February 2016 Independent Contractor Compliance and Misclassification News Update

by Pepper Hamilton LLP

In February 2016, two federal appellate courts ruled in favor of companies in IC misclassification cases: one where the NLRB was reversed in a decision where the agency had found stagehands to be employees and not ICs; the other where an appellate court gave a small but important victory to FedEx Ground in its IC misclassification fight in Massachusetts under the nation’s strictest test for IC status. At the same time, two cases involving food companies are highlighted below: one where merchandisers who maintained shelf space in food stores filed a new lawsuit against Pepperidge Farm under the Illinois wage laws; the other where a nationwide food manufacturer tried to win its IC misclassification class action on a motion for summary judgment but was unable to do so and will instead now have to convince a jury in North Carolina that it properly classified distributors.

One of the more notable developments in February was just reported two days ago, when a Buzzfeed article noted that the drivers delivering items for Amazon Now’s new 2-hour rush order service have been reclassified as employees just months after the filing of a class action lawsuit alleging that they were misclassified as ICs and deprived benefits under California law. The corporate decision to re-classify drivers in the Amazon.com case highlights the need for companies to “play it smart” when initially structuring, documenting, and implementing their IC relationships so they remain free from preventable lawsuits in situations where the individuals are not subject to direction and control over the manner and means by which they perform their services.  That was also the thrust of an article noted below in “Other Noteworthy Matters.” American City Business Journals reported on two approaches to the issue of independent contractor classification: “play it safe” by classifying all workers in the gray area as employees, or “play it smart” by using tools such as IC Diagnostics™ to maximize compliance when structuring, documenting, and implementing IC relationships.

In the Courts (4 cases) 

