Conducting Due Diligence for Independent Contractor Misclassification Liability: A Guide for Private Equity Firms and Their Portfolio Companies

The publisher of this legal blog and Matthew Kane, the General Counsel and Chief Compliance Officer of Z Capital Group, LLC, wrote an article as guest authors for Private Equity Law Report entitled “How to Evaluate Portfolio Companies for Independent Contractor Misclassification Liability.”  The article, published on June 18, 2019, is available to subscribers of PELR and is summarized below, followed by a suggested process by which newly-acquired portfolio companies of private equity (PE) firms can enhance their compliance with independent contractor (IC) laws shortly after the acquisition.

Summary of the Article

Lawsuits by couriers and drivers against a host of gig economy companies such as Grubhub, Instacart, Postmates, Uber and Lyft, alleging that they have been misclassified as ICs instead of employees, have received considerable media coverage.  Recently, both Lyft and Uber stated in their recent initial public offering documents filed with the IRS that IC misclassification claims are a major legal issue – even though Uber has enjoyed some successes in these types of legal challenges. But the issue of IC misclassification exposure is not limited to companies in the gig economy; traditional businesses have likewise experienced similar legal and regulatory challenges in the past decade.

The PELR article discusses the array of IC misclassification claims that have been brought as class and collective action lawsuits, the materiality of the risks, and the abundance of multi-million dollar settlements of these types of cases.

PE firms regularly conduct due diligence of legal risks that could impact potential investments. Few PE firms, though, consider IC misclassification exposure with a sufficient degree of knowledge and insight needed to make well-informed decisions about whether to invest in a particular company that is built on an IC business model or relies on a considerable number of ICs to supplement its workforce. The PERL article details the steps PE firms can take to conduct this type of due diligence.

The article also discusses how PE firms can obtain a better appreciation of the nature and amount of the potential exposure and how to value a contemplated transaction that poses an IC misclassification risk.  Finally, the article briefly notes the types of actions that PE firms can suggest to their portfolio companies to undertake, post-closing, to maximize compliance with IC laws.

This blog post supplements that article, providing an in-depth analysis of the post-closing steps that a PE firm’s portfolio companies can take to substantially minimize their exposure to IC misclassification liability – without altering the company’s underlying business model.

Elaboration of How to Enhance IC Compliance Post-Closing

The PELR article references generally how newly acquired portfolio companies can enhance their IC compliance post-closing, noting that many companies have resorted to a legal process such as IC Diagnostics™.

IC Diagnostics is a process that examines whether a group of workers not being treated as employees would satisfy the applicable tests for IC status under governing state and federal laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws.

There is no universal IC test under all federal laws, and most states have IC tests that not only vary from the federal laws but also differ from the laws in other states – even though some IC tests appear to be similarly worded. This creates a greater challenge for companies operating nationwide or in a number of different states, but there are ways by which those challenges can be met or minimized.

Initial assessment of IC compliance

The first step in a process like IC Diagnostics is the assessment of dozens of relevant factors indicating IC or employee status. While some tests have over 20 factors that are considered and others have as few as two or three, many of the factors themselves take into account a host of additional considerations. For example, some tests for IC status set forth two or three prongs that must be met and can include, as one prong, whether the business directs and controls the workers involved under contract and in fact.  In determining direction and control, courts and administrative agencies have identified well over 48 factors. So, even a test that seems abbreviated can lead to a consideration of dozens of factors bearing on direction and control.

Of course, not all IC business models are capable of becoming compliant with applicable IC laws. If they are not suitable for an IC relationship, presumably the private equity firm has abandoned their interest in acquiring the company. Thus, the following methodology assumes the business model has already achieved a minimal level of IC compliance or can be adjusted to achieve an enhanced level of compliance with IC laws.

Tweaking the IC relationship where needed

There are three principal alternatives to enhancing IC compliance: restructuring, re-distribution (for example, using a workforce management company to engage the workers), and reclassification (either voluntarily or through a program like the IRS settlement classification option). Most PE firms would like to see their new acquisitions retain their IC business model.  But unless the company is one of those few with a business model that can pass scrutiny under an array of IC laws, most portfolio companies will need to restructure (or tweak) their IC relationships so that they can fairly argue that they meet all applicable state and federal tests for IC status – or at least all but the most restrictive state law tests.    

For most businesses, there is typically a need only for a modest amount of restructuring of their IC relationships; for a few others, it may need to be a bit more substantial – but in either case the objective is not to change the business model but rather to retain its essential components in a sustainable and customized manner.

Re-documenting the IC relationship in a state-of-the-art manner

Restructuring should be undertaken in tandem with re-documenting the IC relationship. This is a comprehensive undertaking that is intended to assure that two key business and legal objectives are met: (1) that the restructuring and documentation of the IC relationship is thorough, practical, and sustainable, while maintaining the key components of the company’s business model; and (2) that the restructured IC relationship is articulated within an updated or new agreement containing state-of-the-art provisions that are designed expressly for the particular business – without any empty recitals or misstatements of how the relationship will be implemented.

Well drafted IC agreements serve many valuable purposes including providing a first line of defense against administrative proceedings and audits by regulatory agencies and against class and collective action and individual lawsuits by workers claiming to have been misclassified as ICs.

Re-implementation of the IC relationship

Companies should take steps to ensure that what is set forth in a re-documented IC agreement is implemented in practice on a short-term and long-term basis.  If not implemented in this fashion, businesses are needlessly providing arguments to class action lawyers and government regulators that their IC agreement is little more than a piece of paper that is contradicted by the actual facts and, as such, should be disregarded.  Worse, some class action lawyers and regulators argue that some IC agreements are not much more than a thinly disguised sham indicative of willful misclassification.

As part of the re-implementation, internal company communications with the ICs and about them should be articulated in a manner consistent with an IC relationship – and not indicative of an employment relationship. While some of the changes may be nothing more than semantics, mere word changes alone often do not suffice.  Websites and marketing materials should be also be reviewed and revised to articulate the IC relationship. There are state-of-the-art ways to effectively accomplish this.

Avoid model IC agreements and standardized approaches

“One size fits all” solutions are typically ill-fitting, and “quick fixes” or shortcuts intended to enhance IC compliance usually disserve the objective of meaningfully minimizing or eliminating IC misclassification liability.  The use of standard, model, or “form” IC agreements tend to cause businesses to overlook the need to structure, document, and implement a sustainable IC model that fits a company’s business model; those customized approaches are far more likely to withstand legal scrutiny under applicable legal tests.

Bona fide restructuring, re-documentation, and re‑implementation need not be prohibitively expensive or time-consuming.  Once undertaken and completed in a reasonably short period of time, these steps can place a portfolio company in an enviable place: an enhanced state of IC compliance that can minimize the likelihood that a governmental agency, class action lawyer, union, or employee seeking unemployment or workers’ compensation will attempt to challenge the IC relationship – and if a challenge is raised, these steps can maximize the likelihood that the IC relationship will be upheld as valid.

