Update on Uber: Company Announces It Is Settling Up to 60,000 Individual Arbitrations Alleging Independent Contractor Misclassification

Ride-sharing giant Uber Technologies announced by way of a filing today with the U.S. Securities and Exchange Commission that it has reached agreements to resolve the independent contractor (IC) classification claims of a large majority of the 60,000 drivers in the U.S. who have filed arbitration demands or indicated an intention to file such demands. The company estimated that the cost of such individual settlements will be between $146 to $170 million, inclusive of legal fees.

This disclosure was filed earlier today, just one day before its initial public offering. Earlier this year, on March 11, Uber announced that it has settled its IC misclassification cases with 13,600 drivers in California and Massachusetts who had “opted out” of arbitration for $20 million. Uber’s announcement enunciated its longstanding position that drivers are ICs.  It has prevailed in some court cases, arbitration, and administrative cases; it has lost some of those legal battles; it has settled some others; and it continues to vigorously dispute the remaining legal challenges.

What exactly did the SEC filing say today?

Here is what Uber said in relevant part in its SEC disclosure filed today:

The independent contractor status of Drivers is currently being challenged in courts and by government agencies in the United States and abroad. We are involved in numerous legal proceedings globally, including putative class and collective class action lawsuits, demands for arbitration, charges and claims before administrative agencies, and investigations or audits by labor, social security, and tax authorities that claim that Drivers should be treated as our employees (or as workers or quasi-employees where those statuses exist), rather than as independent contractors. We believe that Drivers are independent contractors because, among other things, they can choose whether, when, and where to provide services on our platform, are free to provide services on our competitors’ platforms, and provide a vehicle to perform services on our platform. Nevertheless, we may not be successful in defending the independent contractor status of Drivers in some or all jurisdictions. Furthermore, the costs associated with defending, settling, or resolving pending and future lawsuits (including demands for arbitration) relating to the independent contractor status of Drivers could be material to our business.

In addition, more than 60,000 Drivers in the United States who have entered into arbitration agreements with us have filed (or expressed an intention to file) arbitration demands against us that assert similar classification claims. As of May 8, 2019, we have reached agreements that would resolve the classification claims of a large majority of these Drivers. Under the agreements, certain Drivers are eligible for settlement payments, subject to a threshold number of the covered Drivers entering into individual settlement agreements. We anticipate the aggregate amount of payments to Drivers under these individual settlement agreements, together with attorneys’ fees, will fall within an approximate range of $146 million to $170 million. As of December 31, 2018, we had reserved $132 million for this matter.

What does this mean going forward?

The settlements announced today do not end all lawsuits pending against the company and do not apply to any regulatory and administrative proceedings. The settlements will not prevent drivers covered by the proposed settlements from bringing additional legal challenges against Uber in the future, and will not prevent those drivers who have not brought legal claims against Uber from doing so.  Nonetheless, one should fully expect Uber to continue to vigorously defend any pending cases, arbitrations, and administrative proceedings, and to just as vigorously defend any new cases that may be filed against it.

What are the takeaways from today’s announcement?

Uber’s disclosure today should not serve as an indication that Uber is backing away from its IC business strategy.  Indeed, the proposed settlements do not require Uber to change its IC business model, which will remain intact. Further, Uber reportedly estimated that the filing fees alone to defend 12,000 arbitrations would have cost it close to $20 million in filing fees, exclusive of its own legal fees to defend the cases. All 60,000 arbitrations presumably would have cost the company close to $100 million just to process.

Other companies who operate an IC business model should not read into today’s SEC disclosure by Uber that an IC business strategy is any less viable than it was before the announcement. While some state law tests for IC status, particularly in California, and Massachusetts, make the IC structure more challenging to comply with, those IC tests are the exceptions, not the rules.

Many companies that seek to enhance their compliance with IC laws yet maintain their IC business model have taken steps to restructure, re-document, and re-implement their IC relationships in a customized and sustainable manner. As part of the re-documentation, many companies that use ICs have put into place state-of-the-art arbitration agreements with class action waivers.

Written by Richard Reibstein

 

 

Posted in IC Compliance

Is There Anything New or Dramatically Different in the Labor Department’s Opinion Letter on Independent Contractor Status for On-Demand App-Based Service Providers?

