New Joint Employer Rule Will Impact Independent Contractor Misclassification Claims

Many companies that operate their businesses on an independent contractor model or supplement their workforce with ICs may be wondering if they will be impacted by the U.S. Department of Labor’s final rule on joint employer status, which was informally released today.  They are likely asking, “Does this final rule have any bearing on independent contractors?”  The answer is yes.

The Labor Department’s final joint employer rule issued earlier today does not set forth a new test for independent contractor status under the Fair Labor Standards Act. Nevertheless, it will have an important impact on one aspect of IC law:  whether a business that contracts with another company, which is found to have engaged in IC misclassification, will also be liable under the joint employer doctrine.  Under the final rule, the likelihood of such exposure will be considerably reduced.

Different Tests for IC Status and Joint Employer Status

The test for independent contractor status under the FLSA has been well established by U.S. Supreme Court decisions.  That test is commonly referred to as the “economic realities” test and it focuses on factors that relate to the worker’s economic dependence on the purported employer.  The final regulation makes it abundantly clear that the test for IC status is different than the test for joint employer status.  In particular, the final rule clarifies that economic dependence, while relevant to a determination as to whether a worker is an employee or IC, has no relevance as to whether two or more employers are the worker’s joint employer.  In one of the key pronouncements of the final rule, the Labor Department states: “Whether the employer is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability under the [FLSA].”

The proposed rule had identified three example of factors related to economic dependence that some courts had used in determining joint employer status.  The new rule makes is clear that while those factors may be relevant to determining IC status, they are wholly irrelevant in determining joint employer status.  The final rule identified a fourth factor that may be pertinent to IC status but should not be used in determining joint employer status.  Those four factors are:

(1) where the worker performs a specialty job or a job that otherwise requires special skill, initiative, judgment, or foresight;

(2) where the worker has the opportunity for profit or loss based on his or her managerial skill;

(3) where the worker invests in the equipment or materials required to perform the work or the employment of helpers; and

(4) the number of contractual relationships, other than with the potential joint employer, that the potential joint employer has entered into to receive similar services.

Whereas IC status generally focuses on the actions of  the worker, joint employer status under the final rule focuses on the actions of the potential joint employer.

New Test for Joint Employer Status

For joint employer determinations, the final new rule establishes a four-factor balancing test.  The rule focuses on whether the potential joint employer exercises or controls one or more of the following four “control factors” –

  • hires or fires the workers found to be employees;
  • supervises and controls their work schedules or conditions of employment to a substantial degree;
  • determines their rates of pay and methods of payment; and
  • maintains their employment records.

Unlike IC tests that focus on the right to control – which can be established through contractual provisions, even those that are unexercised – the final joint employer test depends on the actual exercise of at least one of the above ”control factors.”   This is one of the underlying principles of the final rule – and is a meaningful change.

Many federal courts had determined a company’s joint employer status under the FLSA based on the rights it reserved – even if it never exercised such rights.

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

As the final rule states: “The potential joint employer’s ability, power, or reserved right to act in relation to the employee may be relevant for determining joint employer status, but such ability, power, or right alone does not demonstrate joint employer status without some actual exercise of control.”

Under the standard articulated today by the U.S. Department of Labor, joint employer status is a far less likely result for companies that utilize the services of workers under a contractual relationship with a third party.    

Types of Situations in Which Joint Employer Liability Can Arise in an IC Misclassification Case

As mentioned in many of our monthly blog posts about new and pending cases, it is commonplace for plaintiffs’ class action lawyers to sue multiple parties when filing class and collective actions asserting independent contractor misclassification.

For example, retailers have been sued as joint employers under the FLSA when they contract with delivery companies that in turn retain drivers and installers as ICs to deliver and/or install the retailer’s purchases.  Similarly, companies providing cable or telephone services have been sued as joint employers when they use a third party to engage personnel classified as 1099ers to sell services or install equipment.  Even the federal government has been sued as a joint employer, most recently by a dental hygienist retained as a 1099er by a government contractor that provides dental services at a federal prison.

In contrast, joint employer liability generally should not be an issue where workers classified as ICs provide services directly to the business that engages them or to customers of the business. In that instance, there is generally no “second company” involved that may be jointly liable together with the company that has retained the workers.  For those businesses, the final rule on joint employer liability would not be applicable.

Takeaways

The final joint employer regulation only applies to lawsuits brought under the FLSA; it has no impact on independent contractor misclassification liability under state wage and hour laws.  While this final rule will minimize the likelihood of joint employer liability for IC misclassification under the FLSA, companies would be wise to minimize their exposure under that law and state wage laws by enhancing their level of independent contractor compliance.

How can businesses do so? Many have resorted to a process such as IC Diagnostics™, whereby companies are able to restructure, re-document, and re-implement their IC and business relationships in a manner that considerably enhances their compliance with federal and state IC laws.  Those companies that have already undergone a process such as IC Diagnostics are more likely to avoid joint employer liability, as the process includes re-documenting contracts with any other company that engages ICs directly.