Don’t Forget an Effective Arbitration Clause with Class Action Waiver

Portfolio companies can eliminate most class actions by use of a well drafted arbitration clause with class action waiver. Such clauses can lead to a class member having to litigate his or her case on an individual basis. A poorly drafted arbitration clause may result in the company having to defend itself in a class action if the business did not take full advantage of the current state of the law. Some of the many drafting tips for such clauses can be found in our November 14, 2018 blog post entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in IC Agreements.”

Plaintiffs’ class action lawyers are vigorously challenging such contractual provisions.  While the law favors the use of such clauses, the law is constantly changing at the federal and state level.  That reality strongly suggests that if a portfolio company already has an existing arbitration clauses in its independent contractor agreements, those provisions should be reexamined and updated in tandem with the company’s effort to enhance its compliance with laws governing the use of ICs.

Written by Richard Reibstein

Posted in IC Compliance

April and May 2019 Independent Contractor Misclassification and Compliance News Update

The past two months were two of the busiest ever in terms of judicial decisions involving claims of independent contractor misclassification, administrative and regulatory initiatives, and legislative developments.  They are combined in this blog post.

Two of the most impactful cases involved Amazon and Jan-Pro, a nationwide commercial cleaning franchisor. In the Amazon case, a federal court in Washington State held that Amazon could not compel arbitration of class action claims by drivers making deliveries of packages. The court reasoned that those drivers were interstate transportation workers exempt from arbitration under the Federal Arbitration Act. One of the most important aspects of this decision was that its distinguishing these delivery drivers from those providing only “local deliveries” services to e-commerce companies (such as couriers making restaurant, pharmacy, flower, and alcohol deliveries). The court regarded those local delivery gig workers as intrastate transportation industry workers who therefore are encompassed by the arbitration provisions of the FAA. While many commentators have remarked that the Amazon decision is momentous, it actually is extremely limited because, as noted below, it involved a highly unusual provision in Amazon’s independent contractor agreements with delivery drivers.

The Jan-Pro case involved a decision by the U.S. Court of Appeals for the Ninth Circuit holding California Supreme Court’s Dynamex decision, issued a little over a year ago, applies retroactively. The Dynamex ruling revolutionized the landscape of independent contractor law in California, imposing a new, restrictive test for IC status.  For decades, California businesses had relied upon the more even-handed test established in the Borello case, which was jettisoned by the California Supreme Court in Dynamex in so-called “wage order” claims and replaced with a new “ABC” test created by the California judiciary.

Other court cases reported below include decisions finding an arbitration clause unconscionable; granting workers’ motions for conditional and final class / collective action status; settling five class action IC misclassification cases for $4.75 million, $3.7 million. $3.56 million, $3.1 million, and $700,000; Uber settling up to 60,000 individual arbitrations for between $146 million to $170 million; three decisions favoring businesses and dismissing IC misclassification cases; and a case involving background checks of independent contractors under the federal Fair Credit Reporting Act.

There also were five administrative and regulatory initiatives of note in the past two months, including two receiving a considerable amount of media attention: an NLRB Advice Memorandum finding that drivers for Uber are independent contractors under the National Labor Relations Act, and an Opinion Letter by the U.S. Department of Labor that service providers to a virtual marketplace company were independent contractors and not employees under the federal Fair Labor Standards Act.

Finally, we report on a key development in the California legislature that would “codify” into law the Dynamex decision for all types of claims, not just “wage order” claims, except for workers in a few specified industries.

This heightened level of judicial, administrative and legislative attention to independent contractor misclassification matters is one of the reasons more and more businesses seek ways to enhance their compliance with federal and state independent contractor laws. One of the means by which many companies have maximized their IC compliance is through a process such as IC Diagnostics™, which helps them create a customized and sustainable solution-based approach to minimizing their exposure to independent contractor misclassification liability.

In the Courts (16 cases)

DRIVERS DELIVERING AMAZON PACKAGES FOUND TO FALL WITHIN INTERSTATE TRANSPORTATION WORKERS’ EXEMPTION TO FEDERAL ARBITRATION ACT.  In a case that received national attention, a federal district court in the State of Washington has ruled that drivers that deliver Amazon packages fall within the interstate transportation workers exemption to the Federal Arbitration Act (FAA) and may therefore continue to litigate their federal Fair Labor Standards Act and Washington state wage and hour claims in court rather than in arbitration.  ‎The class and collective action complaint alleges that Amazon contracts directly with drivers around the country to provide delivery services and that, although classified as independent contractors, these delivery drivers are actually employees because they receive training as to how to interact with customers and how to handle issues they may encounter while making deliveries; must follow Amazon’s instructions regarding where to make deliveries, in what order, and which route to take; and they can be penalized or terminated for missing scheduled shifts. Of the tens of thousands of putative class members, all but 165 are parties to a contract with Amazon containing a provision mandating individual arbitration and specifying that the FAA and not Washington State arbitration law will govern any disputes arising between the parties. Washington’s arbitration law by its own terms “does not apply to any arbitration agreement between employers and employees.” Few state arbitration laws have a comparable arbitration exclusion.

The court found that the interstate transportation worker exemption applied to the drivers because “Plaintiffs delivered packaged goods that are shipped from around the country and delivered to the consumer untransformed,” and because a strike by a group of the drivers at issue would interrupt interstate commerce due to the fact that goods travelling interstate would not make it to their final destination. The court further stated: “Courts in this circuit have recognized that, in order for a delivery driver to qualify for the transportation worker exemption, the delivered good must have originated, or transformed into its final condition, in a different state than the delivery state.” The court concluded that “[b]ecause it is not clear what law to apply to the Arbitration Provision or whether the parties intended the Arbitration Provision to be enforceable in the event that the FAA was found to be inapplicable, the Court finds that there is not a valid agreement to arbitrate.” Rittmann v., Inc., No. C16-1554-JCC (W.D. Wash. Apr. 23, 2019).

The publisher of this blog was quoted in a Law360 article published on April 24, 2019 that there is a “hidden lesson” from the Amazon court decision because companies can get around “arbitration-unfriendly laws” by making sure they select state arbitration laws in their independent contractor agreements that do not have the type of exemptions and exclusions found in the FAA and the Washington state arbitration law. “By so doing, companies should generally be able to avoid [the U.S. Supreme Court’s decision in] New Prime and compel arbitration of almost all disputes with independent contractor drivers under an arbitration-friendly state arbitration law – much to the chagrin of workers classified as independent contractors, who may continue to regard New Prime and the new Amazon decision as a get-out-of-arbitration-free card.”

