July 2019 Independent Contractor Misclassification and Compliance News Update

Locke Lord LLP

We are often asked, what industries are impacted by independent contractor misclassification?  While IC misclassification claims are most prevalent in the construction, transportation, and gig economy businesses, there are few, if any, industries that are immune from IC misclassification allegations.  This past month alone we report on class and collective actions alleging that workers have been misclassified as ICs in such widely disparate industries as:

  • medical coding
  • interscholastic sports
  • oil and gas
  • mental health counseling and
  • transportation.

In other monthly news updates this year, we have reported on cases affecting the following industries:

  • adult entertainment
  • cleaning
  • logistics
  • medical technicians and physicians
  • food distribution
  • marketing
  • cell phone sales
  • insurance
  • financial services
  • retail sales
  • security
  • convenience stores
  • cable television
  • dentistry
  • airport shuttle and
  • referral services.

All totaled, we have reported in this legal blog on IC misclassification lawsuits and regulatory audits and investigations affecting more than 100 industries.  Some of those industries include non-profits and governmental agencies.

Regardless of the industry affected, companies that are best equipped to defend themselves in IC misclassification class and collective actions and regulatory audits and proceedings are those that have an enhanced level of compliance with IC laws before being challenged.  Many sophisticated companies engaging a substantial number of ICs or are built on IC business models have elevated their IC compliance by using a process such as IC Diagnostics™.  This process typically involves some degree of restructuring, re-documenting, and/or re-implementing of a company’s independent contractor relationships in a customized and sustainable manner without altering the company’s business model or key operational practices. A process of this nature might have otherwise insulated some of the companies reported below from having to defend themselves in these IC misclassification lawsuits.

In the Courts (6 cases)

LEADING MEDICAL CODING COMPANY TO PAY $1.5 MILLION TO SETTLE INDEPENDENT CONTRACTOR MISCLASSIFICATION CLASS ACTION IN UTAH.  Aviacode, Inc., a leader in outsourced medical coding expertise, has agreed to pay $1.5 million to past and current coders to settle an IC misclassification class and collective action brought in federal court in Utah.  The named plaintiffs alleged that Aviacode violated the Fair Labor Standards Act and the Utah Payment of Wages Act, failed to pay the coders for all hours worked, including overtime, and did not reimburse them for business expenses, as a result of their misclassification as independent contractors and not employees.  According to the complaint, the company exerted “substantial control” over the coders by requiring them, among other things, to comply with specific coding guidelines; meet the company’s turnaround time requirements; maintain 95% coding accuracy measured by the company’s standards; maintain required certifications; complete the company’s required training; and agree to the company’s policies, including confidentiality, nondisclosure and non-solicitation. The complaint in this case further alleged that the coders were subject to the fee rate set by the company, did not bear any risk of loss, had little investment in the business, and were not engaged in an occupation or business distinct from the company’s. The filing seeking court approval of the settlement provided, “[a]lthough Class Counsel calculated potential damages of up to $8 million in a best-case-scenario analysis assuming favorable outcomes on all disputed issues of liability and damages at trial, the recovery of $1.525 million in this Settlement is a significant win for the Class given the financial uncertainties Defendant is facing combined with the uncertainties in the outcomes of the disputed legal and factual issues”.  Hazel v. Aviacode, Inc., No. 2:17-cv-01065 (D. Utah July 1, 2019).

HIGH SCHOOL ATHLETIC ASSOCIATION SETTLES IC MISCLASSIFICATION CASE WITH SPORTS REFEREES IN PENNSYLVANIA.  An interscholastic sports association has settled an independent contractor misclassification class and collective action with sports referees in a case that has received widespread attention and varying prior results before the National Labor Relations Board and the courts.  The Pennsylvania Interscholastic Athletic Association‎ (PIAA), a non-profit corporation whose primary purpose is to promote uniformity in their ‎interscholastic athletic competitions among its 1,611 member schools in Pennsylvania, agreed to pay $262,500 in settlement of the lawsuit, which alleged that PIAA had violated the minimum wage and overtime compensation provisions of the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act due to the misclassification of the referees as independent contractors and not employees. According to the complaint, “every aspect of the Class Members’ jobs are controlled and determined by PIAA, down to their uniforms worn and locations they stand on the field during sporting events.”  This case was settled shortly after the U.S. Court of Appeals for the District of Columbia Circuit denied enforcement of a decision by the ‎NLRB holding that high school lacrosse referees were employees covered by the ‎National Labor Relations Act; the appellate court instead concluded that the referees are independent contractors and thereby exempt from the protections of the NLRA, as we discussed in our blog post of July 8, 2019.‎  Ruslavage v. PIAA, No. 2:17-cv-01598 (W. D. Pa. July 4, 2019).

