July 2014 Monthly Independent Contractor Compliance and Misclassification Update

by Pepper Hamilton LLP
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The leading development this month in the area of independent contractor compliance and misclassification is an Arizona case that deals with a commonplace event – but  one that carries with it the potential for unanticipated independent contractor misclassification liability – where a company outsources a function to a subcontractor, who uses ICs to render the service.  If the ICs claim that they are employees who have been misclassified, they may also allege that the company that outsourced the work and is indirectly receiving the benefit of the work is a “joint employer” with the subcontractor.  This type of claim is most likely to arise where the ICs are indirectly providing a service to a single client or customer of the subcontractor, or to a select few clients or customers.  The case below finds that the outsourcing company was not a joint employer under the facts in that matter, but if some of the facts were changed in any material respect, the court may have concluded that the outsourcing company could be exposed to IC misclassification liability.  The “Takeaway” below explains how outsourcing companies can minimize this potential exposure.

In the Courts (5 cases)

  • ARIZONA COURT FINDS HOME DEPOT IS NOT A JOINT EMPLOYER WITH 3PD DELIVERY, WHICH RETAINED DRIVERS TO DELIVER HOME DEPOT GOODS. As detailed in prior blog posts, drivers who provide delivery services to 3PD customers have succeeded in a number of IC misclassification cases against 3PD; in some cases, they have already collected millions of dollars in class action settlements. This class action case, brought in an Arizona federal district court seeking relief under state and federal wage and hour laws, sought to hold Home Depot liable as a joint employer with 3PD for allegedly misclassifying the drivers as ICs. The court disagreed with the drivers, however, and found that Home Depot, whose products were being delivered by the drivers who had contracted with 3PD, was not a joint employer of the drivers. In reaching its conclusion, the court concluded that Home Depot (1) did not have the power to hire and fire the drivers; (2) did not supervise and control driver work schedules or conditions of employment; (3) did not control the rate and method of pay; and (4) did not maintain employment records of the drivers. The court also took into account additional factors such as Home Depot’s lack of ownership of the trucks; that uniforms were provided by 3PD and the driver (not by Home Depot); and the driver’s profits were determined based on his own managerial skill – each of which, the court concluded, militated against a finding of Home Depot as a joint employer. Montoya v. 3DP, Inc., No. CV-13-8068-PCT-SMM (D. Ariz. July 9, 2014).
    Takeaway: Where independent contractors provide services to a single client of the business that retains them, or to only a few customers, the client itself may be a secondary target of plaintiff class action lawyers, especially if the client has “deeper pockets” than the contracting business. Home Depot was able in this case to deflect the joint employer claim by the drivers providing services to 3PD. However, other clients or customers that direct or control the manner in which the services are performed or otherwise play a role in the performance of the workers’ services may unwittingly be exposed to IC misclassification liability that they never anticipated. Prudent customers require their vendors who provide services to them through individuals classified as ICs to satisfy the applicable tests for proper IC classification. This can be accomplished through the use of IC Diagnostics™, a proprietary process that minimizes IC misclassification exposure.
  • CALIFORNIA APPELLATE COURT UPHOLDS ARBITRATION AGREEMENT IN LAWSUIT ALLEGING IC MISCLASSIFICATION. A field agent for a Washington State real estate company who had filed a class action lawsuit in California alleging that the firm had misclassified him and other similarly situated workers was ordered by a California appellate court to arbitrate his claims instead of pursuing them in court. The class action lawsuit sought to adjudicate claims for unpaid overtime, missed meal and rest breaks, and unreimbursed expense claims against the real estate firm, Redfin Corporation, under the California Labor Code and the state Unfair Competition Laws. The plaintiff had signed a Field Agent Independent Contractor Agreement that contained an arbitration clause covering all disputes arising under the Agreement and requiring arbitration in Washington State. Although the plaintiffs argued that a number of the claims were pleaded under California statutes and therefore did not arise under the Agreement, the appellate court rejected that argument, finding instead that because the “Agreement is the instrument that classified him as [an independent contractor] and that governed his relationship with defendant, including the services he was to provide and the method by which those services would be compensated,” the claims therefore “arose out of” the Agreement. Galen v. Redfin, No. A138642 (Cal. Ct. App. 1st Dist. July 21, 2014).
  • GO-GO DANCERS AT GAY NIGHT CLUB GAIN CLASS CERTIFICATION IN IC MISCLASSIFICATION CASE IN GEORGIA. A federal district court in Georgia granted class certification to group of male go-go dancers at a gay night club, BJ Roosters, in an IC misclassification lawsuit alleging violations of the FLSA and retaliation. The court based its decision to grant class certification for a proposed class of hundreds of dancers because it determined that the dancers had similar responsibilities; were all subject to the club’s policies; set the dancers’ schedules; had the authority to approve or ban dancers’ stage names; retained control of the clothing the dancers could wear at the club; retained strict control over which dancers could perform in different areas of the club; and had controlled which dancers would be permitted to entertain guests in VIP rooms and the compensation dancers could receive from customers in those rooms. Allen v. Jobo’s, Inc. d/b/a BJ Roosters, No. 1:13-CV-3768-RWS (N.D. Ga. July 3, 2014).
