A Solution to the “Five Degrees of Independent Contractor Misclassification”

“Independent contractor misclassification” is a phrase that is misunderstood, misapplied, and misused – constantly. It is used to cover an array of disparate forms of IC misclassification: unpardonable; uninformed; unprepared; unintentional; and unjust. [1]

The phrase is warranted in situations when companies engage in indefensible and unpardonable conduct, such as when a construction worker, custodian, or restaurant worker is paid in cash under the table or when a company knowingly pays an administrative assistant on a 1099 basis.

But the same term is also applied in a few states with laws that de-legitimize valid IC relationships that are lawful under the laws in almost all other states and under all federal laws governing ICs.  When used in this latter context, such as where ICs have some of their own customers but also choose to supplement their income by using a referral company that sends them additional customers seeking the types of services they provide, the phrase “IC misclassification” is not only unsuitable but also legally unjust to both independent contractors and businesses.

And there are at least three other types of so-called IC misclassification in between unpardonable and unjust.  Thus, the phrase is best understood in the context of a spectrum with at least five degrees of IC misclassification.  While most legislative responses are prompted by and cover the first three types (unpardonable, uninformed, and unprepared), a number also broadly apply to unintentional IC misclassification and a few unjustly prohibit many legitimate IC relationships.

Before describing each type of IC misclassification, we will discuss a common situation involving two similar referral companies: one that refers benefits consultants and the other that refers financial analysts to their customers that need those types of talented service providers to better operate their businesses.  The referral companies specialize in the benefits and financial services areas and have a network of hundreds of consultants and analysts that, when available, provide services to the referral company’s clients through and in the name of the referral company.  Each of the referral companies have dotted their i’s and crossed their t’s to avoid retaining or exercising any direction or control over the manner and means by which the services are performed. The consultants and analysts are all in business for themselves as sole proprietorships or LLCs offering their services to multiple customers and other referral companies, or they have the right to do so, but wish to supplement their business by rendering services to the referral companies’ clients.

Each of these referral companies and consultants would likely satisfy the test for IC status under the federal Fair Labor Standards Act (FLSA) and the Internal Revenue Code, as well as most state laws governing ICs, and would be found to be operating in a legitimate and lawful manner. Yet, they are unlikely to pass a few states’ overly restrictive tests for IC status, such as the one that was recently been enacted in California and the test for IC status in Massachusetts. In those two states, those referral companies might be found to have engaged in “independent contractor misclassification” simply by doing nothing more than referring those consultants, who are in business for themselves, to their corporate customers.

Following the recent passage of a law in California that narrowly defines who is and who is not an independent contractor in most industries, legislators in other states and in Congress have begun to propose an array of laws in an effort to curtail IC misclassification.  Legislative bodies should not plunge into this area of the law, however, without first taking into account whether such laws would prohibit legitimate types of IC relationships, whether they will simplify or make even more complex the laws governing ICs, what negative impacts such laws will have on freelancers seeking to supplement regular employment income, and whether there are more effective alternatives than the type of legislative change that was recently enacted in California.  This commentary will discuss those considerations and propose a solution after defining and briefly explaining the five degrees of IC misclassification:

Unpardonable – when a business knows it has no reasonable basis for classifying workers as ICs but does so anyway (this is indefensible wage theft).

Uninformed – when a business has no reasonable basis for classifying workers as ICs but has not bothered to learn the legal requirements.

Unprepared – when a business understands generally the applicable tests for IC status, but it is unclear whether or not particular workers can be classified as ICs under federal and most state laws, yet the business has chosen to classify the workers as ICs without taking meaningful steps to enhance its level of IC compliance.

Unintentional – when a business tries to understand and satisfy the applicable tests for IC status but, despite good faith efforts, the workers are found to have been misclassified as ICs under federal and most state laws solely because the business may not have dotted all its i’s and crossed all its t’s in structuring, documenting, and implementing its IC relationships.

Unjust – when the workers are properly classified under federal and most state laws but not under one of the few overly restrictive state law tests for IC status or where a state law test is dependent on a single factor that is not clearly defined.

A recent example of unjust IC misclassification

Recently, California enacted new legislation, Assembly Bill 5 (A.B. 5), which was signed into law on September 18, 2019 and becomes effective January 1, 2020.  That law codifies the California Supreme Court’s decision in Dynamex Operations West v. Superior Court, which was issued on April 30, 2018. As we noted in a blog post that day, Dynamex created a so-called ABC test similar to the labor standards test for IC status in Massachusetts.  This type of ABC test requires companies to satisfy each of three strict criteria in order to establish independent contractor status, dramatically changing decades of settled law in California.

Prior to Dynamex, IC status was determined in that state by applying a multi-part test issued almost 30 years earlier by the California Supreme Court in the Borello case, which weighed and balanced a number of factors.  This is similar in nature to the test used under the federal FLSA and most state lawsEssentially, Dynamex instantly turned tens of thousands of California businesses and independent contractors in scores of industries that were operating for years in compliance with settled law into companies that, overnight, might well be operating unlawfully.

The new California A.B. 5 test for IC status and the long-established Massachusetts labor standards test for IC status differ substantially from all other states’ ABC tests.  In every other state that has an ABC test, the “B” prong has two alternatives:  the work performed must either be “outside the usual course of the business for which such service is performed or . . . performed outside of all the places of business of the enterprise for which such service is performed.” (Emphasis added.)  However, the “B” prong of the Massachusetts labor standards test and the California test under Dynamex and A.B. 5 requires that a company prove that the contractor’s work is outside the usual course of business in order to establish IC status.  In other words, for some unexplained reason, the alternative way by which companies can satisfy prong “B” in the ABC tests in all other states was dropped.

Thus, in the earlier illustrations, the benefits consultants and financial analysts would remain ICs if they performed their services from their own home office or rendered their services electronically or in an online manner in all states other than Massachusetts and California. Under the new A.B. 5 statute, though, they would now likely become the referral company’s employees, whether they like it or not.  They would not be lawfully able to maintain their own independent businesses and remain independent contractors if they used those referrals to provide consulting and analyst services in the name of the referral companies.

A.B. 5 began as a legislative effort to codify the Dynamex decision into statutory law.  The legislature, however, soon recognized that the multi-factor Borello test was a fairer and more reasonable test than the stringent Dynamex standard and would have turned legitimate IC relationships into violations of the law.  The legislature therefore carved out over fifty industries from the Dynamex ABC test.  For the businesses and independent contractors in those fifty industries, the legislation now provides that the Borello test should remain the standard for independent contractor status.

Those industries that are covered by an exemption should not assume they will satisfy the exemption requirements.   In a reasoned article entitled “Complexity Is the Cost of California’s Worker Classification Law,” which appeared in Law360 on October 24, 2019, Professor Edward Zelinsky of Cardozo Law School concluded that many of the exemptions in A.B. 5 are “opaque” and “ambiguous.”

For example, Professor Zelinsky notes that the exemption for individuals performing marketing services only applies if they engage in “work [that] is original and creative in character and result of which depends primarily on the invention, imagination, or talent of the [individual].” As noted in the Zelinsky article, at least until a body of case law develops over a number of years, “it will often be unclear whether marketing activity is creative enough or imaginative enough to qualify the marketer as an independent contractor for purposes of this A.B. 5 exemption.”  Professor Zelinsky also examined a few other equally “opaque” and “ambiguous” exemptions, including the professional services exemption where a business must show that the professional service provider “customarily and regularly exercises discretion and independent judgment in the performance of the services.”  He commented that “at least for the short run, and perhaps for the long run, this open-ended standard will entail substantial interpretative ambiguity, leaving the boundaries of the exemption unclear.”

As Professor Zelinsky concluded: “A.B. 5 does not make the law of employee status clearer, simpler or more uniform.  Indeed, A.B. 5 makes the law more complex and less uniform than it was before.”

There are many other deficiencies of A.B. 5 besides those identified by Professor Zelinsky.  For example, the new law covers some professionally licensed therapists, such as licensed psychologists, but overlooks others such as licensed clinical social workers, licensed marriage and family therapists, licensed professional clinical counselors, and licensed educational psychologists.

