December 2016 Independent Contractor Misclassification and Compliance News Update

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In our update below for last month’s developments in this area of the law, we report on five significant court cases involving companies in the transportation industry that use ICs as an integral part of their business model. Each of the cases suggests rough sailing for such businesses if they do not enhance their compliance with IC laws.

As we reported in our last blog post, the U.S. Department of Labor has stated that “Even if you are a legitimate independent contractor under one law, you may still be an employee under other laws.” Enhancement of IC compliance, therefore, requires a deep understanding not only of the tests for IC status under various federal laws but, even more importantly, a solid understanding of IC tests under all applicable state laws.

In our 2015 White Paper on “How Companies Can Minimize the Risks of Independent Contractor Misclassification,” we stated that a compliance analysis using a process such as IC Diagnostics™ “should measure the company’s anticipated compliance with each of the applicable independent contractor laws. . . . Even for businesses that operate in those states that have strict tests for determining independent contractor status, this process can provide an assessment of how [best to] minimize or eliminate future misclassification liability.”

Lastly, we report on an NLRB case where a complaint was issued against a nationwide home improvement retailer for literally doing nothing more than treating certain workers as independent contractors and requiring them to sign agreements treating them as such including arbitration agreements with a class action waiver. Previously, all other NLRB complaints involving independent contractors alleged traditional violations of the National Labor Relations Act, such as threats and interrogations regarding protected activity, if the workers involved were employees under the NLRA and not ICs. In those cases, the claim that the company had violated the NLRA by misclassifying workers as ICs can be viewed as an “add on” unfair labor practice charge.

In this latest NLRB case, because the Board regards the waiver of the right to bring or join a class and collective action as an independent violation of the NLRA, the General Counsel of the NLRB may well have pleaded the misclassification charge as an “add on.” These types of IC complaints may continue to be issued until the term of the current General Counsel, a former top lawyer for a leading industrial union, expires in November 2017 and a new General Counsel is appointed by the incoming President.

In the Courts (5 cases)

MASSACHUSETTS HIGH COURT REVERSES WIN FOR “LAST MILE” LOGISTICS COMPANY IN IC MISCLASSIFICATION CASE. The highest state court in Massachusetts reverses a grant of summary judgment in an IC misclassification class action by drivers against RDI Logistics, Inc., a furniture delivery company that provides “last mile” delivery services for large retail companies. The Supreme Judicial Court of Massachusetts rejected the company’s argument that the Massachusetts IC misclassification statute was pre-empted in its entirety by the Federal Aviation Administration Authorization Act (FAAAA).  It concluded that while a portion (Prong 2) of the three-pronged statutory test for IC status is pre-empted by the FAAAA for businesses in this industry, the remaining portions (Prongs 1 and 3) were severable and that the company was required to show that both of those remaining two prongs were met if it wished to defeat the drivers’ IC misclassification claim.

Summary judgment was also reversed on the ground that the drivers lacked standing to bring suit under the IC statute because the statute’s protections apply only to “individuals” who perform services and the drivers, in contracting with the company, did so through their own corporate entities, thereby foreclosing any IC misclassification claims. The court stated that the statute does not expressly exclude individuals who provide services through a corporation and referenced the state Attorney General’s Advisory, which noted that businesses created and maintained in order to avoid application of the IC statute would not immunize employers against enforcement. The court concluded that there were enough facts presented by the plaintiff drivers to establish a genuine issue of fact as to whether the drivers have standing under the law, including evidence that the drivers formed corporations only to be able to contract with RDI, the drivers did not perform work for anyone other than RDI, and the drivers were forbidden from performing work for any other companies besides RDI. In the court’s view, “[t]hese allegations raise the question whether the plaintiffs incorporated for their own benefit, as the defendants’ suggest, or whether RDI required them to incorporate in order to misclassify them as independent contractors.” Chambers v. RDI Logistics Inc., No. SJC-12080 (Sup. Jud. Ct. Mass. Dec. 16, 2016).

