New Jersey Getting Tougher on Independent Contractor Misclassification: Task Force Issues Report With 16 Regulatory and Legislative Recommendations

Earlier today, July 9, the New Jersey Misclassification Task Force issued its first Report. The Task Force, created by an Executive Order issued by Governor Phil Murphy on May 3, 2018, includes representatives from the New Jersey Labor, Treasury, and Law Departments as well as five other state agencies. The Task Force Report estimated that in 2018 alone, over 12,000 workers in New Jersey were misclassified as independent contractors (ICs), franchisees, or limited liability companies or simply paid “off the books.”  It also found that over $462 million in wages were unreported in 2018, and more than $13 million was lost in tax contributions to the state for unemployment, disability, and family leave insurance.  Based on those findings, the Task Force issued 16 recommendations for regulatory and legislative initiatives that, if carried out, will likely make New Jersey one of the most challenging states in the nation for companies that operate on an IC business model or make substantial use of ICs to supplement their workforce. These initiatives will propel more companies doing business in New Jersey through the use of ICs to elevate their level of compliance with the state’s IC laws, in a manner more fully discussed in the “Takeaways” below.

New Jersey is one of about two dozen states with a so-called “ABC” test for determining IC status, a test regarded as worker-friendly.  But unlike most state ABC tests, which typically apply only to unemployment and workers’ compensation benefits, New Jersey’s ABC test also applies to wage payment, overtime, and minimum wage claims.  In that regard, it is similar in scope to the stringent ABC test adopted in a few other states including Massachusetts, California, and Illinois.

The Task Force Recommendations

The stated objective of the recommendations issued by the Misclassification Task Force is to “reduce and eliminate non-compliance and create deterrence by strengthening tools for education, enforcement, and compliance assistance.” The 16 recommendations by the Task Force are summarized below:

  1. Targeted education and public outreach, including a hotline, a webpage, and an email address to report misclassification.
  2. Strengthening state contracts by including requirements such as mandating  state government contractors to affirm their awareness of the law regarding classification of workers.
  3. Interagency coordinated enforcement, including workplace investigations and joint enforcement sweeps.
  4. Data sharing, including sharing of information about companies found to have misclassified workers as ICs, subject to confidentiality laws.
  5. Cooperation with neighboring states, such as entering into agreements for data sharing of wage collection records and audit results.
  6. Cross-training, which includes training all agencies and licensing boards in the state on New Jersey’s version of the ABC test.
  7. Criminal referrals of intentional wrongdoing to the Attorney General as head of the Department of Law.
  8. Utilizing existing workers’ compensation laws to bolster misclassification enforcement, including imposing fines on companies that misclassify workers as ICs and, as a result, fail to provide workers’ compensation for individuals who should have been covered under state law.
  9. Using the Department of Labor’s power to revoke or suspend licenses issued by the state to companies that require licenses to operate in New Jersey and are found to have misclassified workers as ICs.
  10. Enacting legislation to require employers and the state Department of Labor to create notices that companies must post informing workers of the legal prohibition against IC misclassification.
  11. Use of stop-work orders for repeat violators in the construction business in New Jersey.
  12. Passing legislation allowing the state Division of Taxation to share tax information on with the Attorney General, State Auditor, and other state agencies.
  13. Enactment of a bill that imposes joint and several liability on third party companies that contract with organizations which have unsatisfied final judgments requiring them to pay wages, remit payroll taxes, or provide workers’ compensation insurance.
  14. Imposition of personal liability on a company’s owners, directors, officers, and managing agents whose businesses are found to have engaged in IC misclassification, and the imposition of IC misclassification liability on successor entities.
  15. Requiring businesses found to have misclassified workers as ICs to pay to the state the costs of the investigatory and enforcement process including legal fees incurred by the state.
  16. Enacting laws that increase fines and penalties to $5,000 per misclassified worker for a first offense and $10,000 for a second offense, as well as increasing the penalties for record-keeping violations.