Another key deficiency of the A.B. 5 exemptions is that each requires that all of up to 10 or 12 specified conditions be met.  For example, referral agencies must meet each and every one of ten specified conditions to qualify for the Borello test, but cannot qualify if the referred professional provides services in the name of the referral company.  Similarly, business-to-business contractors must meet each and every one of twelve specified conditions to qualify for an exemption.  Few business-to-business contractors and few referral agencies, however, can realistically satisfy every single one of the 10 or 12 respective conditions for an exemption from the ABC test.  Thus, the exemptions are essentially unrealistic for most companies in those types of businesses.  The California legislature could have followed the lead of other states that have set forth an equally comprehensive list of factors for IC status, but provided that it is not necessary to meet each and every element to establish IC status. [2]

Thus, A.B. 5 is more actually complex than the Borello test it supplanted, as Professor Zelinsky demonstrates in his article.  It is also under-inclusive in the types of professions and industries it exempts from the ABC test.  Finally, it is overly rigid in terms of requiring businesses and contractors to fit into a fixed, multi-factor business structure if they wish to qualify for an exemption from the ABC test.  In sum, it is hardly a model that should be emulated by other state legislators. Yet there are some such legislators and governors who are headed in that direction instead of focusing on legislative and enforcement initiatives that will curtail unpardonable, uninformed, and unprepared IC misclassification – the intentional or reckless type where companies know or should know that they are violating the law.

Recent efforts at the state and federal levels may create more unjust and unwise IC misclassification

Legislators in other states that wish to adopt an ABC type test or enact other rigid legislative schemes to curtail IC misclassification should recognize that while an A.B. 5 type of bill would deter and eliminate unpardonable IC misclassification (otherwise known as payroll fraud or wage theft) as well as uninformed and unprepared IC misclassification, it would also sweep in all forms of unintentional misclassification and may even unjustly outlaw IC relationships that have for years been legitimate and lawful under almost all state and federal laws.

For example, in New Jersey, a Senate bill (S. 4204) and Assembly bill (A. 5936) are under consideration that would codify the current law in New Jersey by virtue of a decision by the New Jersey Supreme Court issued five years ago and reported in a blog post on January 15, 2015.  (The Senate version of the bill would have created an ABC test with a prong B identical to A.B. 5; that is, the individual would be presumed to be an employee – even if the worker was free from control or direction over his or her performance and was customarily engaged in an independently established business, profession, trade, or occupation – if the service provided was not “outside the usual course of the business for which that service is performed.” Regardless with which bill prevails, these New Jersey legislative initiatives would sweep away many legitimate IC relationships.  Unlike California’s A.B. 5, which exempts more than 50 industries from the strict Dynamex ABC test, the New Jersey bills do not include any exemptions.  Unless the Senate or Assembly slow down their consideration of these bills to consider legitimate exemptions, as their counterparts did in California,, the New Jersey bill will de-legitimatize many IC relationships where virtually all freelancers wish to remain their own bosses and there are no complaints by other companies in that industry about a competitive disadvantage.

An increase in enforcement of existing laws would likely solve the problem

Instead of seeking to change existing law in a manner that would effectively eliminate the overwhelming number of ICs, legislators should instead seek greater enforcement of existing laws including existing tests for IC status.  This is precisely what former Labor Secretary Thomas Perez and former Wage and Hour Administrator David Weil had consistently endorsed when they were carrying out their duties at a national level to accommodate the valid interests of both workers and businesses.

Secretary Perez testified before the House Education and the Workforce Committee on March 18, 2015 that the Labor Department has been “work[ing] very closely with states, and we’ve entered into MOUs [memorandums of understanding] with 20 states. . . . because this problem’s not a red or blue problem, it’s a problem — a national problem that has three sets of victims: the worker him or herself; the employers who play by the rules — they can’t compete for contracts, they can’t compete for businesses because they pay their taxes; and then the tax collector, because when a business is cheating, they’re not paying their workers’ comp taxes, my U.I. taxes go up because the pool has gotten smaller.” Secretary Perez added:  “I believe that there’s an important place for independent contractors, but I also believe that there’s ample evidence that that’s been abused.”

Similarly, Dr. Weil, when he served as the Wage and Hour Administrator at the U.S. Department of Labor, stated that although an independent contractor relationship should not be used to evade compliance with federal labor law, the use of independent contractors [is] not inherently illegal [and] legitimate independent contractors are an important part of our economy.” 

There is little question that an increase in enforcement, as former Labor Secretary Perez called for in 2015, would effectively put a dent in unpardonable IC misclassification and also propel companies that engage in uninformed, unprepared, and unintentional IC misclassification to take steps to ensure they comply with the law.

The U.S. Department of Labor and state counterparts have issued reports over the years that as part of their coordinated enforcement efforts, they have identified or recovered for workers tens of millions of dollars in unpaid unemployment and payroll taxes. [3]  On October 28, 2019, the U.S. Department of Labor announced that it had recovered a record $322 million in wages owed to workers in Fiscal Year 2019, and part of that recovery included amounts paid by companies found to have engaged in IC misclassification.  It is abundantly clear – and a matter of common sense – that every dollar invested in adding enforcement officers to eliminate unpardonable, uninformed, and unprepared IC misclassification will yield far more money in uncollected taxes than would be needed to pay for additional government enforcement officers and their overhead costs.

Increased enforcement efforts at the federal and state level would also serve to level the playing field for those businesses using an employee model that cannot compete against companies whose use of ICs falls into one of the first three types of IC misclassification.

In addition to increased enforcement, class action plaintiffs’ lawyers have recovered even far more than have the federal and state governments by enforcing private rights of action to sue for IC misclassification based on existing laws.  In our monthly review of IC misclassification cases, we have reported on hundreds of multi-million dollar settlements – not only seven-figure payments by companies alleged to have engaged in IC misclassification, but an increasing number of settlements in the tens of millions of dollars and even a $100 million settlement in the past year.

Maintaining existing laws would be welcomed by the overwhelming number of ICs

There is an additional and equally compelling reason why the solution is not to enact stricter tests for IC status that will, as A.B. 5 will do on January 1, 2020, turn thousands of law-abiding businesses into offenders and convert legitimate ICs into employees.  This further reason is that an overwhelming number of ICs would prefer not to be turned into employees but would rather remain ICs, at least according to two independent studies conducted by the federal government.

In 2015, the U.S. Government Accountability Office (GAO), in a 72-page report to Congress, stated on page 24 of its Report entitled “Contingent Workforce: Size, Characteristics, Earnings, and Benefits,” that it had asked an array of workers the question: “Would you prefer a different type of employment?” 85.2% of independent contractors responded “No” to the question. Similarly, when the independent contractors were asked if they were satisfied with their jobs, the responses as reported on page 24 of the Report were that 92% they were satisfied with their jobs, with 56.8% saying they were “very satisfied”. In contrast, only 45.3% of full-time employees reported that they were “very satisfied” with their jobs.

The 2015 GAO Report also asked about benefits: 75.6% of regular full-time workers said “Yes” to the inquiry, “My Fringe Benefits Are Good.”  While one might expect that ICs are displeased with their fringe benefits, the study concluded just the opposite:  61.0% answered “Yes” to the same question “My Fringe Benefits Are Good.”  Thus, even though ICs had a slightly lower satisfaction rate with their fringe benefits than regular full-time employees, ICs were still as or more satisfied with their work arrangements as were full-time employees, even with less benefits. While the study does not ask why, it is likely that many of those ICs would say, “two of the benefits I like most are being my own boss and having more flexibility than if I was working as an employee somewhere.”

In 2018, the Bureau of Labor Statistics (BLS) issued a study entitled “Contingent and Alternative Employment Arrangements.” One question reported on page 15 of the study was whether ICs preferred their alternative work arrangement or would prefer a traditional work arrangement.  Of those independent contractors who had an opinion, 89.9% said they preferred their alternative work arrangements, while only 10.1% said they would prefer traditional employment.  This is a critical factor that many legislators, commentators, and those in academia seem to overlook or minimize.