Written by Richard Reibstein

Posted in IC Compliance

November and December 2019 Independent Contractor Misclassification and Compliance Law News Update

Our combined news update provides guidance for companies that utilize independent contractors on what not to do.  The first lesson involves a company’s waiver of its best argument for compelling arbitration of an IC misclassification claim.  As we pointed out in our blog post analyzing the U.S. Supreme Court’s decision last year in Oliveira v. New Prime, Inc., that decision may have limited impact because, unlike the Federal Arbitration Act that excludes interstate transportation workers from the arbitration provisions of the FAA, state arbitration laws can provide an alternative basis for compelling arbitration.  New Prime, though, never sought to compel arbitration under the applicable state arbitration law, leading to a court decision that it waived its right to assert the applicability of the state arbitration law and therefore could not use its “get out of jail” card.  This case reinforces the importance of including state arbitration laws (in addition to the FAA) in a motion to compel arbitration at an early time frame or , like New Prime, a company may be found to have waived this valuable defense.

The second lesson involves a case in Florida where a company wisely put into effect an arbitration clause but failed to draft it in an effective manner, limiting it to claims by the workers’ corporate entities but not disputes with the workers themselves.  As we pointed out in an article published by Bloomberg Law’s Daily Labor Report about drafting effective arbitration agreements with class action waivers, these types of contractual provisions should be drafted with care and anticipate arguments by plaintiffs’ class action lawyers that the agreement does not cover the dispute or is unconscionable.

The final lesson derives from a court’s rejection of an $11.5 million settlement of an IC misclassification class action: even when the amount of the settlement is very substantial, the settlement terms must anticipate court concerns about the terms including whether the settlement fund is reasonable, the waiver is overbroad, and the suitability of the class representatives.  Otherwise, there is a higher likelihood that the proposed settlement will not be approved.  Indeed, the greater the settlement amount, the more likely the proposed settlement will be more closely scrutinized by a court.

In the Courts (7 cases)

WAIVER OF STATE ARBITRATION LAW IMPERILS TRANSPORTATION COMPANY.   A Massachusetts federal court has held that trucking company, New Prime, Inc., waived its right to compel arbitration under the Missouri Uniform Arbitration Act (MUAA) of a trucker’s class and collective action claims alleging violations of the federal Fair Labor Standards Act and Missouri Minimum Wage Law.  New Prime, Inc. (the defendant in the Supreme Court case that was the subject of one of our prior blog posts) attempted on three occasions to compel arbitration of those wage and hour claims under the Federal Arbitration Act (and not the MUAA) but failed.  Only after the Supreme Court concluded that the FAA exempted from arbitration all workers who are involved in interstate transportation including independent contractors did New Prime seek to compel arbitration under the MUAA. The court stated that New Prime “wants a fourth bite of the arbitration apple.” In concluding that New Prime waived its right to arbitrate under the Missouri law, the court determined that New Prime had knowledge of the existing right to arbitrate; acted inconsistently with that right; and prejudiced the truckers opposing arbitration. The court also found that the truckers suffered prejudice because a timely motion to compel arbitration under the MUAA could have saved the truckers, including the opt-ins, and the Court, unnecessary time and expense. Thus, any company seeking to compel arbitration under state law must do so promptly and take no steps that may constitute a waiver of the state arbitration law.  Oliveira v. New Prime, Inc., No. 15-10603 (D. Mass. Dec. 9, 2019).

ANOTHER FED EX GROUND IC MISCLASSIFICATION CLASS ACTION CERTIFIED IN NEW JERSEY.  After settling independent contractor cases from around the country for hundreds of millions of dollars and despite changing its business operations, FedEx Ground is facing a new round of IC class actions, including one in federal court in New Jersey where a judge has granted class certification to drivers alleging violations of the New Jersey Wage Payment Act. The drivers claim that FedEx wrongfully withheld from the drivers’ wages amounts for workers’ compensation, employment taxes, and business expenses such as vehicle insurance and maintenance. The three named plaintiffs contracted with FedEx in their own corporate names under Operating Agreements that FedEx no longer uses.  The plaintiffs alleged that FedEx made deductions from drivers’ pay for workers’ compensation insurance, accident insurance, “business support” expenses, and liability insurance. The amended complaint also alleges that FedEx controls the drivers by requiring them to display the FedEx logo on their vehicles; wear approved uniforms; allow FedEx personnel to ride with them to gather data regarding the drivers’ routes; meet the FedEx “Standard of Service”; accept FedEx’s determination of the size and composition of the routes; accept the formula for payment of the drivers that FedEx established; and carry scanners while making deliveries.  A previous motion for class certification had been denied by the court because the drivers failed to provide any analysis, guidance or methodology to determine whether proposed class members experienced the same allegedly improper wage deductions. Carrow v. FedEx Ground Package Systems, Inc., No. 16-3026 (D.N.J. Dec. 26, 2019).