Analysis and Takeaways

The Task Force Report and its recommendations are written in a manner that fails to recognize the important role that legitimate ICs play in the nation’s (and New Jersey’s) economy.  The Report relies on academic studies by a professor who authored articles on IC misclassification, but it fails to acknowledge that, in his capacity as Administrator of the Wage and Hour Division of the U.S. Department of Labor during the prior Administration, the author stated in unequivocal terms that “the use of independent contractors [is] not inherently illegal [and] legitimate independent contractors are an important part of our economy.”

The Report also fails to mention that a 2015 study undertaken by the U.S. Government Accountability Office, entitled “Contingent Workforce: Size, Characteristics, Earnings, and Benefits,” found that 85.2% of independent contractors responded “No” to the question, “Would you prefer a different type of employment?” And when independent contractors were asked if they were satisfied with their jobs, 92% said they were satisfied, with 56.8% of ICs saying they were “very satisfied”.  In contrast, only 45.3% of full-time employees in traditional employment reported that they were “very satisfied” with their jobs.

Many workers reading reports about the Task Force Report or posters in workplaces around the state are likely to conclude that most ICs are misclassified and are dissatisfied with their type of work arrangement, when studies show just the opposite.

Similarly, many businesses that make substantial use of ICs or operate in New Jersey with an IC business model are likely to conclude, after reading the Task Force Report, that the government may have a pre-conceived view that most businesses engage in misclassification. Those companies may, and of course should, take steps to enhance their compliance with the IC laws in New Jersey (and with IC laws in any other states in which they operate).

Many businesses that are compliance-focused have utilized a process such as IC Diagnostics™, which enables them to restructure, re-document, and re-implement their IC relationships in a customized manner that maximizes compliance with applicable IC laws – without changing their business models. Companies using this type of process are not only able to minimize the likelihood of a legal challenge by government agencies, but also reduce the likelihood they will be subject to a class or collective action filed in court invoking a worker-friendly IC standard such as the ABC test in New Jersey.

Written by Richard Reibstein

Posted in IC Compliance

June 2019 Independent Contractor Misclassification and Compliance News Update

This past month was relatively uneventful in the area of independent contractor misclassification and compliance news, if one regards a $16.5 million settlement as unremarkable. But the amount of the settlements in IC misclassification cases appears to be increasing substantially.  This $16.5 million settlement involves a very large logistics company sued in a class and collective action by about 850 drivers.  What is  consequential about the settlement is not just its total sum but also the amounts to be paid individually to each of the drivers, averaging $14,000 per driver (with a high of $138,700).

While the total amount of this settlement is extraordinarily high for an IC misclassification case, it is not the highest we have seen. Last March, we reported on a $100 million settlement in an IC misclassification case involving 20,000 owner-operator drivers, with the average settlement about $5,000 per class member.  The settlement amount in this new case last month nearly triples that amount per driver.

Nonetheless, the $14,000 per class member award, while on the high side in terms of settlement payments per class member in IC misclassification cases brought by drivers, pales in comparison to the amount payable per class member in at least one non-driver case.  Last month, we reported on a settlement between an oil and natural gas exploration and production company and a group of 82 oilfield technicians who received on average $40,000 per class member.

The large amounts of the settlements in IC misclassification cases leads to the conclusion that plaintiffs’ class action lawyers are pursuing these types of cases with very high-dollar potential exposure.

Because of these types of developments, an increasing number of companies that operate with an IC business model or use numerous ICs to supplement their workforce are resorting to a process such as IC Diagnostics™ to enhance their compliance with IC laws – even in states like California and Massachusetts where the tests for IC status are the most challenging.  The evolution of IC litigation also explains why companies, as part of an IC Diagnostics process, are upgrading their IC agreements’ arbitration clauses in a state-of-the-art manner to ensure that their class action waivers in those provisions are as effective as possible and provide them with maximum protection from costly class and collective action lawsuits.