Many freelancers in California are worried that A.B. 5 will eliminate their ability to earn a living. As CNBC reported on December 11, 2019 in an article entitled “California’s New Employment Law Has Boomeranged and Is Starting to Crush Freelancers,” the new A.B. 5 law will not take effect until January 1, 2020, but “freelancers are already feeling the squeeze with a decline in business and income.”

A very recent Gallup poll, as reported in The New York Times on December 18, 2019, found that 92% of self-employed 1099ers also are employed in regular employment and are simply seeking to supplement their income. Those workers reported a far higher satisfaction rate for their working arrangements that those who were limited to W-2 income. The article concludes: “Workers rather than employers seem to be driving the trend in self-employment, since the increase comes from people combining self-employment with traditional employee relationships. Some politicians [in states] like California, have sought to curb self-employment, on the theory that employers have created the gig economy in an effort to evade their tax and regulatory obligations. The reality is more complicated.”

The next day, an article appeared in Slator that interpreters and translators have been canceling contracts with freelance translators and interpreters. The article concludes that A.B. 5 “also affects translators, therapist, musicians, owner-operator truck drivers, engineer in Consultants, and more.” These types of reports of disruption in self-employment and businesses that engage independent contractors are likely to cascade and fill up the airwaves over the next month.

In conclusion, the question is not, what should be done to combat IC misclassification?  It should be re-characterized as, what should be done to combat the first three degrees of IC misclassification:  unpardonable, uninformed, and unprepared? The answer is stricter enforcement of existing laws. That will fully protect businesses that comply with the law, adequately protect workers, raise a tremendous amount of tax revenues, level the playing field, permit legitimate ICs to remain self-employed, and allow small- and medium-size companies with legitimate IC relationships to remain open for business.

Written by Richard Reibstein

This blog post was updated December 19, 2019

[1]  This commentary reflects the views of the author as the publisher of Independent Contractor Misclassification and Compliance Legal Blog, found at www.IndependentContractorCompliance.com; it does not reflect the views of the publisher’s law firm or any of the firm’s clients.

[2]   See, e.g., Florida test for IC status under the state’s workers’ compensation law, where 4 of 6 factors may be met to qualify for IC status.  Fla. Stat. 440.02. Under Wisconsin’s test for I*C status for unemployment insurance benefits, only 6 of 9 factors need be met.  Wisc. Stat. 108.02(12)(bm).

[3] For example, as we noted in a February 5, 2015 blog post, the New York Joint Enforcement Task Force on Employee Misclassification issued a report on February 1, 2015 citing that task force agencies conducted over 12,000 audits and investigations, resulting in detection of employee misclassification involving over 133,000 workers, culminating in the discovery of $316 million in unreported wages, leading to the assessments of $40.4 million in unemployment insurance contributions.

This blog post is based on an article by the author that was published in Law360.com on December 16, 2019. © Copyright 2019, Portfolio Media, Inc., publisher of Law360.  It is republished here with permission.

Posted in IC Compliance

October 2019 Independent Contractor Misclassification and Compliance News Update

Last month saw large settlements and yet another new lawsuit against companies that have an independent contractor business model, but also success by such companies in obtaining a favorable jury verdict in an IC misclassification lawsuit and compelling arbitration of a lawsuit  and thereby avoiding a class action alleging misclassification of employees as independent contractors. These cases highlight the importance of two objectives:  enhancing compliance with IC laws that can lead to favorable resolutions of legal challenges (whether they are brought by class action lawyers or by regulatory or administrative agencies) and minimizing class actions by effective use of arbitration provisions with class action waivers.

More and more businesses seeking to elevate their level of IC compliance are using a process such as IC Diagnostics™ to minimize their exposure to class action lawsuits and maximize their likelihood of success if and when they are subjected to a lawsuit or regulatory or administrative review by a state or federal agency alleging IC misclassification.  This is accomplished by restructuring, re-documenting, and re-implementing IC relationships in a customized and sustainable manner consistent with a company’s business strategy and objectives.

One of the many components to a comprehensive solution-based approach to IC misclassification challenges is an effective arbitration agreement with a class and collective action waiver, consistent with the constantly evolving federal and state law in this area. Many companies are reviewing their arbitration agreements in view of new court decisions and laws affecting the enforceability of such agreements, especially provisions with class action waivers, and trying to make them as bulletproof as possible to the types of arguments that plaintiffs’ class action lawyers have been resorting to lately to challenge their validity.  In our article entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in Independent Contractor Agreements,” which we republished in a blog post last year, we provided businesses with some of the tips we use to counteract such attacks and promote enforceability.

In the Courts (6 items)

NEW INSTACART INDEPENDENT CONTRACTOR MISCLASSIFICATION LAWSUIT FILED IN ILLINOIS.  Personal shoppers, drivers, and delivery persons have filed a proposed class and collective action lawsuit in Illinois federal court alleging wage and hour violations of the Fair Labor Standards Act and Illinois state wage laws due to their alleged misclassification as independent contractors and not employees.  Maplebear Inc. d/b/a Instacart is described in the complaint as a grocery shopping and delivery services company whose workers shop for groceries from various stores such as Safeway, Whole Foods, Trader Joe’s and Costco, and deliver them to Instacart customers within one or two hours. The plaintiffs are dispatched through a mobile phone app to shop, purchase and deliver groceries to customers at their homes and businesses. In support of their misclassification claim, the shoppers allege, among other things, that “Instacart controlled the ‘when,’ ‘where’ and ‘how’ of [their] work;” that the work performed was within the usual course of Instacart’s business of grocery delivery; and that the plaintiffs were not independently engaged in grocery delivery outside of their work for Instacart.  Additionally, the plaintiffs asserted that Instacart generated work orders for them; controlled their wages; enforced behavioral codes of conduct; directed precisely when and where they were to collect and deliver groceries to Instacart customers; expected them to hold themselves out to customers as Instacart employees by wearing lanyards with the company logo; told the plaintiffs how they were to interact with customers; had the right to terminate the plaintiffs’ relationships with Instacart; trained and directed the plaintiffs on how to evaluate and select fruits and vegetable; required them to accept every job that it sent to the plaintiffs’ smartphones within a set period of time or else be subject to financial repercussions; and monitored and managed their job performance “down to the minute.” O’Shea v. Maplebear Inc. d/b/a Instacart, No. 1:19-cv-06994 (N.D. Ill. Oct. 23, 2019).

MACY’S AND XPO LAST MILE SETTLE IC MISCLASSIFICATION CLASS ACTION BY DELIVERY DRIVERS AND HELPERS FOR $3.5 MILLION.  A California federal district court granted preliminary approval of a $3.5 million settlement reached in a proposed class action alleging independent contractor misclassification by a class of over 700  delivery drivers and helpers against Macy’s and XPO Last Mile.  XPO LM provides logistics services for Macy’s West Stores Inc., including arranging for delivery of certain consumer products and home furnishings that are sent out for delivery to consumers from the Macy’s Logistic & Operating Distribution Center in California. The named plaintiffs allege that they and the class members were not paid for all hours worked and were denied meal and rest breaks to which they were entitled. Macy’s and XPO LM denied these allegations and asserted that the drivers and helpers were not employed by either XPO LM or Macy’s. The $3.5 million settlement, which XPO LM agreed to pay on behalf of itself and Macy’s, provides for 60% of the settlement fund to be awarded to drivers and 40% to be allocated to helpers.  Garcia v. Macy’s West Stores Inc., No. 3:16-cv-04440 (N.D. Cal. Oct. 30, 2019).