OIL AND GAS FLOWBACK OPERATORS GRANTED CLASS ACTION STATUS IN IC MISCLASSIFICATION LAWSUIT AGAINST WELL MONITORING SERVICES FIRM.  A North Dakota federal court has granted a motion for conditional certification of overtime claims brought under the federal Fair Labor Standards Act and North Dakota state wage laws by flowback operator on behalf of himself and those similarly situated against KRH, Inc., a Montana company providing oil and gas well monitoring services to energy companies in North Dakota and elsewhere in the U.S.  The oil and gas workers alleged that KRH misclassified them as independent contractors and not employees because they were paid a non-negotiable flat daily rate set by the company without overtime compensation; were subject to supervision, discipline, and discharge by the company; and were required to seek permission to take time off, undergo safety training instructing them how to perform their work, follow the rules and order of work set by the company, and attend company meetings. In granting conditional certification, the court found that the named plaintiff presented evidence in the form of declarations from himself and another flowback operator “establishing a colorable basis that [the company’s] policy of classifying flowback workers and/or flow testers as independent contractors inflicted a common injury on the putative class by wrongly denying them overtime compensation.” Eastep v. KRH Inc., No. 1:19-cv-004 (D. N.D. July 9, 2019).

NEW JERSEY DRIVERS WERE MISCLASSIFIED AS IC’S AND MAY HAVE BEEN SUBJECT TO IMPROPER WAGE DEDUCTIONS.  A New Jersey appellate court has affirmed a lower court’s determination that trucking company, V.M. Trucking, LLC and related entities have misclassified truckers as independent contractors and not employees under the New Jersey Wage Payment Law.  Under that law, IC status is determined under the so-called “ABC test,” which requires the company to establish all three prongs of the test in order to validate its classification of the truckers as ICs. According to the class action complaint, the company violated the state’s Wage Payment Law by misclassifying drivers who provided transportation services to the company’s customers as independent contractors and deducting monies from their paychecks for payment for truck leases, insurance, and membership dues, in accordance with the terms of their independent contractor agreements. The lower court concluded that the drivers were employees because the company failed to establish any of the three prongs of the ABC test, but nonetheless concluded that the company did not violate the Wage Payment Law by making deductions from the trucker’s compensation.  On appeal, the Appellate Division affirmed that the drivers were employees and not independent contractors, but found that the facts were in dispute as to whether the deductions were properly authorized by the drivers under applicable New Jersey law.  Accordingly, the appellate court remanded the case back to the lower court. Morales v. V.M. Trucking, LLC, No. A-2898-16T4 (Super. Ct. App. Div. July 9, 2019).

PSYCHOLOGICAL COUNSELORS PROPERLY CLASSIFIED AS IC’S.  The Pennsylvania Commonwealth Court found that psychological counselors who provided services to clients referred by Pathways Counseling Services, LLC had been properly classified as independent contractors, applying the state’s two-prong AB test. Pathways has contracts with insurance companies to provide referrals for counseling, the costs of which are covered by insurance. The insurers do not contract directly with the individual psychologists or counseling practices; Pathways contracts with the counselors and provides them with referrals from the insurers. The counselors, in turn, are paid through Pathways with funds from the insurers for the counseling services provided to their insureds. In exchange for referrals, office space, telephone/fax service, and billing services provided by Pathways to the counselors, Pathways retains a percentage between 30-40% of the fees it receives on behalf of each counselor.

In reversing an assessment of unemployment taxes against Pathways by the Pennsylvania Department of Labor and Industry, the court determined that Pathways had met Prong A because the therapists operated free of direction and control by Pathways. Specifically, the counselors set their own rates of compensation and work schedules; have the right to accept or reject engagements; and obtain their own professional licenses and liability insurance.  In addition, no taxes were withheld by Pathways; Pathways provided no training, meetings, or tools to the therapists; counselors were not subject to monitoring or review by Pathways; and the requirement that services had to be provided at Pathways’ offices was imposed by the insurer, not Pathways. The court also found that Pathways satisfied Prong B, which requires a showing that the counselors were customarily engaged in an independently established trade, occupation, profession, or business. The court found that “professionals contracting with referral services to obtain clients, and who hold themselves out as providing their professional services to those who want them, are generally viewed as customarily engaged in an independent trade or profession”.  Likewise, the court stated, “one who practices in a ‘free-standing’ profession and whose arrangement with a referral service is ‘non-exclusive’ is ‘not compelled to look only to a single employer,’ and thus satisfies the second prong”.  Pathways Counseling Services, LLC v. Commonwealth of Pennsylvania, Dep’t of Labor & Industry, No. 1332 C.D. 2018 (Comm. Ct. Penn. July 12, 2019)

