The past month included significant state and federal appellate court decisions, large settlements of IC misclassification class actions, class and collective action certifications, and two IC misclassification class actions that survived motions to dismiss. Perhaps the most significant court development in the first quarter of 2017 was an appellate court case that was issued by the Connecticut Supreme Court. That decision clarified the “C” prong of the state’s “ABC” test for independent contractor status under that state’s unemployment insurance law. Notably, one year earlier, the Connecticut Supreme Court clarified the “A” prong of the state’s “ABC” test, as we noted in our March 2016 News Update. Both decisions are favorable to businesses that make use of legitimate ICs in that state.
The other key appellate court decision in the IC misclassification arena involves FedEx, which prevailed in its appeal of an NLRB order that it bargain with a local Teamsters union as the representative of a unit of single-route Ground Division drivers. The United States Court of Appeals for the D.C. Circuit, for a second time, rebuffed the NLRB and denied enforcement of the Board’s bargaining order, finding that the single-route drivers are independent contractors under the National Labor Relations Act.
Two well-known IC misclassification class actions settled for substantial sums: Lyft got formal approval from a federal district court judge to settle its class action IC misclassification case with its on-demand ride-sharing drivers for $27 million, while on-demand shopping delivery service Instacart entered into a proposed settlement of its IC misclassification class action with its “shoppers” for $4.625 million. Another IC misclassification class action involving 35 freelancers at The Hollywood Reporter received final court approval for a settlement of $900,000; each freelancer will recover an average of just under $15,000 after legal fees and other costs.
Class certification was granted by courts in three IC misclassification cases: a Tennessee case involving sales representatives of timeshare cancellation services; a Kentucky case involving drivers making pharmaceutical product deliveries; and a Massachusetts case involving drivers making home deliveries of furniture, appliances, and electronic products.
Finally, there were two IC misclassification cases where the companies made motions seeking to dismiss the claims – and both motions failed. In one, FedEx Ground was denied a motion to dismiss a new case brought by its Ground Division drivers. It had argued that they were not covered by that state’s “ABC” test for IC status because the drivers had entered into IC agreements through LLCs and corporations. The court, however, found that dismissal was inappropriate and that the drivers will be permitted to show that they were misclassified where they alleged that FedEx required that they incorporate. In the other case, sales representatives selling home security products and services in South Carolina survived a motion for summary judgment and were found to be entitled to try their state law IC misclassification claims to a jury.
Apart from the two appellate court decisions, the takeaway from the other eight IC misclassification class actions is that each of the companies could have averted a lawsuit altogether, settled for far less, or obtained a judgment in their favor – had they simply placed themselves in a far better position from an IC compliance standpoint. The allegations in those cases strongly suggest that the businesses involved did not pay sufficient attention to the importance of structuring, documenting, and implementing their IC relationships in a manner that enhanced their compliance with state and federal laws, such as IC Diagnostics™, as discussed in our White Paper.
In the Courts (10 cases)
CONNECTICUT SUPREME COURT CLARIFIES APPLICATION OF STATE LAW TEST FOR IC STATUS. The Connecticut Supreme Court has held that the Connecticut test for independent contractor status under the state’s unemployment insurance law does not require that a worker must provide services for more than one employer to be an independent contractor under that law. Rather, that fact is but one factor to be considered in determining if an individual is “customarily engaged in an independently established trade, occupation, profession or business,” which is Prong C of the three-part “ABC” test for independent contractor status for unemployment purposes in Connecticut. At the underlying hearing in the case, the unemployment referee had determined that Southwest Appraisal Group, LLC, an automotive damage appraisal business that assesses damaged vehicles, had misclassified the appraisers as independent contractors and was therefore liable for unemployment taxes. That decision was appealed to the Board of Review of the Employment Security Appeals Division, which upheld the Referee’s determination as to three of the appraisers who operated their own legitimate independent businesses but did not actually perform services for any other business besides Southwest. On appeal, the Supreme Court reversed that decision as to the three appraisers. In its decision, the Court reasoned that “just as the mere freedom to provide services for third parties is not by itself dispositive under part C… ‘whether the individual actually provided services for someone other than the employer is [not] dispositive proof of an employer-employee relationship.’” The court observed that, in making a determination under Prong C of the test, “the totality of the circumstances” must be evaluated in light of many factors, including but not limited to (1) the existence of state licensure or specialized skills; (2) whether the individual holds himself or herself out as an independent business through the existence of business cards, printed invoices, or advertising; (3) the existence of a place of business separate from that of the putative employer; (4) the individual’s capital investment in the independent business, such as vehicles and equipment; (5) whether the individual manages risk by handling his or her own liability insurance; (6) whether services are performed under the individual’s own name as opposed to the putative employer; (7) whether the individual employs or subcontracts others; (8) whether the individual has a saleable business or going concern with an established clientele; (9) whether the performance of services affects the goodwill of the individual rather than the employer; and (10) whether the individual performs services for more than one entity – the one factor that the referee and Board of Review had focused on. Southwest Appraisal Group, LLC v. Administrator, Unemployment Compensation Act, No. SC19651 (Sup. Ct. Conn. Mar. 21, 2017).