Earlier today, the U.S. Department of Labor 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 independent contractor (IC) status under the federal Fair Labor Standards Act (FLSA) and concluded that all six favored IC status. The opinion is not the least bit surprising; one can hardly envision a more solid IC relationship than the one described in the Opinion Letter. Even the Labor Department during the Obama Administration would have probably concluded that the service providers in this instance are ICs under the FLSA – although it is likely that that Administration’s Labor Department would have found at least one or two of the six factors to have favored employee status.

In June 2017, the Labor Department under the Trump Administration first took a stance on the issue of IC classification when it rescinded a July 2015 Administrator’s Interpretation that had been issued by the Wage Hour Administrator in the Obama Administration. That Interpretation on IC status under the FLSA cited the same U.S. Supreme Court cases and set forth the same six factors that are cited in the new Opinion Letter. But the new Opinion Letter interprets those factors in a dramatically different way – a manner that strongly favors IC status and seeks to lend support to those businesses based on an IC business model in the on-demand economy.

The Limited Impact of the Opinion Letter

Although many commentators have cited the issuance of today’s Opinion Letter as rather momentous, the U.S. Labor Department does not determine the law under the FLSA; only the courts do. And the new Opinion Letter is not binding on the courts. So, for the most part, it is little more than a reflection of the Labor Department’s enforcement policy toward this type of VMC.

The limited nature of today’s Opinion Letter is also a function of the fact that most IC misclassification cases, especially those brought against on-demand businesses, are commenced under state laws, not the FLSA – and most state law tests for IC status differ sharply from the FLSA’s test.

A Brief Analysis of the Six Factors Under the Opinion Letter

According to the new Opinion Letter, the six factors indicative of IC status are all “derived from [U.S.] Supreme Court precedent.”

The first factor is the nature and extent of the potential employer’s control. Unlike the focus of the Obama Administration on whether the business controls the manner and means by which the worker performs services, the new Opinion Letter focuses on whether the company controls the right of a worker to provide his or her services to competitors of the company or his or her own clients.

The second factor is the permanency of the relationship with the potential employer.  Whereas the Obama Administration treated a service provider’s continuous relationship with a company as a factor indicating employee status, even if the worker had the right to provide services to its own clients or to a competitor, the Opinion Letter cites favorably to a court decision finding no permanency where the length of the working relationship “was the product of a mutually satisfactory arrangement.”

The third factor relates to the worker’s investment in facilities, equipment, or helpers.  The Obama Administration compared the monetary investments of the company and the individual worker – a comparison that would almost always support employee status. The new Opinion Letter, in contrast, focuses instead on whether the business provides the facilities and equipment to the worker instead of the worker purchasing his or her own tools and equipment.

The fourth factor involves the skill and initiative required for the worker’s services and the fifth factor involves the opportunity for profit and loss. The differences between the Obama Administration position and the position of the Trump Administration are less divergent on these two factors than the others.

The sixth and last factor is the extent of the integration of the worker’s services into the potential employer’s business. The Obama Administration generally found this factor favored employee status on nearly every occasion. The new Opinion Letter looks at this factor quite differently.  It concludes that the on-demand service providers classified as ICs are not integrated into the company’s referral business because they “do not develop, maintain, or otherwise operate that [on-demand] platform; rather, they use that platform to acquire service opportunities.” The Opinion Letter then refers to the service providers as “consumers” of that on-demand platform. This type of argument seeks to tilt the scales in favor of IC status under the FLSA, but only if the courts concur with the Labor Department’s view of this factor.  For those on-demand companies with operations in California that operate an IC business model, this argument may have some additional value.

A year ago, the California Supreme Court issued its now-infamous Dynamex decision, which requires a business to establish all three prongs of a so-called ABC test if the company wishes to establish IC status when defending against certain types of IC misclassification claims. One of those prongs, Prong B – the one companies in California are finding the most challenging to prove – mandates that a business must show that the workers perform services that are “outside the usual course of the company’s business.” This is close to the wording of the sixth factor used to test IC status under the FLSA – “the extent of integration of the workers’ services into the potential employer’s business.” As noted above, the new Opinion Letter equates the workers with “consumers” of the on-demand platform. It is anticipated that this argument may be used by on-demand and other types of businesses to try to meet Prong B of the Dynamex IC test.

