February 2020 Independent Contractor Misclassification and Compliance Law News Update 

Locke Lord LLP

This past month was the first month we can recall where there were no legal developments of note involving class action independent contractor misclassification lawsuits, which have become increasingly prevalent.  Instead, the two top cases reported below are decisions by federal appellate courts in single plaintiff IC misclassification lawsuits: one where the U.S. Court of Appeals for the Third Circuit concluded that sales marketers for roofing companies had been misclassified under a Pennsylvania wage payment law, and the other where the Fifth Circuit held that a highly paid legal consultant seeking overtime pay under the federal wage and hour law had been properly classified as an IC.

It is not uncommon for companies to classify highly paid workers as ICs even when the legal basis to support such classification is marginal. Highly paid workers classified as ICs who work a considerable number of hours each week may be motivated to seek overtime under federal or state wage and hour laws because of the potential for recovering a very substantial amount of overtime pay and penalties. Federal law and most state wage laws allow for recovery of 1-1/2  times the regular rate of pay for all hours over 40 in a workweek, going back three, four, or six years (depending on the state), oftentimes with liquidated damages of an additional 100% or more.

Thus, a worker earning $52,000 per year as an IC for a company that claims to work 50 hours a week can argue that he or she is owed 10 hours at time-and-one-half, or $375 per week in additional compensation, times 52 weeks a year, or $19,500 per year, times three (or more) years of unpaid overtime, or $58,500, with 100% liquidated damages, for a total of $117,000, which is more than two years’ compensation. The numbers multiply exponentially for workers who earn more money, claim to work up to 60 hours a week, are in a state with a 4-year or 6-year statute of limitations for wage claims, or are in a state (like Massachusetts) that has a liquidated damages penalty of treble damages.  For example, a worker classified as an IC that earns $75,000 per year as an IC, claims to regularly work 55 hours a week, and is in a state (like New York) with a 6-year statute of limitations for wage claims and a 100% penalty, arguably would claim damages of $506,000. If there is more than one highly compensated individual in that situation, the exposure can quickly amount to a very significant 7-figure number.

Savvy businesses that wish to minimize their misclassification liability exposure to highly-compensated workers whom they classify as ICs have utilized the same type of process as do prudent companies that wish to minimize such exposure to large groups of workers they have classified as ICs. One such process is IC Diagnostics™, which focuses on restructuring, re-documenting, and/or re-implementing IC relationships to enhance compliance with applicable IC laws. This type of process creates a highly customized and sustainable means to reduce an otherwise costly liability risk for IC misclassification for groups of workers classified by companies as ICs as well as highly paid workers that work considerable amounts of overtime.

In the Courts (3 cases)

ROOFING COMPANIES FOUND TO HAVE MISCLASSIFIED SALES MARKETER AS INDEPENDENT CONTRACTOR.  The U.S. Court of Appeals for the Third Circuit has ruled that a sales marketer for three related roofing companies had been misclassified as an independent contractor instead of an employee covered by a Pennsylvania state wage payment law. Plaintiff was engaged by the roofing companies to market and sell their roofing services within a set territory. The companies eventually terminated the sales marketer for allegedly diverting business opportunities away from the companies. Plaintiff sued the companies and their owners for violation of the Pennsylvania Wage Payment and Collection Law due to his alleged misclassification as an independent contractor and for other causes of action. While a federal district court dismissed some of plaintiff’s claims, it concluded that, as a matter of law, the plaintiff was an employee of the companies and not an independent contractor. On appeal, the Third Circuit affirmed the district court’s ruling, concluding that “the economic realities outweigh the terms of the [parties’] agreement” that designated him as an independent contractor.  The Third Circuit based its decision on the facts that the companies exercised control over the plaintiff’s work by assigning tasks to him and communicating the way in which the tasks were to be completed; the companies determined the plaintiff’s work schedule and directed his movements; plaintiff had to give notice before he could take vacation; the plaintiff’s work did not require specialized skills; and the companies provided him with necessary materials and an office. Accurso v. Infra-Red Services, Inc., No. 18-01583 (3d Cir. Feb. 20, 2020).

