March 2019 Independent Contractor Misclassification and Compliance News Update

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

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

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

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

In the Courts (7 cases)

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

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

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

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

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

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

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

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

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

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

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

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

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

Written by Richard Reibstein

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Posted in IC Compliance

Impact of Proposed Joint Employer Rule on Independent Contractor Misclassification Claims

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

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

Different Tests for IC Status and Joint Employer Status

The test for independent contractor status under the FLSA has been well established by U.S. Supreme Court decisions.  That test is commonly referred to as the “economic realities” test and it focuses on factors that bear on the workers’ economic dependence on the purported employer.  The proposed regulation makes it abundantly clear that that economic dependence has no relevance to joint employer status.  In one of the key pronouncements of the proposed rule, the Labor Department states that “joint employer status under the Act is not determined by the employee’s ‘economic dependence’…

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

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

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

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

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

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

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

Unlike IC tests that focus on the right to control – which can be established through contractual provisions, even those that are unexercised – the proposed joint employer test focuses on actions the second company actually undertakes in practice, not theoretically what it has a right to do.  This is one of the underlying principles of the proposed new rule – and would be a meaningful change in the law.

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

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

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

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

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

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

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

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

Takeaways

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

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

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

Written by Richard Reibstein

Posted in IC Compliance

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

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

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

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

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

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

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

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

Analysis and Takeaways

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

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

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

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

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

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

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

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

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

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

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

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

Written by Richard Reibstein

Edited by Janet Barsky

Posted in IC Compliance

February 2019 Independent Contractor Misclassification and Compliance News Update

One need only glance at the court cases we report on below to understand why some businesses choose to settle independent contractor misclassification cases.  Three of these cases highlight the unpredictable approaches appellate courts have taken in deciding IC misclassification cases.

To illustrate, in February, one federal appellate court reversed a federal district court judge, who had held that off-duty police officers were ICs, while another reversed a district court judge who held that oilfield consultants were not ICs.  A third federal appellate court this past month reversed a decision by a district court that granted a motion for judgment on the pleadings finding convenience store franchisees were ICs.

The lack of certainty in the outcomes of IC misclassification lawsuits has led many companies that make use of independent contractors to embark on programs to enhance their level of IC compliance with federal and state laws.  Programs such as IC Diagnostics™ offer a process to elevate compliance with IC laws by restructuring, re-documenting, and re-implementing independent contractor relationships without altering a company’s underlying business model.  Not all IC relationships are sustainable under applicable IC laws, but most are – and can be adjusted in a customized manner to comply with federal and almost all state laws.

In past monthly news updates, we reported on a number of cases that involved arbitrations of IC misclassification class actions.  Surprisingly, none of the eight cases that came to our attention in February deal with arbitration issues. While arbitration clauses with class action waivers are not a panacea for companies utilizing ICs, part of the IC Diagnostics process includes adding a state-of-the art arbitration clause that is likely to be effective in overcoming anticipated challenges by plaintiffs’ class action lawyers.

In the Courts (8 cases)

OFF-DUTY POLICE OFFICERS MOONLIGHTING AS SECURITY GUARDS HELD TO BE EMPLOYEES AND NOT IC’S IN MISCLASSIFICATION CLASS ACTION.  The U.S. Court of Appeals for the Sixth Circuit held that police officers moonlighting as private security and traffic control personnel for customers of Off Duty Police Services, Inc. (ODPS) were misclassified as independent contractors instead of being classified as employees.  ODPS offers private security and traffic control services in Kentucky, engaging both sworn officers (those currently working for law-enforcement entities) and nonsworn workers (those who typically have no law enforcement background). Customers contact ODPS specifying the profiles of the workers they are seeking; ODPS then offers the assignment to those in its network matching the specific qualifications requested. The Department of Labor initiated this FLSA suit alleging that all of ODPS’s workers are employees entitled to overtime compensation and that ODPS violated the FLSA’s recordkeeping requirements by failing to keep accurate employment records. The district court determined that ODPS’s nonsworn workers were employees entitled to overtime wages, but that the sworn workers were independent contractors because they “simply were not economically dependent on ODPS and instead used ODPS to supplement their incomes.”