Takeaways

  1. Don’t assume the Labor Department is not serious about enforcing the FLSA

Although the Opinion Letter strongly favors the use of ICs by on-demand businesses, the public should not presume that the Labor Department is unwilling to enforce the FLSA when it comes to ICs. As we reported in our blog post of March 11, 2019, Secretary Acosta recently won an appeal to the U.S. Court of Appeals for the Sixth Circuit, which found in his favor that off-duty sworn police officers retained as security guards had been misclassified as ICs. And as noted in our blog post of November 12, 2018, Secretary Acosta has aggressively prosecuted an independent contractor misclassification claim against a franchisor in the cleaning contracting industry, winning an appeal last Fall that allowed him to proceed with his IC misclassification claim against the cleaning franchisor.

  1. Don’t confine your IC analysis to six factors under the FLSA

The new Opinion Letter only examined six factors, but there are dozens of additional factors that are pertinent to the issue of whether a worker is an IC or an employee under the FLSA. As the Opinion Letter states: “Other factors [beside these six] may also be relevant, and the appropriate weight to give to each factor depends on the facts.”  The Letter continues, “the determination of [employee status] does not depend on [these six factors] but rather upon the circumstances of the whole activity.”

  1. Don’t think that IC misclassification claims will diminish

The new Opinion Letter will not deter plaintiffs’ class action lawyers and state workforce agencies from pursuing IC misclassification claims against companies using ICs. These types of class and collective actions remain in the cross-hairs of the plaintiffs’ bar. Likewise, state workforce agencies will continue to focus on companies that they believe are out of compliance with state IC laws.

  1. Take steps to enhance your company’s IC compliance

Those companies which have elevated their level of compliance with IC laws are less likely to be sued in class action lawsuits alleging IC misclassification or subjected to regulatory audits or administrative proceedings regarding the classification of their 1099ers. Many savvy companies have sought to maximize their IC compliance by use of a process such as IC Diagnostics.™ That type of process examines dozens of factors to determine the level of IC compliance and then uses that diagnostic information to restructure the IC relationship, if necessary, and re-document it in a state-of-the-art manner to minimize exposure to IC misclassification liability. The process should also re-implement the IC relationship in a manner that carries out in practice the structure and documentation of the IC relationship. A process such as IC Diagnostics can also be used by companies to better defend lawsuits and administrative proceedings alleging IC misclassification.

  1. Add an arbitration clause with class action waiver to your IC agreement or update your arbitration clause to take advantage of new case law developments

The courts are increasingly receptive to arbitration clauses with few exceptions, most notably the interstate transportation industry – but there are usually workarounds even for companies in that type of industry. An arbitration clause with class action waiver can minimize the likelihood that an IC misclassification lawsuit will be litigated in a class action in court, if drafted effectively, anticipating arguments by plaintiffs’ class action lawyers that such clauses are unenforceable.

Written by Richard Reibstein

Posted in IC Compliance

March 2019 Independent Contractor Misclassification and Compliance News Update

Cases reported below for this past month show that large companies remain in the crosshairs of class action lawyers representing workers in independent contractor misclassification lawsuits. Two well-known industry leaders in the retail and insurance industries were sued in Texas and Illinois. The claim against the retailer alleges that it is a joint employer with a store setup company that allegedly misclassifies store set-up “crew members” as independent contractors. The claim against the insurance company alleges that thousands of agents historically classified as independent contractors are owed 401(k), pension and other employee benefits.

There also were two notable mega-settlements reached in March.  First, if approved by the court, a case resulting in a $100 million settlement between a trucking company and owner-operators would be, by far, the largest settlement of an IC misclassification case in U.S. judicial history.  The second the case, involving a $20 million settlement just approved by the court, is a dispute between the largest ride-sharing company and drivers.  Ironically,  the same court had previously rejected the parties’ proposed $100 million settlement.  How could that happen?  We explain below.

Two cases reported below illustrate how businesses use arbitration clauses to avoid litigating IC misclassification class actions in court. The company in each case was able to fend off a judicial challenge to the enforcement of an arbitration clause.  As we discussed at length in an article published in the November 9, 2018 edition of Bloomberg BNA’s Daily Labor Report entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in IC Agreements,” when arbitration clauses are effectively drafted they can lessen legal defense costs and reduce the settlement exposure in IC misclassification cases. Many companies combine these types of clauses with a process such as IC Diagnostics™ to enhance their compliance with IC laws and thereby minimize the likelihood of being sued or, if sued, maximize the likelihood of a successful outcome.

The last case reported below involves the latest chapter in the trucking industry’s effort to preempt restrictive state law tests for IC classification status. That effort has been waged with mixed results in Massachusetts, New Jersey, Illinois, and, most recently, California. The publisher of this legal blog was quoted last week in Law360 indicating this issue may reach the U.S. Supreme Court based on a “split in the circuits.”