In the Courts (5 cases)

LOGISTICS COMPANY’S $16.5 MILLION SETTLEMENT WITH DRIVERS ALLEGING IC MISCLASSIFICATION IS APPROVED BY COURT.  A California federal district court has preliminarily approved a $16.5 million settlement of collective and class action claims brought by delivery drivers against XPO Logistics, Inc., one of the largest transportation and logistics companies in the world.  The lawsuit alleged that XPO violated the federal Fair Labor Standards Act and California state wage and hour laws by misclassifying them as independent contractors and not employees. According to the drivers, XPO provides delivery services to retail merchants like Home Depot, Lowe’s, Macy’s, Ethan Allen, and Pottery Barn; 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; control the order and timing of deliveries; require the drivers to wear XPO uniforms and follow customer service standards; determine the year and branding of the vehicles driven by the drivers; unilaterally determine the fees to be received by the drivers; and require the drivers to follow specific methods regarding how to move and install appliances and interact with customers.

The settlement, reached on behalf of approximately 847 current and former delivery drivers, includes a fund of almost $12 million in awards, which consisted of approximately $70 for each day worked by a class member plus an additional $2.50/workday to those who opted in to the FLSA collective action.  Estimated payments to drivers range from as low as $70 to as high as $138,700, with an average of approximately $14,000 per driver. The settlement further provides $4,125,000 (25% of the gross settlement fund) for plaintiffs’ counsel’s fees and expenses, a $24,000 PAGA allocation, settlement administration costs not to exceed $50,000, and up to $102,500 for class representative service awards. A hearing to consider whether the settlement should be granted final approval by the court is scheduled for October 16, 2019. Carter v. XPO Logistics, Inc., No. 3:16-cv-01231 (N.D. Cal. June 27, 2019).‎

$6.6 MILLION SETTLEMENT WITH EXOTIC DANCERS UPHELD BY FEDERAL COURT OF APPEALS.  Over the objections of four class members, the U.S. Court of Appeals for the Sixth Circuit has upheld a federal district court’s approval of a $6.6 million settlement reached in a worker misclassification suit between class of 28,177 exotic dancers and Déjà Vu dance clubs. In their nationwide class and collective action complaint, the dancers claimed that Déjà Vu Consulting, its affiliate dance clubs, and the clubs’ owner violated the federal Fair Labor Standards Act and Michigan wage and hour laws by “intentionally misclassif[ying] class members as independent contractors, refus[ing] to pay minimum wage, unlawfully requir[ing] employees to split gratuities, and unlawfully  deduct[ing] employee wages through rents, fines and penalties.”  The settlement was approved by the federal district court in June 2017 and provided for $1 million towards a general settlement fund; $4.5 million towards a secondary pool of settlement remuneration; $900,000 in attorneys’ fees; and $100,000 to resolve all Private Attorneys General Act claims against Déjà Vu clubs in California.  The settlement also included a requirement that every club provide its current dancers with an Entertainer Assessment Form to determine whether the dancer should be classified as an employee or independent contractor.

Four dancers objected to the settlement. The district court overruled their objections, and the Sixth Circuit (with one of the three judges dissenting in part) affirmed the district court’s decision. In so doing, the Sixth Circuit concluded that, contrary to the objections, the district did not abuse its discretion in finding that the tangible benefits afforded to class members as a result of the settlement agreement outweigh the value of the volatile claims that the Dancers released. Cabrera v. Déjà Vu, No. 17-1801 (6th Cir. June 3, 2019).                                                                                                            

D.C. CIRCUIT FINDS REFEREES IN PENNSYLVANIA ARE INDEPENDENT CONTRACTORS, NOT EMPLOYEES, UNDER THE NLRA.  The U.S. Court of Appeals for the District of Columbia Circuit reversed a decision by the National Labor Relations Board that high school lacrosse referees were employees covered by the National Labor Relations Act.  Instead, the court found the referees to be independent contractors and thereby exempt from the protections of the NLRA. As discussed more fully in our blog post of August 7, 2017, the NLRB had issued a decision that lacrosse officials providing referee services for the Pennsylvania Interscholastic Athletic Association were employees under the NLRA and not independent contractors. The PIAA is a non-profit corporation whose primary purpose is to promote uniformity in their interscholastic athletic competitions of its 1,611 member schools in Pennsylvania. The petitioner in the case, Office and Professional Employees International Union, sought to represent a unit of 140 officials that officiated at junior and senior high schools lacrosse games within the greater Pittsburgh area.

