018, we noted that while Epic Systems may have permitted mandatory arbitration agreements with class action waivers, many courts have struck down such agreements because they were not well-drafted or were found to be unconscionable under applicable state laws. The above commentary provided guidance to companies seeking to effectively draft such arbitration agreements with class action waivers.

The third judicial decision of note in the past two years was the U.S. Supreme Court’s opinion in New Prime Inc., holding that Section 1 of the Federal Arbitration Act (FAA) exempts interstate transportation workers from mandatory arbitration agreements.  That January 2019 decision had prompted Swift Transportation, as mentioned above, to settle its class action IC misclassification lawsuit by owner-operators for $100 million, once it became clear that the FAA could not be used to compel individual arbitrations of the IC misclassification claims.

Plaintiffs’ class action lawyers are now trying to expand the New Prime decision to cover couriers making local deliveries of food, groceries, and retail goods.  That argument will likely be litigated for years before being resolved, possibly by the U.S. Supreme Court.

Administrative and Regulatory Developments in the Past Decade

Perhaps the biggest change in the landscape of IC misclassification law over the past ten years has been in the administrative and regulatory arena.  At the federal level, we began the decade under a Democratic Administration in Washington, D.C., and ended the decade with a Republican Administration. That has meant dramatic differences at the National Labor Relations Board and the U.S. Department of Labor in their approaches to determining IC status.

At the NLRB, there were three major developments affecting IC status during the Obama Administration.  In September 2014, the NLRB issued a ruling that FedEx Ground Division drivers were not ICs but rather employees subject to being represented by a union. The Board disagreed with the U.S. Court of Appeals for the District of Columbia Circuit that the opportunity offered to drivers to acquire and operate multiple routes was a key factor demonstrating their IC status.  The NLRB instead held that “actual, not theoretical, entrepreneurial opportunity” is the “animating principle” of IC status.

A second major decision affecting IC status was the NLRB’s August 2015 decision in Brown-Ferris Industries that joint employer status is to be determined by the contractual right to control the workers, not on whether that right was actually exercised.  We commented that while the case did not directly involve IC status, it appeared that the NLRB would apply it the “right to control” principle in cases involving the IC status of workers that were seeking representation under the NLRA.

Finally, we noted in a blog post in August 2016 that the NLRB’s General Counsel had issued an Advice Memorandum where he seemed poised to find that IC misclassification, standing alone, was itself an unfair labor practice because it purportedly deprived workers of the protections of the National Labor Relations Act by classifying them as non-employees.

All of those decisions went by the wayside after a Republican Administration was able to install new members of the NLRB.

In January 2019, the NLRB overruled the 2014 FedEx decision and the earlier FedEx decision on which it was based. The Board concluded in SuperShuttle DFW, Inc.  that shuttle drivers that owned and operated franchises were independent contractors and not employees eligible for representation under the NLRA.  We commented that in overruling the earlier FedEx cases, the current NLRB set forth a “non-exhaustive” list of eight common law factors, noting that none of the eight were determinative and all should be evaluated “through the prism of entrepreneurial opportunity.”

In May 2019, the General Counsel of the NLRB issued an Advice Memorandum that drivers providing transportation services to customers of Uber Technologies are ICs and therefore outside the purview of the NLRA. In concluding that the Uber drivers were independent contractors, the Advice Memorandum stated that the drivers had virtually complete control of their cars, work schedules, and log-in locations, as well as freedom to work for competitors of Uber, all indicating significant entrepreneurial opportunity for the drivers. The Advice Memorandum pointed out that there was some control exercised by Uber, such as its limitation on the drivers’ ability to select trips and its establishment of fares, but when weighed against the other factors in favor of entrepreneurial freedom, the drivers were independent contractors under the NLRA.

Finally, in August 2019, the NLRB issued a decision finding that the act of misclassifying workers, standing alone, was not an unfair labor practice. As we stated in a blog post explaining the decision, the NLRB essentially held that “when an employer decides to classify its workers as independent contractors, it forms a legal opinion regarding the status of those workers and its communication of that legal opinion to its workers is privileged by Section 8(c) of the Act . . . .’”

At the U.S. Department of Labor, the biggest development occurred In June 2015, when the Administrator of the Wage and Hour Division of the Labor Department issued an Administrator’s Interpretation addressing the misclassification of employees as ICs under the Fair Labor Standards Act.  The 15-page Interpretation set forth the test to be used by the Labor Department in enforcing its wage and hour laws against companies that classify workers as independent contractors. The official interpretation focused almost entirely on economic dependence, to the exclusion of most of the other factors that the Administrator said should be considered.  Many practitioners regarded the Administrator’s Interpretation as a roadmap for plaintiffs’ class action lawyers bringing IC misclassification cases under the FLSA.