JANI-KING PREVAILS TO LIMITED EXTENT IN IC MISCLASSIFICATION CLASS ACTION IN CONNECTICUT.  A federal court in Connecticut has granted summary judgment to Jani-King, the largest commercial cleaning franchisor, on the “unjust enrichment” claims in an IC misclassification lawsuit brought by over 100 cleaning franchisees. The court, however, declined to award summary judgment with regard to the franchisees’ claim that Jani-King unlawfully classified them as independent contractors under the Connecticut’s ABC test for IC status.  Under the three-pronged ABC test in Connecticut for assessing independent contractor/employee status, the franchisees submitted evidence of Jani-King’s control over “nearly every aspect” of the franchisees’ cleaning services; argued that the customers’ homes constituted Jani-King’s places of business; and provided evidence that the franchisees did not have independent business enterprises in the commercial cleaning context outside of their work for Jani-King. The court concluded that the evidence submitted was sufficient to raise genuine issues of fact precluding a grant of summary judgment as to the misclassification issue. As we reported in this blog, Jani-King recently settled a similar case brought under Pennsylvania law for $3.7 million.  Mujo v. Jani King Int’l Inc., No. 3:16-cv-1990 (D. Conn. Dec. 21, 2019).

ARBITRATION AGREEMENT WITH IC’S CORPORATE COMPANY DOES NOT BIND WORKER TO ARBITRATION.  A Florida federal court has refused to compel arbitration of plaintiffs’ individual claims where the arbitration clause contained in the Independent Contractor Agreement was expressly limited to disputes between the plaintiffs’ corporate entities and the defendant company, Eagle Painting. A collective action was filed on behalf of a class of painters against the painting company alleging that the company failed to provide overtime compensation in violation of the Fair Labor Standards Act due to misclassification of the painters as independent contractors and not employees. Conditional certification was granted and at least two individuals opted in as individual plaintiffs. Subsequently, the defendant requested that the court compel arbitration of those two claims pursuant to the terms of the Independent Contractor Agreements executed by each one. The Agreement provided the following relevant language: “Contractor and Company agree that final and binding arbitration will be the exclusive means of resolving any disputes between Contractor and Company…” In denying the company’s motion to compel arbitration, the court stated that the Agreements explicitly defined the terms “Contractor” as each of the painters’ respective corporations and “Company” as the Defendant, Eagle Painting. Because the arbitration clause was expressly limited to disputes between the plaintiffs’ corporations and the company, the court found that the workers’ individual claims were not subject to arbitration. The court stated:  “Had the parties intended to bind the Plaintiffs individually, the Agreements could have expressly stated as such. However, the Agreements do not, and, therefore, Plaintiffs have not agreed to arbitrate their individual claims.” Garcia v. J&J, Inc., No. 19-cv-60728 (S.D. Fla. Nov. 8, 2019).

CALIFORNIA TRUCKING ASSOCIATION CHALLENGES AB5 AND SECURES TEMPORARY RESTRAINING ORDER FOR ITS MEMBERS.  Seven weeks before California’s AB5 law took effect, the California Trucking Association (CTA) challenged the legality of Assembly Bill 5 (AB5), which took effect in California on January 1, 2020.  The CTA alleges that AB5 violates the Supremacy Clause and Commerce Clause and that the new state ABC test for independent contractor/employee status set forth in AB5 is preempted for their members by the Federal Aviation Administration Authorization Act (FAAAA). The lawsuit filed in a California federal court seeks declaratory and injunctive relief prohibiting the application and enforcement of California’s new, restrictive test for determining worker status under AB5, a law we have commented upon frequently and was the subject of a recent commentary published in Law360 and republished in this legal blog. CTA alleges in its amended complaint that the trucking industry has relied upon the owner-operator model for decades and its “ability to contract with independent contractors is necessary because of the demand for, duration of, and volume of trucking services by individual motor carriers fluctuates significantly.” CTA claims that prior to the California Supreme Court’s Dynamex decision, which AB5 sought to codify in the state’s Labor Code, it was lawful for CTA’s members who contracted with owner-operators to treat them as independent contractors and not employees for purposes of California’s labor laws.  With the new statute’s adoption of the Dynamex ABC test for IC status, each CTA member that continues to use individual owner-operators to provide services to their customers must treat these workers as employees and provide them with all of the protections afforded to California employees.

One of the main thrusts of the CTA lawsuit is that Prong B of the ABC test “is expressly preempted by the FAAAA because the requirement that motor carriers treat all drivers as employees and the concomitant de facto prohibition on motor carriers contracting with independent owner-operators to perform trucking services in California directly impacts the services, routes, and prices offered by CTA’s motor-carrier members to their customers.”  This same argument has succeeded in before the First Circuit but failed before the Third Circuit, creating the likelihood that the U.S. Supreme Court may eventually rule on whether the FAAAA preempts the most challenging prong of the ABC test.  California Trucking Association v. Becerra, No. 3:18-cv-02458 (S.D. Cal. Nov. 12, 2019). Just hours before the new law was set to take effect, Judge Roger Benitez granted a temporary restraining order and set a date, January 14, 2020, for a hearing on the CTA’s request for a preliminary injunction.