On appeal, the Sixth Circuit applied the six-factor “economic reality” test and concluded with respect to the first five factors that the services offered by ODPS’s workers are integral to the company; the services do not require the skill or training of a licensed police officer; there is limited investment in specialized equipment; the length and consistency of the relationship between ODPS and the workers suggests permanence; and there was no opportunity for profit because the workers earned set wages to perform low-skilled jobs for fixed periods of time and could not make earn more profit by managing different commitments. Those five factors favored employee status for both the sworn and nonsworn officers. The court held that the sixth factor, ODPS’s right to control the manner of the worker’s performance, favored employee status for the nonsworn officers but did not favor either IC or employee status for the sworn officers. Considering all of the six factors “with an eye on the ultimate question of economic dependence,” the court decided that all of the officers were employees entitled to overtime wages under the FLSA.    Acosta v. Off Duty Police Services, Inc., Nos. 17-5995/6071 (6th Cir. Feb. 12, 2019).

OILFIELD CONSULTANTS HELD TO BE INDEPENDENT CONTRACTORS BY FIFTH CIRCUIT.  Directional drilling consultants filed a Fair Labor Standards Act overtime claim against Premier Directional Drilling L.P. based on their claim that the company had misclassified them as independent contractors instead of employees. The district court granted summary judgment in favor of the consultants, concluding they were employees under the FLSA.  On appeal, however, the U.S. Court of Appeals for the Fifth Circuit reversed and held as a matter of law that the consultants had been properly classified by the company as independent contractors. The Fifth Circuit closely examined the undisputed facts in the record and disagreed with the district court with regard to which factors support the independent contractor classification and which favor employee status.

The Fifth Circuit took issue with the district court’s evaluation of five key factors considered by the court in determining employee / independent contractor status.  As to the first factor – degree of control – the Fifth Circuit found it favored IC status because, although the directional drilling consultant was required to work prescribed shifts and coordinate drilling projects with the company’s personnel, the consultant’s right to accept or reject a project, was more meaningful and demonstrated an overall lack of control. Regarding the second factor – the relative investments of the consultant and the company – the court found that factor “merits little weight in light of the other summary-judgment record evidence supporting IC-status.” The appellate court next considered the worker’s opportunity for profit and risk of loss, and concluded that the consultant’s work on his goat farm when not providing services to Premier favored IC status and was more persuasive than the restriction on subcontracting imposed by Premier.  With regard to the fourth factor, skill and initiative, the Fifth Circuit found the consultant was highly skilled, thereby favoring IC status. The final factor considered – the permanency of the relationship – also favored IC status because the work was contracted on a project-by-project basis, even though the consultant chose to provide services only to Premier. Finally, the Fifth Circuit considered other factors bearing on IC status, including the presence of an express IC agreement and industry standards that demonstrated that the consultants were regarded as ICs in the industry, even though Premier also employed directional drilling employees doing similar work.  The appellate court thus concluded the applicable factors supported independent contractor status.  Parrish v. Premier Directional Drilling, L.P., No. 17-51089 (5th Cir. Feb. 28, 2019).

FRANCHISEE’S IC MISCLASSIFICATION CLASS ACTION RETURNED TO TRIAL COURT ON APPEAL.  A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit issued a decision involving a nationwide convenience store franchise case where four franchisees alleged that they were employees of the franchisor and not independent contractors.  The appellate court vacated and remanded to the district court the franchisees’ claims under the Fair Labor Standards Act and California Labor Code after the district court had dismissed on a motion to dismiss on the pleadings.  The Ninth Circuit ruled the district court erroneously “considered the persuasiveness of the plaintiffs’ factual allegations rather than the plausibility of the plaintiffs’ legal claims,” but it did not provide any detail to explain the semantic differentiation of the words we italicized above. It also criticized the district court for having “focused on the franchise agreement without considering the plaintiffs’ allegations regarding [the franchisor’s] actual control,” but chose not to explain which allegations of control it regarded as warranting reversal.

The Ninth Circuit specifically noted that its decision was “without prejudice to [the franchisor] seeking judgment as a matter of law at a later stage in the proceedings.”  This decision highlights the difficulty in succeeding not only before a district court but also an appellate forum when seeking to dismiss an IC misclassification case on the pleadings; unless it is implausible, even an otherwise unfounded allegation must be construed in “the light most favorable to [the non-moving party].”.  Haitayan v. 7-Eleven, Inc., No. 18-55462 (9th Cir. Feb. 27, 2019).

