Insurance Industry Now Being Targeted for Independent Contractor Misclassification Lawsuits 

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

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

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

Class Action Lawsuit Seeking Overtime Compensation.

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

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

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

Class Action Lawsuit for Employee Benefits.

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

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

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

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

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

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

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

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

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

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

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

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

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

Written by Richard Reibstein and Alan Levin

Edited by Janet Barsky

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

Posted in IC Compliance

March 2018 Independent Contractor Misclassification and Compliance News Update

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

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

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

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

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

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

Further, arbitration agreements with class action waivers are not binding on governmental regulators and are wholly ineffective at forestalling federal and state regulatory agencies from conducting audits or initiating and maintaining enforcement proceedings under employment and independent contractor laws. Hence, the importance of enhancing compliance with employment and independent contractor laws cannot be overstated.  And some state laws have been interpreted, at least at present, as not being susceptible to arbitration. One example is California’s Private Attorneys General Act (PAGA).

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

In the Courts (6 cases)

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

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

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

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

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

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

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

Written by Richard Reibstein

 

 

Compiled by Janet Barsky

 

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Posted in IC Compliance

February 2018 Independent Contractor Misclassification and Compliance News Update

Last month was a busy and important month for IC misclassification and compliance law. Featured among the ten cases summarized below are the first-ever trial of an IC misclassification case in the on-demand, sharing economy (Lawson v. GrubHub Holdings, Inc.); oral argument before a state’s highest court over the test to be applied in IC misclassification cases (Dynamex Operations West v. Superior Court); and the U.S. Supreme Court accepting for review a case that may have far-reaching implications for companies operating across state lines that enter into IC agreements containing arbitration clauses with individuals classified as ICs (New Prime Inc. v. Oliveira).

In addition, there were three IC misclassification cases that the courts certified as class actions (involving educational consultants and trainers, cable technicians, and distributors of baked foods); one case where class action status was denied (involving delivery drivers); a decision compelling arbitration in an IC misclassification case where a client of a staffing company was able to piggy-back on the staffing company’s arbitration agreement; and filings of two new IC misclassification cases (involving port truckers and exotic dancers).

The cases reported below from February 2018 demonstrate that class action IC misclassification cases remain a thorn in the side of companies who use ICs either to supplement their workforce or as an integral part of their business model. That is because, with the exception of GrubHub, too many companies using ICs do so without the attention needed to structure, document, and implement their IC relationships in a manner that maximizes compliance with federal and state IC laws. And in the GrubHub case, the decision may well have turned out differently if the plaintiff presented himself as a sympathetic litigant instead of one the judge found to have engaged in “dishonest conduct” and whose “claimed ignorance of his dishonest conduct [was] not credible.”

How can companies minimize their exposure to IC misclassification liability? There are several ways, as more fully described in our latest White Paper posted on this blog, including restructuring, re-documenting, and re-implementing; re-distributing; and re-classifying. The only choice not recommended is standing still. Even companies like GrubHub, as we noted in our blog post reporting on its win at trial, could have tightened up its IC compliance – despite the fact that it was able to endure the judge’s close scrutiny. Thus, companies that feel that their IC relationships will likewise survive a legal challenge would be well advised to consider further enhancing their IC compliance. And for those businesses that have yet to upgrade their IC compliance, the GrubHub decision should be a positive signal that they, too, can structure, document, and implement their IC relationships in a lawful manner.

In the Courts (10 cases)

CALIFORNIA SUPREME COURT CONSIDERING WHETHER TO KEEP ITS CURRENT TEST FOR IC STATUS OR ADOPT A MORE WORKER-FRIENDLY TEST.  Oral argument was heard on February 6, 2018 in a key California Supreme Court case to determine if the courts in that state should continue a long-standing test in California for determining independent contractor status in cases involving wage and hour issues. As discussed in detail in our blog post of February 5, 2018, the case, involving the trucking company Dynamex, addresses the issue of whether the Supreme Court should continue to follow its time-honored holding from 1989 in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations (which is roughly akin to a common law / economic realities test for determining IC status) or apply a far more rigorous standard as set forth in the 2010 holding in Martinez v. Combs.  The California Supreme Court had asked the parties to file supplemental briefs addressing whether the test for IC status in California should embody the standard set forth in 2015 by the New Jersey Supreme Court in Hargrove v. Sleepy’s LLC, where the courts in New Jersey were instructed to apply in wage and hour cases the same three-pronged “ABC” test formulated by the New Jersey legislature for IC status in unemployment cases. That decision is regarded as employee-friendly because, unlike most other IC tests including Borello, which consider and weigh a number of different factors when determining IC status, an ABC statute requires that each and every one of the three prongs of the ABC test be proven to establish IC status.