HIGHLY PAID LEGAL CONSULTANT FOR OIL AND GAS COMPANY FOUND TO BE INDEPENDENT CONTRACTOR.  The United States Court of Appeals for the Fifth Circuit has affirmed a federal district court’s grant of summary judgment in favor of an oil and gas services company, U.S. Shale Solutions LLC, in an action brought by a former $1,000 per day legal consultant alleging that he was not paid overtime in violation of the Fair Labor Standards Act. The company filed a motion for summary judgment with the district court arguing that plaintiff was an independent contractor who was not subject to the FLSA or, alternatively, that he was an exempt employee under either the “practice of law” or the “highly compensated employee” overtime exemptions in the FLSA. In granting the company’s motion, the district court held that although genuine issues of material fact existed with regard to the independent contractor status and practice of law exemption, plaintiff, a former attorney, was exempt from the FLSA’s overtime requirements as a “highly ‎compensated employee.”

On appeal, the Fifth Circuit concluded that it need not determine whether plaintiff fit within the “practice of law” or “highly compensated employee” exemptions because he was an independent contractor as a matter of law.  The company argued that plaintiff worked independently and managed his own workload and schedule; no performance evaluations were conducted; plaintiff invested in his business by providing his own phone and computer, he paid for his own continuing education expenses and purchased home office equipment; plaintiff controlled his opportunity for profit and loss by choosing to accept or reject projects; plaintiff possessed specific skill and initiative due to his legal training; and there was no permanency because plaintiff was free to leave upon 15 days’ notice. Plaintiff claimed that the company controlled his schedule, that he was reimbursed for expenses and travel, that he had no risk of loss, that he had no other source of income as he worked exclusively for the company, and that he was subject to a non-compete restriction. The Fifth Circuit concluded that while some of the factors favored employee status, the factors as a whole weighed in favor of independent contractor status.  In reaching its decision, the court noted that the existence of the non-compete clause in plaintiff’s independent contractor agreement, while supporting employee status, “does not automatically negate independent contractor status.” Faludi v. U.S. Shale Solutions LLC, No. 17-20808 (5th Cir. Feb. 14, 2020).

CALIFORNIA STATE COURT ENJOINS INSTACART FROM “MISCLASSIFYING” ITS SHOPPERS AS INDEPENDENT CONTRACTORS.  A California state court judge has issued a preliminary injunction requiring Maplebear, Inc. d/b/a Instacart from continuing to misclassify its “Shoppers” as independent contractors and not employees.  Instacart has appealed the ruling. According to the complaint filed in September 2019 by the City Attorney of San Diego on behalf of the People of the State of California, Instacart “maintains an unfair competitive advantage by misclassifying its Shoppers and evading long-established worker protections under California law.” By the alleged misclassification, Instacart “avoids paying its Shoppers a lawful wage and unlawfully defers substantial expenses to its Shoppers, including the cost of equipment, car registration, insurance, gas, maintenance, parking fees, and cell phone data usage.”  In granting the preliminary injunction, the Court found that the City Attorney had made a “very plausible” showing of improper classification under the new ABC test for independent contractor status in California, even though the matter was not free from doubt and there was some evidence to the contrary. The court explained that “it is more likely than not that the People will establish at trial that the ‘Shoppers’ perform a core function of defendant’s business; that they are not free from defendant’s control; and that they are not engaged in an independently established trade, occupation or business.” Establishing any one of those would prevent Instacart from satisfying the ABC test.

Instacart argued it would be irreparably harmed if a preliminary injunction were issued because, among other things, it would be required to hire tens of thousands of Shoppers in California; would have to develop rules, protocols, and management teams to monitor the employees’ performance and control their work; and invest in infrastructure such as software and supervisory staff. The court discounted the company’s arguments finding that Instacart had already taken steps to bring itself into compliance with the new Dynamex ABC test and that it seemed that relatively minor additional steps were needed to be in full compliance. Instead, the court agreed that the harms alleged by the People such as unpaid wages, overtime, rest breaks, missed meals and unpaid expenses reimbursements might take months to sort out, and if Instacart’s business survival were truly in jeopardy, the Shoppers might never recoup their monetary losses. California v. Maplebear Inc., No. 2019-00048731 (Cal. Super. Ct. County of San Diego Feb. 24, 2020).

