August 2018 Independent Contractor Misclassification And Compliance News Update

by Locke Lord LLP

August 2018 was a busy month in the area of independent contractor misclassification and compliance including a number of new court filings and decisions, new regulatory initiatives, and new legislation. While none of these were  blockbuster developments, they do provide an important message for businesses that use ICs.

One notable feature of the news updates reported below is that they cover developments in a diverse geographical area – in states on the East Coast, West Coast, Midwest, South, and the District of Columbia.  The cases also involve a diverse set of businesses – small companies operating in a single state as well as large businesses operating nationwide.  Those companies involved in the cases reported below conduct business in extremely varied industries such as mortuary transportation, construction, online shopping, delivery services, home inspection, and airlines.  Finally, while some states passed laws or took regulatory initiatives seeking to combat IC misclassification, other states, like New York and Massachusetts, were expanding the type of legal protections that are normally reserved for employees to cover independent contractors as well.

So, what’s the takeaway? Independent contractor misclassification and compliance issues arise in virtually every industry; affect companies of all sizes; arise in pretty much every state; and expose those businesses that use ICs to a variety of existing and new laws including those that can create considerable liability and legal expense.

This is why many sophisticated businesses using ICs have taken steps to minimize their risk of IC misclassification liability. Many of those businesses have resorted to a process such as IC Diagnostics™ to enhance their compliance with federal and state IC laws, expand their operations in states with laws that do not tend to restrict the legitimate use of ICs, and curtail operations in states with laws that are IC-unfriendly.

In the Courts (6 cases)

MORTUARY DRIVERS GRANTED CLASS CERTIFICATION IN IC MISCLASSIFICATION CLASS ACTION.  A federal court has granted class certification for mortuary drivers who seek damages for IC misclassification under state and federal wage/hour laws against Serenity Transportation, a company that transports deceased persons for various clients, including hospitals and mortuaries.  The drivers alleged they are subject to direction and control by Serenity because they were required to follow the company’s detailed and restrictive policies upon “hire.” The lawsuit seeks damages for allegedly unpaid on-call time, expenses reimbursement, and wage statement and waiting time penalties as well as unfair competition. The court clarified that should the trier of fact find that the on-call time is compensable, then the overtime, minimum wage and meal and rest break claims may proceed on a class-wide basis as well – or otherwise such claims can be litigated on an individual basis. Johnson v. Serenity Transportation, Inc., No. 15-cv-02004-JSC (N.D. Cal. Aug. 1, 2018).

AMAZON UNABLE TO MOVE IC MISCLASSIFICATION CLASS ACTION BY DRIVERS INTO FEDERAL COURT.  Amazon has failed to remove an IC misclassification class action from a Massachusetts state court into a federal court in that state. The complaint was filed in Worcester Superior Court on behalf of a proposed class of drivers who alleged wage violations under Massachusetts laws, including failure to reimburse drivers for business expenses, failure to pay drivers for additional hours worked after a shift ended, and failure to pay the minimum wage. Amazon filed a Notice of Removal under the Class Action Fairness Act of 2005 (CAFA), which requires the amount in controversy exceed the jurisdictional threshold of $5,000,000 million for all proposed class members. Amazon estimated that damages would be at least $4.4 million for the class, just under $20,000 for the named plaintiff, and $600,000 in legal fees for the class (attorneys’ fees may be included in reaching the $5 million jurisdictional threshold under CAFA).

In granting the drivers’ motion to remand the case to state court, the federal court reasoned that even assuming the damage amounts for unreimbursed expenses, unpaid wages and minimum wage violations were accurate, Amazon’s assertion that another $600,000 will come from attorneys’ fees for the class was speculative. The court rejected Amazon’s argument that because plaintiff’s counsel had previously spent between 900 and 1,800 hours on other misclassification cases, it would likely spend 1,200 hours on this case.  Instead, it concluded that it was equally likely that this case would be decided on summary judgment or settle early. The court stated, “Given that Plaintiff’s attorneys’ fees through this motion totaled only $11,700, and that Plaintiff has shown that cases under Massachusetts Independent Contractor Law are routinely decided on summary judgment, it is unreasonably speculative to assume that this will be a heavily litigated case that amasses over $600,000 in attorneys’ fees.” Waithaka v. Inc., No. 4:17-cv-40141 (D. Mass. Aug. 28, 2018).

OHIO COURIER COMPANY SETTLES IC MISCLASSIFICATION CLASS ACTION FOR $600,000.  An Ohio federal court has approved a $600,000 settlement of a class and collective action brought by drivers against Premier Courier, Inc. for alleged violations of the federal Fair Labor Standards Act, minimum wage and overtime requirements of state wage and hour laws, and the Ohio Fraudulent Transfer Act, claiming they were misclassified as independent contractors and not employees.  The class and collective action complaint had alleged that the drivers were economically dependent on the company; the work the drivers performed was integral to the company’s primary business; the drivers worked in low-paying jobs requiring relatively low skill and held positions for long periods of time; the company determined the work performed by the drivers as well as their hours of work; the company set the fees to be paid to the driver and required them to wear uniforms and badges; and the company controlled the work the drivers performed and the manner in which they were to perform it. Wright v. Premier Courier, Inc., No. 2:16-cv-00420 (S.D. Ohio Aug. 18, 2018).