While it is difficult, even for the most experienced practitioners, to predict how a court may rule based on questions and answers at oral argument, one of the most important exchanges at the oral argument was a question posed by one of the judges when addressing the principal lawyer for the individual who was challenging his classification by Dynamex as an IC : would the worker, who performed services as a driver, be an employee or independent contractor under the Borello test?  The driver’s counsel, without any hesitation or equivocation, responded that the driver would be an employee under Borello.  This response signified that there is no need for the court to consider changing the test for IC status in California in this case. Generally, courts are reluctant to alter long-standing legal standards when the result in the case would not change. This colloquy may be a reason that the California Supreme Court chooses ultimately not to modify Borello at this time.  If a majority of judges feel that the Borello test should continue, they may elect not to “punt” and instead affirmatively re-endorse Borello and reject any notion that California should join New Jersey and adopt an ABC test. The two most likely reasons for upholding Borello are that ABC tests are promulgated by legislatures, not by courts; and that Borello already includes all three prongs of the ABC test, but allows courts flexibility in applying all relevant factors when determining IC status. While the case has been on appeal for over three years, a decision is expected by or before this summer. Dynamex Operations West v. Superior Court (No. S222732).

GRUBHUB PREVAILS IN FIRST ON-DEMAND, SHARING ECONOMY CASE THAT HAS BEEN TRIED. GrubHub, Inc., an on-demand food delivery company, prevailed in an IC misclassification case that was tried this past fall in a California federal court.  The case was brought by a gig worker who made restaurant deliveries for the sharing economy company. The worker alleged that GrubHub misclassified him as an independent contractor. As noted in our blog post of February 8, 2018, the case drew sustained media attention during a non-jury trial in September 2017 because it was the first IC misclassification trial involving a gig economy business. In her lengthy opinion, Magistrate Judge Jacqueline Scott Corley, applying the Borello test, stated that while there were some facts that indicated some control by GrubHub over the manner and means by which the driver, Lawson, rendered his services, there were more facts that, in the judge’s view, supported the conclusion that GrubHub did not control the details of how Lawson accomplished his work. Among other factors supporting IC status, Judge Corley noted that GrubHub did not dictate the vehicle the driver used for deliveries or its condition and the driver did not have to have GrubHub signage on his vehicle, although the company made sure the vehicle was registered and insured and that Lawson had a valid driver’s license; GrubHub did not control the driver’s appearance while making deliveries; GrubHub did not require the driver to engage in any training or orientation, and did not provide the driver with a script to follow when interacting with customers; and GrubHub did not control whether and when Lawson would work and for how long, nor did it tell him what supplies, if any, he needed to carry.

Although the judge found some instances of control, including the fact that  GrubHub could terminate the contractual agreement with the driver at will with 14 days’ notice,  determined the rates the driver would be paid and the fees customers would pay for delivery service, and dictated which blocks of time to make available for driver selection and the geographical boundaries of the delivery zones, Judge Corley stated that such control was not exercised over the manner and means of performing the services, but rather over the result of the work – to ensure diners received their meals in a timely fashion. In evaluating eight “secondary factors” used under the Borello decision to determine IC status, the judge found that three favored GrubHub, four favored the driver, and one was neutral. Thus, the case was what is commonly referred to as falling into a “gray area” where a change in one or two key facts may well change the outcome of the case. As noted in our blog post, one of the keys to the judge’s decision in GrubHub’s favor was her discrediting the driver’s testimony, finding that he engaged in “dishonest conduct” and that his “claimed ignorance of his dishonest conduct is not credible.”  As a result, it appeared that the judge credited the testimony of GrubHub’s witnesses where on key issues of fact. Finally, the judge distinguished a case that she said “has facts similar to those the Court found here.” By focusing on the differences between the facts in that case and this one, the judge confirmed that her decision in the GrubHub case was not a validation of IC status for all gig economy companies that use an IC model, but rather a recognition that the facts matter, and, in this case and this case alone, those facts favored IC status. Lawson v. GrubHub Holdings, Inc., No. 15-cv-05128 (N.D. Cal.).