In the Courts (7 cases)

DISCOUNT RETAILER SUED BY MERCHANDISE EMPLOYEES FOR IC MISCLASSIFICATION.  Discount retailer, Dolgencorp of Texas, Inc., known as Dollar General, and Global Fixture Services, Inc. have been sued under the Fair Labor Standards Act by “crew members” who set up and breakdown shelving/fixtures and rearrange merchandise in Dollar General stores. This collective action seeks to recover allegedly unpaid overtime compensation due to the alleged misclassification of the workers as independent contractors rather than employees. According to the complaint, Global performs services solely at Dollar General stores where Global hires crews of about 12 individuals to “re-set” the stores. The complaint states that a re-set involves removing all merchandise from the store, putting it in storage containers, removing all shelving, coolers and fixtures, rebuilding and rearranging the shelving coolers and fixtures according to a new Dollar General-determined arrangement, and finally putting the merchandise back on the shelves.

The plaintiff claims that the crew members have been misclassified because each one is paid a non-negotiable weekly amount by Global; they are assigned by Global to a specific location; their work is supervised by Global and Dollar General employees; a Dollar General employee is present to oversee the re-set process; the Dollar General employee exercises total control over the re-set process by directing the crew members in their roles and by having the authority to direct Global to terminate a crew member’s engagement; and crew members have no ability to impact their profit or loss due to their own efforts. The plaintiff also alleges that she played an additional role as a “lead contractor” as the point person to engage with the Dollar General representative and to ensure the efficient performance of the crew members. The complaint further asserts that Dollar General is liable with Global as a joint employer. No answer or motion has yet been filed by the defendants, which undoubtedly deny the allegations and are likely to vigorously defend the case. Tillis v. Global Fixture Services, Inc., et al., No. 4:19-cv-01059 (S. D. Tex. Mar. 21, 2019).

INSURANCE AGENTS SUE STATE FARM FOR IC MISCLASSIFICATION UNDER ERISA, AFTER SIXTH CIRCUIT FINDS AGENTS TO BE IC’S.  Two insurance agents on behalf of thousands of other similarly situated agents have sued State Farm entities in an Illinois federal court claiming that the company violated ERISA by allegedly misclassifying them as independent contractors and not employees.  The class action complaint alleges that Term Independent Contractor Agents were not provided 401(k) and retirement and pension benefits that were available to full-time State Farm employees. The plaintiffs allege, among other things, the following:  State Farm reserves the right to control the manner and method of the agents’ business; the agents are required to comply with State Farm’s written and unwritten policies and procedures or be subject to discipline; the agents cannot sell insurance for any other insurance company, even if the insurance product they wish to sell is not offered by State Farm; the agents do not own their books of business; the location of the agents’ offices must be approved by State Farm; State Farm allegedly retains the right to change the agents’ compensation without prior notice or consent; the agents are required to use computers provided by State Farm; the agents’ activities regarding policyholder information and email correspondence are subject to monitoring by State Farm; the agents are subject to a non-compete provision; State Farm controls all advertising by the agents; and the agents are required to attend meetings or face possible termination of their relationship with the State Farm.

Only two months ago, the U.S. Court of Appeals for the Sixth Circuit, located in Cincinnati, ruled that insurance agents for American Family Insurance were properly classified as independent contractors by the company, as reported in our blog post of January 29, 2019.  While the federal court in Illinois is governed by decisions of the Seventh Circuit, not the Sixth, this lawsuit seems to be essentially a repeat of the American Family case.  Apparently, the plaintiffs in this Illinois case are hoping for a result different than that pronounced by the Sixth Circuit, but the courts in the Seventh Circuit may well give considerable weight to the Sixth Circuit’s opinion.  Sheldon v. State Farm Fire & Casualty Co., No. 1:19-cv-01080 (C. D. Ill. Mar. 8, 2019).

TRANSPORTATION COMPANY SETTLES IC MISCLASSIFICATION LAWSUIT WITH OWNER-OPERATOR DRIVERS FOR $100 MILLION.  Swift Transportation Co. has reached a $100 million settlement with nearly 20,000 owner-operator drivers in a class and collective action claiming violations of the FLSA and state wage and contract laws due to Swift’s alleged misclassification of the drivers as independent contractors and not employees. As discussed in our blog post of March 12, 2019 entitled, “A Tale of Two $100 Million Independent Contractor Misclassification Settlements,” this case involved a class action complaint filed in an Arizona federal court in 2009 alleging the drivers were paid less than the federal minimum wage when taking into account their lease payments, the costs of maintaining their trucks, and their outlays for fuel, tolls, and insurance. Swift was unsuccessful in seeking to compel arbitration of the claims on an individualized basis under the arbitration provisions in the drivers’ independent contractor agreements.