FEDERAL APPEALS COURT RULES DYNAMEX DECISION TO BE APPLIED RETROACTIVELY.  The U.S. Court of Appeals for the Ninth Circuit has held that the California Supreme Court’s decision in Dynamex applies retroactively to 11-year-old putative class action lawsuit brought against a nationwide janitorial cleaning business, Jan-Pro International Franchising, Inc. by franchisees who claim they were misclassified as independent contractors. The Dynamex decision, which post-dated the district court’s decision in Jan-Pro, adopted the ABC test for determining whether workers are independent contractors or employees for claims brought under the state’s “Wage Orders.” The Dynamex test makes it far more difficult for businesses to classify workers as independent contractors in California than had been the case for decades. The Ninth Circuit vacated a federal district court’s grant of summary judgment dismissing the complaint for the California franchisees and remanded it back to the district court to apply the new California ABC test to the franchisees’ claims. In concluding that Dynamex applies retroactively, the court stated, “As the Supreme Court of California has explained, it ‘is basic in our legal tradition’ that ‘judicial decisions are given retroactive effect.’” In addition, the court noted that because the California Supreme Court had already denied a petition asking for clarification as to whether the Dynamex decision was to be applied prospectively only, that court implicitly determined that Dynamex should apply retroactively.

The Ninth Circuit rejected the policy arguments made by the International Franchise Association in support of Jan-Pro, arguing that applying the ABC test retroactively “would sound the death knell for Franchising in California” and that the case is “of profound importance” to franchising in California as well as the “national economies.” The court wrote: “Besides ensuring that Plaintiffs can provide for themselves and their families, retroactivity protects the janitorial industry as a whole, putting Jan-Pro on equal footing with other industry participants who treated those providing services for them as employees for purposes of California’s wage order laws prior to Dynamex.” The publisher of this blog stated in a Bloomberg Law News report, in a May 2, 2019 article entitled, “California Independent Contractor Test Applies Retroactively” that “[t]he Ninth Circuit’s decision, even if the reasoning is subject to question, is now the law in the federal courts determining independent contractor status under California law for so-called ‘wage order’ claims.”

The Jan-Pro decision is also meaningful regarding the exposure of franchisors for liability under California’s wage orders. The Ninth Circuit held that even though there was no direct relationship between Jan-Pro and the franchisees that perform the cleaning, because only master regional franchisees enter into contracts with the so-called unit franchisees, Jan-Pro can be deemed the employer of the unit franchisees. In reaching this decision, the court used Jan-Pro’s own marketing language in its website against it, where it described itself as an environmentally responsible commercial cleaning company that provides cleaning services.  Vazquez v. Jan-Pro Franchising International, Inc., No. 17-16096 (9th Cir. May 2, 2019).

CALIFORNIA APPEALS COURT FINDS ARBITRATION AGREEMENT WITH INDEPENDENT CONTRACTOR TO BE “UNCONSCIONABLE” AND THEREFORE UNENFORCEABLE.  A California appellate court has upheld a San Francisco County trial court judge’s ruling that a driver who signed an owner-operator agreement containing an arbitration provision was not bound by those arbitration terms where they were procedurally and substantively unconscionable. Subcontracting Concepts, LLC filed a motion with the trial court to compel arbitration under the arbitration provisions of the agreement with the driver, who had alleged that he had been misclassified as an independent contractor instead of an employee under California law.  The appellate court held that the terms of the agreement were procedurally unconscionable, stating: “[T]he Agreement containing the clause was adhesive in that it was imposed on [the driver] ‘as a condition of employment’ and with ‘no opportunity to negotiate.’”  The appellate court noted that they driver, whose native language was Portuguese, was not fluent enough in English to fully understand legal documents written in English and did not understand and was not told about the meaning and purpose of arbitration; that the Agreement did not clearly state what rules would govern arbitration; and that the driver was not provided with a copy of the governing rules. The court also found the arbitration provisions were substantively unconscionable because the driver was required to bear his own costs for arbitration; that such costs would be substantial; that the driver was barred from recovering any attorneys’ fees or other costs, barred from seeking statutory remedies (including punitive damages, statutory penalties and equitable relief), and barred from bringing any Private Attorneys General Act (PAGA) claims; and that the driver was precluded from taking advantage of the relatively inexpensive remedy to seek recovery through a complaint filed with the Labor Commissioner. Subcontracting Concepts (CT) LLC v. DeMelo, No. A152205 (Cal. Ct. of App. Apr.10, 2019).

UBER IS SETTLING 60,000 INDIVIDUAL ARBITRATIONS BY DRIVERS ALLEGING IC MISCLASSIFICATION.  Ride-sharing giant Uber Technologies announced on May 9, 2019 in a U.S. Securities and Exchange Commission filing that it is settling up to 60,000 individual arbitrations alleging independent contractor misclassification. As discussed in our blog post that day, Uber estimated that the cost of such individual settlement will be between $146 million and $170 million, inclusive of legal fees. In the SEC filing, Uber said that the independent contractor status of drivers is currently being challenged by the courts and government agencies both in the United States and abroad.  In the filing Uber stated: “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.” As discussed more fully in our blog post that day, while the settlements announced in the filing do not end all lawsuits pending against Uber and do not apply to any regulatory and administrative proceeding, Uber will likely continue to vigorously defend against any pending cases, arbitrations, and administrative proceedings, as well as any new cases that may be filed against it.

PENNSYLVANIA OIL AND GAS COMPANY TO PAY $3.56 MILLION – MORE THAN $40,000 PER WORKER – TO SETTLE INDEPENDENT CONTRACTOR MISCLASSIFICATION CASE.  A Pennsylvania federal district court has approved a $3.56 million class and collective action settlement between Cabot Oil and Gas Exploration, an oil and natural gas exploration and production company operating worldwide, and a group of 82 oilfield technicians who provide services to clients of the company, including operating oilfield machinery and performing maintenance on equipment. The class and collective action claims alleged against the company included overtime compensation violations under the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act due to the alleged misclassification of the technicians as independent contractors and not employees. Unlike many such settlements where the settlement has a value of under $10,000 per class or collective member, the amount per class/collective member in this case exceeds $40,000 on average.

The complaint had alleged that the technicians were misclassified as independent contractors because the company and/or its client: exercised control over all aspects of the job; did not require any substantial investment by the technicians; determined the technicians’ opportunity for profit and loss; ordered the hours and locations the technicians worked, the tools used and rates of pay received; prohibited the technicians from working other jobs for other companies while working on company jobs; did not require advanced skill, training or initiative of the technicians; and required the technicians to follow standardized plans, procedures and checklists created by the company and/or its clients.  As part of the settlement, the company denied all of the allegations. Conley v. Cabot Oil and Gas Corp., No. 2:17-cv-01391(W. D. Pa. Apr. 2, 2019).

LOGISTICS COMPANY SETTLES DRIVERS’ IC MISCLASSIFICATION CLASS ACTION FOR $4.75 MILLION.  A California federal district court has approved a $4.75 million settlement of collective and class action claims brought by delivery drivers against Velocity Express (which has now been acquired), alleging that the company violated the federal Fair Labor Standards Act and California state law by misclassifying them as independent contractors and not employees. The drivers claimed that they operated under managerial control exercised by the company’s corporate offices; and that drivers were assigned routes by the company, had to verbally verify deliveries with the company dispatcher, and were required to wear company uniforms. An unusual aspect of the settlement is that the drivers will receive $1.85 million while the bulk of the settlement, $2.9 million, will be paid to the drivers’ counsel for attorneys’ fees and legal and administrative costs.  Flores v. TFI International, Inc., No. 12-cv-05790 (N. D. Cal. Apr. 17, 2019)‎.