XPO LOGISTICS RECEIVES FINAL APPROVAL OF $16.5 MILLION SETTLEMENT OF IC MISCLASSIFICATION CASE BROUGHT BY APPLIANCE INSTALLERS / DELIVERY DRIVERS.  A California federal district court has given final approval to a $16.5 million settlement reached between XPO Logistics and a class of drivers in an IC misclassification class action.  As we discussed in our prior blog post of July 8, 2019, the lawsuit alleged that XPO violated the federal Fair Labor Standards Act and California state wage and hour laws by misclassifying drivers as independent contractors and not employees. According to the drivers, XPO provides delivery services to retail merchants like Home Depot and Lowe’s; those companies contract with XPO to provide the delivery and basic installation services attendant to newly purchased appliances and removal of old appliances from their customers’ homes in California. The drivers claimed, among other things, that XPO reserved the rights to determine the locations where the drivers pick up and drop off merchandise assigned to them; controlled the order and timing of deliveries; required the drivers to wear XPO uniforms and follow customer service standards; determined the year and branding of the vehicles driven by the drivers; unilaterally determined the fees to be received by the drivers; and required the drivers to follow specific methods regarding how to move and install appliances and interact with customers. Estimated payments to drivers range from a high of over $140,000 to a low of $70, with an average of approximately $14,775 per driver. The settlement further provides $4,125,000 (25% of the gross settlement fund) for plaintiffs’ counsel’s fees and expenses, and $120,000 for class representative service awards. Carter v. XPO Logistics, Inc., No. 3:16-cv-01231 (N.D. Cal. Oct. 18, 2019).

DENTAL CONSULTANTS SETTLE CLASS ACTION INDEPENDENT CONTRACTOR MISCLASSIFICATION LAWSUIT FOR $3.4 MILLION.  Dental consultants including dentists and hygienists engaged to evaluate dental insurance claims have reached a proposed $3.4 million settlement of proposed class and collective action alleging wage and hour violations under the Fair Labor Standards Act, the Employee Retirement Income Security Act, and various state labor laws (IL, NJ, NY and RI) due to their alleged misclassification as independent contractors instead of employees.  According to the complaint filed in United States District Court for the Southern District of New York against Metropolitan Life Insurance Company, the dental consultants evaluated claims for benefits submitted by policyholders, participants, and beneficiaries in employee benefit plans to determine whether the services rendered were dentally necessary. The consultants alleged that, among other things, they should have been classified as employees and been entitled to overtime compensation because the company allegedly exercised direction and control over them by dictating their maximum hours of work; requiring them to work at MetLife’s offices and record their hours of work on forms issued by MetLife; requiring them to use computer hardware and software that MetLife provided to the consultants at no charge; imposed guidelines as to how to perform the work;  trained them and supervised their work through managers; created standards by which to assess the quality and quantity of their performance; and assessed their performance under those standards. Under the terms of the proposed settlement, the eligible class members (approximately 120 dental consultants) would receive no less than $1,000 each; $1,260,000 is earmarked for attorneys’ fees; and $168,000 would be set aside for service awards to particular plaintiffs. The parties’ proposed settlement agreement contains a non-admission provision on the part of the company and there is no requirement that the company change its business practices.  The parties await approval of the proposed settlement by the federal district court judge.  McNeely v. Metropolitan Life Ins. Co., No. 1:18-cv-00885 (S.D.N.Y. Oct. 7, 2019).

DOORDASH SUCCEEDS IN COMPELLING ARBITRATION OF IC MISCLASSIFICATION CLAIM.  A Massachusetts federal district court has granted a motion to compel arbitration of wage and hour claims asserted by delivery drivers against DoorDash alleging IC misclassification. The drivers claim that DoorDash, a food delivery service that provides services throughout the United States via an on-demand dispatch system, violated the Massachusetts Wage Act by failing to pay the drivers at least the minimum wage and overtime compensation as a result of its misclassification of the drivers as independent contractors and not employees. DoorDash customers may request food delivery through the mobile app or website. The order is then electronically submitted to both the restaurant and a driver wishes to deliver the order. If the driver agrees to make the delivery, he or she picks up the food and transports it to the customer. The named plaintiff driver claims the drivers are paid a delivery fee plus any customer tips, but after paying their own expenses, including for their vehicle, gas, smartphone, and data plan, their wages fall below the minimum wage.

DoorDash made a motion to dismiss the complaint and compel arbitration of the driver’s claims citing the mutual arbitration provision contained on DoorDash’s mobile app. In granting DoorDash’s motion to compel arbitration, the court rejected the driver’s argument that his arbitration agreement falls within the Federal Arbitration Act’s exclusion for “contracts of employment … of any other class of workers engaged in … interstate commerce.” The court, applying the multi-factor Lenz v. Yellow Transp. Inc. test, concluded that the driver was not a “transportation worker” exempted by section 1 of the FAA.  While the court found that certain factors favored transportation worker status, it concluded that, overall, the facts militated more strongly against interstate transportation status, including that the driver did not allege that he ever crossed state lines; did not allege that drivers are offered routes that involve transporting meals across state lines; did not allege any commercial connection between any interstate food distributor and the customers that received prepared meals via the driver’s delivery; and did not allege any connection between the out-of-state manufacturers of packaged goods and DoorDash. The court stated remarked: “[T]he outcome of this case may well be different if a driver alleged that he crossed state lines to deliver goods, as might occur where a delivery driver is stationed close to a state’s border. Similarly, the outcome of this inquiry might be different for an on-demand driver who delivers groceries for a store that buys goods in interstate commerce.”  Austin v. DoorDash Inc., No. 17-cv-12498 (D. Mass. Sept. 30, 2019).

BARBERS PROVIDING SERVICES AT A CHAIN OF BARBER SHOPS ARE HELD TO BE INDEPENDENT CONTRACTORS.  A three-judge panel of the U.S. Court of Appeals for the 11th Circuit has affirmed a district court’s decision upholding a jury verdict that barbers who provided services at Florida chain of “Razzle Dazzle” barbershops were independent contractors and not employees. The barbers alleged that they were misclassified as ICs instead of employees and, as a result, were allegedly denied overtime compensation under the FLSA. A great deal of conflicting testimony regarding employment status was presented to the jury at the trial. The barbers introduced confidentiality and non-compete agreements describing them as employees; a staff manual detailing a dress code, attendance policy, and job-related duties; and testimony that they did not set their own schedule, were not allowed to choose what hair products to use, and were required to wear specific uniforms. In contrast, the barbershop owner testified that the barbers set their own schedules, wore what they wanted, were free to choose their own hair products, could set their own prices, could provide services to others as long as it was outside the geographic limitation in the agreement, had the opportunity for profit, and provided their own equipment. In affirming the district court’s denial of the barbers’ post-trial motions, the appellate panel concluded that the jury was entitled to make credibility determinations where conflicting testimony was provided by the parties and there was “at least some evidence” to support the jury’s verdict.  Romero v. Razzle Dazzle Barbershop Inc., No. 18-12689 (11th Cir. Oct. 29, 2019).

Written by Richard Reibstein

 

 

 

 

 

 

 

 

Posted in IC Compliance

August and September 2019 Independent Contractor Misclassification and Compliance News Update

There were several notable court and administrative cases over the past two months, but they were overshadowed by a legislative matter: the enactment of Assembly Bill 5 in California, which was the subject of our September 11, 2019 blog post entitled “How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law.” That bill, which seems to have been prompted by the California legislature’s desire to reclassify drivers in that state from independent contractors to employees, was enacted with exemptions for over 50 types of workers in an array of industries.

As summarized in “Legislative Developments” below, those exempted will not be subjected to an ultra-strict test for IC status but rather to a more the even-handed test comparable to the standard for IC status in most states and under a variety of federal laws. The California legislature, operating under time constraints so that the bill could become effective on January 1, 2020, rushed through the legislative process and, in so doing, ended up with statutory language that is ambiguous and inconsistent.  The bill also left many other types of workers that were not exempted – yet have for years operated productively as ICs, as well as the businesses that contracted with such workers – wondering why they were not also carved out from the new test and, all of the sudden, have to meet a higher standard to maintain IC status.  At best, they are left to hope that in the next legislative session they will be recognized as warranting an exemption as well.

In the meantime, more and more businesses are seeking to elevate their level of IC compliance both in California and across the country.  Many are using  a process such as IC Diagnostics™, which maximizes compliance with IC laws by restructuring, re-documenting, and re-implementing IC relationships in a customized and sustainable manner consistent with existing business models.

While AB5 dominated the news the past two months, companies in the pharmaceutical and commercial cleaning industries were paying millions of dollars to settle IC misclassification cases, while an adult entertainment business was exhausting its appeals of a multi-million jury verdict for misclassifying exotic dancers. Companies in the fashion and transportation industries appear headed for trial in IC misclassification cases, unless they settle their cases. Companies in the ride-sharing and travel industries, though, successfully obtained orders compelling workers who had brought class actions to arbitrate their cases on an individual basis instead of proceeding in court.

