February 2019 Independent Contractor Misclassification and Compliance News Update

Locke Lord LLP

One need only glance at the court cases we report on below to understand why some businesses choose to settle independent contractor misclassification cases.  Three of these cases highlight the unpredictable approaches appellate courts have taken in deciding IC misclassification cases.

To illustrate, in February, one federal appellate court reversed a federal district court judge, who had held that off-duty police officers were ICs, while another reversed a district court judge who held that oilfield consultants were not ICs.  A third federal appellate court this past month reversed a decision by a district court that granted a motion for judgment on the pleadings finding convenience store franchisees were ICs.

The lack of certainty in the outcomes of IC misclassification lawsuits has led many companies that make use of independent contractors to embark on programs to enhance their level of IC compliance with federal and state laws.  Programs such as IC Diagnostics™ offer a process to elevate compliance with IC laws by restructuring, re-documenting, and re-implementing independent contractor relationships without altering a company’s underlying business model.  Not all IC relationships are sustainable under applicable IC laws, but most are – and can be adjusted in a customized manner to comply with federal and almost all state laws.

In past monthly news updates, we reported on a number of cases that involved arbitrations of IC misclassification class actions.  Surprisingly, none of the eight cases that came to our attention in February deal with arbitration issues. While arbitration clauses with class action waivers are not a panacea for companies utilizing ICs, part of the IC Diagnostics process includes adding a state-of-the art arbitration clause that is likely to be effective in overcoming anticipated challenges by plaintiffs’ class action lawyers.

In the Courts (8 cases)

OFF-DUTY POLICE OFFICERS MOONLIGHTING AS SECURITY GUARDS HELD TO BE EMPLOYEES AND NOT IC’S IN MISCLASSIFICATION CLASS ACTION.  The U.S. Court of Appeals for the Sixth Circuit held that police officers moonlighting as private security and traffic control personnel for customers of Off Duty Police Services, Inc. (ODPS) were misclassified as independent contractors instead of being classified as employees.  ODPS offers private security and traffic control services in Kentucky, engaging both sworn officers (those currently working for law-enforcement entities) and nonsworn workers (those who typically have no law enforcement background). Customers contact ODPS specifying the profiles of the workers they are seeking; ODPS then offers the assignment to those in its network matching the specific qualifications requested. The Department of Labor initiated this FLSA suit alleging that all of ODPS’s workers are employees entitled to overtime compensation and that ODPS violated the FLSA’s recordkeeping requirements by failing to keep accurate employment records. The district court determined that ODPS’s nonsworn workers were employees entitled to overtime wages, but that the sworn workers were independent contractors because they “simply were not economically dependent on ODPS and instead used ODPS to supplement their incomes.”

On appeal, the Sixth Circuit applied the six-factor “economic reality” test and concluded with respect to the first five factors that the services offered by ODPS’s workers are integral to the company; the services do not require the skill or training of a licensed police officer; there is limited investment in specialized equipment; the length and consistency of the relationship between ODPS and the workers suggests permanence; and there was no opportunity for profit because the workers earned set wages to perform low-skilled jobs for fixed periods of time and could not make earn more profit by managing different commitments. Those five factors favored employee status for both the sworn and nonsworn officers. The court held that the sixth factor, ODPS’s right to control the manner of the worker’s performance, favored employee status for the nonsworn officers but did not favor either IC or employee status for the sworn officers. Considering all of the six factors “with an eye on the ultimate question of economic dependence,” the court decided that all of the officers were employees entitled to overtime wages under the FLSA.    Acosta v. Off Duty Police Services, Inc., Nos. 17-5995/6071 (6th Cir. Feb. 12, 2019).

OILFIELD CONSULTANTS HELD TO BE INDEPENDENT CONTRACTORS BY FIFTH CIRCUIT.  Directional drilling consultants filed a Fair Labor Standards Act overtime claim against Premier Directional Drilling L.P. based on their claim that the company had misclassified them as independent contractors instead of employees. The district court granted summary judgment in favor of the consultants, concluding they were employees under the FLSA.  On appeal, however, the U.S. Court of Appeals for the Fifth Circuit reversed and held as a matter of law that the consultants had been properly classified by the company as independent contractors. The Fifth Circuit closely examined the undisputed facts in the record and disagreed with the district court with regard to which factors support the independent contractor classification and which favor employee status.