Administrative and Regulatory Initiatives (2 items)

MASSACHUSETTS STAFFING COMPANY ASSESSED PENALTIES FOR MISCLASSIFYING TEMPORARY SCHOOL WORKERS.  Massachusetts Attorney General Maura Healy has assessed penalties against a national staffing and referral agency, Delta-T Group Massachusetts Inc., for misclassifying education workers placed in temporary positions in public and private schools. According to a press release issued by the Attorney General’s Fair Labor Division on February 24, 2020, the Attorney General’s Office began investigating Delta-T after receiving information indicating the company ‎was operating in violation of the state independent contractor statute, and ultimately concluded that the workers were misclassified as independent contractors and not employees. The Attorney General rejected the company’s claim that it was “merely connecting workers to jobs as part of the gig economy.” In addition to agreeing to pay the monetary assessment, the company has agreed to modify its practices to require all school workers who use its services ‎to be treated as employees going forward.‎ The Attorney General commented: “The gig economy can offer workers more flexibility, but it also presents real risks when workers are misclassified and denied important job protections. As a result of our investigation, Delta-T changed its practices and came into compliance with our state laws that protect workers.”

NLRB ISSUES NEW JOINT EMPLOYER RULE, BUT IMPACT ON IC’S IS NEGLIGIBLE.  The National Labor Relations Board has issued a Final Rule on joint employer status under the National Labor Relations Act.  On February 26, 2020, the Board issued an explanation of its final rule, noting that “that the common-law factors relative to determining employee or independent-contractor status are instructive but of limited utility in the joint-employer context.”  The rule’s explanation continues:  “The  Application of those [common-law] factors is appropriate to determine whether a putative employer has the ‘right to control the manner and means by which the product is accomplished,’ and therefore independent-contractor principles assist in determining whether a putative employer has such a ‘right to control.’ But they do not assist in answering the key questions in the joint-employer inquiry: who is exercising that control, when and how.”

Legislative Developments (1 item)

U.S. HOUSE PASSES BILL WITH ABC TEST FOR INDEPENDENT CONTRACTOR STATUS.  On February 6, 2020, the United States House of Representatives passed H.R. 2474, a bill entitled Protecting the Right to Organize Act of 2019 (the “PRO Act”), which would amend the National Labor Relations Act and related labor laws to extend protections to union workers. One of the objectives of the PRO Act is to reduce misclassification of employees as independent contractors, and the bill would seek to serve that interest by adopting a stringent ABC test for determining independent contractor/employee status. The bill would also expand unfair labor practices to include prohibitions against replacement of or discrimination toward workers who participate in strikes; make it an unfair labor practice to require or coerce employees to attend employer meetings designed to discourage union membership; permit workers to participate in collective or class action litigation; allow injunctions against employers engaging in unfair labor practices involving discharge or serious economic harm to an employee; expand penalties for labor law violations; and allow any person to bring a civil action for harm caused by labor law violations or unfair labor practices. The bill is unlikely to pass the Republican-controlled Senate.

This bill, like those in states that are seeking to copy the ABC test that recently became law in California, is yet another ill-conceived effort to minimizing IC misclassification. As noted in our commentary entitled “A Solution to the ‘Five Degrees of Independent Contractor Misclassification,” the preferred means to minimize misclassification, according to the two top Obama Administration labor officials when they were at the U.S. Department of Labor, is increased enforcement of existing laws, not enactment of laws with new tests for IC status.  Laws like AB5, which effectively outlaw otherwise legitimate independent contractors, remove “an important part of our economy,” as the former Administrator of the Wage and Hour Division, David Weil, stated in a press release on November 18, 2013 when he announced a partnership with New York State for increased enforcement efforts of existing laws governing the classification of workers as ICs.

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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