U.S. SUPREME COURT ACCEPTS CASE INVOLVING THE INTERSECTION OF IC AGREEMENTS WITH THE FEDERAL ARBITRATION ACT.  The United States Supreme Court has decided to resolve the issue of whether Section 1 of the Federal Arbitration Act, which exempts from the purview of the statute any “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” (emphasis added), includes workers who have signed independent contractor agreements. According to the petition for certiorari, the plaintiff in the underlying claim is an independent contractor driver whose agreement with New Prime, Inc., an interstate trucking company, includes a mandatory arbitration provision requiring that all workplace disputes be arbitrated with New Prime on an individual basis. The driver filed a proposed class action in court alleging, among other things, claims for unpaid wages due to misclassification as an independent contractor.  In opposition to the company’s motion to compel arbitration, the worker claimed that his IC agreement is a “contract of employment” covering him as a worker engaged in interstate commerce.

According to the petition to the Supreme Court, New Prime claims that the U.S. Court of Appeals for the 1st Circuit misread the exemption and applied it far too broadly when it held that the term “contracts of employment” should include independent contractor agreements. Prime stated in its petition that, “Without the ability to include enforceable arbitration provisions in contracts governing independent contractors, the entire transportation industry will be relegated to resolving all disputes arising out of such contracts in court, notwithstanding the contrary intentions of the parties.” New Prime Inc. v. Oliveira, No. 17-340 (U.S. Sup. Ct. Feb. 26, 2018).

EDUCATIONAL TRAINERS AND CONSULTANTS GRANTED CONDITIONAL CERTIFICATION IN CLASS ACTION ALLEGING IC MISCLASSIFICATION.  An Alabama federal court granted conditional collective action certification for on-site educational trainers and consultants nationwide in an IC misclassification action alleging wage and hour violations of the federal Fair Labor Standards Act and state wage and hour laws. The lawsuit was brought against Medfirst Consulting Healthcare Staffing Inc., a company that sells information technology and educational services to healthcare providers across the U.S. The company helps healthcare companies find consultants to implement and customize industry-specific software and train their personnel to use it. The company maintains a network with thousands of consultants.  Plaintiffs alleged that they signed contracts that contained restrictive covenants; received training about the software and methods for training medical personnel; were supervised by Medfirst; had to submit timesheets and expense reports; and were required to report their job performance to the company. In deciding to conditionally certify a class of trainers and consultants, the court concluded that the named plaintiffs presented a reasonable basis for finding that they are similarly situated to the proposed members of the collective class; that “the universal failure to provide overtime pay strongly suggests, at least at this stage, that [the Company]applied common pay policies to all of its trainers and consultants”; and that the economic realities test could be readily applied on a class-wide basis regarding the alleged misclassification issue. Kiley v. Medfirst Consulting Healthcare Staffing, LLC, No. 17-cv-1756 (N.D. Ala. Feb. 23, 2018).

CABLE TECHNICIANS GRANTED CONDITIONAL CERTIFICATION IN IC MISCLASSIFICATION CASE.  A Louisiana federal court granted conditional certification of a collective action under the FLSA brought by cable technicians against Cable Marketing & Installation of Louisiana, Inc.  The technicians claim that they were denied minimum wage and overtime under the FLSA due to their misclassification as independent contractors.  In determining that the technicians who performed services for the company while classified as independent contractors were similarly situated, the court found that all of the technicians worked under the same agreement; the company exerted some control over the technicians’ working conditions; all technicians were paid on a piece rate basis; all of the technicians performed the same type of work; a cap was placed on technician compensation; and technicians were assessed chargebacks for substandard work resulting in their alleged underpayment. Overall, the court concluded that the technicians were similarly situated with respect to job requirements, pay provisions, and elements under the FLSA’s economic reality test. Hobbs v. Cable Marketing & Installation of Louisiana, Inc., No. 17-cv-4766 (E.D. La. Feb. 6, 2018).