The Fifth Circuit took issue with the district court’s evaluation of five key factors considered by the court in determining employee / independent contractor status.  As to the first factor – degree of control – the Fifth Circuit found it favored IC status because, although the directional drilling consultant was required to work prescribed shifts and coordinate drilling projects with the company’s personnel, the consultant’s right to accept or reject a project, was more meaningful and demonstrated an overall lack of control. Regarding the second factor – the relative investments of the consultant and the company – the court found that factor “merits little weight in light of the other summary-judgment record evidence supporting IC-status.” The appellate court next considered the worker’s opportunity for profit and risk of loss, and concluded that the consultant’s work on his goat farm when not providing services to Premier favored IC status and was more persuasive than the restriction on subcontracting imposed by Premier.  With regard to the fourth factor, skill and initiative, the Fifth Circuit found the consultant was highly skilled, thereby favoring IC status. The final factor considered – the permanency of the relationship – also favored IC status because the work was contracted on a project-by-project basis, even though the consultant chose to provide services only to Premier. Finally, the Fifth Circuit considered other factors bearing on IC status, including the presence of an express IC agreement and industry standards that demonstrated that the consultants were regarded as ICs in the industry, even though Premier also employed directional drilling employees doing similar work.  The appellate court thus concluded the applicable factors supported independent contractor status.  Parrish v. Premier Directional Drilling, L.P., No. 17-51089 (5th Cir. Feb. 28, 2019).

FRANCHISEE’S IC MISCLASSIFICATION CLASS ACTION RETURNED TO TRIAL COURT ON APPEAL.  A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit issued a decision involving a nationwide convenience store franchise case where four franchisees alleged that they were employees of the franchisor and not independent contractors.  The appellate court vacated and remanded to the district court the franchisees’ claims under the Fair Labor Standards Act and California Labor Code after the district court had dismissed on a motion to dismiss on the pleadings.  The Ninth Circuit ruled the district court erroneously “considered the persuasiveness of the plaintiffs’ factual allegations rather than the plausibility of the plaintiffs’ legal claims,” but it did not provide any detail to explain the semantic differentiation of the words we italicized above. It also criticized the district court for having “focused on the franchise agreement without considering the plaintiffs’ allegations regarding [the franchisor’s] actual control,” but chose not to explain which allegations of control it regarded as warranting reversal.

The Ninth Circuit specifically noted that its decision was “without prejudice to [the franchisor] seeking judgment as a matter of law at a later stage in the proceedings.”  This decision highlights the difficulty in succeeding not only before a district court but also an appellate forum when seeking to dismiss an IC misclassification case on the pleadings; unless it is implausible, even an otherwise unfounded allegation must be construed in “the light most favorable to [the non-moving party].”.  Haitayan v. 7-Eleven, Inc., No. 18-55462 (9th Cir. Feb. 27, 2019).

LOGISTICS COMPANY UNABLE TO DISMISS DRIVER’S LAWSUIT FOR DISCRIMINATION; COURT FINDS ALLEGATIONS DO NOT FAVOR IC STATUS.  A former driver for logistics services provider, RR Donnelley Logistics Services, may continue his discriminatory discharge action against the company under Title VII of the Civil Rights Act and the Age Discrimination in Employment Act despite being classified by the company as an IC. An Alabama federal court denied the company’s motion to dismiss and summary judgment motions, rejecting the company’s argument that the driver was an independent contractor and not an employee. The court found that the driver established facts that would allow him to prove that he was an employee for purposes of Title VII and the ADEA, including that his work was supervised; delivery routes were selected for and assigned to him; he was required to use a company-furnished “Real Time Delivery Program” on his phone; and a supervisor had the power to discharge him.

The court also denied the company’s motion for summary judgment because of disputed issues of fact concerning the degree of control the company exercised over the driver’s work, such as copies of e-mails and text messages referring to “payday” being on certain days of the month, a request by his supervisor for his photo on an ID badge, and a demand that the driver appear for a drug test. In denying the motion for summary judgment, the court also concluded that although the IC agreement signed by the driver contained independent contractor-centric terms, the driver provided information that, in practice, business operations may not have transpired consistent with the contract. Nemo v. RR Donnelley Logistics Services, No. 17-cv-02130 (N.D. Ala. Feb. 8, 2019).