FEDEX AGAIN ABLE TO OVERTURN NLRB RULING THAT ITS GROUND DIVISION DRIVERS ARE INDEPENDENT CONTRACTORS. FedEx has succeeded for a second time before the U.S. Court of Appeals for the D.C. Circuit in its challenge to a ruling by the National Labor Relations Board that FedEx Ground Division drivers are not independent contractors but rather employees who can be unionized. As more fully discussed in our March 7, 2017 blog post, this was the second time that the D.C. Circuit denied enforcement of an NLRB decision that, if not reversed, would have required FedEx to bargain with a local Teamsters union as the representative of a bargaining unit of Ground Division drivers. In the first decision by the D.C. Circuit, the court concluded that, as a matter of law, the FedEx drivers were independent contractors under the common-law agency test used to determine independent contractor status under the NLRA. FedEx Home Delivery v. NLRB, 563 F.3d 492 (D.C. Cir. 2009). The court in FedEx I then examined a “non-exhaustive list of ten factors [set forth in the Restatement (Second) of Agency] to consider in deciding whether a worker is an independent contractor” and concluded that the “indicia of independent contractor status ‘clearly outweighed’ the factors that would support employee status.” The NLRB did not seek Supreme Court review of the FedEx I decision by the D.C. Circuit. In the second proceeding before the NLRB, the company had argued that the decision in FedEx I compelled a similar ruling in the second case. The NLRB, however, chose to disregard the prior decision by the D.C. Circuit. In its ruling, the NLRB said it “disagreed with [the D.C. Circuit’s] interpretation of the Act.” That decision was promptly appealed by FedEx. Now, the appellate court has again reversed the NLRB: “It is as clear as clear can be that ‘the same issue presented in a later case in the same court should lead to the same result.” The court then stated emphatically: “Doubly so when the parties are the same.” After stating that the NLRB was simply seeking to “nullify this court’s decision in FedEx I,” the court remarked: “This case is the poster child for our law-of-the-circuit doctrine, which ensures stability, consistency, and evenhandedness in circuit law.” FedEx Home Delivery v. NLRB, No 14-1196 (D.C. Cir. March 3, 2017).
INSTACART SETTLES WITH “SHOPPERS” FOR $4.625 MILLION IN IC MISCLASSIFICATION CLASS ACTION. On-demand grocery delivery service Instacart has agreed to settle for $4.625 million an IC misclassification class action by a class of “shoppers” who shop, purchase, and deliver groceries from grocery stores including Safeway and Whole Foods to customers at their homes and businesses through Instacart’s mobile phone app. The shoppers alleged that because of their misclassification as independent contractors, they were denied minimum wage and overtime compensation, were not reimbursed for work-related expenses, did not receive proper meal and rest breaks, and did not receive all of the tips left them by customers, as required by federal law and the laws of Colorado, New York, and California. The settlement seeks to cover shoppers who have performed work for Instacart in California, New York, Pennsylvania, Colorado, Illinois, Washington, Indiana, Texas, Georgia, Oregon, Massachusetts, Minnesota, Florida, North Carolina, Virginia, Maryland and New Jersey. Of the $4.625 million, approximately one-third ($1.54 million) will be for attorneys’ fees and costs, $120,000 for administrative costs, $80,000 for claims under the California Private Attorneys General Act, and amounts ranging from $500 to $5,000 for class members. In addition, as part of the proposed settlement Instacart has agreed to modify its app to clarify for customers the difference between service fees and tips; disclose that commercial insurance may be required in certain jurisdictions and that Instacart does not provide it; implement a formal deactivation policy under which shoppers may only be terminated for cause; and create an interface or app that will allow shoppers to obtain more detailed information regarding their work, including information about the tasks they have performed and the money they have received from those tasks. A hearing on the proposed settlement is scheduled for April 19, 2017. Camp v. Maplebear, Inc., d/b/a Instacart, No. BCC652216 (Super. Ct. Los Angeles County Mar. 17, 2017).