  • NLRB REVERSED BY FEDERAL APPELLATE COURT ON INDEPENENT CONTRACTOR STATUS OF STAGE HANDS RETAINED BY REFERRAL SERVICE. The Court of Appeals for the Eleventh Circuit reverses the National Labor Relations Board and finds that the NLRB misapplied the law of agency when it ruled that local freelance stagehands were employees of a referral service and not independent contractors. The referral service, Crew One Productions, referred stagehands to event producers for sporting, business, musical and other events in the Atlanta area. Once a contract was entered between Crew One and an event producer, stagehands that were in Crew One’s database were e-mailed information about the particular engagement and, on a first-come, first served basis, could accept the offer. Following the filing of a petition by the International Alliance of Theatrical Stage Employees to represent the stagehands, the NLRB found the stagehands to be employees and directed an election, which was won by the union, leading to review by the Eleventh Circuit. In reversing the Board’s decision and finding that the stagehands were independent contractors and not employees, the appeals court found that Crew One had no right to and did not exercise any control over the manner, means, and details of the stagehands’ services; any such control, the court found, was exercised by the clients of Crew One. The court also concluded that the NLRB erroneously found that the stagehands performed essential functions of Crew One’s operations, whereas the court noted that Crew One is in the business of referring stagehands to event producers, not performing stagehand work itself. Crew One Productions, Inc. v. NLRB, No 15-10429 (11th Cir. Feb. 3, 2016).
  • PEPPERIDGE FARM SUED FOR MISCLASSIFICATION OF SALES DEVELOPMENT ASSOCIATES AS IC’S. Pepperidge Farm, Inc., a manufacturer and seller of snack and bakery goods, is sued in Illinois federal district court in a class action by sales development associates (SDAs) claiming misclassification as independent contractors instead of employees in violation of the Illinois Wage Payment and Collection Act and the Illinois Minimum Wage Law. According to the complaint, the SDAs performed delivery, stocking, merchandising, promotional, and removal services on behalf of Pepperidge Farm at various stores within defined territories. The plaintiffs claim that Pepperidge Farm did not negotiate any of the terms contained in the Consignment Agreement it required SDAs to sign; SDAs are prohibited from distributing any products that are competitive with those of Pepperidge Farm, unless prior written consent is given; Pepperidge Farm reserves the right to establish sales and/or distribution goals; SDAs must provide and maintain a delivery truck and computer that meets specifications set by the company; Pepperidge Farm unilaterally dictates the amount of products the SDAs are required to deliver to each customer and determines the retail sales prices; the SDAs are required to follow a code of appearance and conduct; and the activities of the SDAs are carefully monitored for quality assurance and efficiency by Pepperidge Farm. Mulhern v. Pepperidge Farm, Inc., No. 1:16-cv-02199 (N.D. Ill. Feb. 12, 2016).
  • FLOWERS FOODS FAILS TO WIN SUMMARY JUDGMENT IN IC MISCLASSIFICATION CLASS ACTION BY DRIVERS. On February 12, 2016, a federal district court in North Carolina denied a motion for summary judgment by Flowers Foods that sought to dismiss a class action lawsuit filed against it by distributors who claim the company misclassified them as independent contractors and thereby denied them overtime under federal and state wage laws. The distributors purchased distribution rights to sell and distribute food products to customers in a defined territory. They agreed to do so in accordance with “good industry practice,” which was defined in their Distributor Agreements as properly ordering products; keeping shelves stocked with Flowers products; keeping store shelves in good condition in conformance with a planogram; properly rotating products on a regular basis; promptly removing all stale products; meeting customer service requirements; maintaining proper service and delivery to all outlets requesting service; and maintaining all equipment in a sanitary condition and in good, safe working order. The distributors claim that they are required to deliver products to retailers within certain timeframes every service day; must stock products according to predetermined planograms; and can only deliver, order, and stock the products that a retailer has approved with Flowers Foods. According to Flowers Foods, the Distributors determine the type of product and quantity to be delivered to a particular customer, and quantity can be adjusted based upon the customers’ needs, historical sales, and other variables such as weather and holidays. In the course of arguing the motion, Flowers Foods acknowledged that there were issues of fact regarding the IC status of the distributors that could not be resolved on a motion for summary judgment and would have to be resolved by a jury. The company’s alternative argument that the distributors were exempt from overtime in any event as “outside salespersons” even if they are employees under the wage laws, was also denied; the court found that, like the question of their status as ICs, their exempt status also presented issues of fact that could only be resolved at trial. Rehberg v. Flowers Baking Company of Jamestown, LLC, No. 3:12-cv-00596-MOC-DSC (W.D.N.C. Feb.16, 2016).
  • FEDERAL APPEALS COURT HOLDS THAT MASSACHUSETTS WAGE LAW BARRING INDEPENDENT CONTRACTORS IS PARTIALLY PRE-EMPTED BY FEDERAL LAW GOVERNING MOTOR CARRIERS. FedEx has prevailed in maintaining a defense to a class action IC misclassification lawsuit brought against it by its Ground Division drivers in Massachusetts seeking damages under the Massachusetts Independent Contractor Law. In a lengthy decision issued by the U.S. Court of Appeals for the First Circuit, the appellate court finds that the Federal Aviation Administration Authorization Act (FAAAA) pre-empts one portion of the Massachusetts law that sets forth the test for independent contractor status of individuals providing services in that state. The Massachusetts law is the strictest version of a type of statute referred to as an “ABC” law requiring companies to establish three prongs of a test in order to establish the IC status of workers providing services. The second prong of the test, commonly called the “B” prong, requires that the company show that the services of the person classified as an IC “is performed outside the usual course of the business of the employer.” That prong, according to the First Circuit, constitutes a form of “regulatory interference” that the FAAAA preempts in the case of federally registered motor carriers. The other two prongs of the ABC test, according to the court, must still be satisfied by FedEx to establish the IC status of the drivers. Schwann v. FedEx Ground Package System, No. 15-1214 (1st Cir. Feb. 22, 2016).