After a new Secretary of Labor was nominated by President Trump and confirmed by the Senate, changes at the Labor Department were swift.  On June 7, 2019, as we noted in a blog post that day, the Department of Labor announced that it was withdrawing the former Administrator’s Interpretation on the issue of IC status under the FLSA.

In April 2019, the Labor Department issued an Opinion Letter on the issue of independent contractor status of an on-demand virtual marketplace company (VMC) that refers end-market consumers to service providers who offer delivery, transportation, shopping, moving, cleaning, plumbing, painting, and household services. The Labor Department examined six factors pertinent to IC status under the FLSA and concluded that all six favored IC status.

Just before the Opinion Letter was issued last April, the Labor Department issued a proposed new regulation, likely to be released in final form in the next month or so, on the issue of joint employer status.  The proposed regulation made it abundantly clear that joint employer status and IC status are two wholly different legal matters.  The test for IC status under the FLSA is commonly referred to as the “economic realities” test and it focuses on factors that bear on the workers’ economic dependence on the purported employer.  As we pointed out in a blog post, the proposed regulation clarifies that economic dependence has no relevance to joint employer status.  In one of the key pronouncements of the proposed rule, the Labor Department states that “joint employer status under the Act is not determined by the employee’s ‘economic dependence’….”

Takeaway: How to Enhance IC Compliance

One matter that has remained constant during the past decade is the need for companies using ICs to take thoughtful and well-designed steps to enhance their compliance with IC laws.  While the current Administration may not be as aggressive about enforcing the federal wage and hour laws as the past Administration, there has been no perceived unwillingness by the Labor Department to pursue companies that have intentionally or recklessly misclassified employees as ICs.  Nor has there been any perceived falloff of IRS audits of companies that utilize a business model reliant on the use of ICs.

Many state regulatory agencies have continued to conduct audits and investigations of companies that treat workers as ICs instead of employees, forcing businesses to continue to defend an endless number of audits seeking unemployment insurance taxes or workers’ compensation premiums.

Class action lawsuits have not abated, despite the Supreme Court’s decision in Epic Systems that countenanced the use of mandatory arbitration agreements including those with class action waivers. While the value of settlements may have decreased due to Epic, these types of lawsuits continue to proliferate and are likely to hound companies with an IC dependent business model.

The enactment of AB5 in California has caused IC misclassification to enter the national conversation, especially due to the disruption of legitimate IC relationships in that state, the closing of businesses that had been reliant on ICs, and the interest of legislators in other states to adopt a version of AB5 despite its drawbacks.  This is likely to prompt even more IC misclassification lawsuits in the coming decade.

All of this leads to one overriding takeaway for businesses that are reliant on ICs: the best defense is to elevate the level of compliance with IC laws in each state in which a company operates, including California.  AB5 is not a deathtrap for all ICs and companies that make use of them. There are ways to comply with AB5 without converting ICs to employees or terminating relationships with all ICs.

Many companies are making use of a process such as IC Diagnostics,™ a tool designed to restructure, re-document, and re-implement IC relationships in a manner that enhances compliance with IC laws in a customized and sustainable manner, consistent with a company’s business model. As part of that process, it is often wise to have an effective arbitration agreement with class action waiver.  Such agreements can be drafted in a state-of-the-art manner that best avoids arguments by plaintiffs’ class action lawyers who seek to invalidate those types of valuable agreements.

While there is no way of knowing if another Dynamex or AB5 is coming down the road in the next decade, it is fair to assume that the use of ICs will not diminish.  As we noted recently at the end of a lengthy commentary about the “five degrees of independent contractor misclassification,” studies by two well-respected government agencies (the Government Accountability Office and the Bureau of Labor Statistics) have found that those who identify as ICs have greater work satisfaction that those who have traditional jobs as employees, as confirmed by a recent Gallup poll.

Companies wishing to make the best use of those in the workforce who wish to maintain their status as ICs and freelancers need to dot their i’s and cross their t’s to avoid having their own agreements used against them.  The lessons learned from the last decade of IC misclassification lawsuits strongly suggest that a process that elevates a company’s IC compliance is likely to negate or minimize needless costs of defending and settling IC misclassification cases.

Written by Richard Reibstein

This blog post is based on an article by the author that was published in Bloomberg Law Reports on January 2, 2020. © Copyright 2020, The Bureau of National Affairs, Inc.  It is republished here with permission.

 

Posted in IC Compliance