FEDEX SETTLES REMAINING NEW YORK DRIVER INDEPENDENT CONTRACTOR MISCLASSIFICATION CLAIMS FOR $3.1 MILLION.  FedEx has entered into a settlement agreement, subject to court approval, with 450 New York drivers who began delivering packages for FedEx Ground after 2007 and 2008 and were not included in the $240 million IC misclassification settlement that the company reached in June 2016 with delivery drivers in 20 states. In this new settlement, FedEx Ground has agreed to pay $3.1 million to settle claims that it misclassified drivers as independent contractors and made deductions to their pay under an agreement whereby the drivers had to pay for handheld scanners and insurance, allegedly in violation of New York Labor Law Section 193.  The company has stated that the agreement that is the subject of this settlement has not been in use since 2011, when FedEx began to contract only with incorporated businesses that operate more than one route. Padovano v. FedEx Ground Package System, Inc., No. 16-cv-17 (W.D.N.Y. Apr. 26, 2019).

MEDICAL COMPANIES SETTLE PHLEBOTOMISTS’ IC MISCLASSIFICATION CLASS ACTION.  A California federal court has given preliminarily approval to a $700,000 class action settlement between group of 118 phlebotomists and three medical companies in a class action lawsuit alleging wage and hour violations under California state law due to their alleged misclassification as independent contractors and not employees. According to the class action complaint, LabCorp (a provider of leading-edge medical lab tests and services through a national network of primary clinical and specialty labs), Examination Management Services, Inc. (a medical information services provider), and Soko United Corp. (a company that facilitates the supply and administration of phlebotomists for LabCorp and EMSI) are joint employers of the phlebotomists. The phlebotomists alleged they performed services under the direction of the defendants, who allegedly determined the rate and method of the phlebotomists’ compensation; supervised and controlled the quality and quantity of the work; and required the phlebotomists to follow mandated work schedules, work at LabCorp’s work sites or other location of LabCorp’s choosing, follow a dress code, use the tools and materials on-site provided by the defendants and to attend online training.  The phlebotomists also alleged that they worked alongside other phlebotomists who were classified as employees, yet they performed the same or materially the same functions. The settlement provides that EMSI shall pay $410,000; Soko will pay $150,000; and LabCorp will pay $140,000. Gonzalez v. Examination Management Services, Inc., No. 17-cv-1077(S.D. Cal. Apr. 30, 2019).

CLEANING FRANCHISOR SETTLES WITH FRANCHISEES FOR $3.7 MILLION IN IC MISCLASSIFICATION CLASS ACTION.  Jani-King, Inc., the world’s largest commercial cleaning franchisor, has reached a $3.7 million settlement of a class action brought by 290 janitorial franchisees in Pennsylvania who alleged that the company misclassified them as independent contractors.  The plaintiffs allege that by misclassifying the cleaning franchisees as independent contractors and not employees, Jani-King violated the Pennsylvania Wage Payment and Collection Law when it allegedly took improper deductions from their payments for services rendered. According to the franchisees’ complaint, Jani-King had sole discretion to determine whether the franchisees would be offered work and the nature, scope, frequency, and value of the work to be performed for each client; what cleaning methods and procedures would be used; and what training the franchisees would receive. In reaching its settlement, Jani-King agreed to make changes to its business practices, including providing new franchise agreements to those class member franchisees who wish to continue doing business with the company. The new agreement will eliminate various elements of alleged control: no longer will there be post-termination non-competition agreements; the non-solicitation period regarding Jani-King accounts will be shortened to 12 months; and franchisees may sign new business that they generate without paying finder’s fees to Jani-King. Myers v. Jani-King of Philadelphia, Inc., No. 09-1738 (E.D. Pa. May 10, 2019).

FOOD AND BAKED GOODS MANUFACTURER LOSES BID TO DENY CLASS ACTION STATUS TO DISTRIBUTORS.  Distributors for Flowers Foods, Inc., a large food and baked goods manufacturer, have been granted final certification in their national collective and class action lawsuit brought under the Fair Labor Standards Act and New Jersey, Maryland, and Pennsylvania wage laws, alleging that they have been misclassification as independent contractors and not employees. In granting final certification in the FLSA action, the court found that the approximately 100 opt-in members of the collective are similarly situated as they all work for the same Flowers Foods subsidiary; are connected to the same corporate department / division; advance identical claims and seek the same relief; have similar “salaries”; purchase product at a discount margin from Flowers, sell product to customer accounts and delivering that product to customer stores; and were required to complete a company training program. The court noted that some differences existed – some distributors hired assistants, some delivered products for other businesses, and some had a degree of control over the content of their orders – but that such variations “pale in comparison to the commonalities” among the opt-ins. The court rejected Flower Foods’ argument that final certification should be denied because certain of the defenses under the FLSA that it intends to raise, such as the Motor Carriers Act exemption and the Outside Sales exemption, must be determined on an individualized basis. Regarding the state class actions, the court found that the Rule 23 elements of numerosity, commonality, typicality, and adequacy of representation were all satisfied. Carr v. Flowers Foods, Inc., No. 15-cv-06391 (E.D. Pa. May 8, 2019).

LONG-HAUL DRIVERS IN TENNESSEE GRANTED CLASS / COLLECTIVE ACTION STATUS IN IC MISCLASSIFICATION CASE. A Tennessee federal district court has granted a long-haul driver’s motion to conditionally certify his proposed collective action under the federal Fair Labor Standards Act against Western Express Inc., a carrier engaged in the interstate shipment of freight, and New Horizons, a company that leases vehicles to truckers. In his complaint, the plaintiff driver alleged that Western and New Horizons misclassified him and other truck drivers as independent contractors rather than employees and shifted employee expenses onto the drivers, which he alleges led to the result that he and other drivers were paid less than the federal minimum wage for each hour worked per week. In support of his motion, the plaintiff filed, among other things, nine declarations from drivers who entered into an owner-operator agreement with Western and a truck lease with New Horizons as proof that he and other drivers were subject to the same policies that allegedly violated the wage and hour provisions of the FLSA. The declarations stated that the plaintiff and the other drivers had been presented with the New Horizons Lease and Western “owner operator” contract as a package deal and were required to follow Western’s policy manuals and procedures for picking up and delivering loads. In concluding that the plaintiff met “the fairly lenient standard governing conditional certification,” the court determined that there was “sufficient proof that Plaintiff and other truck drivers who entered into a Contract with Defendant Western and a truck Lease with Defendant New Horizons suffered from the same allegedly unlawful pay policy — a misclassification of “owner operator” truck drivers as independent contractors — which violates the FLSA with regard to all potential class members.”  Elmy v. Western Express Inc., No. 17-cv-01199 (M. D. Tenn. Apr. 24, 2019). ‎