POSTMATES’ $11.5 MILLION SETTLEMENT OF IC MISCLASSIFICATION CLASS ACTION REJECTED BY COURT.  A California state court has refused to approve Postmates’ $11.5 million settlement with a proposed class of approximately 380,000 couriers who are claiming that they were misclassified as independent contractors and not employees.  The court issued a “tentative ruling” identifying sections of the proposed settlement agreement that require further explanation. Postmates is an on-demand delivery service that offers clients delivery from restaurants and stores by couriers engaged by Postmates to make the requested deliveries. The court stated, “Significant concerns are present both by what is contained in the language of the settlement and what facts are missing from the motion [for preliminary approval of class settlement.]”  Included among the further information sought by the court was: the maximum value of all the class claims and PAGA claims or the bases for their valuation; declarations from the named plaintiffs setting forth the basic material facts about their employment to demonstrate their adequacy to represent a settlement class; justification by the named plaintiffs for the reasonableness of their proposed settlement discount; and justification for the broad release of claims and for the plaintiffs’ additional release of claims without proper compensation.  Rimler v. Postmates Inc., No. CGC-18-567868 (Super. Ct. County of San Francisco Nov. 21, 2019).

CALIFORNIA SUPREME COURT TO DECIDE RETROACTIVITY OF DYNAMEX.  The California Supreme Court will decide the issue of the retroactivity of its Dynamex decision upon request of the U.S. Court of Appeals for the Ninth Circuit. As we discussed in our prior blog post of August 8, 2019, the U.S. Court of Appeals for the Ninth Circuit withdrew its prior decision to apply Dynamex retroactively in an independent contractor misclassification case and placed the question of retroactivity squarely before the California Supreme Court. On November 20, 2019, the California high court agreed to address that question. We noted in our prior blog post of June 10, 2019 that the Ninth Circuit had held that the California Supreme Court’s decision in Dynamex applied retroactively to an 11-year class action lawsuit brought against a nationwide janitorial cleaning business, Jan-Pro International Franchising, Inc., by franchisees who claimed they were misclassified as independent contractors. The Dynamex decision, which post-dated the district court’s decision in Jan-Pro, adopted a strict form of the “ABC” test for determining whether workers are independent contractors or employees for claims brought under the state’s wage orders. The issue of the retroactivity of Dynamex is likely to be influenced by the passage of AB5, which codified Dynamex and went into effect on January 1, 2020. Vazquez v. Jan-Pro Franchising International, Inc., No. S258191 (Cal. Sup. Ct. Nov. 20, 2019).

Administrative and Regulatory Initiatives (2 matters)

MASSACHUSETTS ATTORNEY GENERAL REACHES “LANDMARK SETTLEMENT” WITH GIG ECONOMY COMPANY TO RECLASSIFY IC’S.  The Office of Massachusetts Attorney General Maura Healy reportedly reached a “landmark settlement” with Stynt, a Boston-based company that provides a digital platform for healthcare workers who wish to search, apply, and get hired for short- and long-term staffing opportunities posted by thousands of dental and medical practices nationwide. It was further reported that as of January 1, 2020, those who chose to use Stynt’s platform will be treated as employees and not independent contractors. This settlement is likely to cause repercussions throughout other gig economy businesses in Massachusetts.

VIRGINIA RELEASES TASKFORCE REPORT ON WORKER MISCLASSIFICATION.  Virginia Governor Ralph Northam has released the final report of the Inter-Agency Taskforce on Worker ‎Misclassification and Payroll Fraud, outlining recommendations intended to promote fair pay, workplace protections, and benefits. According to a News Release issued by ‎the Office of the Governor on November 22, 2019, the Taskforce determined that ‎approximately 214,000 Virginia employees are currently misclassified as independent ‎contractors by their employers, and that Virginia is deprived of an estimated $28 million in ‎tax revenues each year due to such misclassification. Among other remedies, the Taskforce ‎recommends increased education about worker misclassification for employers and employees, formally adopting and continuing to apply the IRS test for determining worker status; creation of a private right of action that permits misclassified workers to sue for wages, lost benefits, taxes, and attorneys’ fees; additional funding for ‎investigations into possible wrongdoing; and harsher penalties for businesses that illegally ‎misclassify their workers. Governor Northam stated: “It’s clear that misclassification is ‎robbing Virginia workers of the pay, benefits, and protections they have earned. These concrete ‎policy changes will make a tremendous difference for thousands of Virginians and their ‎families, and I look forward to working with the General Assembly to turn these ‎recommendations into law.”

Other Noteworthy Matters

FIVE DEGREES OF INDEPENDENT CONTRACTOR MISCLASSIFICATION.  In our December 17, 2019 blog post entitled, “A Solution to the ‘Five Degrees of Independent Contractor Misclassification,’” written by the publisher of this blog, “independent contractor misclassification” is described as a phrase that is “misunderstood, misapplied, and misused – constantly.” The blog post was based on the commentary that appeared in Law360 on December 16, 2019.  The commentary describes in detail how there are at least five different degrees of IC misclassification: unpardonable, uninformed, unprepared, unintentional, and unjust. Given the state of affairs in California involving fall-out from the new Assembly Bill 5 (AB5), which was signed into law on September 18, 2019 and is effective January 1, 2020, the commentary cautions that legislative efforts to deter and eliminate unpardonable IC misclassification, as well as uninformed and unprepared misclassification, may also sweep in all forms of unintentional misclassification and may even unjustly outlaw IC relationships that have for years been legitimate and lawful under almost all state and federal laws.  The commentary suggests that instead of other state legislatures seeking to change existing law in a manner that would effectively eliminate legitimate ICs, legislators should seek greater enforcement of existing laws in lieu of changing the tests for IC status. That suggestion was informed in part by studies and reports that an overwhelming number of ICs would prefer not to be converted into employees but would rather remain as ICs.