CALIFORNIA COURT DENIES MOTIONS FOR SUMMARY JUDGMENT IN IC MISCLASSIFICATION CLASS ACTION AGAINST ANOTHER LOGISTICS COMPANY AND ORDERS CASE TO TRIAL. A California federal court denies competing summary judgment motions brought by the same day delivery, logistics, and courier service, Dynamex Operations West, LLC, and by individual drivers in an IC misclassification collective action under the FLSA for unpaid minimum wage and overtime compensation. Two years after the commencement of the 2013 action, the Court issued an order in October 2015 conditionally certifying a collective action of all drivers who performed delivery work for Dynamex in California who signed the same IC agreement. In September 2016, the court denied Dynamex’s motion to decertify the collective action, and counsel for plaintiffs was directed to identify the single individual with the strongest case for misclassification against Dynamex. Both sides were then invited to bring summary judgment motions regarding that selected individual driver. On December 4, 2016, the Court denied the motions of both parties regarding misclassification, concluding that there were too many fact issues to grant either side’s motion. Among the issues to be tried included whether or not the drivers were required to wear a uniform, whether the drivers actually wore one, and whether it was a customer requirement; whether there were mandatory meetings for the driver; and how the driver received the details of his deliveries. Saravia v. Dynamex, Inc., No. C 14-05003 (N.D. Cal. Dec. 4, 2016).

NEW YORK FEDERAL COURT DENIES FEDEX GROUND’S MOTION TO DISMISS IC MISCLASSIFICATION CLASS ACTION. A New York federal court denies FedEx Ground’s motion to dismiss class action claims of IC misclassification and unlawful deductions from pay under the New York Labor Law and the state’s Commercial Goods Transportation Industry Fair Play Act.  According to the complaint, the drivers, who each signed Operating Agreements with FedEx, alleged that they were directed and controlled by FedEx, not only as to the result to be accomplished, but also  as to the manner and means by which the result was to be accomplished, including supervision by FedEx managers; required compliance with detailed instructions regarding written and unwritten company policies, procedures and directives; required training and attendance at meetings for drivers; requirements that drivers use specific FedEx signage and logos on trucks; and payments from FedEx to drivers that were subject to deductions to cover use of FedEx scanner, cost of FedEx uniforms, liability and workers’ compensation insurance, performance-based penalties, and truck lease payments. In allowing the putative class action to proceed, the federal court concluded that the drivers had plausibly alleged that they were employees under the New York common law test, regardless of whether they had been labeled as ICs under the Operating Agreements, and rejected FedEx’s argument that “it is not a ‘commercial goods transportation contractor’ under the Fair Play Act because pursuant to the Operating Agreements, FedEx Ground did not pay the Plaintiffs directly, but rather paid ‘the companies they drove for.’” Padovano v. FedEx Ground Package System Inc., No.16-cv-00017 (W.D.N.Y. Dec. 6, 2016).

UBER CANNOT DISMISS DRIVERS’ “ON CALL” WAGE CLAIM IN IC MISCLASSIFICATION CASE. A Pennsylvania federal court denies Uber’s motion to dismiss an “on-call” wage claim in an IC misclassification class action lawsuit filed against Uber by UberBLACK limousine drivers.  The drivers assert claims for unpaid minimum wage and overtime and include a claim for payment of hours during which they were “logged into” the Uber app. As more fully discussed in our blog post of December 16, 2016, the drivers claimed that they are “on call” while logged on to the Uber app awaiting ride requests.  In response, Uber argued that the drivers failed to allege any facts to suggest that they were “actually working” within the meaning of the law, “just because they were logged in.” In its decision, the Court cited Supreme Court and Third Circuit precedent and Department of Labor regulations that on-call time may be compensable if the time “on call” is so restricted that it interferes with the driver’s personal pursuits. In reaching its decision, the Court referenced the allegation that drivers who refuse a fare are subject to suspension and termination.  The court concluded that the allegations were sufficient to plead a viable claim that the drivers were restricted in their personal pursuits. This case may well spur plaintiffs’ class action lawyers to bring more “on-call” wage claims against on-demand businesses that use ICs to provide in-person services to their customers. Razak v. Uber Technologies, No. 16-cv-573 (E.D. Pa. Dec. 14, 2016).