We also report on a major NLRB decision that was the focus of one of our blog posts in September. That federal agency narrowed the law and the remedies for IC misclassification, even though it concluded that a courier company had misclassified delivery drivers as ICs.

In the Courts (9 cases)

PHARMA WHOLESALERS TO PAY $7.5 MILLION TO SETTLE INDEPENDENT CONTRACTOR MISCLASSIFICATION CLAIMS BY DRIVERS.  Two pharmaceutical wholesale distributors, Kinray Inc. and Cardinal Health Inc., have reached a $7.5 million settlement with 115 delivery drivers in a proposed collective and class action lawsuit filed in New York federal court alleging wage and hour violations under the FLSA and New York Labor Law  due to misclassification as ICs, not employees.  The wholesalers supply generic and brand name prescription drugs as well as home health products to independent retail pharmacies and engage the drivers to deliver such goods.

The drivers alleged they consistently worked over 40 hours, and sometimes as much as 80 hours weekly without overtime compensation. In support of their argument that they were employees and not ICs, the drivers claimed that they were subject to credit and background checks; required to report to company warehouses at precise times; mandated  to follow delivery routes and manifests  specifying the identity, location, time and sequence of each stop; subject to discipline for tardiness; and prohibited from dealing directly with the companies’ customers. The settlement, if approved by the court, means that the average recovery per driver, before legal fees and costs, will exceed $65,000. Fernandez v. Kinray Inc., No. 1:13-cv-04938 (E.D.N.Y. Aug. 13, 2019).

PENNSYLVANIA CLEANING FRANCHISOR TO PAY $3.7 MILLION TO FRANCHISEES TO SETTLE IC MISCLASSIFICATION CLAIM. A Pennsylvania federal district court granted final approval of $3.7 million settlement between cleaning franchisor and franchisees in an independent contractor misclassification class action. As we reported in our blog post of June 10, 2019, the settlement involves Jani-King, Inc., the world’s largest commercial cleaning franchisor. Of the 265 class members who received notice of the settlement agreement, about 109 filed claims to date. Under the terms of the settlement, the franchisees will recover $2.4 million with the average individual payout of about $11,000; $1.25 million is earmarked for attorneys’ fees and costs; and $30,000 is designated for service awards to the named plaintiffs.

The plaintiffs alleged that by misclassifying the cleaning franchisees as independent contractors, Jani-King violated the Pennsylvania Wage Payment and Collection Law when it took improper deductions from their payments for services. According to the franchisees’ complaint, Jani-King solely determined whether the franchisees would be offered work and the nature, scope, frequency, and value of the work to be performed for each client; the cleaning methods and procedures to be used; and the training franchisees would receive. In reaching its settlement, Jani-King agreed to make changes to its business practices, including providing new franchise agreements to class member franchisees wishing to continue doing business with the company. The new agreement eliminates 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 reduced to 12 months; and franchisees may sign new business without paying finder’s fees to Jani-King. Myers v. Jani-King of Philadelphia, Inc., No. 09-1738 (E.D. Pa. Aug. 26, 2019).

$4.6 MILLION JURY VERDICT FOR IC MISCLASSIFICATION UPHELD ON APPEAL AGAINST ADULT ENTERTAINMENT CLUB.  The United States Court of Appeals for the Third Circuit affirmed a $4.59 million jury verdict in favor of a class of exotic dancers who prevailed at trial in an IC misclassification class action.  A federal district court judge had approved the jury’s verdict against 3001 Castor Inc. d/b/a The Penthouse Club of Philadelphia. As we discussed in our blog posts of December 6, 2016 and April 9, 2018, the lawsuit alleged nationwide collective claims under the FLSA to recover unpaid wages, as well as state wage/hour claims due to misclassification as independent contractors.

The jury reportedly found that by obligating the dancers to pay certain fees for shifts worked, the Club violated federal and state wage and hour laws and owed the dancers over $4 million in unpaid wages.  In sustaining the jury’s verdict, the Third Circuit determined that the Club exerted “overwhelming control” over the performance of the dancers, including establishing shift times, checking attendance and assessing late fines, instructing the dancers regarding their physical appearance, dictating the choice of dress and makeup, choosing the music played while the dancers performed, and setting the price/duration of private dances. Verma v. 3001 Castor Inc d/b/a The Penthouse Club, No. 18-2462 (3d Cir. Aug. 30, 2019). This case is an example of what adult clubs should refrain from doing.  Indeed, there are also steps that entertainment emporiums can follow to enhance their IC compliance. As the title of our February 8, 2015 blog post states: “Even an Exotic Dance Club (a.k.a. Strip Joint) Can Comply with Independent Contractor Laws – And Avoid or Defend Against Class Actions.”

APPEALS COURT VACATES DECISION DISMISSING IC MISCLASSIFICATION LAWSUIT BY FIT MODELS, ALLOWING THEIR CLASS ACTION TO PROCEED TO TRIAL. The U.S. Court of Appeals for the Second Circuit has vacated a federal district court’s decision that granted summary judgment in favor of a modeling company in a class and collective action brought by fit models.  The appellate court held that summary judgment was not appropriate because there are material issues of fact in dispute as to the fit model’s classification as an independent contractor.  The plaintiff brought her complaint on behalf of herself and other fit models who are retained based on body proportions so that clothing designers and apparel companies may test the fit of their designs.  She alleges that by misclassifying models as ICs, the modeling service, Model Service LLC d/b/a/ MSA Models, and its owner denied them overtime and minimum wages and made deductions from their wages in violation of the FLSA and New York Labor Law (NYLL).

In 2018, the district court granted the company’s motion for summary judgment on the issue of whether plaintiff was the company’s employee for purposes of the FLSA and NYLL. On appeal, the Second Circuit concluded that “[w]hen drawing inferences in the light most favorable to [Plaintiff], which the district court did not do, a reasonable jury could have concluded that she was [the company’s] employee.” The appeals court also determined that although no one element of the parties’ relationship was dispositive of the FLSA inquiry, there existed genuine disputes regarding control of the plaintiff’s work schedule, whether she had the ability to negotiate her pay rate, and her ability to accept or decline work. Those disputed factors were viewed as “significant” by the appellate court to the extent they relate to the degree of control exerted by the company over the plaintiff and her opportunity for profit – two of the factors considered by the courts when assessing IC/employee status under the FLSA’s economic reality test. The court also stated that it was premature to resolve the question whether plaintiff was an employee under the NYLL. The case, which we first reported on in a July 5, 2015 blog post, was remanded for trial on the misclassification claims.  Agerbrink v. Model Service LLC d/b/a MSA Models, No. 18-1471 (2d Cir. Sept. 24, 2019).

DRIVERS FOR COURIER SERVICE ARE NOT ENTITLED TO SUMMARY JUDGMENT IN MASSACHUSETTS IC MISCLASSIFICATION CLASS ACTION.  A Massachusetts federal district court has denied a motion for summary judgment by a driver making deliveries for Google Express through transportation logistics company, Dynamex Operations East, LLC in a proposed IC misclassification class action.  However, the court did certify a class of approximately 100 drivers. In the court complaint, the driver alleges individual, class, and collective claims on behalf of himself and other drivers under the FLSA and the Massachusetts wage and hour laws due to the alleged misclassification of the drivers as independent contractors. Dynamex contracted with Google Express to provide drivers to perform same-day delivery services allowing customers to place orders online from retailers like Target, Walgreens, and Staples. The drivers contracted directly with another company that Dynamex used to supply drivers for Google Express deliveries, and were paid as independent contractors by the other company.

In ruling on the driver’s summary judgment motion, the court applied the Massachusetts three-prong ABC test.  It concluded that under Prong A, the court “does not find as a matter of law that Dynamex exercised actual control over the…drivers.” There was no discussion of Prong B inasmuch as the First Circuit has held that Prong B is pre-empted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA) when applied to entities such as Dynamex that arrange for product deliveries. The court did not consider Prong C. In denying summary judgment, the Court found many contradictions between the documentary evidence and deposition testimony of the parties related to recruitment, equipment, deductions from pay, ability to terminate the relationship, assignment of shifts, and communication with the drivers, all of which, the court said, would have to be resolved at trial.   Ouadani v. Dynamex Operations East Inc., No. 1:16-cv-12036 (D. Mass. Sept. 13, 2019).

