January 2017 Independent Contractor Misclassification and Compliance News Update

by Pepper Hamilton LLP

January was a busy month for independent contractor misclassification – and IC compliance. In addition to Lowe’s $2.85 million settlement with installers whom it classified as ICs, Lufthansa agreed to pay $1.1 million in settlement for a small group of aircraft workers.  Meanwhile, Time Warner was sued for allegedly misclassifying cable installers; Uber’s food delivery service was sued in Florida for classifying drivers as ICs; and a construction company entered into a consent judgment with the U.S. Department of Labor because it misclassified painters as ICs.

The update below also include a key case decided in New York concluding that a blogger who was treated as an IC by a news publication had been properly classified as such, in compliance with New York’s unemployment insurance laws.

January was an especially important month in terms of arbitration agreements with class action waivers. A trucking company’s arbitration agreement was found to be of no value in its effort to re-direct a federal court IC misclassification to arbitration, whereas Uber’s arbitration agreement was again upheld as enforceable (this time in New Jersey). Perhaps the biggest development in the area of arbitration and IC misclassification lawsuits was the U.S. Supreme Court’s decision to review three separate cases involving arbitration agreements containing class action waivers. The issue to be decided is whether arbitration agreements with class action waivers are enforceable or, instead, violate the National Labor Relations Act as a restriction on “concerted” activities.  That law applies not only to unionized but also non-unionized workers who are deemed to be “employees” under the NLRA. While none of the three cases accepted for review by the Supreme Court are IC misclassification cases, the Court’s ultimate decision may well be equally applicable in legal challenges by ICs as well.

Although Supreme Court guidance will be welcome on this issue, none of these three cases involved the issue of whether an arbitration clause with a class action waiver is enforceable when it affords the party signing it an opportunity to opt-out of the arbitration clause. Thus, unless the Supreme Court does something that it rarely does (i.e., decide a matter not before it at this time), it will not address a key issue facing businesses that use independent contractors: whether an opt-out “saves” an arbitration clause with a class action waiver. Additionally, a newly constituted NLRB (once new members are appointed by a Republican president) may change its view on this issue and conclude that class action waivers do not violate the NLRA. In that event, it is conceivable that the Supreme Court may choose not to decide the issue at all.

Many businesses using ICs believe that their classification of workers as ICs can be protected by the use of an arbitration clause with a class action waiver. Even if the Supreme Court were to find those clauses to be enforceable, arbitration clauses offer no protection for an array of IC misclassification claims, such as lawsuits and audits by workforce and tax agencies, private attorney general act claims, and individual claims for unemployment and workers’ compensation benefits. Companies that wish to genuinely enhance their IC compliance and avoid needless legal challenges may therefore wish to take the best approach to minimizing IC misclassification exposure: utilizing customized compliance methodologies and processes, such as those described in our White Paper, to minimize IC misclassification exposure.

In the Courts (8 cases)

LOWE’S TO PAY $2.85 MILLION TO INSTALLATION WORKERS IN SETTLEMENT OF IC MISCLASSIFICATION CASE. Lowe’s Home Centers and class of over 450 installers that provided services to Lowe’s customers have sought preliminary approval by New Jersey federal court of a proposed $2.85 million settlement of IC misclassification claims. The class complaint alleges that the installation workers were misclassified as ICs, resulting in violations of the New Jersey Construction Industry Independent Contractor Act and unjust enrichment. According to the installers, Lowe’s had the right to exercise control over the completion of installations due to the Installer Contracts and Installer Guides; had the right to dictate the timing of installations, job site conduct, and Lowe’s marketing services; and used customer survey scores and job site inspections as a means of controlling installers’ conduct. The amount that each class member may receive will not be known until all claims forms are received, but will not exceed $6,500 per individual. The installers’ counsel will seek an award of attorneys’ fees not to exceed one-third of the maximum settlement amount. Mittl v. Lowe’s Home Centers LLC, No. 15-cv-06886 (D.N.J. Jan. 31, 2017).