Swift’s arbitration clause was found to be unenforceable when the court found that it was part of a “contract of employment” exempt from arbitration under the Federal Arbitration Act and Arizona Arbitration Act (which includes exemption language similar to the FAA). That ruling eventually led Swift to agree to the proposed settlement, while vigorously denying that the drivers were misclassified. The proposed settlement provides that up to one-third of the gross settlement fund will be allotted for attorney’s fees and costs of administration; up to $50,000 will be paid in service awards to each of the original named plaintiffs; and awards will be subject to an allocation formula for members of the class with a minimum of $250 to each class member.  Van Dusen v. Swift Transportation Co., Inc., No. 2:10-cv-00899 (D. Ariz. Mar. 11, 2019).

$20 MILLION SETTLEMENT WITH UBER IS APPROVED BY COURT IN INDEPENDENT CONTRACTOR MISCLASSIFICATION CASE.  A California federal district court has approved a $20 million settlement between Uber and 13,600 California and Massachusetts drivers, who alleged they should have been classified as employees and not independent contractors. As discussed in our blog posts of April 22, 2016 and March 12, 2019, Uber had reached a $100 million proposed settlement in April 2016 in this same case with about 385,000 drivers in California and Massachusetts; however, the proposal was rejected by the court because the amount allocated to the drivers’ claim under the California Private Attorneys’ General Act (“PAGA”) was regarded by the judge as inadequate. On March 29, 2019, the court approved new settlement terms applicable to a far smaller class of drivers (13,600 as compared to 385,000). Uber was able to dramatically reduce the number of class members by including in an updated driver contract an arbitration clause with a class action waiver. Drivers were given an opportunity to opt out of the arbitration provisions, but only 4% of the original number of drivers chose to do so.

Although the arbitration provision was challenged in court, Uber prevailed.  As a result, it was able to limit the number of class members to the very small percentage that had opted out. Those opt-outs are covered by the $20 million settlement. Under the monetary terms of the settlement, $5 million will be deducted for attorneys’ fees, $14,800,000 will be paid to class members who submit timely claims; $146,000 will be allocated for administrative costs, and $40,000 will be paid as incentive awards for the settlement class representatives. The settlement does not require the company to convert drivers into employees; they will remain independent contractors.  Non-monetary relief includes the company’s agreement to modify its business practices by maintaining a comprehensive, written policy governing the deactivation of drivers’ accounts that will be easily accessible online; providing safeguards for the drivers under the deactivation policy such as giving advance warning before a driver is deactivated for reasons other than safety, physical altercation, discrimination, sexual misconduct, and the like; instituting an appeals process; and giving a deactivated driver the opportunity to take a course and be eligible for reactivation. This settlement does not include any PAGA claims. O’Connor v. Uber Technologies, Inc., No. 13-cv-03826 (N. D. Cal. Mar. 11, 2019); Yucesoy v. Uber Technologies, Inc., No. 15-cv-00262 (N. D. Cal. Mar. 29, 2019).

GRUBHUB ABLE TO COMPEL ARBITRATION OF IC MISCLASSIFICATION CLAIMS.  An Illinois federal court ordered arbitration of proposed class and collective action claims under the Fair Labor Standards Act and Illinois and California state law claims brought by delivery drivers against GrubHub, an on-demand food delivery service.  The drivers asserted wage and hour violations due to their alleged misclassification as independent contractors and not employees.  GrubHub moved to dismiss the case, arguing that pursuant to the terms of the Delivery Service Provider Agreement signed by the drivers, all of their claims must be resolved in arbitration and not in a federal court. The drivers asserted that the court could not compel arbitration because the Federal Arbitration Act (“FAA”) excludes them from coverage under the transportation-worker exemption, which exempts from the FAA’s coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in … interstate commerce.”

