February 2018 Independent Contractor Misclassification and Compliance News Update

Locke Lord LLP

Last month was a busy and important month for IC misclassification and compliance law. Featured among the ten cases summarized below are the first-ever trial of an IC misclassification case in the on-demand, sharing economy (Lawson v. GrubHub Holdings, Inc.); oral argument before a state’s highest court over the test to be applied in IC misclassification cases (Dynamex Operations West v. Superior Court); and the U.S. Supreme Court accepting for review a case that may have far-reaching implications for companies operating across state lines that enter into IC agreements containing arbitration clauses with individuals classified as ICs (New Prime Inc. v. Oliveira).

In addition, there were three IC misclassification cases where the courts certified cases as class actions (involving educational consultants and trainers, cable technicians, and distributors of baked foods); one case where class action status was denied (involving delivery drivers); a decision compelling arbitration in an IC misclassification case where a client of a staffing company was able to piggy-back on the staffing company’s arbitration agreement; and filings of two new IC misclassification cases (involving port truckers and exotic dancers).

The cases reported below from February 2018 demonstrate that class action IC misclassification cases remain a thorn in the side of companies who use ICs either to supplement their workforce or as an integral part of their business model. But, that is because, with the exception of GrubHub, too many companies using ICs do so without the attention needed to structure, document, and implement their IC relationships in a manner that maximizes compliance with federal and state IC laws. And in the GrubHub case, the decision may well have turned out differently if the plaintiff was sympathetic instead of one whom the judge found to have engaged in “dishonest conduct” and “claimed ignorance of his dishonest conduct [was] not credible.”

How can companies minimize their exposure to IC misclassification liability? There are several ways, as more fully described in the latest White Paper posted on this blog, including restructuring, re-documenting, and re-implementing; re-distributing; and reclassifying. The only choice that is not recommended is standing still. Even companies like GrubHub, as we noted in our blog post reporting on its win at trial, could have tightened up its IC compliance even more – despite the fact that it was able to endure the judge’s close scrutiny. Thus, companies that feel that their IC relationships will likewise survive a legal challenge would be well advised to consider further enhancing their IC compliance. And for those businesses that have yet to upgrade their IC compliance, the GrubHub decision should be a positive signal that they, too, can structure, document, and implement their IC relationships in a lawful manner.

In the Courts (10 cases)

CALIFORNIA SUPREME COURT CONSIDERING WHETHER TO KEEP ITS CURRENT TEST FOR IC STATUS OR ADOPT A MORE WORKER-FRIENDLY TEST.  Oral argument was heard on February 6, 2018 in a key California Supreme Court case to determine if the courts in that state should continue a long-standing test in California for determining independent contractor status in cases involving wage and hour issues. As discussed in detail in our blog post of February 5, 2018, the case, involving the trucking company Dynamex, addressed the issue of whether the Supreme Court should continue to follow its time-honored holding from 1989 in S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations (which is roughly akin to a common law / economic realities test for determining IC status) or apply a far more rigorous standard as set forth in the 2010 holding in Martinez v. Combs.  The California Supreme Court had asked the parties to file supplemental briefs addressing whether the test for IC status in California should embody the standard set forth in 2015 by the New Jersey Supreme Court in Hargrove v. Sleepy’s LLC, where the courts in New Jersey were instructed to apply in wage and hour cases the same three-pronged “ABC” test formulated by the New Jersey legislature for IC status in unemployment cases. That decision is regarded as employee-friendly because, unlike most other IC tests including Borello, which consider and weigh a number of different factors when determining IC status, an ABC statute requires that each and every one of the three prongs of the ABC test be proven by a business to establish IC status.

While it is difficult, even for the most experienced practitioners, to predict how a court may rule based on questions and answers at oral argument, one of the most important exchanges was a question posed to the principal lawyer for the worker, who is a driver for Dynamex: would the worker be an employee or independent contractor under the Borello test?  The driver’s counsel, without any hesitation or equivocation, responded that the driver would be an employee under Borello.  This signifies that there is no need for the court to consider changing the test for IC status in California in this case. Generally, courts are reluctant to alter long-standing legal standards where the result in the case would not change. This may be one reason that the California Supreme Court chooses not to modify Borello at this time.  If a majority of judges feel that the Borello test should continue, they may choose not to “punt” at this time and instead affirmatively re-endorse Borello and reject any notion that California should join New Jersey and adopt an ABC test. The two most likely reasons for upholding Borello are that ABC tests are promulgated by legislatures, not by courts; and that Borello already includes all three prongs of the ABC test, but allows courts flexibility in applying all relevant factors when determining IC status. While the case has been on appeal for over three years, a decision is expected by or before this summer. Dynamex Operations West v. Superior Court (No. S222732).