FLOWER FOODS AGREES TO PAY $9 MILLION IN SETTLEMENT OF DISTRIBUTORS’ IC MISCLASSIFICATION CASE. Flowers Foods Inc., one of the largest producers of packaged bakery foods in the United States, including Wonder Bread, agreed to settle a class action lawsuit brought against it by bakery foods distributors who alleged they were misclassified as independent contractors. The proposed settlement amount of $9 million to resolve claims brought under the federal Fair Labor Standards Act and North Carolina wage laws is subject to court approval. Flowers Foods filed a Form 8-K with the U.S. Securities and Exchange Commission advising shareholders that the proposed agreement includes $5.2 million in settlement funds and $3.8 million in attorneys’ fees. The settlement covers approximately 270 distributors as well as other non-economic terms that are intended to strengthen and enhance the IC model which remains in place. Rehberg v. Flowers Foods, Inc., No. 12-cv-596 (W.D.N.C. Dec. 9, 2016). 

Administrative and Regulatory Initiatives (2 items)

LABOR DEPARTMENT CREATES NEW IC MISCLASSIFICATION WAGE PAGE THAT MAY ENCOURAGE 1099’ERS TO FILE CLAIMS AGAINST BUSINESSES. The U.S. Department of Labor creates a new independent contractor misclassification web page, www.dol.gov/featured/misclassification, which may encourage workers to file complaints and prompt businesses to enhance IC compliance. As discussed in our blog post of December 19, 2016, the Labor Department reissued its resources on IC misclassification and grouped them together with resources from other federal and state agencies on the subject. Our review of the posted materials reveal that no new useful information was included. Rather, the new web page included some the items that were more than 15 years old and others were more likely to confound and confuse those consulting the web page for assistance and education. The web page also highlights links to “Myths about Misclassification” and an abbreviated version of the “Myths” web page. As we reported in our blog post of August 22, 2016, the “Myths” document when issued was not an accurate restatement of the law.  Following our blog post, the Labor Department subsequently took down the page, made some revisions, and reissued it, yet still perpetuated its misapprehension that the test for IC status under the FLSA is a one-factor test – economic dependence. One likely impact of the new site will be increased awareness by workers that they may be misclassified, increased reporting and filing of complaints or enforcement actions by state and federal agencies, and more class action suits alleging IC misclassification. Another likely result is that more businesses will seek to enhance their IC compliance by the use resources like IC Diagnostics™ to minimize their risk of IC misclassification liability.

NLRB ISSUES ANOTHER IC MISCLASSIFICATION COMPLAINT. The Minneapolis regional office of National Labor Relations Board issues a complaint against Wisconsin-based national home improvement retailer, Menards, alleging that the company misclassified thousands of delivery drivers as ICs and not employees in violation of the National Labor Relations Act. The complaint, based on charges brought by the Office and Professional Employees International Union Local 153 in August and September 2016, alleges that the company interfered, restrained and coerced employees in the exercise of their Section 7 rights by maintaining a mandatory arbitration clause in its employee handbook that prohibits workers from filing collective or class-wide legal actions in any forum, legal or arbitral and prohibits them from filing unfair labor practices with the NLRB; and misclassifying the delivery drivers as ICs. According to the complaint, the remedies being sought by the NLRB include an order requiring the company to rescind or revise the mandatory arbitration clause on a nationwide basis and rescind or revise any portion of any agreements classifying the drivers as ICs NLRA; and for the company to cease and desist from communicating to the drivers that they are ICs under the NLRA. Unlike prior complaints issued by the NLRB against a company that allegedly has misclassified employees as ICs, there are no independent violations of the NLRA alleged in this case that are not dependent on the classification of the workers. Menard, Inc. v. Local 153, Office & Professional Employees International Union, AFL-CIO, Case 18-CA-181821 (NLRB Region 18, Dec. 22, 2016).

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