DISTRIBUTOR OF FLOWERS FOODS’ SUBSIDIARY IN SAN ANTONIO WINS COLLECTIVE CERTIFICATION IN IC MISCLASSIFICATION CASE.  A Texas federal court has granted the motion for conditional certification brought by a distributor of a San Antonio subsidiary of Flower Foods, Inc., a nationwide baked goods/snack foods company, where the distributor alleges that he and other distributors for the San Antonio company were misclassified as independent contractors. The court found that the proposed class members’ claims were sufficiently similar to the plaintiff to merit sending notice of the collective action to potential class members. Specifically, through his pleadings and affidavit, the court found that the plaintiff made a sufficient showing that all distributors regularly worked over 40 hours per week and did not receive overtime compensation; they performed similar work in the company’s bakery and warehouse operations; contracts were entered into between the parties without any input from the distributors; and distributors were not permitted to carry any competing products in their delivery vehicles.  In its decision, the court noted that other courts have granted conditional certification in IC misclassification cases involving distributors for several different Flower Foods’ affiliates. Wiatrek v. Flowers Foods, Inc., No. SA-17-CV-772 (W.D. Tex. Feb. 5, 2018).

DELIVERY DRIVERS IN NEW JERSEY DENIED CLASS CERTIFICATION IN IC MISCLASSIFICATION CASE.  A federal court judge in New Jersey has denied the motion of delivery drivers who brought a proposed class action for alleged violations of ERISA, the Family Medical Leave Act, and the New Jersey Wage Payment Law as a result of alleged misclassification of the drivers as ICs.  The court found that the drivers failed to establish that the putative class members were “ascertainable.” The court explained that a plaintiff seeking certification of a federal class action must prove by a preponderance of the evidence that the class is ascertainable, requiring the plaintiff to show that (1) the class is defined with reference to objective criteria; and (2) there is a reliable and administratively feasible mechanism for determining whether proposed class members fall within the class definition. After reviewing the parties’ briefs and deposition testimony of the paralegal responsible for analyzing the data and documents to determine the scope of the proposed class, the court concluded that the methodology used by the plaintiffs to determine who worked full-time, who did not receive overtime pay, and who was subject to company deductions did not satisfy the two-part test for ascertainability. The court stated that there were gaps in time of some of the records relied upon by the paralegal that made assessing the class size “tenuous or speculative” and there was no way of knowing whether the carrier paid drivers overtime compensation.  Hargrove v. Sleepy’s, LLC, No. 10-cv-1138 (D.N.J Feb. 28, 2018).

CLIENT OF STAFFING COMPANY IS THIRD PARTY BENEFICIARY OF AN IC AGREEMENT’S ARBITRATION CLAUSE CONTAINING A CLASS ACTION WAIVER.  An Illinois federal court granted a motion to compel arbitration of the IC misclassification claims by drivers who provided services to automotive parts distributor, Worldpac Inc., even though Worldpac was not a party to the IC agreement.  The drivers alleged that Worldpac, which used staffing company Partsfleet to contract with drivers needed by Worldpac to deliver auto parts to its customers, violated overtime and minimum wage provisions of the FLSA and various state and local laws due to misclassification of the drivers as independent contractors. The drivers did not sue Partsfleet but rather Worldpac, presumably hoping to avoid being compelled to arbitrate their claims under the arbitration provisions contained in the Partsfleet IC agreement. In response to Worldpac’s motion to compel arbitration, the drivers argued that they were not obligated to arbitrate their claims because Worldpac was not covered by the agreement. The court disagreed with the drivers, holding that Worldpac, as a third party/intended beneficiary to the agreement, was entitled to enforce the arbitration provision, which stated that it was intended to apply to all controversies involving the staffing company “or its customers.” Brown v. Worldpac, Inc., 17 CV 6396 (N.D. Ill. Feb. 1, 2018).

PORT TRUCKERS BRING ANOTHER IC MISCLASSIFICATION CLASS ACTION AGAINST A LOGISTICS COMPANY.  Port truckers have brought yet another proposed class action in the drayage industry, this time against a trucking subsidiary of XPO Logistics Inc. in Los Angeles County Superior Court.  The drivers claim wage and hour violations of the California Labor Code due to alleged misclassification of the drivers as independent contractors and not employees. The drivers reportedly seek over $1 million in restitution for failure to pay more than 160 port and rail drivers at least the minimum wage, unpaid wages for meal and rest breaks and non-driving time such as wait time to pick up cargo, and unlawful deductions for operational expenses, administrative fees, and insurance costs. According to the complaint, the company controls when drivers work and which loads they haul; requires drivers to conduct daily truck inspections; and requires drug testing of the drivers. The drayage trucking industry has been besieged by IC misclassification lawsuits not only by class action lawyers but most recently by the City of Los Angeles, as noted in our January blog updateAlvarez v. XPO Logistics CartageLLC, No. BC695123 (Los Angeles Super. Ct. Feb. 26, 2018).