 

Posted in IC Compliance

The Past Decade of Independent Contractor Misclassification and Compliance Law

Ten years ago, when we began a legal blog dedicated to independent contractor compliance and misclassification, the landscape of the law involving ICs was quite different than today – although a great deal remains unchanged.  We summarize below over 250 comprehensive blog posts published over the past ten years dealing with legislative, judicial, and administrative developments that have shaped this key niche area of the law.

Today, the gig economy’s reliance on the independent contractor business model grabs a great deal of attention from lawmakers, regulators, and class action lawyers.  But turn the clock back ten years and the same story was making headlines – not with an entire industry but rather with a single company that was caught in the crosshairs of some of the same class action lawyers that are now involved in litigating the gig economy IC misclassification cases.  That first poster child for IC misclassification claims was FedEx Ground, and our first substantive post in 2010 was “FedEx Ground Suffers a Setback in Illinois.”  FedEx ultimately paid nearly $500 million in settlement costs to resolve dozens of cases brought against it by drivers for its Ground Division.

While a few courts and administrative agencies found that FedEx Ground was in compliance with IC laws, the company was found to have violated state IC laws in large part because the very contract it drafted for drivers needlessly included clauses that retained the right to direct and control them – enough control for two federal appellate courts to conclude that FedEx Ground had misclassified the drivers as a matter of law.

Companies in the gig economy have not yet suffered IC misclassification setbacks anywhere near what FedEx Ground experienced.  But the prolonged course of legal attacks on businesses using ICs illustrates the need for companies in the sharing economy, as well as more traditional industries, to put into place an effective strategy using available tools to enhance compliance with state and federal IC laws.  That is the subject of our “Takeaway” below.

A decade of legislative developments culminating with AB5

Back in 2010, we began tracking and collecting for our readers a host of bills that were introduced in Congress to crack down on IC misclassification.  One of the early bills was the Payroll Fraud Prevention Act,  We first reported on this bill in a blog post in 2011, followed by posts in 2013, 2014, and 2015 when the bill was reintroduced with virtually identical language.  Despite no likelihood of passage, the bill was reintroduced in 2017 and was the subject of hearings on the “future of work” in the fall of 2019.

During that ten-year period, although a dozen or so bills regulating ICs were introduced in Congress, not a single bill involving ICs was passed by Congress, and none is likely in the current political climate in Washington, D.C.

While Congress has had no legislative accomplishments in the past decade, legislative accomplishments nonetheless occurred at the state level.  One of the major developments over the past ten years has been the rise in state legislation involving independent contractors.  Some states have passed laws cracking down on industries where IC misclassification was found to be prevalent, such as the construction industry, as we reported in blog posts dealing with new laws in New York and Pennsylvania targeting that industry. We have also published blog posts commenting on new state laws that seek to curtail the use of ICs, penalize willful misclassification, impose greater penalties for misclassification of ICs, and create misclassification task forces.  In contrast to these types of legislation, a few states have passed legislation that accommodates legitimate independent contractor relationships or even encourages IC relationships.

The most meaningful law enacted in the past ten years involving independent contractors is undoubtedly the recent passage in California of Assembly Bill 5 (AB5), effective January 1, 2020.  That law sought to codify into a statute the California Supreme Court’s decision in the Dynamex case, which adopted a so-called “ABC” test that severely limits the use of ICs.  AB5 has created IC convulsions throughout the state.

Legal challenges to AB5 are being filed by transportation companies and their industry associations, a ballot initiative is being proposed to overturn the legislation, some companies are converting ICs to employees, other companies are terminating relationships with workers previously regarded as ICs, and other companies are just going out of business instead of risking enormous legal liability if workers treated as ICs are found to have been misclassified.

Despite the view by many companies that AB5 spells the end of ICs in California, we have noted that companies using an IC business model may still be able to operate lawfully in California after AB5 becomes effective.  We have also commented that other states should refrain from enacting laws with ABC tests like California’s AB5, even though it carves out over 50 industries from the Dynamex ABC test in a series of exemptions, some of which have been characterized as “opaque” and “ambiguous.”

The absence of legislation at the federal level has undoubtedly created an impetus for state lawmakers to pass a number of new IC laws.  This has contributed to the enactment of a crazy quilt of state laws with vastly different tests for IC status from one state to the next.  Differences in state IC laws has made it extremely challenging for companies operating on a nationwide basis to maintain a high level of compliance with IC laws.  As noted in the Takeaway, though, there are tools that companies can use to enhance their compliance with this wide-ranging array of state and federal IC laws.