“LEAD DEVELOPERS” / MARKETERS FILE CLASS ACTION IN MARYLAND ALLEGING IC MISCLASSIFICATION. Lead Developers for a Maryland-headquartered home remodeling company, Homefix Custom Remodeling Corporation, have filed a class and collective action complaint against the company alleging, among other things, minimum wage and overtime compensation violations under the federal Fair Labor Standards Act and the Maryland, Washington D.C., and Virginia wage and hour laws, as well as race discrimination claims. The complaint alleges that the company engages over 200 Lead Developers that visit homeowners door-to-door and in staff vendor booths at events or kiosks at retailers in Maryland, D.C., and Virginia to market and secure leads for commitments from homeowners to meet with the company’s personnel to discuss the purchase of home remodeling services. In support of their claims that they have been misclassified as independent contractors, the Lead Developers allege that all Lead Developers are required to report to a Homefix office to attend trainings or meetings each workday prior to traveling to neighborhoods to canvass for leads; are required to attend an initial training for at least two hours per day for two days; are coached about how to motivate homeowners to set an appointment with a sales rep; are provided written instructions and scripts for use in encounters with homeowners; are not entitled to pay for leads generated on a day that a Lead Developer fails to attend the daily meeting; travel in company vehicles which bear the company logo; are assigned to staff vendor booths at trade shows; are subject to the schedules and hours set by the company; must wear a company uniform with logo while canvassing or at events; are required to meet lead quotas set by the company; have no input into their rates of pay; and must sign a non-compete agreement. They further alleged that the company oversees the creation and operation of any LLC that a Lead Developer may establish in the performance of services for Homefix. Baylor v. Homefix Custom Remodeling Corp., No. 19-cv-01195 (D. Md. Apr. 24, 2019).

FEDERAL APPELLATE COURT SIDESTEPS CELL PHONE SALES AGENTS’ IC MISCLASSIFICATION CLAIMS, FINDING THEM EXEMPT UNDER THE FLSA. The U. S. Court of Appeals for the Second Circuit affirmed a federal district court’s award of summary judgment against sales agents, who sold cell phones for a telephone sales and marketing company, claiming they had been misclassified as independent contractors instead of employees. The sales agents brought claims for unpaid overtime compensation under the federal Fair Labor Standards Act as well as the wage laws in New York and Arizona.  The defendants argued that the workers were properly classified but, in a “backup” argument, claimed that they were exempt from the federal and state minimum wage and overtime laws under the “outside salesperson” exemption found in each of those laws.  In October 2017, a New York federal district court granted summary judgment against the sales agents on the basis of this backup argument. The district court found that the agents’ primary duty was sales, the agents customarily and regularly engaged in that primary duty away from the company’s place of business, and the agents bore the indicia of outside salespeople including independently soliciting new business in the form of new applications, receiving commission-based compensation, and working free from day-to-day supervision. In affirming the district court’s decision, the Second Circuit rejected the agents’ arguments that they lacked any indicia of outside salespersons because they were subject to strict supervision and were poorly paid. The court found that those factors were not pertinent to whether their primary duty was making sales. Vasto v. Credico (USA) LLC, No. 17-3870 (2d Cir. Apr. 12, 2019).

NEW JERSEY FEDERAL COURT RULES THAT INSURANCE AGENT WAS NOT MISCLASSIFIED AS INDEPENDENT CONTRACTOR.  A New Jersey federal district court has held that a former insurance agent for Northwestern Mutual was an independent contractor and not employee under the state’s strict ABC test for independent contractor status under the New Jersey Wage Payment Law.  As we stated in our blog post of May 10, 2019, this is another very favorable ruling for insurance companies as it comes on the heels of a decision by the U.S. Court of Appeals for the Sixth Circuit that insurance agents for American Family Insurance were not misclassified by the company as independent contractors under ERISA. The Northwestern decision may be more significant than the American Family case because the test for independent contractor status under ERISA is considerably less challenging than the test for IC status under the New Jersey Wage Payment Law. On the other hand, it is hard to imagine a class action where the undisputed facts were so heavily in favor of IC status; thus, insurance companies should be cautious in giving too much weight to the court’s decision, as most cases alleging IC misclassification are not suitable for summary judgment given the fact-specific nature of the legal issue and the typical situation where key facts are often in dispute.

The plaintiff’s proposed class action suit alleged that he and others were misclassified as ICs and that the company violated the New Jersey Wage Payment Law by making expense deductions from his and other Northwestern agents’ commissions. In granting Northwestern’s motion for summary judgment, the court concluded that all three prongs of the ABC test were satisfied. As to Prong A, the court held that the plaintiff failed to allege any control by the company over him and the other agents other than to ensure governmental regulatory compliance; that a Northwestern requirement for agents to maintain minimum sales was simply part of a sales incentive structure; and that although the plaintiff alleged he was required to deal exclusively in Northwestern products, he actually derived substantial income from non-Northwestern business as well.  According to the court, Prong B was met by the company because the plaintiff did not “regularly report to any Northwestern office.” Finally, the court found that the company satisfied Prong C, which mandates that the individual “is customarily engaged in an independently established trade, occupation, profession or business,” because the plaintiff operated his own business as a sole proprietorship, received income from about 20 different insurance companies, took tax deductions related to the operation of a business, and continued to operate his business after his relationship with Northwestern ceased. Walfish v. Northwestern Mutual Life Insurance Co., No. 16-cv-04981 (D.N.J. May 6, 2019).‎

SURGEON CANNOT SUE HOSPITAL FOR DISCRIMINATION BECAUSE SHE WAS PROPERLY CLASSIFIED AS AN INDEPENDENT CONTRACTOR. The U.S. Court of Appeals for the Seventh Circuit has held that a surgeon cannot sue Northwest Community Hospital under Title VII of the Civil Rights Act of 1964 because she is not an employee but rather an IC who is not covered by Title VII. The surgeon, who owned and operated her own private medical practice, alleged that the hospital, where she had practice privileges that were subsequently revoked, discriminated against her on the basis of her sex, religion, and ethnicity. The Seventh Circuit affirmed the district court’s issuance of summary judgment in favor of the hospital, concluding on appeal that the surgeon was “an independent physician with practice privileges at the hospital.” The court added that the surgeon “was not the hospital’s employee.”  In ruling for the hospital, the Seventh Circuit noted that the surgeon owned her own medical practice; billed her patients directly; filed her taxes as a self-employed physician; did not receive employment benefits from the hospital; paid her own professional licensing dues; set her own hours, subject only to operating room availability; could obtain practice privileges at other hospitals; and could use her own staff in surgeries. The Seventh Circuit rejected the surgeon’s argument that because she was subject to peer review, she was an employee; rather, it stated that, “Compliance with regulatory or statutory requirements does not establish control for Title VII purposes.”  Levitin v. Northwest Community Hospital, No. 16-3774 (7th Cir. May 8, 2019).