LYFT’S $27 MILLION CLASS ACTION SETTLEMENT FINALLY APPROVED IN DRIVER IC MISCLASSIFICATION CASE. A California federal court judge grants final approval of a $27 million class action settlement between ride-sharing company, Lyft, and about 95,000 drivers who claimed they were owed tips and reimbursement of expenses under state law due to their alleged misclassification by Lyft as independent contractors. As discussed in our blog post of March 14, 2017, which we updated on March 17, 2017, the settlement also includes a number of non-economic terms, including: (1) Lyft will no longer be able to deactivate drivers at will, for any reason, and instead will only be able to deactivate drivers for specific reasons or after providing notice and an opportunity to cure; the deactivation will be arbitrable; (2) Lyft will provide additional information about potential passengers to drivers prior to the driver accepting any ride request, which presumably will assist drivers in deciding whether to accept a ride request; and (3) Lyft will create a “favorite” driver option where drivers who are designated by riders as a “favorite” are entitled to certain benefits. In exchange for those economic and non-economic terms, all class members (except those who have “opted out” of the settlement) waive all existing claims they may have against Lyft arising from their alleged misclassification as independent contractors. The settlement will cover all Lyft drivers who made at least one trip for Lyft in California between May 25, 2012, and July 1, 2016. Although a few class members, a Teamsters Union local and the “Uber Lyft Teamsters Rideshare Alliance” had filed objections to the settlement primarily because it allows Lyft to maintain its classification of the drivers as independent contractors and does not require Lyft to reclassify them as employees, the federal judge who approved the settlement rejected those objections. Had the drivers been reclassified as employees, federal labor laws would permit the Teamsters to unionize those drivers. The judge’s order states: “The agreement is not perfect. And the status of Lyft drivers under California law remains uncertain going forward. But the agreement falls within a range of reasonable outcomes given the benefits it achieves for drivers and the risks involved in taking the case to trial.” Cotter v. Lyft Inc., No. 13-cv-04065 (N.D. Cal. March 16, 2017).
COURT APPROVES CLASS ACTION SETTLEMENT OF IC MISCLASSIFICATION CLAIM BY ENTERTAINMENT PUBLISHING FREELANCERS. A California state court judge has approved a $900,000 settlement of a class action lawsuit filed by freelancers against Prometheus Global Media, LLC, an entertainment publishing company that publishes The Hollywood Reporter, Billboard, Adweek, and Backstage. The freelancers, who included an assistant editor for social media and a video coordinator, alleged that the company willfully misclassified “freelancers” as independent contractors and thereby denied them wage and hour rights and protections under the California labor laws. Under the terms of the proposed $900,000 settlement, each of the 35 class members will receive approximately $15,000 (totaling about $520,000), and the balance of approximately $380,000 will be earmarked for attorneys’ fees and other costs. As discussed in our October 3, 2013 blog post, the freelancers sought allegedly unpaid overtime, pay for rest and meal breaks that were not provided, reimbursement of expenses, and penalties for failing to issue itemized wage statements and failing to make timely wage payments. The complaint had alleged that the freelancers were treated the same as employees in that they were expected to work Monday through Friday from 9 a.m. to 5 p.m.; were provided with their own work space, computer, company e-mail address, and direct dial phone number; were required to attend meetings; were directed by a supervisor and manager; and were subject to discipline. Simpson v. Prometheus Global Media LLC, No. BC522638 (Super. Ct. Los Angeles County, Mar. 22, 2017).