  • TUTORING COMPANY FOUND TO HAVE MISCLASSIFIED TUTORS AS INDEPENDENT CONTRACTORS IN NEW YORK. A New York appellate court determined that a tutoring referral and billing company, Ivy League Tutoring Connection, misclassified tutors as ICs where the tutors provided in-home tutoring sessions to clients seeking assistance with school work and test preparation. The Court based its decision, which upheld an administrative determination by the Unemployment Insurance Appeal Board, on the following factors: the company screened, interviewed and conducted criminal background checks on prospective tutors; it paid the tutors a set hourly rate; it matched clients with the tutor it deemed best suited for each client’s needs; and it restricted the tutor’s solicitation of the company’s clients both during the relationship and for three years after the relationship ended. Matter of Ivy League Tutoring Connection, Inc. v. Commissioner of Labor, No. 517901 (N.Y. App. Div. 3d Dep’t July 24, 2014)
  • TRANSPORTATION COMPANY IN CALIFORNIA CANNOT USE FEDERAL LAW TO PREEMPT STATE CLAIMS FOR IC MISCLASSIFICATION. The California Supreme Court held that IC misclassification claims against a trucking company, Pac Anchor Transportation, Inc., alleging violations of the California Unfair Competition Law (UCL), are not preempted by the Federal Aviation Administration Authorization Act (FAAAA). The complaint was brought by the State of California against Pac Anchor, alleging that the company misclassified drivers as independent contractors and thereby illegally lowered their costs of doing business by engaging in acts of unfair competition, including but not limited to, failing to pay unemployment insurance taxes, provide workers’ compensation coverage, withhold state disability taxes, and paying the minimum wage. The FAAAA provides that a state “may not enact or enforce a law, regulation, or other provision having the force and effect of a law related to a price, route or service of any motor carrier…with respect to the transportation of property.” In rejecting the preemption argument, he California Supreme Court held: “The sections of the California Labor Code and Unemployment Insurance Code … make no reference to motor carriers or the transportation of property. Rather, they are laws that regulate employer practices in all fields and simply require motor carriers to comply with labor laws that apply to the classification of their employees. In fact, the [trucking company] conceded ‘that those state employment laws…are laws of general application whose effects on the carriers’ prices, routes, and services is remote.’” People ex rel. Harris v. Pac Anchor Transportation, Inc., No. S194388 (Sup. Ct. Cal. July 28, 2014).
    Regulatory and Enforcement Initiatives (2 Matters)
  • MASSACHUSETTS COLLECTED $15.6 MILLION IN IC MISCLASSIFICATION LIABILITIES IN 2013. Massachusetts Labor and Workforce Development Secretary Rachel Kaprielian announced on July 23, 2014 that the Joint Enforcement Task Force on the Underground Economy and Employee Misclassification, comprised of multiple state agencies and the Attorney General’s Office, collected $15.6 million in 2013 in unpaid wages, back taxes, unemployment insurance premiums, and fines and penalties related to employer fraud and worker misclassification. According to the press release, the Massachusetts Misclassification Task Force has recovered since its inception “nearly $56 million from unlawful businesses by enforcing labor, licensing and tax laws.” Massachusetts Attorney General Martha Coakley stated: “This ongoing effort ensures that we are protecting workers by combatting fraud and abuse, returning significant funds to the Commonwealth, and leveling the playing field for all businesses that play by the rules.”
  • MISSOURI LABOR DEPARTMENT EXPLAINS IC MISCLASSIFICATION TEST IN THAT STATE. Officials from Missouri Department of Labor and Industrial Relations, participating in the Mid-America Labor Management Conference on July 8, 2014, explain that the most important factor in determining whether an individual is an independent contractor or employee under Missouri law is whether the business retaining the worker exercises control over the manner in which the work is performed. Thomas Pudlowski, contribution field manager in the Missouri Division of Employment Security (DES), said the DES uses the IRS 20-factor test and “looks at the substance of the relationship rather than the label.” He also advised: “There is not just one factor that can be relied upon for determining whether you have a business-independent contractor relationship or an employer-employee relationship. You’ve got to look at all the factors as a whole.
    On the Legislative Front
  • VIRGINIA LAW INCREASES IC MISCLASSIFICATION PENALTIES UNDER ITS WORKERS’ COMPENSATION LAW. Effective July 1, 2014, a new law takes effect with respect to penalties for Virginia businesses that fail to provide workers’ compensation coverage to those who have been misclassified as independent contractors. According to the Virginia Workers’ Compensation Commission website, the new state law provides that an employer shall be assessed a civil penalty of up to $250 per day of noncompliance, subject to a maximum penalty of $50,000, plus collection costs. The Commission advises businesses that “the facts of the work circumstances will determine if the individual is covered for workers’ compensation, regardless of payment on a 1099 designation.”

 

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