April 2016 Independent Contractor Misclassification and Compliance News Update

by Pepper Hamilton LLP
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This past month involved the settlement of a number of high profile IC misclassification cases. In one case, a federal court gave conditional approval to a $226 million settlement between FedEx and its Ground Division drivers, whereby each of over 2,000 drivers would receive on average over $110,000 before deductions for attorneys’ fees. In contrast, another federal court rejected a proposed settlement agreement between Lyft and its 155,000 California drivers where the average driver, in stark contrast to the FedEx case, would receive under $100 after deductions for attorneys’ fees. Meanwhile, Uber entered into a proposed $84 million settlement agreement covering 385,000 Uber drivers in California and Massachusetts where the average recovery per driver would be under $200 per driver after legal fees. The federal court judge in the Lyft case in California has already rejected the proposed agreement as inadequate, while the presiding judge in the Uber case in California has yet to rule on that proposed agreement.

While the gross amounts of the proposed settlements with FedEx and Uber are astronomical, they are relatively “affordable” expenses for both companies. However, as we have stated in prior blog posts addressing both proposed settlements, both companies likely could have avoided these results if they had structured, documented, and implemented their IC relationships in a manner that enhanced their IC compliance, without compromising their business models.

In the Courts (7 cases)

$226 MILLION IC MISCLASSIFICATION SETTLEMENT BY FEDEX IS CONDITIONALLY APPROVED BY THE COURT.  A federal district court granted conditional approval of a proposed $226 million settlement of the IC misclassification class action lawsuit brought by a class of slightly over 2,000 drivers for the Ground Division of FedEx. As discussed more fully in our blog post of June 13, 2015, this settlement covers the class action claims of FedEx Ground drivers in California who alleged a variety of violations under federal and state law, including claims for reimbursement of business expenses, unpaid overtime, failure to provide meal and rest periods, reimbursement of deductions in pay, and non-payment of termination pay, plus attorneys’ fees and litigation costs. According to calculations done by the settlement administrator, the average pay-out to claiming class members will be approximately $112,000, with awards ranging from  $250 up to over $440,000. As of April 5, 2016, the settlement administrator had received over 1,500 claim forms, or approximately 77% of all drivers covered under the proposed settlement. Judge Edward Chen stated that, at this juncture, he was only granting conditional approval so that (1) the Plaintiffs can undertake additional outreach to non-claiming class members, and (2) the court can consider supplemental briefs related to the amount of attorneys’ fees he will award. Alexander v. FedEx Ground Package System, No. 3:05-cv-00038-EMC (N.D. Calif. Apr. 12, 2016).

JUDGE REJECTS LYFT’S $12.5 MILLION PROPOSED SETTLEMENT AS GROSSLY INADEQUATE. Lyft’s proposed $12.5 million settlement with class of California drivers was rejected by a federal judge, who stated that “[t]he modest nonmonetary relief set forth in the agreement does not come close to making up for…serious defects in the monetary aspect of the settlement.” Most importantly, the judge concluded that “[t]he drivers were…shortchanged by half on their reimbursement claim alone.” As we discussed in our blog post of March 15, 2016, the average payment to the drivers would be modest, well under $1,000 per driver, to cover their out-of-pocket car expenses, allegedly unpaid tips, and any unpaid overtime and minimum wages. It is expected that Lyft will substantially increase its settlement offer in view of the fact that the proposed agreement did not require it to abandon its IC model with the drivers. Cotter v. Lyft Inc., No. 13-cv-04065 (N.D. Cal. Apr. 7, 2016).

UBER AGREES TO SETTLE ITS IC MISCLASSIFICATION CASE WITH DRIVERS IN TWO STATES FOR $84 MILLION; NEW LAWSUITS FILED BY DRIVERS IN OTHER STATES. This past month Uber made headlines for its proposed settlement with Uber drivers for $84 million in two IC misclassification class actions – one in California and the other in Massachusetts – while new class action lawsuits were brought against Uber in Florida and Michigan.

  • The Proposed California and Massachusetts Settlements: In our blog post of April 22, 2016, we noted the more significant terms of the proposed settlement, which is subject to review and approval of the judge presiding over the case in the federal court in San Francisco. The proposed agreement would allow Uber to retain its IC model. In exchange, the settlement guarantees payment of $84 million to the 385,000 Uber drivers covered under the cases in California and Massachusetts, although that amount is likely to decrease to around $60 million after accounting for legal fees, costs of administration of the settlement and payment to the State of California. The drivers would likely receive well under $200 each on average, although the amount would increase to at least $2,000 for those drivers who drove more than 25,000 miles. In addition, Uber will agree to change certain of its business practices such as “deactivation,” the functional equivalent of termination of a driver. Further, Uber will fund and facilitate the creation of a non-union driver association comprised of elected driver leaders. Uber will also clarify its messaging to riders about tipping, making clear that a tip, while not required or expected, is not included in the fare. Finally, an additional $16 million (of which the attorneys will be entitled to 25%) might be added (making the total as much as $100 million) in the event Uber goes public and valuation increases by a particular amount within a specified time period. There is no guarantee that the proposed settlement agreement will be approved by the court; indeed, it may well be rejected by the court if, like the proposed settlement agreement in the Lyft case, the judge in the Uber case regards the settlement amount as inadequate. O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal. Apr. 21, 2016).
  • New Proposed FLSA Class Action Brought in Florida Federal Court: In this filing on April 22, 2016, a current Uber driver has sued Uber on behalf of a nationwide class of drivers who were allegedly misclassified as ICs in violation of the federal Fair Labor Standards Act (FLSA) resulting in allegedly unpaid minimum wage and overtime compensation. Lamour v. Uber Technologies, Inc., No. 1:16-cv-21449 (S.D. Florida Apr. 22, 2016).
  • New Proposed FLSA Class Action Also Brought in Michigan. Ten days earlier, two former drivers filed suit seeking to represent themselves and others drivers similarly situated alleging that Uber violated Michigan and the FLSA law by failing to remit gratuities to the drivers and improperly retaining the tips for itself; misclassifying the drivers as ICs; depriving them of statutory benefits such as minimum wage and overtime compensation; failing to remit to the drivers their expenses for the use and maintenance of their cars; failing to offer insurance to drivers under the Affordable Care Act; and engaging in unfair methods of competition and unfair or deceptive acts or practices. Zawada v. Uber Technologies, Inc., No.: 16-cv-11334 (E.D. Michigan April 12, 2016).