AIRLINE AND AIRCRAFT MAINTENANCE FIRM TO PAY $1.1 MILLION TO SETTLE WITH AVIATION WORKERS. Lufthansa Technik North America Holding Corp. and Global Aircraft Service, Inc. (GAS) have agreed to pay 33 aircraft workers $1.1 million to settle class and collective action IC misclassification lawsuits brought in Maine federal court. The complaint by sheet metal workers, mechanics, and painters include claims for unpaid overtime under the FLSA and the Maine Minimum Wage and Overtime Act. The settlement papers do not provide any details as to what the defendants allegedly did beyond classifying the workers as ICs. Venegas v. Global Aircraft Service., Inc., No.14-cv-00249 (Jan. 18, 2017).

CABLE INSTALLATION COMPANY AND TIME WARNER LOSE INITIAL BATTLE IN CLASS ACTION IC MISCLASSIFICATION CASE. A California federal court granted class certification to installation technicians (ITs) in their IC   misclassification claims against Multi Cable, Inc. (MCI) and Time Warner Cable. The ITs claimed that Time Warner had a business arrangement with MCI in which MCI supplied ITs to service Time Warner customers seeking cable installation, repair. and maintenance services for TV, phone and internet installations. The basis of the claims under federal and state law is that because the ITs were allegedly misclassified as “faux ‘independent contractors’” and not employees, MCI and Time Warner failed to pay the ITs overtime compensation. The ITs alleged that “MCI and T[ime Warner] controlled virtually every facet of the ITs’ jobs, including the uniforms they wear, the decals on their vehicles, materials they use, and the jobs they perform, including the hours during which those jobs are to be completed and the location at which the services will be provided.” Of course, obtaining class certification is not a review of the merits of the case. As the court stated, “At the class certification stage, the court makes no findings of fact and announces no ultimate conclusions on Plaintiffs’ claims.” It was therefore hardly a surprising decision, especially because there is a low burden on plaintiffs to establish the right to preliminary class certification. Luviano v. Multi Cable, Inc., No. 15-cv-05592 (C. D. Cal. Jan. 3, 2017).

UBER EATS SUED IN FLORIDA FOR IC MISCLASSIFICATION. A Florida delivery driver has filed class and collective actions in federal court against UberEATS, an on-demand meal delivery service, alleging that UberEATS misclassified him and similarly situated individuals providing services as delivery drivers.  The lawsuit alleges a violation of the minimum wage provisions of the FLSA and state law. The complaint alleges that through a mobile phone software app, customers can place orders from hundreds of partner restaurants that prepare meals that are then picked up and delivered to the customer by UberEATS’ local delivery drivers. According to the class complaint, the drivers should be regarded as employees under the law because Uber controls the manner and means by which the drivers accomplish their work; has the right to hire or fire the drivers in its sole discretion; has the right to terminate the phone app completely and block its usage by a driver; sets all rates of pay for the drivers; requires the drivers to accept discount promotions offered to customers by UberEATS; requires driver participation in a training session before being permitted to provide services; mandates that drivers’ vehicles meet UberEATS requirements; and retains the right to discipline the drivers. It is also alleged that because of a pay formula used by UberEATS, the drivers are not paid for all hours worked and are not paid at least the minimum wage for each hour worked.  Crespo v. Uber Technologies Inc., No. 17-cv-00187 (M.D. Fla. Jan. 24, 2017).