NEW IC MISCLASSIFICATION CASE BROUGHT BY EXOTIC DANCERS AGAINST ADULT ENTERTAINMENT CLUB. An exotic dancer has brought a proposed collective action against Georgia gentlemen’s club, Peaches of Atlanta, claiming minimum wage and overtime compensation violations of the FLSA due to misclassification of herself and other dancers as independent contractors. According to the plaintiff, the dancers’ only compensation was in the form of tips from Club patrons and the Club had a “practice of siphoning away those tips to distribute to non-tip eligible employees.” The collective action complaint alleges that the dancers were employees and not ICs under the economic realities test because the Club had the power to hire, fire and discipline the dancers; required the dancers to work a certain number of days during the week, including one “slow day”; called for each dancer to audition before hire; required the dancers to wear certain clothing on specific days of the week; determined the rate and method of payment for the dancers; required the dancers to tip out other employees at the end of each shift, such as the DJ, House Mom and Club owner; maintained attendance records; scheduled mandatory meetings; assessed fines for missed meetings; and controlled the music used by the dancers. Lawson v. Clean City, Ltd. d/b/a Peaches of Atlanta, No. 18-cv-579 (N.D. Georgia Feb. 6, 2018).

Written by Richard Reibstein

Compiled by Janet Barsky

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Posted in IC Compliance

What Does GrubHub’s Big Win In Its Independent Contractor Misclassification Trial Mean for Other On-Demand, Sharing Economy Businesses?

Earlier today, GrubHub, Inc. won its highly publicized case brought against it by a restaurant delivery driver / courier for allegedly misclassifying him as an independent contractor. The case drew sustained media attention during a non-jury trial in federal court in September 2017, as it was the first IC misclassification trial involving a gig economy business.

Magistrate Judge Jacqueline Scott Corley of the U.S. District Court for the Northern District of California released a lengthy opinion today where she issued a judgment in favor of GrubHub and against driver / courier Raef Lawson.  Is this a win for all on-demand sharing economy companies or only GrubHub?  The answer is, it depends.

What does it depend on? The facts in each case. According to the judge, while there were some facts that indicated a degree of control by GrubHub over the manner and means by which Lawson rendered his services, there were far more facts that, in the judge’s view, supported the conclusion that GrubHub did not control the details of how Lawson accomplished his work. As Judge Corley noted, the control factor is the most important legal consideration in any IC misclassification case.

If a number of the facts were different, though, the decision may have favored Lawson, except for one crucial circumstance: credibility. It appears that when there was a disputed issue of fact, the judge discredited Lawson’s testimony and credited the testimony of GrubHub’s witnesses. Why? Because, she found, Lawson engaged in “dishonest conduct” and that his “claimed ignorance of his dishonest conduct is not credible.”

The judge then evaluated eight “secondary factors,” finding that three favored GrubHub, four favored Lawson, and one was neutral. Finally, the judge distinguished a case that she said “has facts similar to those the Court found here.” By focusing on the differences between the facts in that case and this one, the judge confirms our view that it’s the facts that matter, not the industry. Thus, while this is most definitely good news for sharing economy businesses using an IC model, there is a compelling need to structure, document, and implement the IC relationship in a manner that, on the whole, can withstand a heightened degree of legal scrutiny – as GrubHub was able to do in this case.

The Issue of Control

Judge Corley recognized that the legal test for employee vs. independent contractor status is set forth in the 1989 California Supreme Court case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations. She noted that under Borello (which the California Supreme Court is currently reconsidering), the key is whether GrubHub retained or exercised the right to control the details of how Lawson performed his services.

The judge examined a number of facts relevant to control. First, Judge Corley noted that the company did not control the vehicle Lawson used for deliveries or its condition and Lawson did not have to have GrubHub signage on his vehicle, although GrubHub made sure the vehicle was registered and insured and he had a valid driver’s license. The judge found this type of “oversight” did not weigh in favor of employee status.

