August 2016 Independent Contractor Misclassification and Compliance News Update

Pepper Hamilton LLP

This month’s news update includes three initiatives by the U.S. Department of Labor to combat IC misclassification. The first was the issuance of a new page on the DOL website called “Misclassification Mythbusters.” We critiqued the new DOL page in a blog post, pointing out that the DOL had mischaracterized state and federal IC laws. We stated: “Hopefully, the DOL will take note and remediate these misleading statements.” Following the issuance of our blog post, the DOL took down its “Mythbusters” page and recently restored it, changing each of the mischaracterizations we had highlighted.

The second regulatory initiative was the signing of a memorandum of understanding (MOU) between the U.S. Labor Department and two more state workforce agencies. This brings to 33 the number of states that have joined with the federal government to share information and conduct joint enforcement efforts to combat IC misclassification.

The third administrative action was the U.S. Labor Department’s signing of an MOU with a federal construction agency, the U.S. Department of Housing and Urban Development, to prevent IC misclassification in the construction of housing in six Western states. Those actions are discussed in the second part of this news update, in the section called “Administrative and Regulatory Initiatives.”

In the Courts (3 cases)

$2.4 MILLION CONSENT JUDGMENT ENTERED AGAINST CONSTRUCTION COMPANY AND ITS PAYROLL AFFILIATE. A Massachusetts federal district court entered a consent judgment for $2.4 million against a construction company, Force Corporation, and its affiliate, AB Construction Group Inc., for misclassifying the bulk of their 478 employees as ICs and engaging in other wage and hour violations under the Fair Labor Standards Act (FLSA). According to a news release dated August 2, 2016 from the Wage and Hour Division (WHD) of the Department of Labor, an investigation conducted by the WHD revealed IC misclassification including overtime violations and improper record-keeping. The WHD also found that AB Construction was created to provide Force Corp. with much of its labor, and that Force Corp. prepared and controlled the payroll and payment procedures for both companies. The consent judgment orders the companies to pay nearly $2.4 million in back wages and liquidated damages to the employees; refrain from misclassifying employees as ICs; make, keep and preserve accurate records of employees’ wages, hours and working conditions; and engage qualified independent consultants to create an FLSA-compliant payroll system. Perez v. Force Corp., 16-cv-40103 (TSH) (D. Mass. Aug. 1, 2016).

LEADING TRUCKING AND TRANSPORTATION LOGISTICS FIRM SUED FOR IC MISCLASSIFICATION. A California truck driver filed a class action complaint in federal court against one of North America’s largest trucking and logistics firms, J.B. Hunt Logistics, Inc.  The company provides transportation of customers’ products via semi trailer trucks. The IC misclassification lawsuit alleges that the company failed to pay drivers overtime under the FLSA and failed to reimburse them for expenses under the California Labor Code. The driver claims that he and other drivers were required to lease trucks through the Company at their own expense; the Company controlled all aspects of the drivers’ employment; and drivers had no ability to negotiate the fees that drivers received. Guevara v. J.B. Hunt Logistics, Inc., No. 16-cv-06410 (C.D. Cal. Aug. 25, 2016).

UBER’S PROPOSED $100 MILLION SETTLEMENT REJECTED BY FEDERAL COURT AS INADEQUATE. Uber’s $100 million proposed settlement of drivers’ IC misclassification claims, negotiated with counsel for the drivers, was rejected by California federal judge on August 18, 2016.  Judge Edward Chen focused most of his concerns about the adequacy of the proposed settlement on the allocation of “only” to settle the claims brought by the drivers under the California Private Attorneys General Act (PAGA).  The judge noted that the $1 million allocation was only one tenth of one percent of the possible $1 billion value of that claim. He also expressed concerns that the expansive waiver and release covered workers who were not part of the class, covered claims that were not part of the lawsuit, and may adversely affect the prosecution of other cases brought against Uber. On September 7, 2016, the Ninth Circuit Court of Appeals ruled that the class action waiver arbitration agreements, which most of the class members had signed, were valid.  As a result, the number of class members will be dramatically reduced, thereby fundamentally changing the scope of the class action lawsuit. The effect of the Ninth Circuit’s ruling remains to be seen.  Class action waiver arbitration agreements, however, have been subject to rejection by the Ninth Circuit under the National Labor Relations Act. O’Connor v. Uber Technologies Inc., No. 13-cv-3826 (N.D. Cal. Aug. 18, 2016); Yucesoy v. Uber Technologies Inc., No. 15-cv-0262 (N.D. Cal. Aug. 18, 2016).

Administrative and Regulatory Initiatives (4 matters)

“MISCLASSIFICATION MYTHBUSTERS” RELEASED BY U.S. LABOR DEPARTENT, BUT REVISED IN RESPONSE TO OUR EARLIER BLOG POST. The United States Department of Labor released an online publication entitled “Misclassification Mythbusters” in effort to educate the public about IC misclassification. As discussed in our blog post of August 22, 2016, the DOL identified 12 IC misclassification “myths” that it sought to debunk and provided explanations for each of their analyses. Our review of each myth revealed inaccuracies in some of the explanations provided by the DOL, including mischaracterizations of some of tests used to determine IC or employee status. Following the posting of our critique, which implored the DOL to “take note and remediate these misleading statements,” the DOL took down its site and then did, in fact, remediate some of the mischaracterizations, as noted in our Publishers’ Notes added earlier today to the August 22 blog post.