TRAVEL CONSULTANTS MUST ARBITRATE THEIR IC MISCLASSIFICATION CLAIMS.  A federal district court in Washington state has granted the motion to compel arbitration filed by an online travel management company in a proposed collective action brought on behalf of travel consultants.  The consultants provide customer communications services for clients of Expedia Group, Inc. and Egenia, LLC.  Those two companies together ‎operate an online travel management company. The plaintiff and the companies never entered directly into either an employment or independent contractor agreement. Egenia contracts with another company, WSOL LLC, which provides telephone, email, and call center and business processing support. WSOL contracted with the plaintiff to provide customer assistance to travelers via chat, email, and phone.

The operative issue involved the plaintiff’s independent contractor agreement with WSOL that included specific references to her relationship with Egenia as well as a broad arbitration provision, a clause delegating authority to the arbitrator to make certain determinations, and a class action waiver. The complaint alleged that Expedia violated the Fair Labor Standards Act by failing to pay the travel consultants overtime compensation due to their alleged misclassification as independent contractors. In opposition to Expedia’s motion to compel arbitration, the plaintiff argued among other things that, even if a valid arbitration clause existed, Expedia and Egenia may not enforce it as non-signatories to the Agreement.  The court was not persuaded; it held that Expedia and Egenia were third-party beneficiaries to the independent contractor agreement’s arbitration provision and were therefore able to compel arbitration based on the arbitration clause contained in plaintiff’s agreement with WSOL.  Krause v. Expedia Group., Inc., No. 2:19-cv-00123 (W. D. Wash. Sept. 17, 2019).

RIDE-SHARING COMPANY SUCCEEDS IN COMPELLING ARBITATION OF WARN ACT CLASS ACTION.  A former driver providing transportation services to customers of Uber Technologies may not litigate in court his proposed class action claims under the Worker Adjustment and Retraining Notification Act. The driver alleged that the company violated the WARN Act when it ceased operations in Austin, Texas without providing WARN Act notice to drivers at least 60 days in advance of the closing. According to the complaint, in May 2016, after losing a public referendum to repeal an ordinance requiring transportation network companies like Uber to make changes in their manner of operation, Uber chose to terminate immediately its business operations in Austin. The driver contended that he and the other potential class members are employees of Uber who were entitled to WARN notice as “affected employees;” if they were independent contractors, however, the WARN Act would not apply.

Uber filed a motion to compel individual arbitration of the driver’s claims. With the parties in agreement that the driver had signed Uber’s arbitration agreement and did not opt-out, the “key disagreement pertains to whether the Court should enforce the Arbitration Agreement and order Plaintiff to individually arbitrate his claims or find the class action waiver in the Arbitration Agreement unenforceable because it conflicts with the WARN Act.” At a hearing on the issue, both parties agreed that it would be inappropriate for the Court to decide the issue whether the driver was an IC or an employee given that the arbitration provision clearly and unmistakably provided that the arbitrator must decide all disputes including the enforceability, revocability, or validity of the arbitration provision. The court concluded: “If the arbitrator determines that Plaintiff is properly classified as an Uber employee – such that Plaintiff would qualify for the protections of the WARN Act – the arbitrator must send the case back to this Court for a determination whether the Class Action Waiver is valid in light of the WARN Act. If the arbitrator determines that Plaintiff is properly classified as an independent contractor, the arbitrator may retain jurisdiction over the rest of the case since the WARN Act would not impede arbitration under that circumstance.” Johnston v. Uber Technologies, Inc., No. 16-cv-03134 (N. D. Cal. Sept. 16, 2019).

TRUCKING COMPANY FACES CLASS ACTION LAWSUIT BY DRIVERS ALLEGING OVERREACHING IN CONNECTION WITH THEIR IC MISCLASSIFICATION CLAIM.  A group of Illinois trucking companies face a new proposed class action lawsuit by drivers, most of whom are recent immigrants, claiming wage and hour violations of the Illinois Wage Payment and Collection Act and common law fraudulent inducement, misrepresentation and concealment due to their alleged misclassification as ICs and not employees. According to the class action complaint, the companies, Patriot Transport Inc. and Expeditor Systems Inc., “implemented their exploitative scheme in full knowledge that most of the truck drivers they hired would take the job offered, not complain about underpayment of wages, and not seek any recourse in court or otherwise with government authorities.”

The complaint further alleges that the drivers “had low English language proficiency and lacked legal sophistication,” and the companies required them to comply with instructions dictated by written and unwritten policies, procedures and directives regarding the drivers’ duties; imposed supervision; mandated  certain insurance;  required advance notice of intended time off; prohibited the drivers from having their own customers; ordered them to use company vehicles with company branding; and prohibited them from negotiating any matters or bargains with customers or brokers. Tlenchiyev v. Patriot Transport, Inc., No. 2019CH09186 (Cir. Ct. Cook County, IL Aug. 8, 2019).

RIDE-SHARING COMPANY SUED IN MASSACHUSETTS FOR IC MISCLASSIFICATION. Drivers for San Francisco-based on-demand ride-sharing company, Lyft, Inc., have filed a class action complaint in Massachusetts federal court alleging that Lyft violated the state’s wage and hour laws by requiring the drivers to pay business expenses, failing to pay them at least a minimum wage, and failing to pay overtime premiums  for hours worked in excess of forty per week due to their alleged misclassification as independent contractors. According to the complaint, among other things, Lyft allegedly requires drivers to follow its policies and rules that, they claim, controls the drivers’ work performance; retains the right to terminate drivers at any time in its discretion; assigns particular rides to drivers; does not require drivers to possess any advanced skills; sets the rate of pay for drivers, which it can change it at its sole discretion; monitors drivers’ performance; and may suspend or terminate drivers who do not accept enough rides, cancel too many rides, do not maintain high customer satisfaction ratings, or do not take the most efficient routes.  It is anticipated that the company will make a motion to compel arbitration and vigorously defend the claims. Cunningham v. Lyft, Inc., No. 1:19-cv-11974 (D. Mass. Sept. 17, 2019).

Administrative and Regulatory Actions (1 case)

NLRB FINDS COURIERS WERE MISCLASSIFIED AS INDEPENDENT CONTRACTORS, BUT REJECTS ARGUMENT THAT MISCLASSIFICATION IS A “STAND-ALONE” VIOLATION OF THE LAW.  As we discussed in detail in our blog post of August 29, 2019, the National Labor Relations Board has held that a courier services company misclassified drivers as independent contractors, not employees protected under the National Labor Relations Act.  The Board also ruled the company violated the NLRA when it terminated its relationship with one of the couriers because of her activities raising group complaints about the company’s classification of drivers. With one member dissenting, the NLRB refused to conclude, however, that the company’s act of misclassifying the couriers as ICs was, standing alone, a violation of the NLRA.  It also rejected the argument that it should issue an order mandating that the courier company reclassify its drivers as employees and notify them that they are not ICs.  As we noted in our blog post, the Board’s decision on the “stand-alone” issue was dictated by the “free-speech” provisions of the NLRA as well as public policy considerations. Velox Express, Inc., 368 NLRB No. 61 (Aug. 29, 2019).

Legislative Developments (2 new laws)

CALIFORNIA AB5 ENACTED WITH OVER FIFTY EXEMPTIONS; MORE CLARIFICATIONS EXPECTED.  Assembly Bill 5 (AB5), which codifies the California Supreme Court’s Dynamex decision that was issued in April 2018, was signed into law by California Governor Gavin Newsom on September 18, 2019 and becomes effective January 1, 2020.  As we discussed in our detailed September 11, 2019 blog post entitled “How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law,” Dynamex created a so-called ABC test requiring companies to satisfy each of three strict criteria in order to establish independent contractor status, dramatically changing decades of settled law in California.  Prior to Dynamex, IC status was determined in that state by applying a multi-part test issued 30 years earlier by the California Supreme Court in the Borello case, which weighed and balanced a number of factors.  Essentially, Dynamex instantly turned tens of thousands of businesses in scores of industries that were operated for years in compliance with settled law into companies that, overnight, might well be operating outside of the law.