GRUBHUB PREVAILS IN FIRST ON-DEMAND, SHARING ECONOMY CASE THAT HAS BEEN TRIED. GrubHub, Inc., an on-demand food delivery company, prevailed in an IC misclassification case that was tried this past fall in a California federal court.  The case was brought by a gig worker who made restaurant deliveries for the sharing economy company. The worker alleged that GrubHub misclassified him as an independent contractor. As noted in our blog post of February 8, 2018, the case drew sustained media attention during a non-jury trial in September 2017 because it was the first IC misclassification trial involving a gig economy business. In her lengthy opinion, Magistrate Judge Jacqueline Scott Corley, applying the Borello test, stated that while there were some facts that indicated some control by GrubHub over the manner and means by which the driver, Lawson, rendered his services, there were more facts that, in the judge’s view, supported the conclusion that GrubHub did not control the details of how Lawson accomplished his work. Among other factors supporting IC status, Judge Corley noted that GrubHub did not dictate the vehicle the driver used for deliveries or its condition and the driver did not have to have GrubHub signage on his vehicle, although the company made sure the vehicle was registered and insured and that Lawson had a valid driver’s license; GrubHub did not control the driver’s appearance while making deliveries; GrubHub did not require the driver to engage in any training or orientation, and did not provide the driver with a script to follow when interacting with customers; and GrubHub did not control whether and when Lawson would work and for how long, nor did it tell him what supplies, if any, he needed to have with him.

Although the judge found some instances of control, including the fact that  GrubHub could terminate the contractual agreement with the driver at will with 14 days’ notice,  determined the rates the driver would be paid and the fees customers would pay for delivery service, and dictated which blocks of time to make available for driver selection and the geographical boundaries of the delivery zones, Judge Corley stated that such control was not exercised over the manner and means of performing the services, but rather over the result of the work – to ensure diners received their meals in a timely fashion. In evaluating eight “secondary factors” used under the Borello decision to determine IC status, the judge found that three favored GrubHub, four favored the driver, and one was neutral. Thus, the case was what is commonly referred to as falling into a “gray area” where a change in one or two key facts may well change the outcome of the case. As noted in our blog post, one of the keys to the judge’s decision in GrubHub’s favor was because she discredited the driver, finding that he engaged in “dishonest conduct” and that his “claimed ignorance of his dishonest conduct is not credible.”  As a result, it appeared that the judge credited the testimony of GrubHub’s witnesses where there was disputed testimony on a key issue of fact. Finally, the judge distinguished a case that she said “has facts similar to those the Court found here.” By focusing on the differences between the facts in that case and this one, the judge confirmed that her decision in the GrubHub case was not a validation of IC status for all gig economy companies that use an IC model, but rather a recognition that the facts matter, and, in this case and this case alone, those facts favored IC status. Lawson v. GrubHub Holdings, Inc., No. 15-cv-05128 (N.D. Cal.).

U.S. SUPREME COURT ACCEPTS CASE INVOLVING THE INTERSECTION OF IC AGREEMENTS WITH THE FEDERAL ARBITRATION ACT.  The United States Supreme Court has decided to resolve the issue of whether Section 1 of the Federal Arbitration Act, which exempts from the purview of the statute any “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce” (emphasis added), includes workers who have signed independent contractor agreements. According to the petition for certiorari, the plaintiff in the underlying claim is an independent contractor driver whose agreement with New Prime, Inc., an interstate trucking company, includes a mandatory arbitration provision requiring that all workplace disputes be arbitrated with New Prime on an individual basis. The driver filed a proposed class action in court alleging, among other things, claims for unpaid wages due to misclassification as an independent contractor.  In opposition to the company’s motion to compel arbitration, the worker claimed that his IC agreement is a “contract of employment” covering him as a worker engaged in interstate commerce.

According to the petition to the Supreme Court, New Prime claims that the U.S. Court of Appeals for the 1st Circuit misread the exemption and applied it far too broadly when it held that the term “contracts of employment” should include independent contractor agreements. Prime stated in its petition that, “Without the ability to include enforceable arbitration provisions in contracts governing independent contractors, the entire transportation industry will be relegated to resolving all disputes arising out of such contracts in court, notwithstanding the contrary intentions of the parties.” New Prime Inc. v. Oliveira, No. 17-340 (U.S. Sup. Ct. Feb. 26, 2018).