Regulatory and Enforcement Initiatives (1 item)

  • U.S. LABOR DEPARTMENT NOW FOCUSING ON IC MISCLASSIFICATION IN HOME HEALTH CARE FIELD. David Weil, Administrator of the Wage and Hour Division of the U.S. Department of Labor, writes in a blog post on February 25, 2016 that the home care industry is a current focus where the DOL has “worked hard to update the rules to guarantee minimum wage and overtime protections” and to continue to combat IC/employee misclassification. Dr. Weil stated: “As of Jan. 1, 2016, the [home care minimum wage and overtime] rule is being fully enforced and we are working to ensure that basic wage rights are guaranteed to those they are intended to protect. Employers should use care to ensure their workers are properly classified and that employees are paid at least the minimum wage and overtime.”  

Other Noteworthy Matters (3 items)

  • AMAZON PRIME DELIVERY DRIVERS REPORTEDLY RECLASSIFIED AS EMPLOYEES FOLLOWING CLASS ACTION IC MISCLASSIFICATION LAWSUIT. As reported in our blog post of October 28, 2015, Amazon.com and the companies that retained drivers who delivered Amazon products within two hours of being ordered through Amazon’s “Prime Now” app were sued by the drivers in a proposed class action in Los Angeles County Superior Court. The drivers claimed that they had been misclassified as independent contractors and should instead have been treated as employees and paid for an array of state labor and employment benefits that independent contractors (who are paid on a 1099 basis) are not eligible to receive – unless they have been misclassified. Now, just five months later, the drivers have reportedly been reclassified as employees by the companies that formally retained their services, according to a February 29, 2016 article by Carolyn O’Donovan in Buzzfeed. This type of reclassification will stem any alleged damages claimed by the drivers and indicates that the companies retaining the drivers for Amazon may have imperfectly structured, documented, and/or implemented their IC relationship with the drivers from its inception.  
  • FINAL OBAMA BUDGET PROVIDES $10 MILLION TO COMBAT INDEPENDENT CONTRACTOR MISCLASSIFICATION. President Obama released his Fiscal Year 2017 Budget on February 9, 2016 and funds earmarked to crack down on IC misclassification remain in the Budget. The Department of Labor’s Budget in Brief outlined the following points regarding misclassification of employees: “The Budget also expands funding for efforts to ensure that workers receive back wages they are owed and cracks down on the illegal misclassification of some employees as independent contractors, a practice that deprives misclassified workers of basic protections like unemployment insurance, workers’ compensation, and overtime.” Specifically, the budget includes $10 million to improve state efforts to detect and remedy misclassification of workers as independent contractors.
  • “PLAY IT SAFE” OR “PLAY IT SMART” WHEN CLASSIFYING WORKERS WHO FALL IN THE “GRAY AREA.” Richard Reibstein, one of the publishers of this blog, writes in a February 23, 2016 blog post about an article written recently by Frances McMorris of American City Business Journals. McMorris identified two approaches that companies can take when deciding whether to use an independent contractor or employee business model where the individuals providing services are in the “gray area.” She first quotes a Florida lawyer who suggests that companies in that instance “play it safe” and classify the workers as W-2 employees. She then asked Reibstein about any other compliance approaches. He noted: “At Pepper Hamilton, [the firm] helps clients improve their compliance with a proprietary system known as IC Diagnostics. It reviews as many as 60 to 70 different factors to determine classification and whether a company’s system needs to be revamped. With IC Diagnostics, Reibstein said, “you keep your business model but you tailor it to the law. You tweak it, you restructure it, you re-document it, [and] you re-implement in a way that [enhances compliance] with the law” – i.e., you “play it smart” using IC Diagnostics™. Ms. McMorris then listed a few of the many things companies can do to maximize compliance: “Among the actions Reibstein counsels businesses who use independent contractors to avoid are: Needlessly directing and controlling actions [that] may transpire [in the ordinary course] without [exercising any] direction and control. For example, Reibstein said, ‘You don’t have to direct a contractor to provide services between 9 and 5 when your business is [only] open between those hours. When else can they do the work?’ ‘You don’t need to prevent or restrict a contractor [from] delegating responsibility or duties to others.’ Avoid paying for expenses of the contractor and work out a fee that includes those costs. ‘If someone wants $10 hour plus expenses, [negotiate an all-in rate of] $12 an hour,’ Reibstein said.

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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