March 2019 Independent Contractor Misclassification and Compliance News Update

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Cases reported below for this past month show that large companies remain in the crosshairs of class action lawyers representing workers in independent contractor misclassification lawsuits. Two well-known industry leaders in the retail and insurance industries were sued in Texas and Illinois. The claim against the retailer alleges that it is a joint employer with a store setup company that allegedly misclassifies store set-up “crew members” as independent contractors. The claim against the insurance company alleges that thousands of agents historically classified as independent contractors are owed 401(k), pension and other employee benefits.

There also were two notable mega-settlements reached in March.  First, if approved by the court, a case resulting in a $100 million settlement between a trucking company and owner-operators would be, by far, the largest settlement of an IC misclassification case in U.S. judicial history.  The second the case, involving a $20 million settlement just approved by the court, is a dispute between the largest ride-sharing company and drivers.  Ironically,  the same court had previously rejected the parties’ proposed $100 million settlement.  How could that happen?  We explain below.

Two cases reported below illustrate how businesses use arbitration clauses to avoid litigating IC misclassification class actions in court. The company in each case was able to fend off a judicial challenge to the enforcement of an arbitration clause.  As we discussed at length in an article published in the November 9, 2018 edition of Bloomberg BNA’s Daily Labor Report entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in IC Agreements,” when arbitration clauses are effectively drafted they can lessen legal defense costs and reduce the settlement exposure in IC misclassification cases. Many companies combine these types of clauses with a process such as IC Diagnostics™ to enhance their compliance with IC laws and thereby minimize the likelihood of being sued or, if sued, maximize the likelihood of a successful outcome.

The last case reported below involves the latest chapter in the trucking industry’s effort to preempt restrictive state law tests for IC classification status. That effort has been waged with mixed results in Massachusetts, New Jersey, Illinois, and, most recently, California. The publisher of this legal blog was quoted last week in Law360 indicating this issue may reach the U.S. Supreme Court based on a “split in the circuits.”

In the Courts (7 cases)

DISCOUNT RETAILER SUED BY MERCHANDISE EMPLOYEES FOR IC MISCLASSIFICATION.  Discount retailer, Dolgencorp of Texas, Inc., known as Dollar General, and Global Fixture Services, Inc. have been sued under the Fair Labor Standards Act by “crew members” who set up and breakdown shelving/fixtures and rearrange merchandise in Dollar General stores. This collective action seeks to recover allegedly unpaid overtime compensation due to the alleged misclassification of the workers as independent contractors rather than employees. According to the complaint, Global performs services solely at Dollar General stores where Global hires crews of about 12 individuals to “re-set” the stores. The complaint states that a re-set involves removing all merchandise from the store, putting it in storage containers, removing all shelving, coolers and fixtures, rebuilding and rearranging the shelving coolers and fixtures according to a new Dollar General-determined arrangement, and finally putting the merchandise back on the shelves.

The plaintiff claims that the crew members have been misclassified because each one is paid a non-negotiable weekly amount by Global; they are assigned by Global to a specific location; their work is supervised by Global and Dollar General employees; a Dollar General employee is present to oversee the re-set process; the Dollar General employee exercises total control over the re-set process by directing the crew members in their roles and by having the authority to direct Global to terminate a crew member’s engagement; and crew members have no ability to impact their profit or loss due to their own efforts. The plaintiff also alleges that she played an additional role as a “lead contractor” as the point person to engage with the Dollar General representative and to ensure the efficient performance of the crew members. The complaint further asserts that Dollar General is liable with Global as a joint employer. No answer or motion has yet been filed by the defendants, which undoubtedly deny the allegations and are likely to vigorously defend the case. Tillis v. Global Fixture Services, Inc., et al., No. 4:19-cv-01059 (S. D. Tex. Mar. 21, 2019).

STATE FARM SUED BY INSURANCE AGENTS FOR IC MISCLASSIFICATION UNDER ERISA, SHORTLY AFTER SIXTH CIRCUIT RULING FINDING AGENTS TO BE IC’S.  State Farm entities have been sued in an Illinois federal district court by two insurance agents on behalf of thousands of other similarly situated agents claiming that the company violated ERISA as a result of their alleged misclassification by State Farm as independent contractors and not employees.  The class action complaint alleges that Term Independent Contractor Agents were not provided 401(k) and retirement and pension benefits that were available to full-time State Farm employees. The plaintiffs allege, among other things, the following:  State Farm reserves the right to control the manner and method of the agent’s business; the agents are required to comply with State Farm’s written and unwritten policies and procedures or be subject to discipline; the agents cannot sell insurance for any other insurance company, even if the product is not offered by State Farm; the agents do not own their books of business; the location of the agent’s office must be approved by State Farm; State Farm allegedly retains the right to change the agent’s compensation without prior notice or consent; the agents are required to use computers provided by State Farm; the agents’ activities regarding policyholder information and email correspondence are subject to monitoring by State Farm; the agents are subject to a non-compete provision; State Farm controls all advertising by the agents; and the agents are required to attend meetings or face possible termination of the relationship.