TRUCKING COMPANY LOSES KEY ARBITRATION ARGUMENT IN IC MISCLASSIFICATION CASE. An Arizona federal court granted the motion for partial summary judgment filed by a class of truckers in their IC misclassification case finding that the contractor operating agreements that the drivers entered with Swift Transportation Co. were agreements that are not covered by the Federal Arbitration Act and Arizona Arbitration Act.  The contractor operating agreements included a clause requiring arbitration of all disputes arising out of the contract and expressly stated that the contractor is an IC and not an employee of Swift, responsible for determining the method, means, and manner of performing work and services under the agreement.  Those words were regarded as empty recitals by the court, which rejected Swift’s claim that the truckers were ICs after assessing many factors that, in the court’s view, supported an employment relationship.  Some of the factors favoring employment included the agreements could be terminated at will by Swift; drivers were required to follow company policy; Swift had the right to unilaterally change terms in the agreement with notice; Swift determined load assignments for the drivers; drivers were required to have a specific communications system compatible with Swift’s; cost-advancing and leasing options were offered by Swift; and the truck leases entered by the drivers were inextricably intertwined with Swift. Although Swift argued that the leasing company was a separate entity and was separate from the contracting agreement, the court disagreed. It concluded that the two agreements were designed to operate in conjunction with each other for drivers who leased equipment for purposes of becoming contract drivers with Swift and constituted a form of further control by Swift over the drivers. In that regard, the court concluded that the ability of the drivers to keep leasing their trucks was explicitly dependent on them maintaining their Contractor Agreements with Swift; the leases required drivers to authorize and direct Swift to pay the rent due on the truck directly to the leasing company from the driver’s earned compensation on a weekly basis; and if the contractor agreement was terminated, the leasing company was entitled to terminate the lease and accelerate all remaining lease payments for the remainder of the lease, placing great financial hardship upon the drivers. Dusen v. Swift Transportation Co., Inc., No. 10-cv-00899 (D. Ariz. Jan. 6, 2017).

NEW JERSEY FEDERAL COURT UPHOLDS UBER’S ARBITRATION AGREEMENT. Uber secured a victory in a New Jersey federal court, which held that its arbitration clause with drivers is legally valid as applied to a class action lawsuit alleging misclassification of drivers as ICs. The complaint alleged that Uber failed to pay overtime compensation and imposed an unlawful requirement that the drivers pay for significant business expenses that were incurred for Uber’s benefit. To gain access to Uber’s app allowing the driver to accept ride requests from prospective passengers and transport them for a fare, a driver must electronically accept the applicable Software License and Online Services Agreement, which contains a voluntary arbitration clause that the driver is free to opt out of within 30 days of the execution of the Agreement. In granting Uber’s motion to compel arbitration of the claims, the court rejected the drivers’ argument that the Uber did not provide a copy of the arbitration clause to its New Jersey drivers and only provided a hyperlink to the online Agreement, which contained the arbitration clause. The court stated that the drivers were provided with reasonable notice as to the existence of the terms and conditions of the hyperlinked Agreement, including capitalized instructions about the need to review all of the documents; that the Agreement was prominently displayed and conspicuously located directly under the instructions; and that the named plaintiff agreed to the terms of the Agreement in two different places by clicking “YES, I AGREE.” The federal court also rejected the drivers’ argument that the class waiver contained in the arbitration clause violated the National Labor Relations Act (NLRA) and concluded that the 30-day opt-out provision gave the drivers the choice of either arbitrating their claims on an individual basis, or litigating them, either individually or collectively. The court found that the arbitration provision did not violate the NLRA because it was voluntary in nature. Singh v. Uber Technologies Inc., No. 16-cv-03044 (D.N.J. Jan. 30, 2017).

