June 2018 Independent Contractor Misclassification and Compliance News Update

by Locke Lord LLP

This past month was not a particularly newsworthy month in the area of independent contractor misclassification and compliance, but four court cases do provide insights for businesses that rely on ICs.  In the first case reported below, a group of newspapers thought they had won their case on summary judgment but an appellate court reversed and has sent the case to trial. As discussed in prior posts on this blog, the newspaper business has not fared well in legal challenges by newspaper deliver persons: as we noted in one blog post, a group of newspapers were saddled with a jury verdict of $11,000,000, while another newspaper publisher paid $22,000,000 to settle its case with delivery persons. As we discussed in that post, these cases illustrated how companies should try to structure and implement their independent contractor relationships consistent with court expectations; otherwise, they increase the risk that they will  needlessly experience IC misclassification exposure.

Inadequate documentation in IC agreements can also create legal expense and increase exposure to misclassification liability. The second case reported below involves a logistics and freight company that chose New Jersey as its “choice of law” in its IC agreements but then tried to avoid New Jersey law when the driver-plaintiffs sought to enforce the company’s own selection of New Jersey as governing law. Some states’ laws in the area of independent contractors are not as favorable as the laws in other states, and New Jersey’s test for IC status changed in 2015 to a worker-friendly test, as we reported in a blog post immediately following that development. States with laws that are less IC-friendly include Massachusetts, California, New Jersey, and Illinois.

The third case involved a courier that sought unemployment benefits from a web-based platform for customers to request on-demand pick-up and delivery from restaurants or stores.  Although the New York Unemployment Insurance Appeal Board ruled that the courier was an employee for unemployment insurance purposes, an appellate court reversed that decision, finding that the couriers were legitimate ICs. This case illustrates that a company’s attention to structuring, documenting, and implementing an IC relationship in a manner consistent with court expectations can result in a validation of IC status – at least under that state’s unemployment insurance law.

The final case reported below involves an industry that has been plagued by costly IC misclassification verdicts and settlements: the adult entertainment business. As noted on this blog in one post after another after another, many companies operating in this industry have not  structured, documented, or implemented their IC relationships in a way that has been found to comply with applicable IC laws, oftentimes settling or paying verdicts in the $4 million to $8 million range.  Yet, as we stated in a blog post, “even an exotic dance club (a.k.a. strip joint) can comply with independent contractor laws – and avoid or defend against class actions.”

How can businesses that use ICs in industries such as newspapers, logistics and freight, and adult entertainment as well as most other industries maximize their IC compliance and minimize their IC misclassification liability?  One way is through the use of a process such as IC Diagnostics™, which examines whether a group of workers not being treated as employees would pass the applicable tests for IC status under governing state and federal laws, and then offers a number of practical alternatives to enhance compliance with those laws, including a customized and sustainable solution that may be suitable for many businesses. While no solution guarantees that all state and federal courts will validate an IC relationship, the effort to maximize compliance reduces the likelihood of IC misclassification lawsuits and increases the likelihood of success.

Lastly, we report on a U.S. government study released on June 7, 2018 on contingent work arrangements. The report shows that ICs make up about 7% of the U.S. workforce. The new study also provides statistics confirming that while misclassification lawsuits continue to be brought against companies that use independent contractors, the overwhelming number of those classified as ICs prefer their working arrangements over traditional employment – and only a very small percentage of those classified as ICs are dissatisfied with their working arrangements.