NINTH CIRCUIT WITHDRAWS OPINION THAT DYNAMEX SHOULD BE APPLIED RETROACTIVELY; REFERS ISSUE TO CALIFORNIA SUPREME COURT.  The U.S. Court of Appeals for the Ninth Circuit has withdrawn its prior decision to apply Dynamex retroactively in an independent contractor misclassification case and places the question of retroactivity squarely before the California Supreme Court. As discussed more fully in our prior blog post of June 10, 2019, the U.S. Court of Appeals for the Ninth Circuit had held that the California Supreme Court’s decision in Dynamex applied retroactively to an 11-year class action lawsuit brought against a nationwide janitorial cleaning business, Jan-Pro International Franchising, Inc. by franchisees who claimed they were misclassified as independent contractors. The Dynamex decision, which post-dated the district court’s decision in Jan-Pro, adopted a strict form of the “ABC test” for determining whether workers are independent contractors or employees for claims brought under the state’s wage orders. The Dynamex test makes it far more difficult for businesses to classify workers as independent contractors in California than had been the case for decades. The Ninth Circuit had vacated a federal district court’s grant of summary judgment dismissing the complaint brought by California cleaning franchisees and remanded the case back to the district court to apply the new California ABC test to the franchisees’ claims. The Ninth Circuit’s Order withdrawing its May 2, 2019 Jan-Pro decision states, “A revised disposition and an order certifying to the California Supreme Court the question of whether Dynamex … applies retroactively will be filed in due course.” Vazquez v. Jan-Pro Franchising International, Inc., No. 17-16096 (9th Cir. May 2, 2019 and July 22, 2019).

Administrative and Regulatory Initiatives (2 matters)

NEW JERSEY MISCLASSIFICATION TASK FORCE ISSUES FIRST REPORT WITH 16 RECOMMENDATIONS TO CURTAIL IC MISCLASSIFICATION.  On July 9, 2019, the New Jersey Misclassification Task Force issues its first Report including 16 regulatory and legislative recommendations to combat independent contractor misclassification. The Task Force, created by an Executive Order issued by Governor Phil Murphy on May 3, 2018, includes representatives from the New Jersey Labor, Treasury, and Law Departments as well as five other state agencies. As more fully discussed in our blog post of July 9, 2019, the Task Force Report estimated that in 2018 alone, over 12,000 workers in New Jersey were misclassified as independent contractors, franchisees, or limited liability companies or simply paid “off the books.”  Additionally, the Report found that in 2018, over $462 million in wages in New Jersey were unreported and more than $13 million was lost in tax contributions to the state for unemployment, disability, and family leave insurance.  Based on those findings, the Task Force issued 16 recommendations that, if carried out, will likely make New Jersey one of the most challenging states in the nation for companies that operate on an IC business model or make substantial use of ICs to supplement their workforce. The stated objective of the recommendations is to “reduce and eliminate non-compliance and create deterrence by strengthening tools for education, enforcement, and compliance assistance.”

Some of the 16 recommendations by the Task Force are targeted education and public outreach, including a hotline, a webpage, and an email address to report misclassification; strengthening state contracts by including requirements such as mandating  state government contractors to affirm their awareness of the law regarding classification of workers; interagency coordinated enforcement; data sharing; cooperation with neighboring states; cross-training, which includes training all agencies and licensing boards in the state on New Jersey’s version of the ABC test; criminal referrals of intentional wrongdoing to the Attorney General; using existing workers’ compensation laws to bolster misclassification enforcement; passing legislation allowing the state Division of Taxation to share tax information on with the Attorney General, State Auditor, and other state agencies; and enacting laws that increase fines and penalties to $5,000 per misclassified worker for a first offense and $10,000 for a second offense, as well as increasing the penalties for record-keeping violations. The Task Force Report and its recommendations, however, are written in a manner that fails to recognize the important role that legitimate ICs play in the nation’s (and New Jersey’s) economy.  The Report relies on academic studies by a professor who authored articles on IC misclassification, but it fails to acknowledge that, in his prior role as Administrator of the Wage and Hour Division of the U.S. Department of Labor during the Obama Administration, the author stated in unequivocal terms that “the use of independent contractors [is] not inherently illegal [and] legitimate independent contractors are an important part of our economy.”

THREE MID-ATLANTIC STATES TO SHARE INFORMATION TO COMBAT IC MISCLASSIFICATION.  The Labor Departments of Delaware, New Jersey and Pennsylvania have signed a reciprocal agreement to better protect workers and employees from independent contractor misclassification through information sharing and coordination of enforcement efforts. According to a News Release issued on July 10, 2019 by the New Jersey Department of Labor and Workforce Development (NJDOL), the agreement provides for strategic data sharing, interstate case referrals, and joint investigations that will impact wage claim investigations, worker misclassification, workplace safety efforts, and other labor-related compliance matters. NJDOL Commissioner Robert Asaro-Angelo stated, “All three states have been tasked with protecting our workers, and looking out for those businesses who play by the rules. This new cooperation agreement will ensure that those crossing state lines to do business are in full compliance with our laws, and employees are taking home every single penny they have earned.” Similar statements were made by the Delaware Secretary of Labor Cerron Cade and Pennsylvania Department of Labor and Industry Secretary Jerry Oleksiak.

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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