SALES REPRESENTATIVES OF SERVICE COMPANY ASSISTING TIME SHARE OWNERS TO CANCEL INVESTMENTS GRANTED CLASS ACTION STATUS IN IC MISCLASSIFICATION CASE. A Tennessee federal district court has granted conditional certification of a collective action brought under the Fair Labor Standards Act by sales representatives alleging that Wesley Financial Group, LLC, a company that assists individuals in modifying or cancelling their ownership interests in timeshares, has misclassified them as independent contractors and not employees. The sales reps, who called prospective customers to determine whether they were interested in engaging Wesley’s services, were paid a percentage of any fee generated from a timeshare owner whom they successfully referred to the Company. The class action alleges that by misclassifying them as independent contractors, Wesley engaged in violations of the federal minimum wage and overtime provisions. In granting conditional class certification, the Court noted that the standard that applies at the initial stage of a collective action under the FLSA requires only that a class representative need only “make a ‘modest factual showing’ demonstrating that she and potential class members are ‘similarly situated,’” which the court held to be satisfied by the plaintiff’s declaration that all sales reps were subject to the same unlawful pay policy of being treated as independent contractors. Burgess v. Wesley Financial Group, LLC, No. 16-CV-01655 (M.D. Tenn. Mar. 16, 2017).
PHARMACEUTICAL PRODUCT DELIVERY DRIVERS GRANTED CONDITIONAL CLASS CERTIFICATION IN IC MISCLASSIFICATION. A Kentucky federal district court has granted conditional certification of an FLSA collective action brought by delivery drivers against King Bee Delivery, LLC, a company that provides pharmaceutical product delivery services to pharmacies and hospitals in Kentucky, Ohio, and Indiana. The drivers allege that King Bee violated the overtime provisions of the FLSA when it misclassified the drivers as independent contractors. In granting the certification motion, the court concluded that the drivers made “the modest factual showing” that their “position is similar, not identical, to the positions held by the putative class members.” The court based its conclusion on evidence that the drivers performed similar duties, adhered to similar schedules, and followed similar rules as do other delivery drivers working for the company. Although the drivers had also brought claims for unlawful deductions for GPS trackers, uniforms, and other fees under the Kentucky Wage and Hour Act, the court granted the company’s motion to dismiss those claims because they amounted to nothing more than conclusory allegations. Williams v. King Bee Delivery, LLC, No. 15-cv-306 (E.D. Ky. Mar. 14, 2017).
DRIVERS FOR MASSACHUSETTS APPLIANCE, FURNITURE, AND ELECTRONIC HOME DELIVERY COMPANY GRANTED CLASS ACTION CERTIFICATION IN IC MISCLASSIFICATION CASE. A Massachusetts federal district court has granted conditional class certification to delivery drivers in their IC misclassification class action brought against Spirit Delivery & Distribution Services, a logistics company specializing in appliance, furniture and electronic home delivery. The drivers alleged violations of the Massachusetts independent contractor wage law. The company sought to avoid class certification by arguing that the state law is preempted by the Federal Aviation Administration Authorization Act (FAAAA). While the court agreed that the FAAAA preempts the second prong of the “ABC” test under the Massachusetts independent contractor law (that “the service is performed outside of the usual course of business of the employer”), the other two prongs of the ABC law were not. In granting conditional class certification, the court found, among other things, that the drivers’ allegation that the Company’s system wide policy of misclassifying the drivers as ICs in violation of the state law satisfied the commonality requirement and that the injuries arise from the same events and course of conduct as those of the proposed class members. Vargas v. Spirit Delivery & Distribution Services, Inc., No. 13-cv-12635-TSH (D. Mass. Mar. 24, 2017).
FEDEX GROUND FAILS IN EFFORT TO DISMISS IC MISCLASSIFICATION WAGE PAYMENT CLAIM IN NEW JERSEY BY GROUND DIVISION DRIVERS, WHERE THEY WERE REQUIRED TO OPERATE THROUGH SEPARATE LLC’S AND CORPORATIONS. In 2016, FedEx resolved most of its remaining IC misclassification lawsuits by Ground Division drivers, as we noted in our blog post of October 24, 2016. But new cases have been filed against the courier giant, including one pending in federal court in New Jersey alleging that FedEx violated state consumer protection laws, common law, Consumer Fraud Act, and the New Jersey Wage Payment Law when it misclassified drivers as independent contractors instead of employees. The amended complaint in the case alleges that FedEx engages approximately 300 truck and van drivers in New Jersey and requires some drivers to create limited liability companies (LLCs) or corporations and enter into an Operating Agreement with drivers through their business entities for particular Ground Division routes. Although the plaintiffs acknowledged that FedEx represents to the drivers that they can “be [their] own boss,” “grow [their] own business,” have “sole control” over their businesses, and enjoy a proprietary and entrepreneurial interest in the delivery routes, the drivers allege that FedEx treats them as employees by regulating or controlling vehicle appearance, vehicle maintenance, liability insurance, driver reports, driver uniforms, driver service areas, the prices charged for services, route schedules, electronic equipment used, forms for paperwork, and approval of substitutes and assistants. To that end, the drivers allege that FedEx ensures drivers are following those requirements by actively monitoring how drivers operate their vehicles, carry packages, and complete paperwork. FedEx filed a motion to dismiss all of the claims in the complaint and succeeded in part: the court dismissed all of the state statutory and common law complaints except for the New Jersey Wage Payment Law claim. FedEx argued that the drivers could not bring a claim under the state’s wage law because their companies, not them personally, are not parties to the Operating Agreements, and the law only protects “persons” and not business entities. Federal District Judge Robert B. Kugler, however, rejected that argument. He stated that courts “are obliged to look behind contractual language to the actual situation – the status in which parties are placed by relationship that exists between them.” He further stated that a court “must analyze beyond the contract formed between Defendant and the corporate entities formed by Plaintiffs in order to determine whether Plaintiffs were employees.” Carrow v. FedEx Ground Package Systems, Inc., No. 16-cv-3026 (D.N.J. Mar. 30, 2017).