COURT UPHOLDS NLRB RULING THAT MUSICIANS IN ORCHESTRA CAN BE UNIONIZED BECAUSE THEY ARE EMPLOYEES AND NOT IC’S. A federal appellate court has upheld a decision by the National Labor Relations Board that musicians in a Pennsylvania orchestra are employees and not ICs and, therefore, the union was properly certified by the NLRB as the representative of the musicians following an election conducted by the NLRB where the union prevailed. To determine whether the musicians were employees or not, the court applied the common law of agency and evaluated the ten factors contained in the Restatement (Second) of Agency as well as an additional factor: whether there is a significant entrepreneurial opportunity for gain or loss by the worker. In considering the orchestra’s petition for review, the Court analyzed those factors and found that “the relevant factors point in different directions.” Specifically, although some factors supported employee status, the court also found that there were a number of factors supporting IC status. The Court, however, decided to “defer to the Board,” stating that it “will…uphold the Board if at least it can be said to have made a choice between two fairly conflicting views.” Lancaster Symphony Orchestra v. National Labor Relations Board, No. 14-1247 (D.C. Cir. Apr. 19, 2016).

ONLINE PRODUCT ADVOCATES HELD TO BE EMPLOYEES, NOT IC’S. A Utah appellate court held that product advocates retained by an Internet chat-based customer service platform were correctly classified by the Utah unemployment compensation board as employees and not ICs. The product advocates chat in real time with customers of retailers about the retailer’s products. Under Utah state law, workers are regarded as employees for unemployment purposes unless they are (a) free from direction and control over the means of performance of services both under contract and in fact, and (b) customarily engaged in an independently established trade, occupation, profession, or business. The unemployment compensation board only addressed the second factor, finding that the product advocates were not independently established in business. The court affirmed the board’s determination. Needle Inc. v. Department of Workforce Services, Workforce Appeals Board, No. 20141157 (Ore. Ct. App. Apr. 28, 2016).

Regulatory and Enforcement Initiatives (2 items)

NLRB ISSUES COMPLAINT ALLEGING IC MISCLASSIFICATION IS AN UNFAIR LABOR PRACTICE. A Regional Director of National Labor Relations Board issued an unfair labor practice complaint against Intermodal Bridge Transport alleging that the company “has misclassified its employee-drivers as ICs, thereby inhibiting them from engaging in section 7 activity and depriving them of the protections of the [National Labor Relations] Act.” As more fully discussed in our blog post of April 21, 2016, this complaint relates to the intensive efforts of the Teamsters union to organize port truckers in California and elsewhere, including those truckers whom the union claims have been misclassified as ICs. The Teamsters filed an unfair labor practice charge with the NLRB’s Regional Director in Los Angeles in 2015; eight months later, an unfair labor practice complaint was issued. The allegations in the complaint are two-fold: (1) Those involving “classic” violations such as interrogation of a driver by his supervisor about his support for the union; promises of more work if a driver refrained from union organizing activities; threats by a supervisor to a driver of job loss and other reprisals if he continued to support the union; and threats by a supervisor to a driver that the company would close the facility if the union won or came in to the facility. (2) Those regarding misclassification of the drivers as ICs and not employees.  As noted in that blog post, it remains to be seen whether the General Counsel of the NLRB is taking the position that mere misclassification of workers as ICs is itself an unfair labor practice or that something more must be done in violation of the law to a worker whom the General Counsel believes should be classified as an employee. Intermodal Bridge Transport, Case 21-CA-157647 (Apr. 18, 2016).

OREGON BECOMES 29TH STATE TO SIGN JOINT ENFORCEMENT MEMO WITH U.S. DEPARTMENT OF LABOR. The Oregon Bureau of Labor and Industries (“BOLI”) has signed a Memorandum of Understanding with the U.S. Department of Labor’s Wage and Hour Division (“WHD”) – the 29th state to do so. The three-year agreement commencing April 4, 2016 between the WHD and BOLI sets forth specific and mutual goals of providing clear, accurate, and easy-to-access outreach to employers, employees, and other stakeholders, and of sharing resources and enhancing enforcement by conducting joint investigations and sharing information consistent with applicable law. In a News Release dated April 4, 2016 by the WHD, Commissioner of BOLI Brad Avakian stated: “When corporations misclassify their workforce, they make it much more difficult for workers facing wage theft, civil rights abuse or other unfair treatment on the job. This agreement will create a new tool to help protect the rights of Oregon workers cheated on the job.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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