In rejecting the drivers’ argument and compelling arbitration, the court concluded that the drivers were not engaged in interstate commerce as “[t]heir day-to-day duties do not involve handling goods that remain in the stream of interstate commerce, traveling to and from other states.” The court stated: “The Seventh Circuit held [in another case] that – even though the milk used to make the ice cream came from out of state – the ice cream maker only made intrastate sales, so it was not acting ‘in’ interstate commerce. The same conclusion holds for GrubHub drivers here, who do not allege they were delivering food for interstate sales.”  Wallace v. GrubHub Holdings Inc., No. 18-C-4538 (N. D. Ill. Mar.‎ 28, 2019).

LYFT COMPELS ARBITRATION OF DRIVERS’ IC MISCLASSIFICATION CLAIMS.  Drivers for Lyft must arbitrate their misclassification claims individually, according to the U.S. Court of Appeals for the First Circuit, which affirmed the validity and enforceability of the arbitration clause contained in Lyft’s Terms of Service Agreement accepted by each driver. The plaintiff’s complaint, originally brought in state court and later removed to federal district court, was brought on behalf of a class of Massachusetts drivers alleging that Lyft violated the Massachusetts Wage Act by misclassifying them as independent contractors rather than employees and by requiring drivers to bear expenses for items such as gas and car maintenance. Before starting to drive for Lyft, the driver completed an online Terms of Service Agreement as part of the registration process and, by clicking the “I accept” button, agreed, among other things, to the arbitration clause and a class action waiver.

Lyft made a motion to dismiss the complaint and to compel individual arbitration under the Federal Arbitration Act. In opposing the motion, the driver argued that no valid contract to arbitrate had been formed under state law, and even there was a valid contract, it was unconscionable due to its selection of the American Arbitration Association’s rules that included a requirement that the driver and Lyft would equally split the costs of arbitration. The district court rejected the driver’s position  and compelled arbitration. The First Circuit affirmed the district court’s decision concluding that the agreement was not unconscionable because Lyft offered to pay all of the fees of the arbitration – and, nonetheless, in Massachusetts, an arbitration-fee-splitting arrangement is not substantively unconscionable when the arbitration fees a plaintiff would owe amount to less than the damages the plaintiff claims. Bekele v. Lyft, Inc., No. 16-2109 (1st Cir. Mar. 13, 2019).

TRUCKING ASSOCIATION LOSES FIRST ROUND IN CALIFORNIA IN ITS BID TO PREEMPT DYNAMEX WITH FEDERAL DEREGULATION ACT.  A California federal district court has rejected the arguments of Western States Trucking Association in its efforts to avoid the restrictive IC classification test set forth in the Dynamex decision, a ruling issued by the California Supreme Court on April 30, 2018.  As explained in our blog post that day, the Court “created a new test that is modeled after the so-called ‘ABC’ test used in Massachusetts, widely viewed as the toughest test in the country for ICs.” That state’s ABC test for IC status was held to be partially preempted in a 2016 decision by the U.S. Court of Appeals for the First Circuit in Boston, and the Western States Trucking Association was seeking a similar ruling. As the publisher noted in an article by Linda Chiem published on April 4, 2019 in Law360:  “‘The transportation industry groups have been waging war for years on laws that use an ABC test to determine independent contractor status, and have obtained mixed results,’ said Richard Reibstein, a partner with Locke Lord LLP and co-head of its independent contractor misclassification and compliance practice, adding that the trucking industry might look . . . to [have the U.S. Supreme Court] resolve this ‘split in the circuits.’”

Written by Richard Reibstein

Your comments are invited.

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Posted in IC Compliance

Impact of Proposed Joint Employer Rule on Independent Contractor Misclassification Claims

Companies that operate their businesses on an independent contractor model or supplement their workforce with ICs are likely to be asking, “Does the proposed new joint employer regulation issued by the U.S. Department of Labor have any impact on independent contractors?”  The answer is yes.

While the Labor Department’s proposed joint employer rule issued earlier today does not set forth a new test for independent contractor status under the FLSA, 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 new proposed 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 bear on the workers’ economic dependence on the purported employer.  The proposed regulation makes it abundantly clear that 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’…

The proposed rule explains that joint employer status focuses on the actions of the potential joint employer—not on the actions of the employee or his or her immediate employer.  The proposed rule then identifies three examples of economic dependence that are relevant to determining IC status but are  irrelevant in determining joint employer status:

(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; and

(3) where the worker invests in the equipment or materials required to perform the work.

As the proposed regulation states:  “While courts have used these factors for determining whether a worker is an employee or independent contractor, they are not relevant for determining whether additional persons are jointly liable under the Act to a worker whose classification as an employee has already been established.”