NATIONAL ELECTRICAL CONTRACTOR SUED BY D.C. ATTORNEY GENERAL FOR IC MISCLASSIFICATION OF ELECTRICAL WORKERS.  The District of Columbia Attorney General has filed suit against Power Design, Inc., a national electrical contractor headquartered in Florida, for allegedly misclassifying at least 535 electrical workers as independent contractors “in a[n alleged] scheme to cut costs and avoid legal responsibilities.” The D.C. Attorney General also sued two other companies described as “labor brokers” that were hired by Power Design to engage workers and dispatch them to provide services as independent contractors on Power Design construction sites. In its August 6, 2018 press release, the Office of the Attorney General for the District of Columbia stated that in misclassifying the workers, the companies violated the D.C. Workplace Fraud Act (applicable only to the construction industry), D.C. Minimum Wage Revision Act, D.C. Sick and Safe Leave Act and the D.C. Unemployment Compensation Act.  D.C. Attorney General Karl Racine added: “Power Design cheated hundreds of District workers out of their hard-earned wages and stripped them of their legal rights. When companies misclassify employees as independent contractors, they steal from their workers and gain an unfair advantage over competitors that follow the law.” According to the allegations in the complaint, Power Design “exercised significant – if not total – control and direction over the labor broker workers” because the company unilaterally set the work schedules; required workers to wear a specific uniform and provided most of the tools and supplies; set policies that were expected to be followed; closely supervised the workers’ work production a daily basis; and had the power to terminate the relationship with a worker without consulting the labor broker.                        District of Columbia v. Power Design, Inc., Super. Ct. D.C. Aug. 6, 2018.

RESIDENTIAL INSPECTION AGENTS FILE IC MISCLASSIFICATION CLASS ACTION LAWSUIT.  ServiceLink Field Services, LLC, a home inspection company performing services for its financial institution clients, has been sued by residential inspection agents in a class action complaint filed in California state court for alleged wage and hour violations under the California Labor Code.  The plaintiff claims that the inspection agents were misclassified as independent contractors and not employees. The inspectors allegedly were not paid for all hours worked; not paid at least the minimum wage; not paid for meal or rest breaks, travel time, or work performed at home; and not paid for supplies and maintenance of their vehicles, among other things. According to the complaint, “Defendant ServiceLink contracts with third party vendors to either perform inspections themselves and/or provide and pay other class members to perform ServiceLink inspections.” In support of the misclassification claims, the inspector claims that inspections must be performed pursuant to ServiceLink policies, procedures, and directions within timeframes set by ServiceLink. Collins v. ServiceLink Field Services, LLC, No. 37-2018-00040352-CU-OE-CTL (Aug. 10, 2018).

NEW CASE BEFORE THE CALIFORNIA SUPREME COURT COULD IMPACT NATIONWIDE COMPANIES SENDING IC’S TO THAT STATE FOR LIMITED PERIODS OF TIME.  The U.S. Court of Appeals for the Ninth Circuit has certified three questions of law to the California Supreme Court involving the applicability of that state’s wage and hour laws to workers who only work episodically in that state.  Pilots and flight attendants for United Airlines and Delta Air Lines commenced lawsuits alleging violations of the California Labor Code. They are seeking to apply California law to their claims based solely on the location of their work, despite the de minimis amount of time they worked in California.

The district courts each granted summary judgment in favor of the airlines, but the plaintiffs appealed to the Ninth Circuit. In certifying three questions to the California Supreme Court related to extraterritorial application of state laws, the Ninth Circuit stated: “There is no controlling California precedent on the question whether California labor law applies to an employee who works for an out-of-state employer and does not work principally, or even for days at a time, in California.” The three certified questions are: (1) Do California Labor Code §§ 204 and 226 apply to wage payments and wage statements provided by an out-of-state employer to an employee who, in the relevant pay period, works in California only episodically and for less than a day at a time? (2) Does the California minimum wage law apply to all work performed in California for an out-of-state employer by an employee who works in California only episodically and for less than a day at a time? and (3) Does the California Labor Code § 226 apply to wage statements provided by an out-of-state employer to an employee who resides in California, receives pay in California, and pays California income tax on her wages, but who does not work principally in California or any other state?

The court further reasoned that these certified questions matter greatly to the many California residents who work only episodically in California and to the many employers who regularly send California residents to work outside of the state.  Ward v. United Airlines, Inc., 889 F.3d 1068 (9th Cir. 2018); Vidrio v. United Airlines, Inc., No. 17-55471 (9th Cir. 2018); Oman v. Delta Air Lines, Inc., 889 F.3d 1075 (9th Cir. 2018).