After the PIAA refused to bargain with the Union, it petitioned the D.C. Circuit for review of the Board’s holding. On appeal, the D.C. Circuit reversed the Board on the grounds that it “failed to adequately account for the strength of the two aspects of this relationship that most strongly favor independent-contractor status: the few times on which PIAA actually pays the officials [as compared to the many games for which the officials are paid by the schools] and the short duration of their employment.”  The court further identified other factors that supported IC status, although not as strongly as the payment and duration factors – the skill and expertise needed to be a lacrosse referee, the fact that the referees had to provide their own equipment, and the parties’ understanding of their relationship as ICs as evidenced by the PIAA Constitution and Bylaws, the Officials’ Manual, and registration/application materials. A few factors were identified by the D.C. Circuit as favoring employment status, but found that they were “not as strongly as those that point to classifying them as independent contractors.” Those factors included that the referees were part of PIAA’s regular business, and there was a “mixed bag” of control and supervision. Ultimately, in finding the referees to be ICs, the court stated, “Indeed, ‘almost every state court decision involving an amateur sports official’s employment status’ has come to the same conclusion.” Pennsylvania Interscholastic Athletic Association, Inc. v. NLRB, No. 18-1037 (D.C. Cir. June 14, 2019).

TWO NEW JERSEY APPELLATE COURT DECISIONS DIFFER ON COMPELLING ARBITRATION OF INTERSTATE TRANSPORTATION DRIVERS’ IC MISCLASSIFICATION CLAIMS.  Two decisions by appellate courts in New Jersey reached different results as to whether delivery drivers can be compelled to arbitrate their claims for IC misclassification. In the first case, plaintiff drivers sued in state court alleging that Strategic Delivery Solutions, a freight broker and forwarder that arranges for the local delivery of pharmaceutical products and general merchandise to its customers, violated the New Jersey Wage and Hour Law and Wage Payment Law due to their misclassification as independent contractors and not employees. Each driver signed an Independent Vendor Agreement that provided that the law of the state of the residence of the vendor would govern the agreement – in this instance, New Jersey law. The agreement also contained an arbitration provision and class action waiver. SDS filed a motion to dismiss the complaint and to compel arbitration of the claims on an individual basis, not as a class. The drivers, relying on the recent U.S. Supreme Court decision in New Prime, Inc. v. Oliviera, which extended the reach of the FAA transportation exemption to independent contractor agreements as well as employment agreements, argued that they were exempt from arbitration, as was the driver in the New Prime case under the interstate transportation worker arbitration exemption. The trial court granted SDS’s motion to dismiss and found the drivers’ agreement to arbitrate and the class action waivers were clear, unambiguous, valid and enforceable. Following an appeal by the drivers, the New Jersey Appellate Division vacated the order of dismissal and reinstated the complaint, concluding that the trial court had failed to determine whether the drivers were engaged in transportation services in interstate commerce and therefore exempt under the FAA. In addition to remanding that issue to the lower court, the appeals court included another wrinkle: it held that even if the trial court found that the drivers were engaged in interstate commerce and were exempt under the FAA, they would still be subject to the New Jersey Arbitration Act (“NJAA”) which does not include an exemption for interstate transportation workers.