The judge also found that GrubHub did not control Lawson’s appearance while making deliveries; while he could wear a company shirt and hat, he was not required to do so. While he agreed to wear a GrubHub shirt and hat in exchange for GrubHub providing him with an insulated bag for food deliveries, the company did not check to see if he was wearing the shirt or hat.

The judge found that GrubHub did not require Lawson to engage in any training or orientation, and he was not provided with a script to follow when interacting with customers. He was not told what supplies, if any, he needed to have with him.

While GrubHub conducted a background check on Lawson and reserved the right to perform a background check on any worker to whom he subcontracted his deliveries, GrubHub had no control over who would make deliveries or accompany him in his vehicle.

The court noted that GrubHub did not control whether and when he would work and for how long.  He could sign up for a block of time but decide not to work that block of time at any time before the period began.  Lawson could also reject any order offered to him during the block of time. As the judge concluded, “Lawson had complete control of his work schedule.”  Judge Corley concluded that GrubHub’s right to terminate Lawson for signing up for a block of time and not cancelling is “not controlling the manner and means of how Mr. Lawson performed deliveries; it is merely the right to terminate the agreement if one party does not do what he contracted to do.”

The judge also noted that GrubHub did not specify the amount of time in which a driver had to pick up an order or how quickly he had to complete the order. The judge also found that Lawson could pick his own route, and even make deliveries for other companies while delivering for GrubHub.

The court found that GrubHub did control some aspects of Lawson’s work. GrubHub determined the rates Lawson would be paid and the fees customers would pay for delivery service. It also determined which blocks of time to make available for driver selection and the length of each block. Finally, it determined the geographical boundaries of the delivery zones and required drivers to stay in or around their zone during scheduled blocks. In the judge’s view, such control was not exercised over the manner and means of performing the services, but over the result of the work – to ensure diners received their meals in a timely fashion.

The court did, however, find that GrubHub had a right to control Lawson’s work by its right to terminate his agreement at will, upon 14 days’ notice. The judge did not give that factor as much weight as other courts have given it because, she noted, Lawson was not dependent on GrubHub as he made deliveries for other companies and only sporadically performed services for GrubHub “so he could pursue his acting career.”

In assessing all of the above facts, the court concluded that “the right to control factor weighs strongly in favor of finding that Mr. Lawson was an independent contractor.”

The So-Called “Secondary Factors”

Next, the judge, following Borello’s teachings, considered eight other “secondary factors.”

Whether the worker was engaged in a distinct occupation or business. The judge concluded he was not, and found that this factor favored employee status.

Whether the work was performed under the principal’s direction or control.  The judge found that this factor favored IC status because there was insufficient direction and control over Lawson’s work..

The degree of skill required.  The judge found that the evidence showed that no special skills were needed, so she found this factor favored employee status.

The provision of tools and equipment. The judge found that this factor favored IC status as Lawson supplied his own vehicle, smartphone, and could even supply his own insulated bags.

The length of time for performance of services. The judge found that this factor also supported IC status because Lawson only made deliveries for GrubHub for four months, only worked half the days of those months, and could sign up for blocks of time he wanted and was not obligated to sign up for times he was unavailable.

The method of payment. The court found that, in practice, Lawson was paid on an hourly basis and, in fact, was paid at the minimum wage because he did not perform enough deliveries. The court concluded that this factor “weighs slightly in favor of an employment relationship.”

Whether the work was part of GrubHub’s regular business. The judge found that even though GrubHub started as an internet ordering business, and only in recent years added a delivery component, this factor favored employee status.

The parties’ intent. The court found that this factor was neutral. The judge noted that the agreement states that Lawson was an IC, but Judge Corley noted that a label placed on a relationship by a party that offers workers a low wage, low-skilled job should not be given much weight.

Thus, of the eight “secondary” factors, four favored employee status, three favored IC status, and one was neutral.

The Court’s “Upshot” and “Conclusion”

Judge Corley then penned a section of the opinion she called “The Upshot.” Interestingly, this section confirms that “the facts make the case.” In this section, Judge Corley compared this case with the 2006 case of JKH Enterprises, which the court said “has facts similar to those the Court has found here.” Yet, the judge then proceeded to distinguish and differentiate the facts in that similar case from those in the GrubHub case.  