LOGISTICS COMPANY UNABLE TO DISMISS DRIVER’S LAWSUIT FOR DISCRIMINATION; COURT FINDS ALLEGATIONS DO NOT FAVOR IC STATUS.  A former driver for logistics services provider, RR Donnelley Logistics Services, may continue his discriminatory discharge action against the company under Title VII of the Civil Rights Act and the Age Discrimination in Employment Act despite being classified by the company as an IC. An Alabama federal court denied the company’s motion to dismiss and summary judgment motions, rejecting the company’s argument that the driver was an independent contractor and not an employee. The court found that the driver established facts that would allow him to prove that he was an employee for purposes of Title VII and the ADEA, including that his work was supervised; delivery routes were selected for and assigned to him; he was required to use a company-furnished “Real Time Delivery Program” on his phone; and a supervisor had the power to discharge him.

The court also denied the company’s motion for summary judgment because of disputed issues of fact concerning the degree of control the company exercised over the driver’s work, such as copies of e-mails and text messages referring to “payday” being on certain days of the month, a request by his supervisor for his photo on an ID badge, and a demand that the driver appear for a drug test. In denying the motion for summary judgment, the court also concluded that although the IC agreement signed by the driver contained independent contractor-centric terms, the driver provided information that, in practice, business operations may not have transpired consistent with the contract. Nemo v. RR Donnelley Logistics Services, No. 17-cv-02130 (N.D. Ala. Feb. 8, 2019).

COURT APPROVES $9 MILLION IC MISCLASSIFICATION CLASS ACTION SETTLEMENT BY BAKED GOODS COMPANY WITH ITS DISTRIBUTORS.  A Tennessee federal judge has approved a settlement of $9 million between baked goods company, Flowers Foods Inc., and about 900 distributors of their bakery products in resolution of a Fair Labor Standards Act collective action alleging the distributors had been misclassified as independent contractors. Flowers Foods is one of the largest producers of packaged bakery foods in the United States, including brands such as Wonder Bread, Tastykake, Sunbeam and Nature’s Own. Following mediation that encompassed 12 different misclassification lawsuits involving the company (and its related entities) and distributors in Alabama, Kentucky, Texas, Mississippi, North Carolina, Tennessee, Virginia and Missouri, the parties entered into a Global Settlement Agreement and Release. The $9 million settlement provides $3.6 million in attorney’s fees and $5.4 million for the named plaintiffs and settlement class members, depending on the amount of time they worked for the company. Green v. Flowers Foods Inc., No. 19-cv-01021 (W. D. Tenn. Feb. 27, 2019).

WELL AND DRILL SITE MANAGERS REACH $3.2 MILLION SETTLEMENT WITH OIL GIANT IN IC MISCLASSIFICATION CLASS ACTION.  Well and drill site managers providing services in states including California, Texas, New Mexico and Oklahoma, have reached a $3.2 million settlement with Chevron Corporation in a proposed class and collective action alleging FLSA and state wage and hour violations due to the managers’ misclassification as independent contractors and not employees. According to the amended class and collective action complaint, Chevron directed the work of the site managers through the company’s policies, practices, supervision, and ability to discipline the managers; the managers worked exclusively for Chevron on a full-time and continuing basis; the managers did not sell or advertise their services to the general public and were required to follow Chevron’s instructions and processes regarding the method by which work was to be performed; and Chevron set the managers’ work schedules, determined the their rates of pay, provided the equipment needed to perform the work (including laptops, uniforms and email addresses), and required daily reports and attendance at meetings.

Plaintiffs’ motion papers requesting approval of the settlement note that the site managers were not directly employed by Chevron, but rather were paid through a variety of third-party staffing companies, and that they worked 12-hour shifts, sometimes for fourteen consecutive days. They claimed to have been paid a day rate, but did not receive overtime compensation. Under the terms of the settlement, in which Chevron denied any liability, each member of the class group will receive an average of over $29,000, and attorneys’ fees are earmarked for 25% of the of the settlement amount.  McQueen v. Chevron Corp., 16-cv-02089 (N.D. Cal. Feb. 8, 2019).