COURT APPROVES $9 MILLION IC MISCLASSIFICATION CLASS ACTION SETTLEMENT BY BAKED GOODS COMPANY WITH ITS DISTRIBUTORS.  A Tennessee federal judge has approved a settlement of $9 million between baked goods company, Flowers Foods Inc., and about 900 distributors of their bakery products in resolution of a Fair Labor Standards Act collective action alleging the distributors had been misclassified as independent contractors. Flowers Foods is one of the largest producers of packaged bakery foods in the United States, including brands such as Wonder Bread, Tastykake, Sunbeam and Nature’s Own. Following mediation that encompassed 12 different misclassification lawsuits involving the company (and its related entities) and distributors in Alabama, Kentucky, Texas, Mississippi, North Carolina, Tennessee, Virginia and Missouri, the parties entered into a Global Settlement Agreement and Release. The $9 million settlement provides $3.6 million in attorney’s fees and $5.4 million for the named plaintiffs and settlement class members, depending on the amount of time they worked for the company. Green v. Flowers Foods Inc., No. 19-cv-01021 (W. D. Tenn. Feb. 27, 2019).

WELL AND DRILL SITE MANAGERS REACH $3.2 MILLION SETTLEMENT WITH OIL GIANT IN IC MISCLASSIFICATION CLASS ACTION.  Well and drill site managers providing services in states including California, Texas, New Mexico and Oklahoma, have reached a $3.2 million settlement with Chevron Corporation in a proposed class and collective action alleging FLSA and state wage and hour violations due to the managers’ misclassification as independent contractors and not employees. According to the amended class and collective action complaint, Chevron directed the work of the site managers through the company’s policies, practices, supervision, and ability to discipline the managers; the managers worked exclusively for Chevron on a full-time and continuing basis; the managers did not sell or advertise their services to the general public and were required to follow Chevron’s instructions and processes regarding the method by which work was to be performed; and Chevron set the managers’ work schedules, determined the their rates of pay, provided the equipment needed to perform the work (including laptops, uniforms and email addresses), and required daily reports and attendance at meetings.

Plaintiffs’ motion papers requesting approval of the settlement note that the site managers were not directly employed by Chevron, but rather were paid through a variety of third-party staffing companies, and that they worked 12-hour shifts, sometimes for fourteen consecutive days. They claimed to have been paid a day rate, but did not receive overtime compensation. Under the terms of the settlement, in which Chevron denied any liability, each member of the class group will receive an average of over $29,000, and attorneys’ fees are earmarked for 25% of the of the settlement amount.  McQueen v. Chevron Corp., 16-cv-02089 (N.D. Cal. Feb. 8, 2019).

DIRECTV INSTALLATION PROVIDER SUED BY TECHNICIANS IN IC MISCLASSIFICATION CLASS ACTION.  Installation technicians have filed a collective and class action complaint against Synergies3 TEC Services, LLC, a satellite television installation provider for DirecTV, alleging violations of state (Illinois and Missouri) and federal (FLSA) overtime laws due to their alleged misclassification as independent contractors and not employees. According to the complaint, the installation technicians were subject to direction and control by the company as they were required to follow the company’s instructions, processes, and policies regarding the methods by which work was to be completed; were supervised and required to use specific apps to open and close orders; could not sell or advertise their services to the general public or work for other companies; were required to attend meetings and communicate any changes in their work schedule/hours to the company in advance ; were subject to discipline by the company for failure to follow the company’s standards, policies and procedures; and were not permitted to negotiate rates of pay or determine or set their own schedules. Jackson v. Synergies3 TEC Services, LLC, No. 4:19-cv-00178 (E.D. Mo. Feb. 4, 2019).

DENTAL CARE COMPANY SUED FOR IC MISCLASSIFICATION BY DENTIST.  An Illinois dentist has reportedly sued Bright Dental Care P.C. d/b/a Smile Dental Care and others in state court alleging breach of contract and violations of the Illinois Wage Payment and Collection Act due to his alleged misclassification as an independent contractor and not an employee. According to the Cook County Record published on February 20, 2019, the dentist claims he is owed over $65,000 plus 45 percent of the fees collected by the defendants for work he performed. Despite that parties’ agreement, the dentist reportedly alleges that the defendants failed to pay him for all of his work, including his final compensation and wages required by the Illinois statute. Salem v. Bright Dental Care P.C., No. 2019L001584 (Cook County Cir. Ct. Ill. Feb. 13, 2019).

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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