Rather, as noted above, what are relevant are the actual actions of the potential joint employer.  The proposed new rule establishes a four-factor balancing test focusing on four types of actions:  whether the potential joint employer –

  • hires or fires the workers found to be employees;
  • supervises and controls their work schedules or conditions of employment;
  • 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 proposed joint employer test focuses on actions the second company actually undertakes in practice, not theoretically what it has a right to do.  This is one of the underlying principles of the proposed new rule – and would be a meaningful change in the law.

Many federal courts have determined joint employer status under the FLSA based not only on what the second company actually did in practice but also the rights it has reserved under contract to impact the first company’s employees – even if it never exercised such rights.

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

As the proposed rule states: “[A] person’s ability, power, or reserved contractual right to act with respect to the employee’s terms and conditions of employment would not be relevant to that person’s joint employer status under the Act. Only actions taken with respect to the employee’s terms and conditions of employment, rather than the theoretical ability to do so under a contract, are relevant to joint employer status under the Act.”

The proposed regulation also provides examples of conduct that indicates joint employer liability and conduct that does not.  One example refers to a business contract where one company requires the other to institute workplace safety measures, wage floors, sexual harassment policies, morality clauses, or requirements to comply with the law or promote other desired business practices.  According to the proposed rule, such contractual provisions do not make joint employer status more or less likely under the FLSA.

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 proposed new rule on joint employer liability would not be applicable.

Takeaways

The proposed 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 proposed rule, if adopted, 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 likely to be safe from joint employer liability, as the process includes re-documenting contracts with any other company that engages ICs directly.

The comment period for the proposed new rule is 60 days from April 1, 2019.  There will likely be thousands of comments filed, requiring months of review by the Labor Department.  If the final rule maintains the thrust of the proposed regulation, it will most assuredly simplify joint employer issues under the FLSA, assuming the courts give deference to the new rule and apply it as drafted.

Written by Richard Reibstein

Posted in IC Compliance

A Tale of Two $100-Million Independent Contractor Misclassification Settlements

Yesterday, the first $100-million settlement of an independent contractor misclassification case suddenly became a $20-million deal, but on the same day a nine-figure settlement in another case took its place.

As reported in our blog post on April 22, 2016, Uber Technologies had reached a $100-million proposed settlement with about 385,000 drivers in California and Massachusetts; $84 million was guaranteed and another $16 million would be added if Uber went public and achieved a certain valuation within its first year after an initial public offering. But that settlement proposal was rejected by a federal district court judge on August 18, 2016, as we reported in our post that day, because the amount allocated to the drivers’ Private Attorneys General Act (PAGA) claim was regarded by the judge as inadequate.

Yesterday, Uber and a much smaller class of 13,600 drivers who had opted out of the arbitration provisions in the Uber driver agreement reached a proposed settlement in the same case for $20 million along with certain non-economic benefits to drivers. O’Connor v. Uber Technologies, Inc., No. 15-cv-262 (N.D. Cal. Mar. 11, 2019).  This seems like a rather large reduction, and it is, but the amount per class member rose exponentially.

But on the same day this former $100 million settlement was replaced by a lower amount, another $100 million IC misclassification settlement was reached between Swift Transportation Co. and approximately 20,000 owner-operator drivers who entered into independent contractor agreements with Swift. Van Dusen v. Swift Transportation Co., Inc., No. CV 10-899 (D. Ariz. Mar. 11, 2019).

The Swift lawsuit was commenced in the federal district court for Arizona over nine years ago.  The class action complaint claimed that the drivers were employees of Swift who had been misclassified as ICs and were paid below the federal minimum wage level when taking into account their lease payments and costs of maintaining their trucks and paying for fuel, tolls, and insurance. The lawsuit against Swift was brought under the Fair Labor Standards Act as well as state wage and contract laws.

Uber was able to trim the number of potential class members in the lawsuit from 385,000 to a small fraction of that number by including in an updated driver contract an arbitration clause with a class action waiver.  Drivers were given a set period of time to opt out of the arbitration provisions, but less then 4% of the original number of drivers in the class (only 13,600 drivers) did so.  The arbitration provision was was later challenged in court, but Uber was able to ultimately succeed in compelling arbitration on an individualized basis for all drivers other than the relatively small percentage who had opted out. Those drivers remained class members, and only that group is covered by the new $20 million settlement.