DIRECTV INSTALLATION PROVIDER SUED BY TECHNICIANS IN IC MISCLASSIFICATION CLASS ACTION.  Installation technicians have filed a collective and class action complaint against Synergies3 TEC Services, LLC, a satellite television installation provider for DirecTV, alleging violations of state (Illinois and Missouri) and federal (FLSA) overtime laws due to their alleged misclassification as independent contractors and not employees. According to the complaint, the installation technicians were subject to direction and control by the company as they were required to follow the company’s instructions, processes, and policies regarding the methods by which work was to be completed; were supervised and required to use specific apps to open and close orders; could not sell or advertise their services to the general public or work for other companies; were required to attend meetings and communicate any changes in their work schedule/hours to the company in advance ; were subject to discipline by the company for failure to follow the company’s standards, policies and procedures; and were not permitted to negotiate rates of pay or determine or set their own schedules. Jackson v. Synergies3 TEC Services, LLC, No. 4:19-cv-00178 (E.D. Mo. Feb. 4, 2019).

DENTAL CARE COMPANY SUED FOR IC MISCLASSIFICATION BY DENTIST.  An Illinois dentist has reportedly sued Bright Dental Care P.C. d/b/a Smile Dental Care and others in state court alleging breach of contract and violations of the Illinois Wage Payment and Collection Act due to his alleged misclassification as an independent contractor and not an employee. According to the Cook County Record published on February 20, 2019, the dentist claims he is owed over $65,000 plus 45 percent of the fees collected by the defendants for work he performed. Despite that parties’ agreement, the dentist reportedly alleges that the defendants failed to pay him for all of his work, including his final compensation and wages required by the Illinois statute. Salem v. Bright Dental Care P.C., No. 2019L001584 (Cook County Cir. Ct. Ill. Feb. 13, 2019).

Written by Richard Reibstein

 

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Posted in IC Compliance

January 2019 Independent Contractor Misclassification and Compliance News Update

This past month may well be regarded as one of the more legally satisfying for businesses using independent contractors.  Courts issued three decisions in favor of companies on the issue as to whether certain workers are ICs or employees: the U.S. Court of Appeals for the Sixth Circuit found insurance agents to be ICs in an ERISA case; the Indiana Supreme Court held that a referral company met the state’s “ABC” test for IC status under the state’s unemployment compensation law; and the National Labor Relations Board reversed an Obama-era test for IC status and promulgated a new, more IC-friendly standard to be used when unions seek to represent workers classified as 1099ers or franchisees.

At the same time, however, two major decisions favored workers in class action IC misclassification cases arising in the transportation industry: one where the U.S. Court of Appeals for the Third Circuit held that the federal transportation deregulation law did not preempt New Jersey’s “ABC” test for wage and hour claims; and the other where the U.S. Supreme Court ruled that the federal arbitration statute, which exempts interstate transportation workers from arbitration under that law, applies not only to employees but also to ICs engaged in interstate transportation, and a court, not an arbitrator, is the appropriate decision-maker for determining if a worker is covered by the exemption – even in the face of an arbitration agreement between the business and the worker delegating all disputes to an arbitrator.

The news last month also provided a financial impetus to class action lawyers who represent workers in IC misclassification cases.  Two high-profile class action cases settlements were approved: one for $9.25 million and another for $1.3 million.

These cases, as more fully discussed below, send a clear message to companies using ICs:  while courts and administrative agencies are more willing to accept company arguments that certain workers have been properly classified as independent contractors, class action lawyers are unlikely to be deterred from challenging companies’ classification of workers as ICs because these types of cases often lead to sizable settlements, including payment of considerable legal fees.

Are companies nonetheless able to minimize their legal exposure to these types of class and collective action lawsuits, including the substantial costs associated with defending and settling them?  Yes.  As we noted in our blog post this past month about the Supreme Court case involving ICs, there are two actions businesses can take: (1) maximizing their level of compliance with IC laws, thereby reducing the likelihood they will be subject to a judicial or regulatory challenge to their IC relationships, using a process such as IC Diagnostics™; and (2) entering into IC agreements containing state-of-the-art arbitration provisions with class and collective action waivers, using the tips discussed in that blog post. Prudent businesses that use ICs to supplement their workforce or as part of a business model have taken these very types of steps to enhance the structure, documentation, and implementation of their IC relationships and upgrade the effectiveness of their arbitration agreements.

In the Courts (7 cases)

INSURANCE AGENTS ARE INDEPENDENT CONTRACTORS, NOT EMPLOYEES, FOR ERISA PURPOSES.  Many insurance companies have utilized independent contractor agents to sell policies to prospective and existing policyholders. So, it came as a shock to most insurance companies when a federal district court held in mid-2017, in an employee misclassification class action case brought under ERISA, that American Family Insurance had misclassified thousands of agents as ICs and consequently may owe hundreds of million dollars in allegedly unpaid pension, life, disability, and health insurance benefits. On January 29, 2019, the U.S. Court of Appeals for the Sixth Circuit reversed, holding that, under ERISA, some 7,200 current and former agents selling American Family policies has been properly classified by the company as independent contractors.