Multi-million-dollar IC misclassification settlements were rare in 2010, but are now commonplace

The first seven-figure settlement in the area of IC misclassification involved FedEx Ground, which agreed to pay $3 million in a July 2010 settlement with the Attorney General of Massachusetts to resolve claims that it misclassified Ground Division drivers.  Shortly thereafter, FedEx settled similar claims with the Attorney General of Montana for $2.3 million.

The first multi-million-dollar settlement of a class action lawsuit alleging IC misclassification involved 3P Delivery Inc., settling with drivers from Oregon and Washington in October 2010 for $2.25 million.

The earliest gig economy settlement of an IC misclassification case took place in January 2013, when kgb USA, a text message and internet information provider, settled a lawsuit brought by the U.S. Department of Labor for $1.3 million.

Later in 2013, the first of many IC misclassification settlements in the adult entertainment area was reached between exotic dancers and Penthouse Executive Club, which agreed to pay the dancers and their lawyers $8 million.  Since that time, adult entertainment clubs have been targeted for IC misclassification lawsuits and have entered into dozens of seven-figure settlements with dancers.

The first eight-figure IC misclassification settlement in the past decade was reached in January 2014 by Copley Press, publisher of the San Diego Tribune, which agreed to pay $11 million to settle claims by a class of 1,200 paper carriers.

The first reported IC misclassification settlement in the retail economy was with Lowe’s in May 2014, when it settled with home improvement contractors for $6.5 million.  Other retailers have been sued, such as Macy’s, J.C. Penney, Sears, and Hope Depot, leading to other multi-million-dollar IC misclassification settlements in this industry.

Logistics and delivery companies have been targeted repeatedly as class action defendants in IC misclassification cases, and the amounts of settlements in those cases are often very substantial. For example, XPO Logistics settled one of many IC misclassification cases against it for $16.5 million.

By mid-decade, the first nine-figure settlement in an IC misclassification case was reached, when FedEx settled a class action with Ground Division drivers for $228 million.  This settlement followed on the heels of a decision by the U.S. Court of Appeals for the Ninth Circuit, which held that FedEx had misclassified those drivers in California as a matter of law.  That decision was one of first published decisions by an appeals court on the merits of an IC misclassification claim.

Since 2016, the gig economy has become the main target of plaintiffs’ class action lawyers in IC misclassification cases.  In early 2016, two ride-sharing companies announced that they had reached large settlements with drivers in California and Massachusetts:  $12.5 million in the case of Lyft and between $84 million and $100 million in the case of Uber Technologies. The federal courts overseeing those settlements, however, rejected both as being legally inadequate.  This prompted Lyft to recalibrate its settlement parameters and settle its California class action in June 2016 for $27 million.

Uber, though, chose to reevaluate its defense strategy and adopt an even more vigorous litigation approach, together with a greater reliance on arbitration agreements with class action waivers. Eventually, Uber chose to resolve most of its IC misclassification cases in the first and second quarters of 2019 (just before it issued its Initial Public Offering), settling its California and Massachusetts class actions along with about 60,000 individual arbitrations for approximately $175 million.

Nine-figure settlements were not limited to FedEx and Uber: Swift Transportation announced in March 2019 that it reached a $100 million settlement with 20,000 owner-operators.

Gig economy companies have been sued regularly for IC misclassification, including such household names as Postmates, Instacart, DoorDash, GrubHub, Handy, and many others, some of which have settled cases for sizeable seven-figure amounts.

There has been virtually no industry using ICs that is immune from an IC misclassification lawsuit, and the list would go on for pages.  Just taking one letter from the alphabet, “C”, IC misclassification lawsuits have been brought by cable television installers, cheerleaders, chiropractors, cell phone sales agents, convenience store franchisees, and cleaning contractors and custodians.

Some companies have prevailed in IC misclassification class actions and regulatory challenges

Some companies have successfully defended against IC misclassification cases.  American Family and Northwest Mutual have withstood challenges to their IC business model for insurance agents.

While some oil and gas companies have settled IC misclassification cases for considerable amounts, at least one has withstood that type of legal challenge by directional drilling consultants.

High school referees have been found to be properly classified as ICs, black car drivers have succeeded, as have distributors for a baked goods company.

The list of those who have succeeded are a lot shorter than the list of those who have settled IC misclassification cases, because the legal fees alone to defend these types of lawsuits can approach the cost of settling them.

Three Court Cases in the Past Two Years Have Already Had a Dramatic Impact on IC Misclassification Cases: Dynamex, Epic, and New Prime

The decision that has caused an earthquake in California independent contractor circles was Dynamex, issued by the California Supreme Court on April 30, 2018Overnight, it changed close to three decades of settled law in California that had been based on the 1989 California Supreme Court decision in the Borello case, which had set forth a non-exhaustive list of factors that the courts should consider in determining if a worker was an IC or employee.  In Dynamex, the California Supreme Court created a so-called ABC test where all three prongs must be met to establish IC status.

Many companies – from mom-and-pop shops to the largest gig economy companies – had invested in and built their businesses in reliance on Borello, only to have the highest court in the state change the test for IC status in a manner that severely restricts the use of ICs.  As noted above, the Dynamex decision prompted the California legislature to pass AB5, which was signed by the Governor and is effective January 1, 2020.  While AB5 was designed to “codify” Dynamex into the California Labor Code, it exempted more than 50 industries from the ABC test and allows them to continue to qualify for IC status under Borello.

