August 2014 Monthly Independent Contractor Compliance and Misclassification Update

by Pepper Hamilton LLP
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This month’s headline development are the seismic decisions, issued on August 27, 2014 by the U.S. Court of Appeals for the Ninth Circuit, concluding as a matter of law that FedEx Ground had misclassified over 2,300 drivers in California and a smaller group of drivers in Oregon. The appellate decision reversed a district court decision applicable to over 40 lawsuits filed around the country by FedEx Ground drivers. The Ninth Circuit decision, which is arguably the most significant legal development to date in 2014 in the field of independent contractor misclassification, was based on the court’s close examination of the terms of the independent contractor agreement and the policies and procedures used on a nationwide basis by FedEx Ground. This game-changing decision is likely to have broad ramifications across all industries, and cause regulators and class action lawyers to more closely scrutinize independent contractor agreements in an effort to determine if the company in question retains sufficient direction and control over the manner or means by which the work is performed by individuals who claim to be employees and not independent contractors.

In the Courts (3 cases)

  • FED EX GROUND SLAMMED BY NINTH CIRCUIT IN DECISION CHANGING INDEPENDENT CONTRACTOR LANDSCAPE. Federal appeals court overturns a lower court decision applicable to 42 court cases where the lower court had found that FedEx Ground delivery drivers were independent contractors and not employees. The Ninth Circuit Court of Appeals reversed that decision as it applies to California and Oregon law, finding that FedEx Ground had the right to exercise control and/or actually exercised control over the drivers’ appearance and dress, their vehicles, the times the drivers work, how and when drivers deliver their packages, and the “decorum” that the drivers must exercise to “foster the professional image and good reputation of FedEx.”  See our detailed blog post on August 29, 2014, including the impact that the decision will have on other companies using independent contractors and how companies can minimize misclassification liability by restructuring, re-documenting, and re-implementing their independent contractor relationships. Alexander v. FedEx Ground Package System, Inc., No. 12-17458 and 12-17509 (9th Cir. Aug. 27, 2014); Slayman v. FedEx Ground Package System, Inc., Nos. 12-35525 and 12-35559 (9th Cir. Aug. 27, 2014).
  • NEWPAPER AGREES TO PAY $3.2 MILLION TO SETTLE CLASS ACTION LAWSUIT BROUGHT BY ITS HOME DELIVERY CARRIERS. After six years of costly litigation, Lee Publications (d/b/a North County Times) of San Diego has settled an independent contractor misclassification lawsuit brought by home delivery newspaper carriers.  The plaintiffs alleged many causes of action against the newspaper, including failure to pay minimum wage, hourly wages and overtime wages and failure to reimburse the carriers for their business expenses. Although the class action claim was limited to exclude the minimum wage claims, the parties settled the state law claims alleging failure to reimburse the carriers for their reasonable business expenses and for unfair business practices. An approval hearing regarding the proposed settlement is scheduled for October 2014. Dalton v. Lee Publications, Inc., No. 08-CV-1072 (GPC NLS) (S.D. Cal. August 15, 2014).
  • WASHINGTON STATE DISCRIMINATION LAW CAN APPLY TO INDEPENDENT CONTRACTOR ALLEGEDLY FIRED IN RETALIATION FOR COMPLAINING ABOUT DISCRIMINATION. The Washington Court of Appeals has found Northland Services Inc. liable for the retaliatory dismissal of an independent contractor truck driver, Larry Currier, under the Washington Law Against Discrimination (WLAD), even though the driver did not have an employer-employee relationship with the company. The independent contractor driver complained to the company that another independent contractor had directed racially derogatory statements at a Latino driver. Two days later, the company terminated Currier’s contract. Although the company argued that the WLAD did not apply to independent contractors and, consequently there could be no retaliation as a matter of law, the Court of Appeals disagreed. It found that the WLAD extends broad protections to “any person” engaging in statutorily protected activity from retaliation by an employer or “other person.” Currier’s complaint about the discriminatory treatment of others was found to be a statutorily protected activity and the timing of the termination of the contract to the complaint by Currier and other evidence served as a causal link evidencing retaliation. Currier v. Northland Services Inc., No. 70128-2-I (Ct. App. Wash. August 4, 2014).

 On the Legislative Front (2 matters)

  • VIRGINIA GOVERNOR ISSUES EXECUTIVE ORDER CREATING INDEPENDENT CONTRACTOR MISCLASSIFICATION TASK FORCE. Virginia Governor Terry McAuliffe signs Executive Order 24 establishing an interagency task force to combat worker misclassification and payroll fraud. In a press release issued by his office on August 15, 2014, the Governor stated: “Every Virginian who works hard and follow the rules should get the pay and benefits that they deserve. This executive order will begin a process to ensure that employers throughout the Commonwealth follow the same rules when it comes to benefits and pay for their employees.” The activities of the Task force are to include reviewing existing statutes and regulations related to worker misclassification and payroll fraud; evaluating current enforcement practices; developing procedures for more effective inter-agency cooperation and joint enforcement; implementing a pilot program for joint enforcement; developing educational materials; advising about technological improvements in misclassification and payroll fraud detection; and recommending changes to legislation or administrative rules.
  • PENNSYLVANIA LEGISLATOR INTRODUCES BILL TO BOOST ENFORCEMENT OF CONTRUCTION INDUSTRY MISCLASSIFICATION. Pennsylvania state senator Mike Stack (D. Philadelphia) introduces Senate Bill 1454 in an effort to enhance the enforcement of the current independent contractor misclassification laws in Pennsylvania, particularly the law prohibiting misclassification in the construction industry. In an August 12th press release, Sen. Stack stated:  “When it comes to protecting workers and taxpayers from employer manipulation, the state Department of Labor is not up to the job. It’s time to give local law enforcement the tools to prosecute when they uncover violations of state labor law.”  The bill seeks to amend Act 72 (the Construction Workplace Misclassification Act), which required that construction industry businesses satisfy a rigid test for those classified as independent contractors and made it a criminal offense for employers in the construction industry to misclassify employees. The proposed bill, which is currently pending before the Senate Labor and Industry Committee, would allow local district attorneys to investigate and prosecute violations of state law regarding exploitation of the “independent contractor” class of employees. Senator Stack was harsh in his assessment of Pennsylvania regulators, whom he said have resolved less than one third of complaints in the three years following the enactment of Act 72.

Regulatory and Enforcement Initiatives (1 matter)

  • The Illinois Department of Employment Security (IDES) reported on August 11, 2014 that in the prior year, nearly 20,000 workers in that state were found by the IDES to have been misclassified as independent contractors and that the IDES assessed unemployment insurance contributions and penalties attributable to over $250 million in unreported taxable wages. According to the state’s Bureau of Labor Statistics, Illinois had the most productive employer auditing effort in the country, with 3,635 audits conducted of employers in 2013.

Other Noteworthy Matters (1 Matter)

  • San Francisco cab drivers vote on August 13, 2014 to join the San Francisco Taxi Workers Alliance, which is the first independent contractor affiliate of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO).  This alliance was formed in an effort to gain political and legal strength against emerging trend of app-based ride services like Lyft and Uber, in the face of what the taxi drivers believe to be inaction by the City of San Francisco to regulate Internet-based ride services.

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