As more fully detailed in our comprehensive blog post published that day, the appellate court reviewed 12 factors under ERISA’s “common law” test for IC status, as set forth in the U.S. Supreme Court’s Nationwide Insurance Co. v. Darden, and found that “the district court incorrectly applied the standards relating to (1) the skill required of an agent and (2) the hiring and paying of assistants.”  The Sixth Circuit concluded that “[h]ad the court applied those standards properly, it would have found that those factors actually favored independent-contractor status” and tipped the balance in favor of an independent contractor determination.  In addition, the Sixth Circuit held that the district court failed to give sufficient weight to the parties’ written agreement, which expressly stated the parties’ intent was to create an independent contractor relationship and that the agent was “not an employee of the Company for any purpose” – and if it had done so, it “would have further swung the balance in favor of independent-contractor status.”   A dissenting judge submitted a dissent emphasizing American Family’s own internal writings characterizing its agents as employees and instructing managers to exercise direction and control over them.  Jammal v. American Family Insurance Co., No. 17-4125 (6th Cir. Jan. 29, 2019).

We note in our January 29 blog post that this is the type of internal documentation that insurance companies should eliminate in an undertaking to re-document and re-implement their IC relationships in a state-of-the-art manner. We also noted in our blog post that this decision, while important, is limited only to claims under ERISA, which has a far less challenging test for IC status than other federal and most state laws.

NEW JERSEY “ABC” TEST FOR IC STATUS NOT PREEMPTED BY FEDERAL TRANSPORTATION DEREGULATION LAW. The U.S. Court of Appeals for the Third Circuit has held that the Federal Aviation Authorization Administration Act of 1994 (FAAAA) does not pre-empt New Jersey’s “ABC” test for determining independent contractor/employee  status under the New Jersey wage and hour wage payment laws. In that case, three drivers filed a proposed class action against American Eagle Express (AEX), a logistics company providing delivery services to various medical organizations.  The drivers sought a judgment declaring them to be employees of AEX, rather than ICs, under those New Jersey laws.  AEX made a motion for judgment on the pleadings arguing the FAAAA pre-empted the “ABC” test because B prong impermissibly impacted the company’s rates, routes, and services.  On appeal, the Third Circuit affirmed the district court’s decision that FAAAA preemption does not preempt laws “where a law’s impact on carrier process, routes, or services is so indirect that the law affects them ‘in only a tenuous, remote, or peripheral … manner.’”  The court added, “preemption only occurs where a state law has a significant impact on carrier rates, routes, or services.”

In assessing the “ABC” test’s impact on prices, routes, or services, the court recognized the test does not mention carrier prices, routes, or services; does not single out carriers as opposed to all businesses; and does not regulate carrier-customer interactions or other product outputs; rather, it only concerns employer-worker relationships.  The opinion of the Third Circuit follows decisions by other federal appellate courts and distinguishes a contrary holding involving the “ABC” test in Massachusetts that is different than New Jersey’s “ABC” test.  As noted in a January 30, 2019 article by Linda Chiem in Law 360 entitled “3rd Circ. NJ Classification Ruling Curbs Scope of Preemption,” quoting the publisher of this legal blog, “the decision in this case is “not groundbreaking,” but by limiting the applicability of the FAAAA as has been done in similar cases, it “may nonetheless bury most arguments by transportation companies that state ABC independent contractor tests are preempted by the federal transportation deregulation laws.” Bedoya v. American Eagle Express Inc., No. 18-1641 (3d Cir. Jan. 29, 2019).