TWO MORE STATES SIGN COORDINATION AGREEMENT WITH U.S. DOL TO COMBAT IC MISCLASSIFICATION. Pennsylvania and North Carolina became the 32nd and 33rd states to sign Memoranda of Understanding with the U.S. Department of Labor (DOL) targeting IC misclassification. On August 4, 2016, the DOL entered into a three-year Memorandum of Understanding (MOA) with the Pennsylvania Department of Labor & Industry and on August 31, 2016, it entered into an MOA with the North Carolina Industrial Commission. The goals of these partnerships include providing clear, accurate, and easy-to-access compliance information to employers, employees, and other stakeholders, and sharing of resources and enhancing enforcement by conducting coordinated enforcement actions and sharing of information consistent with applicable law.  David Weil, the Wage and Hour Administrator of the DOL, stated in press releases announcing each state’s MOA: “The Wage and Hour Division continues to attack this problem head-on through a combination of a robust education and outreach campaign, and nationwide, data-driven strategic enforcement across industries.” He continued: “Our goal is always to strive toward workplaces with decreased misclassification, increased compliance, and more workers receiving a fair day’s pay for a fair day’s work.”

U.S. DOL AND HUD ENTER INTO MEMO OF UNDERSTANDING. In addition to MOUs that the U.S. DOL has entered into with the IRS and state workforce agencies, it recently entered into an MOU with the U.S. Department of Housing and Urban Development.  The MOU was entered into to combat IC misclassification in federally funded construction projects in six western states: Colorado, Montana, North Dakota, South Dakota, Utah and Wyoming. According to a news release dated August 22, 2019, this is the first MOU of its kind representing a new effort on the part of the agencies to work together to protect employee rights and level the playing field for responsible employers by reducing the practice of IC misclassification. Dr. David Weil, Administrator of the Wage and Hour Division said in a news release: “The Wage and Hour Division stands together with the U.S. Department of Housing and Urban Development to protect workers and responsible employers and ensure everyone has the opportunity to succeed. Misclassification deprives workers of rightfully earned wages and undercuts law-abiding businesses.”

NLRB GENERAL COUNSEL TRIES TO CREATE AN IC “MISCLASSIFICATION-PLUS” UNFAIR LABOR PRACTICE. As we noted in our blog post of August 30, 2016, the General Counsel of the NLRB has sought to create a “misclassification-plus” unfair labor practice, as reflected in a recently released NLRB Advice Memorandum. According to the Advice Memo dated December 18, 2016 and made public on August 26, 2016, “where the Employer told its drivers that they were independent contractors and had no right to form a union but treated them as employees in virtually every respect, the Employer’s misclassification of its drivers as ICs interfered with and restrained the drivers in their exercise of Section 7 rights, in violation of Section 8(a)(1).” While a close reading of the Advice Memo makes it clear that misclassification itself is not an unfair labor practice, the NLRB seems to have created an unfair labor practice premised on IC misclassification “plus something more” – even a statement that may be nothing more than a comment protected by Section 8(c) of the NLRA. Pacific 9 Transportation, Inc., Case 21-CA-150875 (Div. of Advice Memo, Dec. 18, 2015, released to public August 26, 2016).

On the Legislative Front (1 item)

ARIZONA LAW CREATES A “DECLARATION OF INDEPENDENT BUSINESS STATUS” TO ASSIST IN DETERMINING IC STATUS IN THAT STATE. A new Arizona independent contractor law aimed at clarifying IC or employee status took effect August 6, 2016. Under the Republican-sponsored bill (HB 2114) signed into law by the Governor, an IC has the option of signing a “Declaration of Independent Business Status” in which the IC must acknowledge that he/she operates his/her own independent business; the IC is not an employee and has no rights to unemployment benefits or any other rights arising from an employment relationship; the IC is responsible for all tax liability; and the IC is responsible for obtaining and maintaining any required registration, licenses or other authorization necessary to perform the services to be provided by the IC. In addition, the IC must acknowledge that he/she satisfies at least 6 out of 10 factors often used in tests across the country to determine IC status. Some of those factors include: the IC is not entitled to health insurance  and workers’ compensation coverage from the contracting party; the IC has a non-exclusive relationship with the contracting party; the IC has the right to accept or decline engagements; the contracting party expects that the IC provides services for others; the IC is not economically dependent on the contracting party; and the contracting party does not dictate the performance, methods or process the IC uses to perform the services. The execution of a Declaration creates a rebuttable presumption of an IC relationship between the IC and the contracting party. The statute makes clear that the failure to execute a Declaration does not create any presumptions and is not admissible to deny the existence of an IC relationship.

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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