INSURANCE, BANKING AND FINANCIAL SERVICES COMPANY WINS ONE MOTION AND LOSES ANOTHER REGARDING BACKGROUND CHECKS PERFORMED ON AGENTS CLASSIFIED AS INDEPENDENT CONTRACTORS. An Iowa federal district court ruled on two dispositive motions by an insurance company in a claim brought under the Fair Credit Reporting Act (FCRA) by an individual insurance agent who also sought to proceed on a class action basis on behalf of other agents. Mutual of Omaha, a multi-line organization providing services including insurance, banking, and financial products nationwide, filed a motion for summary judgment the plaintiff’s original claim that the company allegedly failed to provide pre-adverse action notices before denying applications for positions based on consumer background reports that allegedly violated Section 1681(b)(b)(3) of the FCRA. In granting summary judgment in favor of the company, the court concluded that the pre-adverse action notice requirement in the FCRA does not apply to the plaintiff, whom it determined was an independent contractor, because that section only applies if the report is obtained “for employment purposes,” and that means “for the purpose of evaluating a consumer for employment, promotion, reassignment or retention as an employee.” After considering many factors, the court determined that no rational factfinder could conclude that the plaintiff was other than an independent contractor, and consequently, the FCRA pre-adverse notice requirements did not apply to him.

The company also made a second motion seeking dismissal of the agent’s claim that Mutual of Omaha obtained and used consumer reports without a permissible statutory purpose in violation of section 1681b(a) and (f) of the FCRA. The plaintiff had argued that the company certified to the credit reporting agency that the report would be used for employment purposes only, yet the company could not have used the report for employment purposes when it later claimed that the plaintiff was an independent contractor and not an employee. The court denied the company’s motion to dismiss, stating that while “it may be a defense to [the agent’s] claim that Mutual of Omaha had some other “permissible purpose,” the company would have to establish such a permissible purpose to prevail.  As we have noted in the past, there are other permissible purposes that Mutual of Omaha can rely upon – at least on a prospective basis.  Smith v. Mutual of Omaha Insurance Company, No.17-cv-00443 (S. D. Iowa May 1, 2019).

On the Legislative Front (2 items)

CALIFORNIA STATE ASSEMBLY PASSES BILL CODIFYING DYNAMEX AS TEST FOR INDEPENDENT CONTRACTOR STATUS, WITH EXCEPTIONS. By a vote of 53-11, the California Assembly passed a bill, referred to as AB5, on May 30, 2019, codifying the California Supreme Court’s decision in the Dynamex case, which made it far more challenging for businesses to classify workers as independent contractors in that state. Dynamex creates a presumption that a worker who performs services for a business is an employee for purposes of wage orders issued by the Industrial Welfare Commission. Under the Assembly’s bill, the reach of Dynamex would be expanded and the ABC test would be codified into law in order to determine the status of a worker as an employee or independent contractor for all provisions of the California Labor Code and the Unemployment Insurance Code, and not only claims under wage orders, unless another definition or specification of “employee” is provided in a particular law. Currently, a less stringent and more evenly balanced test, which was articulated decades ago by the California Supreme Court in the Borello case, is used as the test for independent contractor status under the Labor Code and Unemployment Insurance Code.

The bill has several exemptions, which will continue to be covered by the Borello test: licensed insurance agents; physicians and surgeons; registered security broker dealers and investment advisors and their agents and representatives; real estate brokers; and, provided they meet certain conditions, direct sales salespersons and hairstylists / barbers. The bill states that it does not apply to a contract for “professional services” (provided that nine specified factors are all met) where such professionals are licensed by the State of California in the fields of law, dentistry, architecture, engineering, or accounting, or have an advanced degree in the fields of marketing or human resources; but the term “professional services” does not include professionals engaged in the fields of health care and medicine (other than physicians and surgeons).  The bill now advances to the state Senate.

TENNESSEE ENACTS MORE BUSINESS-FRIENDLY TEST FOR INDEPENDENT CONTRACTOR STATUS.  Tennessee has enacted a new law adopting the twenty factors considered for many years by the IRS for determining independent contractor status in unemployment, wage/hour, and other employment contexts. On May 10, 2019, Tennessee Governor Bill Lee signed into law H.B.539 which will become effective on January 1, 2020. This new law amends the current statute and provides for the usage of the twenty factors historically considered by the IRS when deciding if a worker is an independent contractor or an employee. This test is less restrictive than the so-called ABC test, which was previously applied under the state’s unemployment law, where there was presumption that the worker was an employee unless the “employer” could satisfy all three prongs of the ABC test. The twenty factors include: instructions, training, integration, services rendered personally, hiring/supervising/paying assistants, continuing relationship, set hours of work, full time required, doing work on employer’s premises, set order or sequence, oral or written reports, payment by hour/week/month, payment of business or traveling expenses, furnishing of tools and materials, significant investment, realization of profit or loss, working for more than one firm at a time, making services available to general public, right to discharge, and right to terminate.

Administrative and Regulatory Initiatives (5 items)

U.S. DEPARTMENT OF LABOR ISSUES OPINION LETTER REGARDING INDEPENDENT CONTRACTOR STATUS OF SERVICE PROVIDERS TO VIRTUAL MARKETPLACE COMPANIES.  On April 29, 2019, the U.S. Department of Labor issued an Opinion Letter addressing the independent contractor status of service providers for an on-demand virtual marketplace company (VMC) under the Fair Labor Standards Act.  The Opinion Letter, issued by the Acting Administrator of the Wage and Hour Division, addresses an unnamed company whose lawyer sought an opinion based on a specified set of facts.  In issuing its Opinion Letter, the DOL stated that, “Generally, a VMC is an online and/or smartphone-based referral service that connects service providers to end-market consumers to provide a wide variety of services, such as transportation, delivery, shopping, moving, cleaning, plumbing, painting, and household services.” The Labor Department examined six factors pertinent to independent contractor status under the FLSA and found that all six factors favored IC status: (1) the nature and extent of the potential employer’s control; (2) the permanency of the relationship with the potential employer; (3) the worker’s investment in facilities, equipment or helpers; (4) the skill and initiative required for the worker’s services; (5) the opportunity for profit and loss; and (6) the extent of integration of the worker’s services into the potential employer’s business. As we discussed in our blog post of April 29, 2019, although many commentators have cited the issuance of the Opinion Letter as being rather dramatic, the U.S. Labor Department does not determine the law under the FLSA; only the courts do – and the Opinion Letter is not binding on the courts. In addition, the limited nature of the 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.  Lastly, the Opinion Letter is based on a specified set of facts that may or may not prove accurate in practice – either for the unnamed company or other VMCs.