In stark contrast, Swift was unsuccessful in seeking to compel arbitration on an individualized basis under the arbitration provisions in the drivers’ IC agreements.  Swift’s arbitration clause was found unenforceable when it was held by a district court judge to be part of a “contract of employment” that is exempt from arbitration under the Federal Arbitration Act (FAA) and the Arizona Arbitration Act.  This court ruling eventually led Swift to agree to the proposed settlement, even though it has vigorously denied misclassifying any owner-operators.

Analysis and Takeaways

Few would have anticipated that there would ever be a second nine-figure settlement in an IC misclassification class action.  Nor would many have anticipated a few years ago that arbitration clauses would have such a major impact on the amount of the settlements in these types of cases.

But in the past few years, the law of arbitration has been evolving in a manner that few could predict with certainty.  In the past year alone, the U.S. Supreme Court has issued major decisions addressing arbitration clauses.

Last May, the Supreme Court decided Epic Systems Corp., which upheld mandatory arbitration agreements imposed by companies.  Uber used that decision to its advantage. And only two months ago the Supreme Court decided New Prime Inc. v. Oliveira, which held that the FAA’s exemption of “contracts of employment” applied not only to employees but also to independent contractors where the workers are involved in interstate transportation. The drivers in the Swift Transportation used that recent decision to their advantage.

While there are both pros and cons associated with arbitration clauses, most companies have concluded that the benefits usually outweigh the detriments, and more and more businesses have implemented arbitration clauses with class action waivers in their IC agreements.

But, merely having an arbitration clause with a class action waiver in an IC agreement is not a guarantee that a company will be able to forestall a class action in court by obtaining a court order compelling individual arbitrations.  Plaintiffs’ class action lawyers have been successful at times in obtaining court decisions that certain arbitration agreements are unenforceable – whether because of the FAA exemption, or because the arbitration clause is found to be unconscionable, or because it has been drafted ineffectively.

As we noted in our November 14, 2018 blog post entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in IC Agreements,” there are an abundance of issues that should be considered when creating or updating arbitration agreements in independent contractor agreements (or, for that matter, in employment agreements).

  • Does it require individual arbitrations and eliminate class arbitrations from the authority of the arbitrator?
  • Does the arbitration agreement cover third-party beneficiaries?
  • Does the arbitration clause’s choice of law select a state with a favorable arbitration law and an IC-friendly test?
  • Does the agreement avoid the types of unconscionability arguments that plaintiffs’ class action lawyers routinely advance to try to invalidate an arbitration clause?
  • Is the arbitration provision buried in the IC agreement or is it conspicuous?
  • Is the jury trial waiver drafted in a way that will likely withstand judicial scrutiny?
  • Is the provision that sets forth the authority of the arbitrator (sometimes referred to as the “delegation clause)” drafted in an effective and favorable manner?
  • Are there certain types of disputes that need to be carved out of an arbitration clause by virtue of state law?
  • Are there any disputes that are better suited for judicial resolution?
  • Has federal or state arbitration law changed since the last time the arbitration provision with class action waiver was drafted?
  • Should the arbitration agreement take into account any legislative bills being proposed in Congress or the state legislatures limiting or expanding arbitration?

While arbitration clauses with class action waivers are being increasingly deployed by companies, they are merely a procedural defense to IC misclassification lawsuits, and do not cover proceedings by regulatory and administrative agencies, which are not bound by arbitration agreements.  Substantive defenses to the merits of an IC misclassification claim are far more important.

For example, as we reported in our January and February 2019 news updates, federal appellate courts have ruled on the substantive merits that insurance agents and oilfield consultants were properly classified as ICs.

By elevating compliance with federal and state IC laws, companies can substantially lessen the likelihood of an IC misclassification lawsuit being filed in the first place.  And, if filed, an enhanced level of compliance not only increases the likelihood of a successful defense on the merits but also leads to a less costly settlement.

One way in which companies have sought to elevate their compliance with IC laws is by the use of a process such as IC Diagnostics™, which examines whether a group of workers being treated as ICs would pass the applicable tests for independent contractor status under governing state and federal laws.  Such a process then offers a number of practical, alternative solutions to enhance compliance with those laws. Those alternatives include restructuring, re-documenting, and re-implementing IC relationships in a customizable and sustainable manner consistent with a company’s existing business model.

Elements of this process can also be used to create a more effective defense of an IC misclassification class action.

Written by Richard Reibstein

Edited by Janet Barsky

Posted in IC Compliance