In the Courts (4 cases)

NEWSPAPERS DENIED SUMMARY JUDGMENT IN IC MISCLASSIFICATION CLASS ACTION BY DELIVERY PERSONS.  Media companies Torrance Holdings, LLC d/b/a The Daily Breeze, MediaNews Group, Inc., and Long Beach Publishing d/b/a Long Beach Press-Telegram were dealt a setback by a California appellate court in an independent contractor misclassification class action brought under the California Labor Code. The lower court had granted summary adjudication in favor of the newspapers that the delivery persons were independent contractors under state law. The plaintiffs then appealed the court’s ruling against them on their claim for reimbursement of business expenses under Section 2802 of the Labor Code. On appeal, the California Court of Appeal reversed, finding that there were “triable issues of fact” that required a trial whether the delivery persons were properly classified as independent contractors or were employees under the common law employment test set out in Borello & Sons, Inc. v. Dep’t of Industrial Relations.  As noted in our blog post of April 30, 2018, Borello was recently overruled by the California Supreme Court in the Dynamex case, but not for Section 2802 claims for business expenses, which the Court expressly noted was not on appeal in that case.

In addressing the main factor under Borello – the right to control – the appellate court noted that plaintiffs had provided sufficient evidence of control to avoid summary adjudication, including that the newspapers required them to deliver the papers in a manner satisfactory to the papers and their customers; retained the right to terminate the independent contractor agreements on only 30 days’ notice; required that the delivery persons not receive more than a certain percentage of complaints per deliveries; and required plaintiffs to promote and extend the circulation of the newspapers. The appellant court also noted evidence of control to the extent that the delivery persons were closely supervised by local district managers; the papers had to folded in a specific manner; and daily customized instructions were given. In addition, the court found other evidence created triable issues of fact as to the status of the delivery persons, including that if a carrier was absent, the district manager was responsible for delivering that route; all carriers were required to report to a central distribution center to assemble the papers; and payment was on a piece-rate basis. Salgado v. The Daily Breeze, No. B269302 (Cal. Ct. of App. June 6, 2018).

NEW JERSEY COURT HOLDS LOGISTICS/FREIGHT COMPANY TO ITS OWN CHOICE OF LAW SELECTION IN IC MISCLASSIFICATION CLASS ACTION.  A New Jersey federal district court has held that New Jersey law applies in a choice-of-law contest involving a proposed independent contractor misclassification class action brought by truckers against logistics/transportation company, National Freight, Inc. The plaintiffs, truckers from Pennsylvania and Rhode Island, made deliveries to Trader Joe’s stores throughout many East Coast states on behalf of NFI and claimed that NFI is liable for statutory wage/hour violations, unjust enrichment, and payment of their expenses as a result of allegedly being misclassified as ICs.  The plaintiffs initially sued under Massachusetts law, but sought to amend their claims to be governed by New Jersey law, which was the choice of law cited in the parties’ contracts.  The defendants objected to the motion to amend, even though NFI selected New Jersey law in the contracts it drafted and tendered to the truckers to sign.

The court reviewed the language contained in the Independent Contractor Operating Agreements and Lessor and Lease Operating Agreements entered between the parties. Although the agreements had a choice-of-law provision designating New Jersey as the relevant and applicable body of law, the court applied a “narrow reading” and explained that such an approach was warranted because the claims at issue did not implicate the terms of the contract. The court then undertook a secondary analysis using “the most significant relationship” test under New Jersey law and determined that New Jersey law did, in fact, apply to the claims brought by the truckers against NFI. The court found conflicting factors supporting usage of Pennsylvania law, which NFI favored, and New Jersey law, which the truckers favored. In reaching its conclusion, the court placed emphasis on the fact that NFI was the more sophisticated party and had drafted the contracts in which NFI elected to be bound by Jersey law, at least with regard to contract claims.  Portillo v. National Freight Inc., No. 15-cv-7908 (D.N.J. June 11, 2018).