NLRB’S GENERAL COUNSEL CONCLUDES THAT UBER DRIVERS ARE INDEPENDENT CONTRACTORS AND THEREFORE OUTSIDE THE PURVIEW OF THE NLRB.  The National Labor Relations Board’s Office of the General Counsel released an Advice Memorandum on May 14, 2019 concluding that drivers providing personal transportation services to Uber Technologies, Inc. using the company’s app-based ride-share platform were independent contractors and not employees under the National Labor Relations Act (NLRA). Three unfair labor practice charges were considered by the NLRB: two alleged that Uber unlawfully terminated its relationships with drivers who had provided rides through UberX; the other charge alleged that Uber provided unlawful assistance to or unlawfully dominated a labor organization representing UberX and UberBLACK drivers in New York City. In concluding that the UberX drivers were independent contractors, the Advice Memorandum provided that the drivers had virtually complete control of their cars, work schedules, and log-in locations, as well as freedom to work for competitors of Uber, all indicating significant entrepreneurial opportunity for the drivers. “On any given day, at any free moment, UberX drivers could decide how to best serve their economic objectives: by fulfilling ride requests through the App, working for a competing ride-share service, or pursuing a different venture altogether.” The Advice Memorandum noted that there was some control that was exercised by Uber, such as its limitation on the drivers’ ability to select trips and its establishment of fares, but when weighed against the other factors in favor of entrepreneurial freedom, the drivers were independent contractors under the NLRA. The same result was reached for UberBLACK drivers, whom the Advice Memorandum noted had even more factors supporting their independent contractor status, including their increased investment of capital in their work as compared to UberX drivers because UberBLACK drivers had to provide higher-end vehicles and maintain commercial liability insurance; their freedom to hire other drivers to work on their behalf; their ability to choose to receive UberX ride requests plus UberBLACK requests; and the fact that they contracted with Uber as business entities, and not as individuals.

Based on the findings in the Advice Memorandum, the Office of General Counsel ‎recommended that the applicable Regional Directors dismiss the charges against Uber.‎ In an article written by Hassan A. Kanu and Robert Iafolla on May 14, 2019 in Bloomberg Law entitled, “Uber Drivers are Contractors, Labor Board’s Top Lawyer Says,” the publisher of this blog was quoted as follows: “Whereas a decision by the full five-member NLRB is generally ‘appealable’ to a federal appellate court, decisions by the General Counsel’s Office not to issue an unfair labor practice are not subject to judicial review.” The publisher of this blog cautioned, however, that “[t]he crazy quilt of state law tests for independent contractor status is not affected by the issuance of the Advice Memorandum” and that “[t]he primary battleground for independent contractor misclassification issues remains at the state level.”

WISCONSIN GOVERNOR CREATES WORKER MISCLASSIFICATION TASK FORCE. Wisconsin Governor Tony Evers has signed an Executive Order creating a Joint Enforcement Task Force on Payroll Fraud and Worker Misclassification that will coordinate such matters handled by the Wisconsin Departments of Revenue, Workforce Development (Unemployment Insurance and Workers’ Compensation), and Justice, as well as the Office of the Commissioner of Insurance. As reported in a press release issued by the State of Wisconsin Department of Workforce Development on April 15, 2019, Governor Evers said: “When employees are falsely classified or treated unfairly, it hurts our families, our communities, and our whole state. Executive Order 20 and the new Joint Enforcement Task Force will make sure everyone who puts in an honest day’s work gets the compensation and benefits they’ve earned.” According to Wisconsin Unemployment Division Administrator Mark Riehl, “Last year alone, UI Division auditors conducted 2,459 audits, identifying 8,677 misclassified workers and recouping more than $1.5 million in UI taxes, interest and penalties due to their efforts.” Among other things, the Joint Task Force will review the work of the Worker Misclassification Task Force that was established in 2008 by the Department of Workforce Development; examine and evaluate existing misclassification enforcement; facilitate the sharing of information related to suspected worker misclassification violations; and work cooperatively with business, labor and community groups interested in reducing worker misclassification.

MICHIGAN ATTORNEY GENERAL LAUNCHES PAYROLL FRAUD ENFORCEMENT UNIT TO INVESTIGATE IC MISCLASSIFICATION COMPLAINTS.  Michigan Attorney General Dana Nessel is establishing the Payroll Fraud Enforcement Unit within the Department of the Attorney General, ‎dedicating resources to receive credible complaints of misclassification and payroll fraud such as failure to pay full wages, overtime compensation, and taxes.  According to a press release issued April 22, 2019 by that Department, “the ‎unit will investigate those claims with the assistance of other departments and agencies, and take ‎appropriate actions available under existing laws to deliver meaningful remedies to the workers ‎of Michigan.”  A Michigan State University study cited in the press release found that “payroll fraud robs those workers and Michigan taxpayers of hundreds of millions of dollars in lost wages, benefits and tax revenues every year,” and that “Michigan taxpayers are shortchanged $107 million a year in revenue through tax fraud when ‎businesses misclassify workers, by reporting employees as self-employed independent contractors ‎or paying them off the books as a way to avoid paying their fair share of taxes.” The press release also announced that Democrats in the Michigan Legislature have said they will introduce anti-fraud legislation that includes increasing civil and criminal penalties for payroll theft; strengthening whistleblower protections and creating incentives to turn in violators; auditing companies that commit violations; and requiring companies that “cheat” workers to pay back-wages.

TEXAS WORKFORCE COMMISSION AMENDS INDEPENDENT CONTRACTOR TEST FOR WORKERS USING AN APP-BASED “MARKETPLACE PLATFORM’S” DIGITAL NETWORK.  The Texas Workforce Commission has issued new guidance to Texas app-based businesses by amending the state’s Unemployment Insurance Law and adopting new rules for digital platform companies to classify certain workers as independent contractors for unemployment insurance purposes only. With an effective date of April 29, 2019, the rules will “develop an employment status analysis for workers who use a marketplace platform’s digital network to conduct their own independent businesses.” Under the new rule, a “marketplace contractor” is “any individual, corporation, partnership, sole proprietorship, or other entity that enters into an agreement with a marketplace platform to use the platform’s digital network to provide services to the public (including third-party individuals or entities) seeking the type of service or services offered by the marketplace contractor.” A “digital network” means “an online-enabled application or website offered by a marketplace platform for the public (including third-party individuals and entities) to use to find and contact a marketplace contractor to perform one or more needed services.” The term “marketplace platform” means an entity operating in Texas that (a) uses a digital network to connect marketplace contractors to the public seeking the type of service or services offered by the marketplace contractors; (b) accepts service requests from the public only through its digital network, and does not accept service requests by telephone, fax, or in person at physical retail locations; and (c) does not perform services offered by the marketplace contractor at or from a physical business location that is operated by the platform in Texas.