INDIANA SUPREME COURT HOLDS “ABC” INDEPENDENT CONTRACTOR TEST MET BY REFERRAL COMPANY. The Indiana Supreme Court has ruled that a driver for Q.D.-A., a company that matches drivers with businesses needing vehicles like RVs delivered to them, is an independent contractor and not an employee under the state’s unemployment insurance laws.  After filing for unemployment benefits, the state’s Department of Workforce Development concluded the driver was an employee.  After that decision was affirmed by an Administrative Law Judge, an intermediate appellate court reversed.  On further review, the Indiana Supreme Court affirmed, holding that all three prongs of the state’s ABC test for IC status under Indiana’s unemployment laws had been satisfied.  Under Prong A, the court found that the driver was not under the company’s control or direction, under either his contract or in fact. Under Prong B, the court determined that the driver performed a service outside of the company’s usual course of business: the driver provided “drive-away” services, while the company did not “regularly or continually provide such services.”  The court found that Prong C was satisfied because neither party disputed the agency’s initial finding that the company “provided sufficient evidence to demonstrate that [the driver] was customarily engaged in an independently established trade, occupation, profession, or business of transporting commodities.”  Q.D.-A. v. Indiana Department of Workforce Development, No. 19S-EX-43 (Sup. Ct. Ind. Jan. 23, 2019).

TRANSPORTATION COMPANY SETTLES IC MISCLASSIFICATION CLASS ACTION FOR $9.25 MILLION. A California federal court has granted final approval of a $9.25 million settlement between drayage transportation company, Roadrunner Intermodal Services LLC, and a class of 896 truck drivers claiming violations of state wage and hour laws due to their alleged misclassification by the company as independent contractors. The drivers also sought reimbursement of expenses including fuel, liability and property damage insurance, maintenance, and equipment repair. In approving the settlement, the court stated that “while plaintiffs potentially have meritorious claims, it is far from certain that they would have prevailed on those claims, given the uncertain nature of relevant case law.” The court also stated that, given the plaintiffs’ serious concerns regarding the impact of protracted class action litigation on the company’s financial condition and its related ability to pay a settlement, the proposed settlement “provides compensation that is available now, without the additional time and risk of a decision that would likely be subject to a lengthy appeals process.” The settlement provides for $5.8 million to the drivers (or approximately $6,550 on average to each class member), slightly over $3 million (one-third of the total) for class counsel, and $75,000 in payments under the California Private Attorneys General Act.  Singh v. Roadrunner Intermodal Services LLC, No. 15-cv-1497 (E.D. Cal. Jan. 24, 2019).

RIDE-SHARING COMPANY’S $1.3 MILLION SETTLEMENT APPROVED BY COURT IN IC MISCLASSIFICATION CASE.  A North Carolina federal district court has granted final approval of a $1.3 million settlement between Uber Technologies Inc. and class of 5,200 drivers who claim they were misclassified as independent contractors and not employees. The drivers, each of whom had opted out of their arbitration agreements, claimed that they were owed minimum wage and overtime compensation under the Fair Labor Standards Act because, they alleged, they were employees, not independent contractors. In approving the settlement, which reportedly is the first FLSA lawsuit the company has settled, the court concluded that in this collective action, the named plaintiff and class counsel had “authority to settle the case on behalf of the opt-in class and that the settlement was a fair and reasonable resolution of a bona fide dispute of FLSA provisions.”

Under the agreement, the company will pay a maximum gross settlement amount of $1,304,250 of which $734,294 will be paid to class plaintiffs who have opted in (or on average, under $150 per driver).  One-third of the settlement proceeds will be paid in attorneys’ fees and the remainder is earmarked for legal expenses, service awards, and the fees of the settlement administrator.  In their submission in support of settlement, the drivers acknowledged that the company had a “‘significant chance’ of either prevailing on the merits, by a finding that the drivers are independent contractors, or of achieving a reduction of liability if not required to compensate for drivers’ wait time.”  Hood v. Uber Techs., Inc., No. 1:16-cv-00998 (M.D.N.C. Jan. 3, 2019).

FEDERAL ARBITRATION ACT EXEMPTION FOR INTERSTATE TRANSPORTATION WORKERS COVERS INDEPENDENT CONTRACTORS AND BARS COMPANY’S MOTION TO COMPEL ARBITRATION. After an intermodal trucking company, New Prime Inc., was sued in a proposed class action by a truck driver whom New Prime classified as an independent contractor, the company filed a motion to compel arbitration under its independent contractor agreement containing a mandatory arbitration provision.  The district court denied the motion, holding it lacked authority to compel arbitration because Section 1 of the Federal Arbitration Act (FAA) exempts from arbitration all disputes involving “contracts of employment” with interstate transportation workers.  The U.S. Court of Appeals for the First Circuit affirmed.  The U. S. Supreme Court reviewed the decision and held that a court, not an arbitrator, should decide whether the transportation worker is excluded from the provisions of the FAA. In rejecting New Prime’s argument that the question should be determined by an arbitrator, the Supreme Court determined that the parties could not, by agreement, bypass the interstate transportation worker exclusion of Section 1 of the FAA.