Judge Corley’s “Conclusion” was short and succinct: “Based on what the Court observed at trial and the facts found, and after applying the Borello test, the Court finds that the four months Mr. Lawson performed delivery services for GrubHub he was an independent contractor.”

Analysis and Takeaways

This case will have more impact in the media and among gig economy commentators than it may have legally.  As noted in a prior blog post after the trial in this case: “Cases of this nature dealing with a single individual frequently turn on their particular facts, which can differ from case to case. Differing facts often lead to different results regarding the proper classification of workers. Thus, where the evidence varies from one case to the next, another court may reach a different decision in other cases involving drivers or other on-demand workers providing services to companies in the gig economy. Indeed, the decision in this case may not even be a precedent for other drivers at GrubHub.”

So, how much precedential value will other courts give to this case? Just as Judge Corley “distinguished” the facts in JKH Enterprises from those in this GrubHub case, plaintiffs’ lawyers in the next on-demand sharing economy IC misclassification case are likely to try to distinguish the facts in their case from those here. Meanwhile, lawyers representing the business in the next such case will likely argue that their facts are close enough to the facts in this GrubHub case that the result here should govern in their case.

The lack of precedential value is more pronounced in cases that might be fairly be characterized as falling in the “gray“ area – where some facts favor independent contractor status and other facts favor employee status. In those types of cases, a difference in one or more key facts can sometimes completely change the outcome of a legal decision as a matter of law. Moreover, where the facts on key issues are in dispute, the court has to decide which witnesses to credit and which to discredit, and that determination can critically affect the outcome of a case.  As noted above, the decision in this case by Judge Corley was undoubtedly influenced to some degree by her conclusion that Lawson was not a credible witness.

But, the judgment in GrubHub’s favor most assuredly signals that an on-demand sharing economy business can lawfully be structured on an independent contractor model. To that end, GrubHub prevailed in large part because it structured, documented, and implemented its IC relationships with an eye on compliance with IC laws.

Still, the case was close enough that another judge might conceivably have reached a different conclusion if Lawson was not such a poor witness, and a jury trial deciding a case like this one, brought by a sympathetic plaintiff, might render a verdict that the worker was an employee.

So, the takeaway for businesses in the gig economy is to maximize compliance with the applicable state and federal IC laws. How can a company do so? Some companies have resorted to a process such as IC Diagnostics™, which seeks to restructure, re-document, and re-implement IC relationships in a manner than enhances IC compliance.

Undoubtedly, GrubHub could have, based on Judge Corley’s decision, tightened up its IC compliance even more – despite the fact that it was able to endure the judge’s scrutiny. Companies that feel that their IC relationships will likewise survive a legal challenge should still consider further enhancing their IC compliance. For those businesses that have yet to upgrade their IC compliance, this win by GrubHub should be a positive signal that they, too, can structure, document, and implement their IC relationships in a lawful manner.

Richard Reibstein

Posted in IC Compliance

Oral Argument Tomorrow in Key California Supreme Court Case on Independent Contractor Status

The California Supreme Court will hear oral argument tomorrow in a case that has the potential for altering the long-standing test in California for independent contractor status. The case is Dynamex Operations West v. Superior Court (No. S222732), which has been on appeal before the California Supreme Court since January 2015. The issue in Dynamex is whether, in wage and hour cases in California, the Supreme Court should continue to follow its time-honored holding from 1989 in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations (which is roughly akin to a common law / economic realities test for determining IC status) or apply a far more rigorous standard as set forth in the 2010 holding in Martinez v. Combs.

In connection with the oral argument, the California Supreme Court asked the parties to file supplemental briefs addressing whether the test for IC status in California should embody the standard set forth in 2015 by the New Jersey Supreme Court in a case called Hargrove v. Sleepy’s LLC. As we discussed in a blog post on January 15, 2015, the Hargrove decision held that, henceforth, when determining IC status in wage and hour cases, the courts in New Jersey would borrow the so-called “ABC” test formulated by the New Jersey legislature for IC status in unemployment cases. That decision is regarded as employee-friendly because, unlike most other IC tests including Borello, which consider and weigh a number of different factors when determining IC status, an ABC statute requires that each and every one of the three prongs of the ABC test be proven by a business to establish IC status.