Rather than simplify the law, which the California Supreme Court sought to do by enacting a three-part test, litigation resulting from Dynamex and AB5 will likely complicate the legal landscape in California and consume a great deal of attention in the next year or two – and maybe a number of years thereafter.

The second noteworthy decision in the past decade was issued in May 2018 by the U.S. Supreme Court in the Epic Systems Corp. case.  That opinion upheld mandatory arbitration agreements, including those with class action waivers, imposed on workers by companies. Epic Systems has dramatically changed the landscape of IC misclassification class actions, prompting motions to compel arbitration and reducing considerably the cost of settlements in these types of cases.

In a commentary entitled “Ten Tips for Drafting Arbitration Agreements with Class Action Waivers in Independent Contractor Agreements,” which was published by Bloomberg BNA Daily Labor Report on November 8, 2018, we noted that while Epic Systems may have permitted mandatory arbitration agreements with class action waivers, many courts have struck down such agreements because they were not well-drafted or were found to be unconscionable under applicable state laws. The above commentary provided guidance to companies seeking to effectively draft such arbitration agreements with class action waivers.

The third judicial decision of note in the past two years was the U.S. Supreme Court’s opinion in New Prime Inc., holding that Section 1 of the Federal Arbitration Act (FAA) exempts interstate transportation workers from mandatory arbitration agreements.  That January 2019 decision had prompted Swift Transportation, as mentioned above, to settle its class action IC misclassification lawsuit by owner-operators for $100 million, once it became clear that the FAA could not be used to compel individual arbitrations of the IC misclassification claims.

Plaintiffs’ class action lawyers are now trying to expand the New Prime decision to cover couriers making local deliveries of food, groceries, and retail goods.  That argument will likely be litigated for years before being resolved, possibly by the U.S. Supreme Court.

Administrative and Regulatory Developments in the Past Decade

Perhaps the biggest change in the landscape of IC misclassification law over the past ten years has been in the administrative and regulatory arena.  At the federal level, we began the decade under a Democratic Administration in Washington, D.C., and ended the decade with a Republican Administration. That has meant dramatic differences at the National Labor Relations Board and the U.S. Department of Labor in their approaches to determining IC status.

At the NLRB, there were three major developments affecting IC status during the Obama Administration.  In September 2014, the NLRB issued a ruling that FedEx Ground Division drivers were not ICs but rather employees subject to being represented by a union. The Board disagreed with the U.S. Court of Appeals for the District of Columbia Circuit that the opportunity offered to drivers to acquire and operate multiple routes was a key factor demonstrating their IC status.  The NLRB instead held that “actual, not theoretical, entrepreneurial opportunity” is the “animating principle” of IC status.

A second major decision affecting IC status was the NLRB’s August 2015 decision in Brown-Ferris Industries that joint employer status is to be determined by the contractual right to control the workers, not on whether that right was actually exercised.  We commented that while the case did not directly involve IC status, it appeared that the NLRB would apply it the “right to control” principle in cases involving the IC status of workers that were seeking representation under the NLRA.

Finally, we noted in a blog post in August 2016 that the NLRB’s General Counsel had issued an Advice Memorandum where he seemed poised to find that IC misclassification, standing alone, was itself an unfair labor practice because it purportedly deprived workers of the protections of the National Labor Relations Act by classifying them as non-employees.

All of those decisions went by the wayside after a Republican Administration was able to install new members of the NLRB.

In January 2019, the NLRB overruled the 2014 FedEx decision and the earlier FedEx decision on which it was based. The Board concluded in SuperShuttle DFW, Inc.  that shuttle drivers that owned and operated franchises were independent contractors and not employees eligible for representation under the NLRA.  We commented that in overruling the earlier FedEx cases, the current NLRB set forth a “non-exhaustive” list of eight common law factors, noting that none of the eight were determinative and all should be evaluated “through the prism of entrepreneurial opportunity.”

In May 2019, the General Counsel of the NLRB issued an Advice Memorandum that drivers providing transportation services to customers of Uber Technologies are ICs and therefore outside the purview of the NLRA. In concluding that the Uber drivers were independent contractors, the Advice Memorandum stated 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. The Advice Memorandum pointed out that there was some control 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.

Finally, in August 2019, the NLRB issued a decision finding that the act of misclassifying workers, standing alone, was not an unfair labor practice. As we stated in a blog post explaining the decision, the NLRB essentially held that “when an employer decides to classify its workers as independent contractors, it forms a legal opinion regarding the status of those workers and its communication of that legal opinion to its workers is privileged by Section 8(c) of the Act . . . .’”

At the U.S. Department of Labor, the biggest development occurred In June 2015, when the Administrator of the Wage and Hour Division of the Labor Department issued an Administrator’s Interpretation addressing the misclassification of employees as ICs under the Fair Labor Standards Act.  The 15-page Interpretation set forth the test to be used by the Labor Department in enforcing its wage and hour laws against companies that classify workers as independent contractors. The official interpretation focused almost entirely on economic dependence, to the exclusion of most of the other factors that the Administrator said should be considered.  Many practitioners regarded the Administrator’s Interpretation as a roadmap for plaintiffs’ class action lawyers bringing IC misclassification cases under the FLSA.