The Court then addressed the question of whether the Section 1 exclusion refers only to contracts between employers and employees or also covers contracts between businesses and independent contractors.  In finding that “contracts of employment” extended to independent contractor agreements, the court considered, among other things, that “[a]t the time of the Act’s adoption in 1925, the phrase “contract of employment” was not a term of art and dictionaries tended to treat “employment” more or less as a synonym for “work.”

As more fully discussed in our blog post of January 15, 2019, the Supreme Court decision is of limited value because it only applies to the federal arbitration statute.  State arbitration laws generally do not include an exception for transportation workers.  As noted in a January 16, 2019 article entitled “Supreme Court Gives Truckers a Victory” by Margot Roosevelt in the Los Angeles Times, quoting the publisher of this legal blog:  “An argument can be made that this decision will have little or no effect on the right of employers to compel arbitration of any worker’s dispute. Those who suggest that this decision is momentous … may wish to reconsider their exuberance.”  New Prime Inc. v. Oliveira, No. 17-340 (U.S. Sup. Ct. Jan. 15, 2019).

BAKED GOODS COMPANY UNABLE TO DECERTIFY CLASS AND COLLECTION IC MISCLASSIFICATION LAWSUIT. Distributor/drivers in Maine have gained class certification in a class and collective IC misclassification lawsuit against Flowers Foods, Inc., one of the largest producers of packaged bakery foods in the United States.  The distributor/drivers allege violations of various state wage/hour and the federal Fair Labor Standards Act. Flowers Foods claimed that individual questions of fact preclude maintenance of the lawsuit as a class and collective action, but the court disagreed.  It held that questions of fact or law common to class members predominate over questions affecting only individual members and that a class action is superior to other available methods for fairly and efficiently adjudicating the misclassification controversy.  In addition, the court denied the company’s motion to decertify the FLSA collective action, concluding that the distributors are similarly situated to the named plaintiff and the maintenance of a collective action is preferable to potentially conducting many individual trials.  Noll v. Flowers Foods, Inc., No. 1-cv-493 (D. Me. Jan. 15, 2019).

Administrative Decisions (1 case)

NLRB REVERSES OBAMA-BOARD’S UNION-FRIENDLY TEST FOR INDEPENDENT CONTRACTOR STATUS IN FRANCHISEE CASE. The National Labor Relations Board has revived the “common law” test for determining independent contractor status and overturned the union-friendly test adopted during the Obama Administration.  An NLRB Regional Office found that shuttle drivers who owned and operated franchises of SuperShuttle DFW, Inc. were independent contractors and not employees eligible to be represented by a union under the National Labor Relations Act. In reaching its decision finding IC status, the NLRB Regional Office had applied the Board’s traditional common law agency test. That decision was reviewed at the behest of the union.  But instead of simply affirming the decision, the NLRB (in a 3-1 decision) overruled an earlier union-friendly NLRB decision issued during the Obama Administration. The NLRB reviewed eight factors under the common law test and found that five factors supported IC status; two factors supported employee status; and one factor was neutral. In concluding that the franchisees were ICs, the Board majority discounted the importance of two factors favoring employee status, finding them to be “relatively less significant” than those favoring IC status.

As discussed in our blog post of January 25, 2019, this decision, while perhaps noteworthy politically, has limited application to most companies for two reasons:  First, it is only applicable to union efforts to organize and represent workers classified as independent contractors.  It has no application under any other laws, including federal and state wage and hour laws, state wage payment laws, unemployment insurance and workers’ compensation laws, and the federal law governing retirement and employee welfare benefits.  Second, the NLRB adopted the common law test used by the U.S. Court of Appeals for the District of Columbia, which had rejected the NLRB’s prior test.  As noted in a January 25, 2019 article in the Los Angeles Times by Margot Roosevelt entitled “NLRB Empowers Companies to Treat More Workers as Independent Contractors,” quoting the publisher of this legal blog, “The NLRB’s decision is . . . limited to determining only if certain individuals are employees that can be represented by a union. It has no application to state or federal wage and hour laws.”  SuperShuttle  DFW, Inc., 367 NLRB No. 75 (Jan. 25, 2019).

Written by Richard Reibstein

Posted in IC Compliance