Administrative &Regulatory Initiatives (1 matter)

NEW JERSEY SIGNS IC MISCLASSIFICATION PARTNERSHIP AGREEMENT WITH U.S. DEPARTMENT OF LABOR.  The State of New Jersey and the U.S. Department of Labor have signed an independent contractor misclassification partnership agreement.  A News Release dated August 10, 2018 announced the three-year Memorandum of Cooperation between the Wage and Hour Division of the U.S. Department of Labor and the New Jersey Department of Labor and Workforce Development. The specific and mutual goals of this partnership include coordinating efforts to provide clear, accurate, and easy-to-access outreach to employers, employees, and other stakeholders, and to enhance enforcement by conducting coordinated investigations and sharing information consistent with applicable law. In New Jersey alone, auditors have reportedly identified more than $80 million in underreported employer contributions since 2010. The New Jersey Labor Commissioner stated, “One of the Labor Department’s core responsibilities is to safeguard workers from unscrupulous business practices, and to support responsible businesses by making sure everyone plays by the same set of rules. This partnership with U.S. DOL will help ensure that our business partners and the state’s workers all get the protections they deserve.”

Legislative Developments (3 laws)

VIRGINIA ESTABLISHES TASK FORCE TO COMBAT IC MISCLASSIFICATION.  Virginia Governor Ralph Northam has signed Executive Order on August 13, 2018 establishing an inter-agency task force to combat worker misclassification and payroll fraud. A 2012 report of Virginia’s Joint Legislative Audit and Review Commission (JLARC) found that one third of audited employers in certain industries misclassify their employees and that worker misclassification lowers Virginia’s state income tax collections as much as $28 million a year. The proposed task force will include representatives from the following agencies: the Virginia Employment Commission, the Department of Labor and Industry, the Department of Professional and Occupational Regulation, the State Corporation Commission’s Bureau of Insurance, the Department of Taxation, and the Workers’ Compensation Commission. Included among their responsibilities are reviewing statutes and regulations related to worker misclassification and payroll fraud; evaluating current enforcement practices of the agencies involved; developing procedures for more effective inter-agency cooperation and joint enforcement; and developing educational materials and an outreach strategy for employers. In a News Release issued on August 13, 2018, Governor Northam said, “Treating Virginia workers fairly is central to building an economy that works for everyone, no matter who you are or where you live. Every employer in the Commonwealth should be playing by the same rules and this task force will come up with a comprehensive plan to make sure workers aren’t missing out on the protections and benefits they would receive if properly classified.”

NEW MASSACHUSETTS NON-COMPETE LAW APPLIES TO INDEPENDENT CONTRACTORS.  Governor Charlie Baker of Massachusetts signed into law new, expansive non-compete legislation on August 10, 2018 that applies not only to employees but also to independent contractors. Under the new law, which the state Legislature had been considering for 10 years, Massachusetts employers must comply with new non-compete rules for agreements that are executed on or after October 1, 2018.  In the law, the term “employee” is defined as including independent contractors as well. The Massachusetts law reportedly aims to prevent overuse of non-competes by prohibiting their usage with employees and/or ICs who are: categorized as non-exempt under the Fair Labor Standards Act; part-time and full-time undergraduate or graduate students; terminated without cause or laid off; or under the age of 18. To be valid and enforceable, the non-compete must, among other things, be provided to the worker with his/her formal offer of employment or 10 days prior to the worker’s first day of work, whichever is earlier; generally be signed by the employer and the worker; be limited to a 12-month period; be no broader than necessary to protect certain legitimate business interests of the employer; and be reasonable in geographic reach and scope of proscribed activities in relation to the interests protected.

NEW YORK’S NEW SEXUAL HARASSMENT LAW NOW PROTECTS IC’S AS WELL.  The New York State Human Rights Law has been expanded to add sexual harassment protections for independent contractors.  As part of the New York State Budget Bill that was recently passed, the Human Rights Law was amended to provide that it is an unlawful discriminatory practice for an employer to permit sexual harassment of “non-employees” in its workplace.  Under the new law, an employer may be held liable to a non-employee who is a contractor, subcontractor, consultant, or vendor, when the employer, its agents, or supervisors knew or should have known that such non-employee was subjected to sexual harassment in the employer’s work-place, and the employer failed to take immediate and appropriate corrective action. This expansion is significant because, until now, employees were protected under the law when they were sexually harassed by independent contractors in the workplace, but independent contractors did not share the same protections with regard to sexual harassment as employees did. This new law will now provide recourse to the independent contractor and should heighten employers’ awareness to preventing and protecting against sexual harassment in their workplace against non-employees as well.

In carrying out the new law, the New York State Division on Human Rights issued on August 23 a Model Sexual Harassment Policy, which provides in part:  “[Employer Name] Policy applies to all employees, applicants for employment, interns, whether paid or unpaid, contractors and persons conducting business with [Employer Name].” It further provides: “New York Law protects employees, paid or unpaid interns, and non-employees, including independent contractors, and those employed by companies contracting to provide services in the workplace. A perpetrator of sexual harassment can be a superior, a subordinate, a coworker or anyone in the workplace including an independent contractor, contract worker, vendor, client, customer or visitor.”

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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