Prior to the AB5 legislative initiative, all businesses in California were covered by the Dynamex decision for so-called “wage order” claims.  However, Dynamex did not cover “non-wage order” claims, such as causes of action for overtime and reimbursement of expenses. Although AB5 began as a legislative effort to codify Dynamex for both wage order and non-wage order claims (as well as claims under the unemployment and disability benefits laws in California), it became a lobbying exercise whereby over 50 industries and types of businesses have been exempted from the ABC test in Dynamex. For those companies fortunate enough to have been carved out of the harsh ABC test, AB5 statutorily re-establishes the multi-factor test in Borello for both wage and non-wage claims. Some of the businesses carved out of AB5 are: licensed insurance agents; certain professionals (physicians and surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, and accountants); referral agencies connecting clients with service providers  in the following industries that meet all of 10 specific ‎requirements: graphic design, photography, tutoring, event planning, ‎minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog ‎walking, dog grooming, web design, picture hanging, pool cleaning, and yard cleanup; and certain professional service providers in the following occupations that meet all of six specific requirements: marketing contractors, human resources administrators, travel agents, graphic designers, grant writers, fine artists, enrolled tax agents, payment processing agents, still photographers, photojournalists, freelance writers, publication editors, and newspaper cartoonists.

An exemption from AB5 is not a “get-out-of-jail-free” card; those businesses carved out from the Dynamex ABC test still must abide by the multi-factor Borello test.  Many businesses in industries that obtained a carve-out will still be governed by the ABC test (and not Borello) if they are unable to satisfy any of up to a dozen specific requirements.  The publisher of this blog was quoted in Law360 on September 11, 2019 stating, “There are probably 150 industries that lobbied, and 50 were successful,” and those industries that failed this go-round will likely make another attempt in a “cleanup bill” in the 2020 legislative session, which could yield more exemptions and clarify other exemptions that were added in haste after legislative hearings had concluded.

NEW YORK CITY BROADLY EXPANDS HUMAN RIGHTS LAW TO INDEPENDENT CONTRACTORS.  On September 12, 2019, the New York City Council passed a bill (Intro No. 136-A) by a vote of 47-3‎ ‎expanding the New York City Human Rights Law’s anti-discrimination protections to independent contractors and freelancers. The bill, sponsored by Councilman Brad Lander, is due to take effect in December 2019 after the Mayor signs it into law, as is expected shortly.  This additional protection for independent contractors and freelancers follows other enactments that have expanded safeguards for ICs, such as the 2017 Freelance Isn’t Free Act. Councilman Lander said, “Closing the loophole that left independent contractors without sufficient recourse for ‎discrimination or harassment builds on the Council’s ambitious work to win protections for gig-‎economy workers.” Likewise, Caitlin Pearce, Executive Director of the Freelancers Union, reportedly posted, “This is huge news for NYC’s 1.3 million independent workers, who may face harassment and discrimination in the workplace with fewer protections or paths for recourse than traditional employees.” Regarding the expansion of protections to ICs and freelancers, the publisher of this blog was quoted in Bloomberg Law’s September 12, 2019 Daily Labor Report as follows: “The Council bill, by ensuring that freelancers shouldn’t be subject to discrimination by a company that utilizes them to further its business, is consistent with a growing trend in the city and the state to give additional protections to freelancers and independent contractors.” But, finding the bill “overbroad,” this blog’s publisher said: “It goes beyond only a company’s decisions to retain or let go an independent contractor, and encompasses everything in between: their compensation, promotion, benefits, and other terms and conditions or privileges of employment.”

Written by Richard Reibstein

Posted in IC Compliance

How to Operate in California with Independent Contractors After AB5 Bill Is Signed Into Law

The latest version of Assembly Bill 5, which codifies the California Supreme Court’s Dynamex decision that was issued in April 2018, is about to become law.  Dramatically changing decades of settled law in California, Dynamex created a so-called ABC test requiring companies to satisfy each of three strict criteria in order to establish independent contractor status.  Prior to Dynamex, IC status was determined in that state by applying a multi-part test issued three decades earlier by the California Supreme Court in the Borello case, which weighed and balanced a number of factors.  Essentially, Dynamex instantly turned tens of thousands of businesses in scores of industries that were operated for years in compliance with settled law into companies that, overnight, might be operating outside of the law.

Prior to this legislative initiative, referred to as “AB5”, all businesses in California were covered by the Dynamex decision for so-called “wage order” claims.  However, Dynamex did not cover “non-wage order” claims, such as causes of action for overtime and reimbursement of expenses, as we noted in a blog post reporting on a case that delineated which types of claims were covered and which were not by Dynamex.  Thus, AB5 began as a legislative effort to codify Dynamex for both wage order and non-wage order claims (as well as claims under the unemployment and disability benefits laws in California).  But it ended up becoming a lobbying exercise whereby over 50 industries and types of businesses have been exempted from the ABC test in Dynamex. For those companies fortunate enough to have been carved out of the harsh ABC test, AB5 statutorily re-establishes the multi-factor test in Borello for wage and non-wage claims.

Those carved out of AB5 are the following:

  • licensed insurance agents
  • certain professionals (physicians and surgeons, dentists, podiatrists, psychologists, veterinarians, lawyers, architects, engineers, and accountants)
  • broker dealers, investment advisers, direct salespersons, private investigators, and commercial fishermen
  • certain professional service providers that meet all of six specific requirements in the following occupations: marketing contractors, human resources administrators, travel agents, graphic designers, grant writers, fine artists, enrolled tax agents, payment processing agents, still photographers, photojournalists, freelance writers, publication editors, and newspaper cartoonists
  • licensed real estate salespersons, repossession agents, estheticians, electrologists, manicurists, barbers, and cosmetologists
  • business-to-business contractors that meet all of 12 specific requirements
  • selected construction subcontractors and motor club service providers
  • referral agencies connecting clients with service providers that meet all of 10 specific requirements in the following industries: graphic design, photography, tutoring, event planning, minor home repair, moving, home cleaning, errands, furniture assembly, animal services, dog walking, dog grooming, web design, picture hanging, pool cleaning, and yard cleanup

Some of the exemptions will not, however, cover all businesses in a particular industry, especially where the carve-outs include a number of specific requirements, all of which must be met.

Many industries were not granted exemptions even though they are similar to the types of industries that AB5 specifically carved out from having to meet the strict ABC test.  And certain types of gig economy businesses, such as ride-sharing technology companies, were likewise omitted from any relief from Dynamex and are now covered by the ABC test for both wage and non-wage claims.

Operating in California with ICs After AB5

An exemption from AB5 is not a “get-out-of-jail-free” card; those businesses carved out from the Dynamex ABC test must still comply with the multi-factor Borello test.  Many businesses in industries that obtained a carve out will still be governed by the ABC test (and not Borello) if they are unable to satisfy any of up to a dozen specific requirements.  Thus, those businesses that will be covered by Borello need to structure, document, and implement their IC relationships in California consistent with that multi-factor test, which is similar in many ways to most of the varying tests for IC status under the major federal laws and a majority of state laws.

For some companies that will be governed by the Dynamex ABC test in California, establishing all three prongs of the ABC test may be untenable.  But the ABC test may well be interpreted by the courts in California in a manner that legally permits a number of companies to continue to use ICs.  In that regard, few courts have yet to issue decisions applying Dynamex and the Supreme Court of California has yet to apply any of the three prongs in any case.  Therefore, while it will undoubtedly be more challenging now to structure, document, and implement an IC relationship in a business governed by the ABC test in California instead of the multi-factor Borello test, it still can be accomplished by certain types of businesses.  Indeed, California is not the only state with an ABC test – no less than 20 states have variations of that test for IC status, although most of the ABC tests are applicable only for unemployment insurance or workers’ compensation claims.

Many companies that have sought to enhance their compliance with both a multi-factor test and an ABC test have resorted to an enhancement process such as IC Diagnostics™, which elevates a company’s level of compliance with applicable state and federal laws  by restructuring, re-documenting, and re-implementing IC relationships.  This compliance approach can be done in a customized and sustainable manner without changing a company’s business model.

