March 2015 Independent Contractor Compliance and Misclassification News Update

Pepper Hamilton LLP

This past month’s headline developments involve three major developments in the area of independent contractor (IC) misclassification. The first case involves a large department store that agreed to pay most of the costs of an IC misclassification settlement of a class action brought by drivers that signed IC agreements not with the department store but rather with the department store’s delivery and logistics partner. The second case involves two of the leading tech start-ups in the car service arena which were unable to convince federal court judges that the drivers who operate vehicles in their network are ICs as a matter of law. The third case involves the use of franchise arrangements in the commercial cleaning industry, where a federal appeals court concluded that individuals who signed franchise agreements were not independent contractors as a matter of law, notwithstanding the fact that they were LLCs or corporations, and that the franchisees could present their IC misclassification claims to a jury.

In the Courts (9 cases) 

  • MACY’S AND LOGISTICS COMPANY TO PAY $4 MILLION TO SETTLE MISCLASSIFICATION CASE BY DRIVERS AND HELPERS. Macy’s West Stores, Inc. and the department store’s logistics management company, Joseph Eletto Transfer Inc. have agreed to pay $4 million to settle a class action misclassification lawsuit brought in California by over 600 truck drivers and their helpers. Of that amount, Macy’s agreed to pay $3 million and the logistics company $1 million in settlement of the claims by drivers and helpers that the department store and its delivery company misclassified them as independent contractors in violation of the California Labor Code. According to the plaintiffs, although the drivers signed IC agreements with the logistics management company, the relationship was heavily regulated by Macy’s and the logistics company through work-related directives and restrictions, including allegations that the drivers/helpers were required to display Macy’s logo on their trucks and had to wear Macy’s uniforms, could not set their own delivery schedules, had to leave the trucks at Macy’s site at the end of the day, and had to go through the process of role-playing where Macy’s employees evaluated whether the drivers/helpers met Macy’s standards and expectations of delivery and customer service. Fuentes v. Macy’s West Stores Inc., No. 2:14-cv-00790 (C. D. Cal. Mar. 16, 2015).
  • UBER AND LYFT FACE SETBACKS IN DEFENSE OF IC MISCLASSIFICATION LAWSUITS. Ride-sharing companies Uber and Lyft each lose motions for summary judgment in two California federal court class action independent contractor misclassification lawsuits. Both companies sought dismissal of the claims as a matter of law, but neither succeeded. The judges in both cases found sufficient evidence of direction and control by Uber and Lyft to create material factual issues that can only be resolved by a jury. For a detailed analysis of both cases and a discussion of how not to become the next Uber or Lyft in the area of independent contractor misclassification, see our blog post dated March 12, 2015. O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal. Mar. 11, 2015); Cotter v. Lyft, Inc., No. 3:13-cv-04065-VC (N.D. Cal. Mar. 11, 2015).
  • JANITORIAL FRANCHISEES OBTAIN CLASS CERTIFICATION IN MISCLASSIFICATION LAWSUIT AGAINST LARGEST COMMERICAL CLEANING FRANCHISOR. A Pennsylvania federal district court granted class certification in a lawsuit alleging that Jani-King, Inc., the world’s largest commercial cleaning franchisor, misclassified over 150 cleaning franchisees as independent contractors. The plaintiff franchisees claim that as a result of their misclassification, Jani-King took improper deductions from their wages in violation of the Pennsylvania Wage Payment and Collection Law. The plaintiffs alleged that Jani-King sold them rights to its cleaning services franchise, but the franchise agreements that secured those rights were, in reality, illegal employment agreements. Myers v. Jani-King of Philadelphia, Inc., No. 09-1738 (E.D. Pa. Mar. 11, 2015).
  • SATELLITE TV-INTERNET INSTALLATION TECHNICIANS MAY PRESENT IC MISCLASSIFICATION CLAIM TO JURY. The U.S. Court of Appeals for the Sixth Circuit reversed a federal district court’s grant of summary judgment in favor of Miri Microsystems LLC and directed that a jury decide the IC misclassification claim for unpaid overtime under the Fair Labor Standards Act. Applying the six-factor economic realities test, the federal appeals court found that there were disputed issues of facts that could not be decided as a matter of law in favor of the company, including whether the parties had a de facto permanent, exclusive working relationship because the technician did not have time to work for any other company; whether the degree of skill needed to perform the technician’s assignments indicated that he was an employee; whether the technician’s investments demonstrated that he was economically independent; whether the technician could have increased his profitability had he improved his efficiency or requested more assignments; and whether the company exercised control over the manner in which the technician performed his work. Keller v. Miri Microsystems LLC, No. 14-1430 (6th Cir. Mar. 26, 2015). 
  • MISCLASSIFICATION CASES INVOLVING STRIP CLUBS CONTINUE TO MAKE HEADLINES. The operators of Rick’s Cabaret in New York City have settled its misclassification case brought by exotic dancers for $15 million. Hart v. Rick’s Cabaret International, Inc., No. 09 Civ. 3043 (PAE)  (S.D.N.Y. Mar. 31, 2015). A Texas jury awards exotic dancers $126,000 in a collective action against strip club, Tiffany’s Cabaret (formerly known as KHG), due to the club’s misclassification of the dancers as independent contractors and failure to pay minimum wage and overtime compensation in violation of the Fair Labor Standards Act. Alex v. KHG of San Antonio LLC, Case No. 5:13-cv-00728 (W.D. Tex. Mar. 12, 2015) The Supreme Court of South Carolina holds that an exotic dancer who sustained gunshot wounds while working at the Boom Boom Room Studio 54 was an employee, not an independent contractor, and should receive workers’ compensation for her injuries. Lewis v. L.B. Dynasty d/b/a/ Boom Boom Room Studio 54, No. 2012-213376 (S. Ct. S.C. Mar. 18, 2015).
  • TAX COURT FINDS APARTMENT MAINTENANCE MANAGERS, WORKERS, AND APARTMENT MANAGERS ARE US Tax Court finds maintenance supervisor, maintenance workers, and apartment managers of apartment complex owned by TFT Galveston Portfolio, Ltd. to be employees and not independent contractors resulting in employment tax liabilities for the owner. Applying the definition set forth in the Employment Tax Regulations and the seven factors enumerated in Weber v. Commissioner, 103 T.C. 378 (1994), aff’d per curiam, 60 F.3d 1104(4th Cir. 1995), the Court found that the workers in question had been misclassified as 1099ers instead of W-2 employees and that the taxpayer business was liable for unpaid employment taxes, interest and penalties for failure to file Form W-2s for the workers in question. In reaching its misclassification holding, the Tax Court found, among other facts, that TFT controlled nearly every aspect of the work performed by the apartment managers and maintenance supervisor; that TFT set the maintenance workers were subject to supervision by TFT; that managers were provided with on-site housing paid by THT; that all incidental expenses were paid by TFT; that either party could end the relationship at any time; and that there were no independent contractor agreements or any written contracts defining the workers’ relationship with THT. TFT Galveston Portfolio, Ltd. v. Commissioner of Internal Revenue, 144 T.C. No.7 (Feb. 26, 2015).