A day after the SDS decision, another panel of the New Jersey Appellate Division reviewed a similar case alleging IC misclassification by delivery drivers who delivered Health Express Corporations’ pharmaceutical products in and around New Jersey. The drivers had signed contracts with the company that included an arbitration clause providing that the agreement was to be governed by the FAA. Prior to the issuance of the Supreme Court’s New Prime decision, the lower court has issued an order compelling arbitration. Following the issuance of New Prime, the Appellate Division granted the drivers permission to reinstate the appeal based on a change in the law. In reversing the lower court, the appeals court concluded that the drivers’ contract with the company constituted a “contract of employment” under the interstate transportation exemption to the FAA, stating: “Consequently, the FAA cannot govern the arbitration agreement, as contemplated by the parties. The inapplicability of the FAA to the parties’ arbitration agreement undermines the entire premise of their contract. Because the FAA cannot apply to the arbitration, as required by the parties, their arbitration agreement is unenforceable for lack of mutual assent.”

Unlike the SDS case, neither the company nor the panel of appellate judges addressed or mentioned the New Jersey Arbitration Act (“NJAA”), which would have required arbitration in this case. Thus, the conflict in rulings may be attributed to a difference in how the companies’ lawyers litigated the two cases. Colon v. Strategic Delivery Solutions, LLC, No. A-2378-17T4 (N.J. Super. Ct. App. Div. June 4, ‎‎2019); Arafa v. Health Express Corp., No. A-1862-17T3 (N.J. Super. Ct. App. Div. June 5, 2019).

Other Newsworthy Matters (2 items)

PRIVATE EQUITY FIRMS PROVIDED WITH GUIDANCE AS TO HOW TO CONDUCT DUE DILIGENCE OF A PORTFOLIO COMPANY’S POTENTIAL FOR IC MISCLASSIFICATION LIABILITY.  Private equity firms were the focus of an article entitled “How to Evaluate Portfolio Companies for Independent Contractor Misclassification Liability,” published June 18, 2019 in Private Equity Law Reports. The publisher of this legal blog together with Matthew Kane, General Counsel and Chief Compliance Officer of Z Capital Group, LLC, wrote an article as guest authors for PELR discussing the array of IC misclassification claims that have been brought as class and collective action lawsuits, the materiality of the risks, the abundance of multi-million dollar settlements in these types of cases, how to value the potential risk of IC misclassification liability, and what post-closing steps can be taken generally to minimize such risk. Our blog post of July 1, 2019 provides an elaboration of the steps that private equity firms can encourage their new portfolio companies to undertake to maximize compliance with IC laws.

PUBLISHER QUOTED IN INSURANCE PUBLICATION DEALING WITH INSURANCE AGENT EXEMPTION TO NEW CALIFORNIA BILL CODIFYING THE DYNAMEX TEST FOR IC STATUS.  The Financial Times’ June 12, 2019 publication of Life Annuity Specialist included an article entitled, “Insurers Watch as California Moves to Tighten Independent Contractor Rules.”  The article by Arthur D. Postal reports on the insurance industry’s interest in Assembly Bill 5, a bill that has passed the California Assembly and has now moved to the California Senate. As discussed more fully in our blog post of June 10, 2019, AB5 proposes to codify the California Supreme Court’s decision in the Dynamex case creating an ABC test for purposes of classifying workers as employees or ICs.  The newly-enunciated ABC test made it far more challenging for businesses to classify workers as independent contractors in California. With regard to the insurance industry, AB5 currently includes an exemption for licensed insurance agents, among other categories of workers listed as exempt. Without that exclusion for licensed insurance agents, Alan Levin of Locke Lord LLP stated in the article that the proposed legislation would potentially “shake the foundations” of how insurance policies are distributed and serviced in the state. The publisher of this blog was also quoted as follows: “This is the most important issue facing the insurance industry at this time. Insurance companies cannot be complacent and count on past decisions to apply to them, especially when class action lawyers are targeting the industry and continuing to bring misclassification cases.” He added that the full implication of the bill is unclear, because the “B” prong of the ABC test has not been litigated in California.

Written by Richard Reibstein


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Posted in IC Compliance

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