SUPREME COURT TO DECIDE IF ARBITRATION CLAUSE WITH CLASS ACTION WAIVER VIOLATES THE NLRB. The U.S. Supreme Court agreed to consider “whether an agreement that requires an employer and an employee to resolve employment-related disputes through individual arbitration, and waive class and collective proceedings, is enforceable under the Federal Arbitration Act, notwithstanding the provisions of the NLRA.”  Three cases from the 5th, 7th and 9th U.S. Circuit Courts of Appeals will be consolidated in the Court’s review. In Epic Systems, the 7th Circuit held: “[The arbitration clause also] precludes employees from seeking any class, collective, or representative remedies to wage-and-hour disputes, Epic’s arbitration provision violates Sections 7 and 8 of the NLRA. Nothing in the FAA saves the ban on collective action.” Similarly, the 9th Circuit, in Ernst & Young, vacated the district court’s order compelling arbitration when it found that the employer violated the NLRA by requiring employees to sign an agreement precluding them from bringing, in any forum, a concerted legal claim regarding wages, hours, and terms and conditions of employment. The 5th Circuit in Murphy Oil took an opposite view and held that the oil company did not commit an unfair labor practice by requiring employees to sign its arbitration agreement with a class action waiver or seeking to enforce that agreement in federal district court. Ernst & Young, LLP v. Morris, No.16-300 (U.S. Jan. 13, 2017); Epic Systems Corporation v. Jacob Lewis, No.16-285 (U.S. Jan. 13, 2017); NLRB v. Murphy Oil USA Inc., No. 16-307 (U.S. Jan. 13, 2017).

BLOGGER FOUND TO BE IC BY NEW YORK APPELLATE COURT. A New York state intermediate appeals court found that a blogger for The Nation, a print magazine and website, is an independent contractor who is not entitled to state unemployment insurance benefits. In reversing the decisions of the Administrative Law Judge and the Unemployment Insurance Appeal Board, the Appellate Division Third Department applied the “more detailed, qualitative and arguably less deferential analysis of the various employment factors” used very recently by the New York Court of Appeals in Matter of Yoga Vida, NYC, Inc. v. Commissioner of Labor, 28 N.Y.3d 1013 (Oct. 25, 2016).  As noted in our blog post of October 25, 2016, in a vast number of cases the Third Department has affirmed Appeal Board decisions on the basis that, despite evidence in the record that may lead that court to a contrary result, the record contains “substantial evidence” to support the Appeal Board’s decision. To practitioners, this meant if there was even a smidgeon of evidence favoring employee status, the Third Department was likely to affirm the Appeal Board’s determination, even where there was an abundance of evidence favoring IC status. This decision confirms that the legal landscape for IC determinations in New York for unemployment law purposes has changed. Among the IC factors used in the court’s analysis were the following: the blogger, an experienced, well-known writer, author and media critic, was regarded as a professional; filed his taxes as self-employed; did not need to obtain permission to take vacations; did not receive fringe benefits; was not covered by the union contract; was free to write for other entities and in fact, simultaneously blogged for The Huffington Post and authored eight books during his engagement with The Nation; worked from home using his personal laptop; set his own hours; and did not suffer any adverse consequences if he did not post a story. In contrast, the court noted that there were some factors favoring employee status: the blogger was required to identify himself as a writer for The Nation; he received an annual salary and was reimbursed for expenses; and he was required to use The Nation’s content management system. On balance, the court concluded that these factors favoring employee status were insufficient to create an employer-employee relationship in view of the Court of Appeals’ decision in Yoga Vida. Mitchell v. The Nation Co. Ltd. Partners, No. 522892 (App. Div. N.Y. 3d Dep’t, Dec. 29, 2016).

Administrative and Regulatory Initiatives (1 item)

TEXAS COMMERCIAL PAINTING COMPANY TO PAY OVERTIME TO PAINTERS MISCLASSIFIED AS IC’S. Star Finishes LLC, a Texas commercial painting company, agreed to pay $182,000 in back overtime wages to 82 current and former workers following a U.S. Department of Labor investigation concluding that Star Finishes had misclassified the workers as ICs. As a consequence of their misclassification, the workers were paid straight time for overtime hours, without regard to the number of hours they actually worked. In a News Release issued on January 11, 2017 by the Labor Department’s Wage and Hour Division, Betty Campbell, stated: “Misclassified workers are denied fair wages and access to critical benefits and protections that come with their rightful status as employees. Companies that violate the law in these cases also gain an unfair economic advantage over employers who play by the rules.” According to Ms. Campbell, misclassification of employees as independent contractors is an “alarming trend” and is seen “all too often in the construction industry.”

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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