On the Legislative Front (4 items)

  • GEORGIA: Employment security bill (HB500) passes the state House of Representatives on March 9, 2015 and awaits action in the state Senate. HB500 proposes that services performed by an individual for wages shall be deemed to be employment unless (1) the Department of Labor makes a contrary determination that the individual has been and will continue to be free from control or direction over the performance of services, in contract and in fact, based on an analysis of the totality of a series of factors such as non-exclusivity of the relationship, freedom to accept or reject assignments without consequence, no set minimum amount of hours or orders to be obtained, no direct oversight or supervision regarding the services to be performed, and whether the worker sets own schedule; and (2) the individual is customarily engaged in an independently established trade, occupation, profession or business, or the IRS has issued an SS-8 determination finding non-employee status. The bill also proposes that a web-based reporting system be created by the Department of Labor for instances of worker misclassification and that the Department investigate all credible reports of IC misclassification.
  • NEVADA: Bill (SB224) introduced in state Senate on March 6, 2015 seeks, among other things, to create a uniform definition of the term “independent contractor” and addresses eight specific factors that must be considered to determine whether an individual is an independent contractor or employee. Some of those factors include the whether the individual: is free to establish days and hours of his/her schedule and to be substantially free from the control and direction of the principal; is customarily engaged in a trade or business of the work being performed and is established independently of the principal; is exclusively engaged in providing services to the business; holds a current state business license issued by the Nevada Secretary of State; and leases space or equipment from the principal.
  • NEW HAMPSHIRE: Bill (HB450) that passed the House on March 12, 2015 is introduced in the state Senate on March 19, 2015. The bill would create a uniform definition of the term “employee” with a comprehensive set of factors to consider when determining independent contractor versus employee status. The proposed definitions and factors would be the same across the contexts of wage/hour, whistleblower, workers’ compensation and unemployment laws.
  • TEXAS: Bill (SB927) introduced in the state Senate on March 9, 2015 that proposes penalties for failure to properly classify workers as independent contractors or employees. The bill would also create a rebuttable presumption that “An individual performing a service for wages or under an express or implied contract of hire is presumed to be an employee of the person for whom the service is performed.” That presumption may be rebutted by showing “to the satisfaction of the commission that the individual’s performance of the service has been and will continue to be free from control or direction under the contract and in fact.”

Regulatory and Enforcement Initiatives (1 item)

  • LABOR SECRETARY ACKNOWLEDGES IMPORTANT ROLE OF BONA FIDE INDEPENDENT CONTRACTOR RELATIONSHIPS IN THE U.S. ECONOMY, BUT NOT WHEN THE IC RELATIONSHIP IS ABUSED BY BUSINESSES. The U.S. Secretary of Labor Thomas Perez testified at a March 18, 2015 House Education and the Workforce Committee hearing on “Reviewing the President’s FY2016 Budget Proposal for the Department of Labor.” In response to Congressman Polis’ question asking how more can be done to deter worker misclassification, Secretary Perez stated: “One thing we’ve been doing is work very closely with states, and we’ve entered into MOUs with 20 states, ranging from Utah and Alabama to Massachusetts, because this problem’s not a red or blue problem, it’s a problem — a national problem that has three sets of victims: the worker him or herself; the employers who play by the rules — they can’t compete for contracts, they can’t compete for businesses because they pay their taxes; and then the tax collector, because when a business is cheating, they’re not paying their workers’ comp taxes, my U.I. taxes go up because the pool has gotten smaller. And so those three types of victims are why we’re working with states across the country on this issue. It’s a very significant problem. I believe that there’s an important place for independent contractors, but I also believe that there’s ample evidence that that’s been abused.”

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