January 2015 Independent Contractor Compliance and Misclassification Update

Pepper Hamilton LLP

In the Courts (4 cases)

  • JANITORIAL FRANCHISE COMPANY SETTLES ITS APPEAL OF $4.8 MILLION JUDGMENT IN FAVOR OF MISCLASSIFIED CUSTODIANS. Coverall North America Inc. settled the independent contractor misclassification case filed against it by a class of 166 custodians who were classified as franchisees under the terms of a franchise agreement they each signed with Coverall. As noted in our blog post of February 5, 2013, a federal district court found in favor of custodians that they were employees under Massachusetts’ strict “ABC” independent contractor law and had been misclassified as franchisees by Coverall. The court entered judgment in their favor for $4.8 million. Coverall appealed the judgment. One week before arguments were to commence before the U.S. Court of Appeals for the First Circuit in early January, the parties reached a proposed class action settlement. The terms will be revealed in settlement proceedings before the district court. Awuah v. Coverall North America, Nos. 13-2190, 13-2274 (1st Cir. Jan. 2, 2015).
  • HOME IMPROVEMENT RETAILER SETTLES IC MISCLASSIFICATION CLASS ACTION WITH INSTALLATION CONTRACTORS FOR $6.5 MILLION. A California federal judge approved a $6.5 million settlement between Lowe’s Home Centers and a class of its home improvement contractors (both individuals and businesses) in their independent contractor misclassification class action lawsuit in federal court. The court awarded plaintiffs’ class counsel $1,625,000 in legal fees. As noted in our January 14, 2015 blog post, there were four lessons that other businesses could learn from the case and its settlement: (1) retaining contractors who operate in the form of business entities, such as LLCs, do not necessarily insulate companies from independent contractor misclassification exposure; (2) a failure to properly structure, document, and implement independent contractor relationships can be avoided; (3) there are  “hidden costs” of class action settlements as well as other misclassification exposures that can arise after settlement; and (4) companies that can financially survive class action misclassification settlements or judgments in court or before an administrative agency need not necessarily reclassify the workers as employees. Shepard v. Lowe’s HIW, Inc., No. 12-CV-03893-JSW (N.D. Cal. Jan. 12, 2015).
  • NEW JERSEY SUPREME COURT SETS LOW BAR FOR WORKERS WHO CLAIM THEY HAVE BEEN DENIED OVERTIME AND WAGE RIGHTS WHEN MISCLASSIFIED AS IC’S. The New Jersey Supreme Court issued a long-awaited decision in an independent contractor misclassification class action brought against Sleepy’s by its drivers who deliver mattresses for the company. The New Jersey high court had been asked by the U.S. Court of Appeals for the Third Circuit to determine the test that should be applied to determine IC/employee status in wage and hour and wage payment cases in that state. The New Jersey Supreme Court reviewed all four tests that had been applied in other contexts such as unemployment, whistleblowing, and discrimination and concluded that the proper test for wage claims in New Jersey is the so-called “ABC” test applied in cases under New Jersey’s unemployment law. That test was the one favored by the drivers and is the most challenging to establish for employers and, conversely, the easiest to establish for those who claim they have been misclassified as ICs. Our January 16, 2015 blog post analyzed in depth the impact this test may have on companies conducting business using ICs in New Jersey, and provided insights for companies seeking to enhance their IC compliance in that state in light of the Supreme Court’s decision. Hargrove v. Sleepy’s, LLC, No. A-70-12(072742) (N.J. Jan. 14, 2015).
  • TRUCKING COMPANY IN CALIFORNIA ORDERED TO PAY $2 MILLION TO SEVEN PORT DRIVERS FOUND TO BE MISCLASSIFIED AS IC’S. A $2 million award by the California Labor Commissioner in favor of seven port truck drivers was upheld by a California Superior Court judge in the drivers’ IC misclassification lawsuit. The drivers provided services to Pacer Cartage. The court found the company exercised control over the drivers. It found that Pacer required them to follow numerous procedures beyond those required under federal safety standards and required them to report by radio as to their status on the job; that the vehicles used by the drivers were not registered in the drivers’ names; that the drivers were required to enter into a complex leasing arrangement with the company; that the drivers could face disciplinary action for traffic and inspection violations; that the drivers had to obtain insurance through the company; and that most of the drivers spoke virtually no English and lacked even a high school education and there was no evidence the leasing and hauling documents were explained to them in detail. Additionally, the court found that the drivers were an essential part of the company’s business; the company supplied the tools and place of work; the drivers had long-term relationships with the company; the drivers were paid on a weekly basis with a printout showing salary, deductions, and year-to-date earnings; and there was no evidence demonstrating that the drivers had the ability to generate profit or face loss. Miranda v. Pacer Cartage, No. 37-2014-00008552 (Cal. Super. Jan. 28, 2015).