EDUCATIONAL TRAINERS AND CONSULTANTS GRANTED CONDITIONAL CERTIFICATION IN CLASS ACTION ALLEGING IC MISCLASSIFICATION.  An Alabama federal court granted conditional collective action certification for on-site educational trainers and consultants nationwide in an IC misclassification action alleging wage and hour violations of the federal Fair Labor Standards Act and state wage and hour laws. The lawsuit was brought against Medfirst Consulting Healthcare Staffing Inc., a company that sells information technology and educational services to healthcare providers across the U.S. The company helps healthcare companies find consultants to implement and customize industry-specific software and train personnel to use it. The Company maintains a network with thousands of consultants.  Plaintiffs alleged that they signed contracts that contained restrictive covenants; received training about the software and methods for training medical personnel; were supervised by Medfirst; had to submit timesheets and expense reports; and were required to report their job performance to the company. In deciding to conditionally certify a class of trainers and consultants, the court concluded that the named plaintiffs presented a reasonable basis for finding that they are similarly situated to the proposed members of the collective class; that “the universal failure to provide overtime pay strongly suggests, at least at this stage, that [the Company]applied common pay policies to all of its trainers and consultants”; and that the economic realities test could be readily applied on a class-wide basis regarding the alleged misclassification issue. Kiley v. Medfirst Consulting Healthcare Staffing, LLC, No. 17-cv-1756 (N.D. Ala. Feb. 23, 2018).

CABLE TECHNICIANS GRANTED CONDITIONAL CERTIFICATION IN IC MISCLASSIFICATION CASE.  A Louisiana federal court granted conditional certification of a collective action under the FLSA brought by cable technicians against Cable Marketing & Installation of Louisiana, Inc.  The technicians claim that they were denied minimum wage and overtime under the FLSA due to their misclassification as independent contractors.  In determining that the technicians who performed services for the company while classified as independent contractors were similarly situated, the court found that all of the technicians worked under the same agreement; the company exerted some control over the technicians’ working conditions; all technicians were paid on a piece rate; all of the technicians performed the same type of work; a cap was placed on technician compensation; and technicians were assessed chargebacks for substandard work resulting in their alleged underpayment. Overall, the court concluded that the technicians were similarly situated with respect to job requirements, pay provisions, and elements under the FLSA’s economic reality test. Hobbs v. Cable Marketing & Installation of Louisiana, Inc., No. 17-cv-4766 (E.D. La. Feb. 6, 2018).

DISTRIBUTOR OF FLOWERS FOODS’ SUBSIDIARY IN SAN ANTONIO WINS COLLECTIVE CERTIFICATION IN IC MISCLASSIFICATION CASE.  A Texas federal court has granted the motion for conditional certification brought by a distributor of a San Antonio subsidiary of Flower Foods, Inc., a nationwide baked goods/snack foods company, where the distributor alleges that he and other distributors for the San Antonio company were misclassified as independent contractors. The court found that the proposed class members’ claims were sufficiently similar to the plaintiff to merit sending notice of the collective action to potential class members. Specifically, through his pleadings and affidavit, the court found that the plaintiff made a sufficient showing that all distributors regularly worked over 40 hours and did not receive overtime compensation; they performed similar work in the company’s bakery and warehouse operations; contracts were entered into between the parties without any input from the distributors; and distributors were not permitted to carry any competing products in their delivery vehicles.  In its decision, the court noted that other courts have granted conditional certification in IC misclassification cases involving distributors for several different Flower Foods’ affiliates. Wiatrek v. Flowers Foods, Inc., No. SA-17-CV-772 (W.D. Tex. Feb. 5, 2018).