A process such as IC Diagnostics™ also can be utilized in an effort to meet the six specific requirements under AB5 for selected professional service providers, the 12 specific requirements under AB5 for business-to-business contractors, and the 10 specific requirements under AB5 for referral agencies.

Companies that are operating in California and elsewhere with ICs should also  enhance and update their arbitration clauses with class action waivers.  In doing so, they can most effectively limit class and collective action lawsuits, as we discussed in detail in an article published last fall in the Daily Labor Report by Bloomberg Bureau of National Affairs that was then posted on this legal blog.  

Written by Richard Reibstein

Posted in IC Compliance

NLRB Finds Couriers Were Misclassified As Independent Contractors, But Rejects Argument That Misclassification Is a “Stand-Alone” Violation of the Law  

The National Labor Relations Board earlier today held that a courier services company misclassified drivers as independent contractors instead of employees protected under the National Labor Relations Act.  The Board also held that the company violated the NLRA when it terminated its relationship with one of the couriers because of her activities raising group complaints about the company’s classification of the drivers. With one member dissenting, the NLRB refused to conclude, however, that the company’s act of misclassifying the couriers as ICs was, standing alone, a violation of the NLRA.  It also rejected the argument that it should issue an order mandating that the courier company reclassify its drivers as employees and notify them that they are not ICs under the NLRA.  

At first blush, the Board’s decision may seem internally inconsistent – finding that the company misclassified the workers in question and committed an unfair labor practice by terminating a worker for engaging in protected activity, but concluding that the company did not violate the law by its act of misclassifying the workers and advising the workers that they are independent contractors.  Yet a close review of the majority’s opinion demonstrates that the Board’s decision on the “stand-alone” issue was mandated by the “free-speech” provisions of the NLRA as well as public policy considerations.

Despite the Board majority’s view that misclassification itself is not an unfair labor practice, its decision today should not be read to suggest that the NLRB’s Republican-appointed members countenance IC misclassification.  The Board unanimously held that the drivers had been misclassified as ICs and, as a result, they are now subject to  unionization. For that reason, we discuss in the “Takeaways” below a means by which many businesses that utilize an IC business model can meaningfully enhance their IC compliance – and do so in a customized manner consistent with their business strategy.

The Decision 

The Misclassification of the Couriers

Before reaching the issue of whether the act of misclassifying employees as ICs violated the NLRA, the Board majority first addressed the threshold question of whether the company, Velox Express, Inc., had actually misclassified the drivers who provided services to Velox and its customers.  Applying the Board’s new test for IC status as set forth in its January 25, 2019 decision in SuperShuttle DFW, which was the subject of our blog post that day, the majority of the NLRB concluded that the Velox couriers were employees and not ICs under the NLRA’s test for IC status.

In concluding that the couriers were misclassified, the Board majority found the following factors supported employee status:  Velox’s drivers must personally service pre-established routes in which they had no proprietary interest and must service those routes during certain specific time periods on designated days with no discretion to determine when and how long they work;  they received flat fees over which they had no input or control; they had to request time off from Velox when they did not wish to work a scheduled day; and they had to follow detailed procedures and respond to all Velox communications or be subject to disciplinary fines.

The “Stand-Alone” Issue

After finding the couriers were statutory employees under the NLRA, the Board addressed the following question, which was posed by the Board 18 months ago when it issued a Notice and Invitation to File Briefs:  “Under what circumstances, if any, should the Board deem an employer’s act of misclassifying employees as independent contractors a violation of Section 8(a)(1) of the Act?”

In addition to the briefs of the parties and the General Counsel of the NLRB, over a dozen amicus curiae briefs were filed, including from the AFL-CIO and Teamsters, on the one hand, and the American Trucking Association and the Chamber of Commerce of the United States, on the other hand.

In finding that an employer’s classification of workers as ICs and its “mere communication to its workers that they are classified as independent contractors” does not violate the NLRA, the Board majority first addressed Section 8(c) of the Act, the so-called “free speech” section, which provides: “The expressing of any views, argument, or opinion, or the dissemination thereof, whether in written, printed, graphic, or visual form, shall not constitute or be evidence of an unfair labor practice . . . , if such expression contains no threat of reprisal or force or promise of benefit.”  It concluded that when an employer decides to classify its workers as independent contractors, it forms a legal opinion regarding the status of those workers and “its communication of that legal opinion to its workers is privileged by Section 8(c) of the Act . . . .”

Notably, the NLRB majority concluded that even if a company is wrong in its view that certain workers are ICs and is determined to have misclassified the workers, “erroneously communicating to workers that they are independent contractors does not, in and of itself, contain any ‘threat of reprisal or force or promise of benefit.”

As a policy matter, the Board majority noted that “[i]ndependent-contractor determinations are difficult and complicated enough when only considering the Act, but the Act is not the only relevant law.” It added: “An employer must consider numerous Federal, State, and local laws and regulations that apply a number of different standards for determining independent-contractor status. Unsurprisingly, employers struggle to navigate this legal maze. Further, in classifying its workers as independent contractors, an employer may be correct under certain other laws but wrong under the Act—which is all the more reason why it would be unfair to hold that merely communicating that classification is unlawful.”

The Remedy

The final issue addressed by the Board majority was the appropriate remedy for the unfair labor practice it found that Velox had committed.  The majority opinion, in a lengthy footnote, declined to order Velox to reclassify the workers as employees, finding that such a remedy only should be considered where the posting of a notice – the standard NLRB remedy – is insufficient, and there was no reason to believe that a notice would not dissipate the unlawful discharge of the driver.

The Dissent

In Member McFerran’s dissent, she focused on what she referred to as the “chilling effect” of misclassification, arguing that the IC agreement that declared each driver to be an IC “implied that drivers had no rights under the Act,” which she regarded as unlawful.  She also viewed Section 8(c)’s free speech provisions as inapplicable because, in her view, the communication of IC status to the drivers was not a “legal opinion” and itself restrained, coerced, and interfered with the drivers’ rights under the NLRA.  Finally, Member McFerran asserted that because Velox committed an unfair labor practice by terminating a driver for engaging in protected activities, it is necessary for Velox to inform the other drivers that they are not ICs but rather employees entitled to rights protected by the NLRA.

Analysis and Takeaways

This issue – whether the act of misclassifying workers as ICs is itself an unfair labor practice – was the subject of a prior blog post on this site.  On August 30, 2016, we commented on an “Advice Memorandum” issued by the General Counsel of the NLRB, an Obama appointee, who stated:  “Although the Board has never held that an employer’s misclassification of statutory employees as independent contractors in itself violates Section 8(a)(1), there are several lines of Board decisions that support such a finding.”  However, when we closely examined those NLRB decisions, we found that they all required what we referred to at the time as “misclassification-plus” – an unfair labor practice added to misclassification.  That issue is at the core of this case, and Member McFerran has essentially adopted the position of the former General Counsel.

The Board majority, though, essentially has adopted a “misclassification-plus” approach, but in its mind the “plus” needs to be “super-plus” – an unfair labor practice that applies not to a single worker but to the entire group of misclassified employees.  As noted above, the Board majority favorably cited to existing NLRB cases which held that companies will violate the NLRA if they seek to reclassify workers from employees to ICs to avoid unionization.

The lesson for businesses based on an IC model or that engage a considerable number of ICs is to avoid the consequences and risks now faced by Velox.  While it likely Velox had a good faith belief that its classification of drivers as ICs was valid, at least one federal agency has now found its classification was unlawful, which makes it a target for unionization and/or a class action lawsuit for a wage and hour or other employment law violation.

How can companies minimize these types of risks?

One way by which an increasing number of businesses have elevated their level of IC compliance is through a process such as IC Diagnostics™, which provides companies with a customized means to restructure, re-document, and re-implement their IC relationships to minimize IC misclassification exposure without changing their business model. Had a company like Velox undertaken this type of process, the likelihood of it having to defend itself before the NLRB or risking unionization or being the subject of a class action would have been substantially reduced.

Written by Richard Reibstein

Posted in IC Compliance