What is the ABC Test?

The ABC test is the statutory definition of “employee” under the New Jersey Unemployment Compensation Act. It is the same test used by over 20 other states for determining eligibility for unemployment benefits. It presumes an individual is an “employee” unless the employer can show that:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

The New Jersey Supreme Court in Hargrove noted that “[T]he failure to satisfy any one of the three criteria results in an ‘employment’ classification.”

Analysis of the Arguments Made by the Parties in Their Supplemental Briefs

The worker whose status is in dispute in the Dynamex case is a delivery truck driver. His lawyers’ supplemental brief states that the Court should adopt the Hargrove test because the remedial, worker-protective purposes of the wage and hour laws in California mirror those in New Jersey. Of particular interest in the worker’s brief is the lawyers’ statement that “the second consideration in Part B of the ABC test (work performed outside all the places of business of the hirer) would be of limited value as a consideration, however, because in today’s modern economy, many people work remotely such that their services are typically performed outside of the principal’s places of business.”

But that analysis does not consider the impact of Prong B on those workers who, like the truck driver who began this case as well as a huge number of individuals classified as ICs, perform some or all of their services at one or more places where the company conducts business. Taking the worker’s brief to its logical conclusion would lead to the anomalous result that many workers would be classified as ICs or employees depending simply on whether or not they work from their home office and/or any other “remote” location.

The supplemental brief of the company focuses on the fact that the ABC test is a statutory test issued by a legislative body, and no court has adopted that test without such a “statutory or regulatory underpinning.” The company also notes that each of the three prongs of the ABC test are already considered in the Borello test for IC status.

This last point may be the most important one raised in the parties’ supplemental briefs. The California Department of Industrial Relations states on its website page entitled “Independent contractor versus employee” that, under Borello, the determination of a worker’s status “depends upon a number of factors, all of which must be considered, and none of which is controlling by itself.” The website page states that the California Division of Labor Standards Enforcement considers all factors bearing on “whether the person to whom service is rendered…has control or the right to control the worker both as to the work done and the manner and means in which it is performed.” The website page then lists 11 specific factors “that may be considered.” Notably, although court cases in California have made note of the location where the services are performed, none of the 11 factors listed on the webpage addresses the location where the services are performed, which is the second part of the B prong in the ABC test. At least in the minds of the government regulators, the location where the services are performed does not appear to be of particular significance.

Abandoning Borello in favor of an ABC test would eliminate the flexibility built into the current test for IC status. If for example, a business could establish all 11 of the IC factors listed on the Department of Industrial Relations website, but the worker performed a part of his or her services at a place of business of the company for which the services are provided, then the worker would automatically be deemed an employee.

One final observation: When the New Jersey Supreme Court held in Hargrove that the test for IC status in wage and hour cases would now be the ABC test, it did not change the law; rather, that Court had not previously issued a definitive ruling on IC status in that context. In contrast, Borello was decided by the California Supreme Court close to 30 years ago. Since issued, many businesses and individuals in California have sought to construct their IC relationships in compliance with the teachings of Borello. Indeed, when any new business in California wished to create a business model utilizing ICs and desired to structure and document their IC relationship in a lawful manner, they would likely have searched for the webpage described above and sought to follow the guidelines listed online by the California Department of Industrial Relations. To change the test for IC status would not only result in confusion, but also could be extremely costly and prejudicial to those companies and individuals who have sought to comply with the law as articulated by the courts and the Department of Industrial Relations if they otherwise are unable to meet any of the three prongs of an ABC test.

Takeaway

The laws applicable to ICs have been in flux for the last ten years, and the tests for IC status differ considerably among various federal laws and even more so under a crazy quilt of state laws. The California Supreme Court may opt for consistency, or it may see fit to change the law.

While oral arguments can be informative to the parties and interested members of the general public in terms of what the reviewing court may decide, few lawyers can predict with any degree of certainty how an appellate court will rule.

Regardless of the ultimate outcome in Dynamex, companies that wish to enhance their compliance with whatever test is used in California, or with the current tests in other states, should consider using a process that maximizes their IC compliance. One such process is IC Diagnostics,™ as discussed in the latest White Paper on “How Companies Can Minimize the Risk of IC Misclassification Liability.”

Written by Richard Reibstein

Posted in IC Compliance