DELIVERY DRIVERS IN NEW JERSEY DENIED CLASS CERTIFICATION IN IC MISCLASSIFICATION CASE.  A federal court judge in New Jersey has denied the motion of delivery drivers who brought a proposed class action for alleged violations of ERISA, the Family Medical Leave Act, and the New Jersey Wage Payment Law as a result of alleged misclassification of the drivers as ICs.  The court found that the drivers failed to establish that the putative class members were “ascertainable.” The court explained that a plaintiff seeking certification of a federal class action must prove by a preponderance of the evidence that the class is ascertainable, requiring the plaintiff to show that (1) the class is defined with reference to objective criteria; and (2) there is a reliable and administratively feasible mechanism for determining whether proposed class members fall within the class definition. After reviewing the parties’ briefs and deposition testimony of the paralegal responsible for analyzing the data and documents to determine the scope of the proposed class, the court concluded that the methodology used by the plaintiffs to determine who worked full-time, who did not receive overtime pay, and who was subject to company deductions did not satisfy the two-part test for ascertainability. The court stated that there were gaps in time of some of the records relied upon by the paralegal that made assessing the class size “tenuous or speculative” and there was no way of knowing whether the carrier paid drivers overtime compensation.  Hargrove v. Sleepy’s, LLC, No. 10-cv-1138 (D.N.J Feb. 28, 2018).

CLIENT OF STAFFING COMPANY IS THIRD PARTY BENEFICIARY OF AN IC AGREEMENT’S ARBITRATION CLAUSE CONTAINING A CLASS ACTION WAIVER.  An Illinois federal court granted a motion to compel arbitration of the IC misclassification claims by drivers who provided services to automotive parts distributor, Worldpac Inc., even though Worldpac was not a party to the IC agreement.  The drivers alleged that Worldpac, which used staffing company Partsfleet to contract with drivers needed by Worldpac to deliver the auto parts to its customers, violated overtime and minimum wage provisions of the FLSA and various state and local laws due to misclassification of the drivers as independent contractors. The drivers did not sue Partsfleet but rather Worldpac, presumably hoping to avoid being compelled to arbitrate their claims under the arbitration provisions contained in the Partsfleet IC agreement. In response to Worldpac’s motion to compel arbitration, the drivers argued that they were not obligated to arbitrate their claims because Worldpac was not covered by the agreement. The court disagreed with the drivers, holding that Worldpac, as a third party/intended beneficiary to the agreement, was entitled to enforce the arbitration provision, which stated that it was intended to apply to all controversies involving the staffing company “or its customers.” Brown v. Worldpac, Inc., 17 CV 6396 (N.D. Ill. Feb. 1, 2018).

PORT TRUCKERS BRING ANOTHER IC MISCLASSIFICATION CLASS ACTION AGAINST A LOGISTICS COMPANY.  Port truckers have brought yet another proposed class action in the drayage industry, this time against a trucking subsidiary of XPO Logistics Inc. in Los Angeles County Superior Court.  The drivers claim wage and hour violations of the California Labor Code due to alleged misclassification of the drivers as independent contractors and not employees. The drivers reportedly seek over $1 million for more than 160 port and rail drivers in restitution for failure to pay at least the minimum wage, unpaid wages for meal and rest breaks and non-driving work such as wait time to pick up loads, and unlawful deductions for operational expenses, administrative fees, and insurance costs. According to the complaint, the company controls when drivers work and which loads they haul; requires drivers to conduct daily truck inspections; and requires drug testing of the drivers. The drayage trucking industry has been besieged by IC misclassification lawsuits not only by class action lawyers but most recently by the City of Los Angeles, as noted in our January blog updateAlvarez v. XPO Logistics Cartage LLC, No. BC695123 (Los Angeles Super. Ct. Feb. 26, 2018).

NEW IC MISCLASSIFICATION CASE BROUGHT BY EXOTIC DANCERS AGAINST ADULT ENTERTAINMENT CLUB. An exotic dancer has brought a proposed collective action against Georgia gentlemen’s club, Peaches of Atlanta, claiming minimum wage and overtime compensation violations of the FLSA due to misclassification of herself and other dancers as independent contractors instead of employees. According to the plaintiff, the dancers’ only compensation was in the form of tips from Club patrons and the Club had a “practice of siphoning away those tips to distribute to non-tip eligible employees.” The collective action complaint alleges that the dancers were employees and not ICs under the economic realities test because the Club had the power to hire, fire and discipline the dancers; required the dancers to work a certain number of days during the week, including one “slow day”; required each dancer to audition before hire; required the dancers to wear certain clothing on specific days of the week; determined the rate and method of payment for the dancers; required the dancers to tip out other employees at the end of the shift, such as the DJ, House Mom and Club owner; maintained attendance records; scheduled mandatory meetings; assessed fines if days of work/meetings were missed; and controlled the music used by the dancers. Lawson v. Clean City, Ltd. d/b/a Peaches of Atlanta, No. 18-cv-579 (N.D. Georgia Feb. 6, 2018).

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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