After a new Secretary of Labor was nominated by President Trump and confirmed by the Senate, changes at the Labor Department were swift.  On June 7, 2019, as we noted in a blog post that day, the Department of Labor announced that it was withdrawing the former Administrator’s Interpretation on the issue of IC status under the FLSA.

In April 2019, the Labor Department issued an Opinion Letter on the issue of independent contractor status of an on-demand virtual marketplace company (VMC) that refers end-market consumers to service providers who offer delivery, transportation, shopping, moving, cleaning, plumbing, painting, and household services. The Labor Department examined six factors pertinent to IC status under the FLSA and concluded that all six favored IC status.

Just before the Opinion Letter was issued last April, the Labor Department issued a proposed new regulation, likely to be released in final form in the next month or so, on the issue of joint employer status.  The proposed regulation made it abundantly clear that joint employer status and IC status are two wholly different legal matters.  The test for IC status under the FLSA is commonly referred to as the “economic realities” test and it focuses on factors that bear on the workers’ economic dependence on the purported employer.  As we pointed out in a blog post, the proposed regulation clarifies that economic dependence has no relevance to joint employer status.  In one of the key pronouncements of the proposed rule, the Labor Department states that “joint employer status under the Act is not determined by the employee’s ‘economic dependence’….”

Takeaway: How to Enhance IC Compliance

One matter that has remained constant during the past decade is the need for companies using ICs to take thoughtful and well-designed steps to enhance their compliance with IC laws.  While the current Administration may not be as aggressive about enforcing the federal wage and hour laws as the past Administration, there has been no perceived unwillingness by the Labor Department to pursue companies that have intentionally or recklessly misclassified employees as ICs.  Nor has there been any perceived falloff of IRS audits of companies that utilize a business model reliant on the use of ICs.

Many state regulatory agencies have continued to conduct audits and investigations of companies that treat workers as ICs instead of employees, forcing businesses to continue to defend an endless number of audits seeking unemployment insurance taxes or workers’ compensation premiums.

Class action lawsuits have not abated, despite the Supreme Court’s decision in Epic Systems that countenanced the use of mandatory arbitration agreements including those with class action waivers. While the value of settlements may have decreased due to Epic, these types of lawsuits continue to proliferate and are likely to hound companies with an IC dependent business model.

The enactment of AB5 in California has caused IC misclassification to enter the national conversation, especially due to the disruption of legitimate IC relationships in that state, the closing of businesses that had been reliant on ICs, and the interest of legislators in other states to adopt a version of AB5 despite its drawbacks.  This is likely to prompt even more IC misclassification lawsuits in the coming decade.

All of this leads to one overriding takeaway for businesses that are reliant on ICs: the best defense is to elevate the level of compliance with IC laws in each state in which a company operates, including California.  AB5 is not a deathtrap for all ICs and companies that make use of them. There are ways to comply with AB5 without converting ICs to employees or terminating relationships with all ICs.

Many companies are making use of a process such as IC Diagnostics,™ a tool designed to restructure, re-document, and re-implement IC relationships in a manner that enhances compliance with IC laws in a customized and sustainable manner, consistent with a company’s business model. As part of that process, it is often wise to have an effective arbitration agreement with class action waiver.  Such agreements can be drafted in a state-of-the-art manner that best avoids arguments by plaintiffs’ class action lawyers who seek to invalidate those types of valuable agreements.

While there is no way of knowing if another Dynamex or AB5 is coming down the road in the next decade, it is fair to assume that the use of ICs will not diminish.  As we noted recently at the end of a lengthy commentary about the “five degrees of independent contractor misclassification,” studies by two well-respected government agencies (the Government Accountability Office and the Bureau of Labor Statistics) have found that those who identify as ICs have greater work satisfaction that those who have traditional jobs as employees, as confirmed by a recent Gallup poll.

Companies wishing to make the best use of those in the workforce who wish to maintain their status as ICs and freelancers need to dot their i’s and cross their t’s to avoid having their own agreements used against them.  The lessons learned from the last decade of IC misclassification lawsuits strongly suggest that a process that elevates a company’s IC compliance is likely to negate or minimize needless costs of defending and settling IC misclassification cases.

Written by Richard Reibstein

This blog post is based on an article by the author that was published in Bloomberg Law Reports on January 2, 2020. © Copyright 2020, The Bureau of National Affairs, Inc.  It is republished here with permission.

 

Posted in IC Compliance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A recent example of unjust IC misclassification

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Written by Richard Reibstein

This blog post was updated December 19, 2019

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

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

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

 

Posted in IC Compliance

October 2019 Independent Contractor Misclassification and Compliance News Update

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

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

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

In the Courts (6 items)

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

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

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

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

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

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

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

Written by Richard Reibstein

 

 

 

 

 

 

 

 

Posted in IC Compliance