HOME SECURITY COMPANY FAILS TO DISMISS IC MISCLASSIFICATION CLASS ACTION BY SALES REPRESENTATIVES. A South Carolina federal court has denied a motion for summary judgment filed by AVSX Technologies, a company that sells, installs, and services home security systems, in a class action IC misclassification lawsuit by sales representatives selling AVSX products and services. The sales reps (who became employees of AVSX at a later point in time) claim that the company violated the FLSA and the South Carolina Wage Payment Act by treating them as ICs instead of employees. The sales reps claim damages for allegedly unlawful holdbacks of amounts retained by the Company for any security contracts that are cancelled by the consumers and allegedly unlawful chargebacks against their commissions, as well as the company’s failure to provide them with benefits and restitution for the tax burden imposed on the sales reps due to their classification as 1099ers. In defending against the motion for summary judgment, the sales reps introduced evidence of the company’s right to and exercise of control over the sales reps’ performance by the use of contract forms provided by the company, who allegedly set the prices, terms, and conditions of sale; the company’s furnishing of company shirts, IDs, marketing materials, company iPads, cell phones, and vehicles; and the company’s right to terminate the sales reps at any time with or without cause. The company argued that the sales reps set their own schedules, determined potential clients, set their own geographic boundaries, did not have an office provided by the Company, were not required to attend meetings, and signed contracts specifying that they were independent contractors. The Court concluded that summary judgment should be granted in favor of the company on the FLSA claims, as that law does not address holdbacks, chargebacks, benefits, or tax burdens. The Court, however, denied summary judgment for the claims under the state wage payment law on the holdback claims, finding that those claims could be brought under the state law if the sales reps had been misclassified as independent contractors. It concluded that the facts submitted by both sides on the motion for summary judgment demonstrated that there existed a genuine issue of material fact that needed to be tried to a jury regarding the employment status of the sales reps. As the court stated, “a reasonable jury could find that Plaintiffs were employees regardless of the contracts that they signed.” Sill v. AVSX Techs., LLC, No. 16-cv-0555 (D.S.C. Mar.17, 2017).
Regulatory and Enforcement Initiatives (1 item)
WISCONSIN REPORTS RECOVERY OF $1.1 MILLION IN UNPAID UNEMPLOYMENT INSURANCE TAXES, PENALTIES, AND INTEREST FOR IC MISCLASSIFICATION IN 2016. Wisconsin’s enhanced enforcement of IC misclassification laws since mid-2013 resulted in recovery of $1.1 million of unpaid unemployment insurance taxes, penalties and interest in 2016. According to the State of Wisconsin 2017 Report to the Unemployment Insurance Advisory Council, issued on March 15, 2017, Unemployment Insurance auditors identified a total of 8,613 misclassified workers in 2016. The Report also notes that the Department of Workforce Development has produced educational videos to instruct employers how to properly classify a worker as an employee or an independent contractor and how to prepare for a tax appeal hearing. The Report projects that the Department has committed to conducting a total of 650 worker classification field investigations in 2017. Scott Manley, Unemployment Insurance Advisory Council Member, stated, “The UI system is funded by employers and intended to help workers in need. Protecting those funds from waste, fraud and abuse is an important mission.”