Regulatory and Enforcement Initiatives (5 matters)

  • FLORIDA AND WISCONSIN ARE THE 19TH AND 20TH STATES TO SIGN JOINT COOPERATION AND ENFORCEMENT AGREEMENTS WITH THE U.S. DEPARTMENT OF LABOR. This month, the U.S. Department of Labor announced that two more states had signed memorandums of understanding with the federal agency, agreeing to cooperate in their enforcement actions to detect and deter misclassification of employees as independent contractors. The Florida Department of Revenue and the Wisconsin Department of Workforce Development raise to 20 the number of state agencies that have signed similar agreement with the U.S. Labor Department in its “Misclassification Initiative.” These agreements allow the parties to share information and coordinate law enforcement in an effort to “level the playing field for responsible employers by reducing the practice of misclassification.” The importance of these state-federal partnerships is more fully discussed in our blog post of January 13, 2015.
  • U.S. LABOR SECRETARY INCLUDES IC MISCLASSIFICATION AS KEY ITEM HE IS FOCUSING ON IN 2015. The Secretary of the U.S. Department of Labor, Thomas E. Perez, told attendees in his remarks at the January 7, 2015 AFL-CIO National Summit on Raising Wages that the issue of employee misclassification will be a key focus of the Labor Department in 2015. He stated: “And it’s not just low-wage workers who are victimized. In many traditionally middle-class occupations, workers are undercut by the abusive practice of misclassification. Let me be clear: when you improperly categorize your employees as independent contractors stripping them of rights and benefits in the process, dodging your own tax obligations as an employer, what you’re doing is committing fraud, plain and simple.”
  • TENNESSEE MISCLASSIFICATION TASK FORCE PUBLISHES REPORT. The Legal Committee of the Tennessee Employee Misclassification Task Force published its report addressing key issues involving the frequency and costs of misclassification, including which industries have a higher frequency of misclassification; whether state law should specify a uniform definition of employment; whether current Tennessee misclassification laws are effective; and the ways to facilitate sharing of information across agencies. The report noted that based on investigations undertaken by the Tennessee Department of Labor and Workforce Development (TDLWD), businesses in industries that are most prevalent in engaging in the practice of misclassifying workers are construction, courier services, care-giving services, call centers, nursing services, and security guard services. The Task Force also advised that: “While important, we do not believe that having a uniform definition of the employment relationship is as critical as are measures that will enhance the TDLWD’s ability to find and penalize employers who are cheating the system by engaging in the practice of misclassifying their employees as independent contractors or by paying the employees off the books.”
  • NORTH CAROLINA ISSUES REPORT TOUTING SUCCESSES IN DETECTING IC MISCLASSIFICATION. The North Carolina Division of Employment Security (DES) issued a press release on January 22, 2015 examining its successes in uncovering employer fraud within the state’s Unemployment Insurance system. In the media statement, the DES remarked that North Carolina led the southeastern region of states in the discovery of misclassified workers during calendar year 2013 and is likely to remain at or near the top of that list when results are tallied for calendar year 2014.
  • TWO TEXAS PAINTING COMPANIES ORDERED TO PAY OVERTIME WAGES TO PAINTERS AND SHEETROCK INSTALLERS FOUND TO BE MISCLASSIFIED AS IC’S. Two Texas companies, Specialty Painting & Wall Covering Inc. and M&S Enterprise, were ordered by the U.S. Department of Labor to pay over $108,000 in overtime to 22 painters and sheetrock installers whom the Labor Department concluded had been misclassified as independent contractors. The Wage and Hour Division reported that the companies, which were jointly owned and operated, had been paid for up to forty hours per week with a check from one of the two companies and by separate check for all hours worked over forty in a workweek by the other company, and that no overtime was paid and no withholdings were made to the amounts paid.

On the Legislative Front (1 matter)

  • IOWA LEGISLATURE INTRODUCES BILL TO DOUBLE PENALTIES FOR FAILURE TO PAY UNEMPLOYMENT INSURANCE TAX FOR WORKERS MISCLASSIFIED AS IC’S. A bill (HF72) introduced in state House of Representatives on January 22, 2015 would seek to increase certain penalties for employers willfully misclassifying employees as independent contractors for unemployment compensation contribution purposes. The current law provides that a penalty equal to 50% of the unemployment contribution or part thereof that should have been paid on behalf of the employee will be assessed against the employer when subsequent intentional misclassification violations occur. The proposed bill would double the penalty to 100% of the contribution or part thereof that should have been made by the employer.


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