The rule, codified at §815.134 of the TWC’s Rules on Employment Status: Employee or Independent Contractor, found at, sets forth nine factors that must be satisfied for a marketplace contractor not to be considered an employee of the marketplace platform: (1) all or substantially all of the payment to the contractor shall be on a per-job or transaction basis; (2) the marketplace platform does not unilaterally prescribe specific hours during which the contractor must be available to accept service requests from the public submitted through the digital network; (3) the marketplace platform does not prohibit the contractor from using a digital network offered by any other marketplace platform; (4) the marketplace platform does not restrict the contractor from engaging in any other occupation or business; (5) the marketplace contractor is free from control by the platform as to where and when the contractor works and when the contractor accesses the digital network; (6) the marketplace contractor bears all or substantially all its own expenses; (7) the marketplace contractor is responsible for providing the necessary tools, materials and equipment; (8) the marketplace platform does not control the details or methods for the services performed by requiring the contractor to follow specified instructions how to perform the services; and (9) the marketplace platform does not require the contractor to attend any mandatory meetings or training.

Written by Richard Reibstein

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Posted in IC Compliance

Second Favorable Ruling for Insurance Companies on Independent Contractor Misclassification

Following on the heels of a very favorable decision by a federal appellate court earlier this year that insurance agents for American Family Insurance were not misclassified by the company as independent contractors in a class action brought under ERISA, a federal district court in New Jersey earlier this week reached the same conclusion about an insurance agent for Northwestern Mutual Life Insurance Company who claimed he had been misclassified in a lawsuit under the New Jersey Wage Payment Law.

This decision may be more significant than the American Family case because the test for IC status under ERISA is considerably less challenging for companies to meet than the test for IC status under the New Jersey Wage Payment Law. Yet, the evidence in this Northwestern Mutual case was far stronger for IC status than was the facts in the American Family case. Thus, while insurance companies will take comfort from this new decision, the risk cannot be ignored of an adverse decision on the issue of IC misclassification affecting another carrier with regard to their agents. Nonetheless, there are steps that companies in the insurance and other industries can take to buttress their IC compliance going forward, as discussed at the Analysis and Takeaways below.

The Facts

The plaintiff, Fred Walfish, was a Northwestern Mutual financial representative for about 15 years before he entered into a new relationship in 2010 with a general agency owned and operated by a general agent, Robert Seery, doing business as the Seery Agency.  From 2010 on, Walfish sold insurance under a contract with the Seery Agency. He sold both Northwestern Mutual policies as well as the policies of about 20 other companies to his clients. Walfish received no more than one-third of his overall commissions from Northwestern products. He also filed taxes as a sole proprietorship called Fred Walfish Insurance.

The agent rented an office from the Seery Agency and later its successor. He admitted he had “no … clue” as to how much time he spent in his rented office and in the field. Walfish failed to sell a minimum number of Northwestern policies in 2015, and by June 2016 he was no longer associated with the company. He did, however, continue to sell insurance to his clients and operate Fred Walfish Insurance.

Walfish brought a proposed class action lawsuit against Northwestern Mutual claiming that it violated the New Jersey Wage Payment Law when it deducted expenses from his commissions and the commissions of other Northwestern Mutual agents. He claimed that the company exercised substantial control over the performance of his work and that under the employee-friendly “ABC” test for IC status in New Jersey, which was articulated in 2015 by the New Jersey Supreme Court in the Sleepy’s case, he alleged that the company could not establish each of the three prongs of that ABC test in New Jersey.

The Court’s Decision

Judge William J. Martini of the U.S. Court for the District of New Jersey granted Northwestern Mutual’s motion for summary judgment. As to the first prong of the ABC test, which requires that a defendant to establish that the individual in question “has been and will continue to be free from control or direction over the performance of … service, both under his contract of service and in fact,” Judge Martini noted that a worker must allege control other than that required by regulatory authorities. It therefore discounted any “control” that was simply imposed upon Walfish by Northwestern “to ensure regulatory compliance,” such as requirements that he maintain his insurance agent license, keep accurate records, and provide accurate marketing materials to his clients.

The court examined the requirement that the agent maintain minimum sales, but it found that this was a sales incentive structure, not a form of control over the agent’s performance. Similarly, as to the claim that the company required Walfish to deal exclusively in Northwestern Mutual products, the evidence showed just the opposite – that he derived substantial income from non-Northwestern business as well. Walfish also argued that the company exercised control by requiring attendance at annual meetings, but the court said that such control was “de minimis”.

The second prong of the ABC test (prong B) requires the business to establish that the services is “either outside the usual course of the business for which the 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.” The B prong is “disjunctive,” so a company must only prove one or the other part of the second prong to satisfy this segment of the test.

The court’s decision is a bit unclear on the “usual course” part of prong B.  The court noted in one part of the opinion that the evidence was in dispute as to whether Northwestern Mutual “sells” insurance or not, but then it stated that the company does not “sell” insurance. The decision as to the “location-of- work” part of prong B, on the other hand, could not be clearer.  The court held that Walfish did not “regularly report to any Northwestern office.”

As to prong C, which mandates that the business establish that the individual “is customarily engaged in an independently established trade, occupation, profession or business,” the court found that Northwestern met its burden as to this prong as well.  The court noted that Walfish operated his own business as a sole proprietorship, received income from about 20 different insurance companies, took tax deductions related to the operation of a business, and continued to operate his insurance business after his relationship with Northwestern Mutual terminated.

An appeal by the plaintiff is anticipated.

Analysis and Takeaways

We see few IC misclassification cases that have stronger facts favoring IC status than the facts in this case.  New Jersey’s ABC test is far more challenging for a company to meet than any federal test for IC status, and considerably more challenging than any other state IC standards other than the tests in California (which is currently limited to so-called wage claims) and Massachusetts (which has been interpreted to exclude real estate salespersons). In those two states, the B prong of their ABC tests is not a two-part “disjunctive” prong it is in New Jersey.  Rather, the IC test in those two states contains a prong B that has only one part, which requires the company to prove that the service being provided by the worker in question is “outside the usual course of the [company’s] business.”

While the ABC tests in Massachusetts and California are the most employee-friendly in the U.S., there are legitimate ways the businesses can maintain an IC business model in those states, other than by reclassifying ICs as employees.

In the Northwestern Mutual case, the federal court apparently decided the “usual course” factor was satisfied when it said that Northwestern did not “sell” insurance.  But, there is some question whether California or Massachusetts, or for that matter other states with a similar ABC test, would follow the same reasoning that Judge Martini did to determine if the insurance agent performed services outside of the usual course of the company’s business – that is, determining whether Northwestern (like Walfish) actually “sells” insurance.  The judge’s analysis and logic makes perfect sense. Unfortunately, courts in other states have applied their ABC tests in ways that defy common sense.

What should a company do in the insurance business in any other industry to minimize these types of lawsuits and maximize their chances of success if they are sued for IC misclassification?  Rather than simply hoping that the plaintiff’s factual allegations are as weak as they were in the Northwestern Mutual case, a host of companies have resorted to a process such as IC Diagnostics™, which enhances compliance with IC laws by restructuring, re-documenting, and re-implementing their IC relationships in a customized and sustainable manner – and does so without any change in a company’s business strategy or business model.

The decision is Walfish v. Northwestern Mutual Life Insurance Company, No. 16-cv-4981 (WJM) (D.N.J. May 6, 2019).

Written by Richard Reibstein and Alan Levin

Posted in IC Compliance

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.


  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