POSTMATES COURIER FOUND TO BE AN INDEPENDENT CONTRACTOR UNDER NEW YORK UNEMPLOYMENT LAW. A New York appeals court has held that a courier engaged with Postmates, a company that operates a web-based platform for customers to request on-demand pick-up and delivery service from local restaurants or stores, is an independent contractor and not an employee. The courier had applied for unemployment benefits following the termination of his relationship with Postmates resulting from alleged negative consumer feedback and/or fraudulent activity. In reversing the decision of the Unemployment Insurance Appeal Board and finding the courier to be an independent contractor, the appellate court determined that the courier and those similarly situated were not subject to an interview; have no set work schedules; are not required to perform any minimum or maximum number of deliveries;  may accept, reject or ignore a delivery request without penalty; may choose the mode of transportation they wish to use for deliveries; provide and maintain their own transportation; choose the route they wish to take for deliveries; are not required to wear a uniform; are not provided with any ID card or logo; are only paid for deliveries they complete; and are not reimbursed for any of their delivery-related expenses.

The court also noted that although there was a required criminal background check from a third-party provider and an orientation session on how to use the application software platform, the couriers were not thereafter required to report to any supervisor and they “unilaterally retain the unfettered discretion as to whether to even log on to Postmates’ platform and actually work.” Despite the fact that there was some “incidental control” exercised by Postmates over the couriers, such as Postmates’ determining of the fee to be charged to the customer and the rate to be paid to the courier, the tracking of the deliveries in real time. and the handling of customer complaints, the court concluded that those factors were not substantial enough to establish an employer-employee relationship.  In the Matter of Vega (Postmates), 2018 NY Slip Op 04610 (3d Dep’t June 21, 2018).

JURY VERDICT AGAINST ADULT ENTERTAINMENT CLUB IN AN IC MISCLASSIFICATION CASE WILL COST $1.8 MILLION.  A Florida jury has found an adult entertainment club liable to eight exotic dancers for a reported $1.8 million where the jury found the dancers had been misclassified as independent contractors.  Miami strip club, King of Diamonds, and its owner, were found liable for misclassification in violation of the overtime and minimum wage provisions of the Fair Labor Standards Act. In addition to assessments of unpaid wage and hour amounts, liquidated damages will reportedly be paid to the dancers following the jury’s finding that the club and its owner either knew or showed reckless disregard for the FLSA when they misclassified the dancers as independent contractors. One of the dancers will receive an additional $75,000 plus liquidated damages due to the jury’s finding that she was discharged by the club because she filed a lawsuit against it and/or refused to sign an arbitration agreement after the lawsuit was filed.

The dancers had alleged in their amended complaint that they were subject to corporate-wide, uniform written rules, guidelines and policies that were established by the club; were required to dance on stage according to a stage rotation established by the club; were told how much clothing to remove during each song; were not permitted to adjust the fee schedule set by the club; were required to show up for work at a specific time and make up a schedule in advance; were charged fees for lateness; were required to attend meetings without compensation;  and had to pay various shift fees.  Espinoza v. Galardi South Enterprises Inc., No. 14-cv-21244 (S. D. Florida June 27, 2018).

Administrative & Regulatory Initiatives (1 matter)

LABOR DEPARTMENT STUDY OF CONTINGENT WORKFORCE SHOWS THAT 4 OUT OF 5 INDEPENDENT CONTRACTORS PREFER THEIR WORK ARRANGEMENT.  The U.S. Department of Labor, Bureau of Labor Statistics (BLS), released on June 7, 2018 a report on Contingent and Alternative Employer Arrangements based data collected in May 2017. The report found that independent contractors made up 6.95% of total “employment” (10.6 million workers). This statistic is consistent with the results of a previous study conducted by the U.S. Government Accountability Office (GAO) in May 2015 and discussed in our blog post of May 22, 2015 in which the GAO reported that independent contractors made up 7.4% of total U.S. “employment.”

In what we feel is the most meaningful result of the study, the new BLS report also stated that 79% of independent contractors prefer their alternative work arrangement to traditional jobs, while 12% were unsure or did not respond, and only 9% would prefer a traditional employment relationship. (See Table 11.)  This figure is also consistent with the GAO’s 2015 report which found that “more than 85% of independent contractors and self-employed persons appeared content with their employment type.”  These statistics confirm that only a rather modest percentage of those classified as ICs are genuinely dissatisfied with their working status.

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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