Only two months ago, the U.S. Court of Appeals for the Sixth Circuit, located in Cincinnati, ruled that insurance agents for American Family Insurance were properly classified as independent contractors by the company, as reported in our blog post of January 29, 2019.  While the federal court in Illinois is governed by decisions of the Seventh Circuit, not the Sixth, this lawsuit seems to be essentially a repeat of the American Family case, and the courts in the Seventh Circuit may well give considerable weight to the Sixth Circuit’s opinion.  Sheldon v. State Farm Fire & Casualty Co., No. 1:19-cv-01080 (C. D. Ill. Mar. 8, 2019).

TRANSPORTATION COMPANY SETTLES IC MISCLASSIFICATION LAWSUIT WITH OWNER-OPERATOR DRIVERS FOR $100 MILLION.  Swift Transportation Co. has reached a settlement of $100 million with nearly 20,000 owner-operator drivers in a class and collective action claiming violations of the FLSA and state wage and contract laws due to Swift’s alleged misclassification of the drivers as independent contractors and not employees. As discussed in our blog post of March 12, 2019 entitled, “A Tale of Two $100 Million Independent Contractor Misclassification Settlements,” this case involved a class action complaint that had been filed in an Arizona federal district court in 2009 alleging that the drivers were paid below the federal minimum wage level when taking into account their lease payments and the costs of maintaining their trucks, and paying for fuel, tolls, and insurance. Swift was unsuccessful in seeking to compel arbitration on an individualized basis under the arbitration provisions in the drivers’ independent contractor agreements.

Swift’s arbitration clause was found to be unenforceable when it was held by a district court to be part of a “contract of employment” that is exempt from arbitration under the Federal Arbitration Act and the Arizona Arbitration Act. That ruling eventually led Swift to agree to the proposed settlement, while vigorously denying that the drivers were misclassified. The proposed settlement provides for up to one-third of the gross settlement fund as attorney’s fees, as well as costs, expenses and costs of administration; up to $50,000 in service awards to each of the original named plaintiffs; awards subject to an allocation formula to members of the class; and a minimum of $250 to each class member, regardless of when they worked as compensation for nonwage damages.  Van Dusen v. Swift Transportation Co., Inc., No. 2:10-cv-00899 (D. Ariz. Mar. 11, 2019).

$20 MILLION SETTLEMENT WITH UBER IS APPROVED BY COURT IN INDEPENDENT CONTRACTOR MISCLASSIFICATION CASE.  A California federal district court has granted approval of a $20 million settlement reached between Uber and 13,600 California and Massachusetts drivers, who alleged they should have been classified as employees and not independent contractors. As discussed in our blog posts of April 22, 2016 and March 12, 2019, Uber reached a $100 million proposed settlement in April 2016 with about 385,000 drivers in California and Massachusetts; however, the proposal was rejected by the federal court because the amount allocated to the drivers’ California Private Attorneys’ General Act claim (“PAGA”) was regarded by the judge as inadequate. On March 29, 2019, the court approved the new settlement terms that will apply to a far smaller class of drivers (13,600 as compared to 385,000). Uber was able to trim the number of potential class members by including in an updated driver contract an arbitration clause with a class action waiver. Drivers were given a period of time to opt out of the arbitration provisions, but only 4% of the original number of drivers chose to do so.

Although the arbitration provision was challenged in court, Uber prevailed.  As a result, it was able to limit the number of class members to the very small percentage that had opted out. Those opt-outs are covered by the $20 million settlement. Under the monetary terms of the settlement, $5 million will be deducted for attorneys’ fees, $14,800,000 will be paid to class members who submit timely claims; $146,000 will be allocated for administrative costs, and $40,000 will be paid as incentive awards for the settlement class representatives. The settlement does not require the company to convert drivers into employees; rather, they will remain independent contractors.  Non-monetary relief includes the company’s agreement to modify its business practices by maintaining a comprehensive, written policy governing the deactivation of drivers’ accounts that will be easily accessible online; providing safeguards for the drivers under the deactivation policy such as giving advance warning before a driver is deactivated for reasons other than safety, physical altercation, discrimination, sexual misconduct, etc.; instituting an appeals process; and giving a deactivated driver the opportunity to take a course and be eligible for reactivation. This settlement does not include any PAGA claims. O’Connor v. Uber Technologies, Inc., No. 13-cv-03826 (N. D. Cal. Mar. 11, 2019); Yucesoy v. Uber Technologies, Inc., No. 15-cv-00262 (N. D. Cal. Mar. 29, 2019).

GRUBHUB ABLE TO COMPEL ARBITRATION OF IC MISCLASSIFICATION CLAIMS.  An Illinois federal district court has ordered arbitration of proposed class and collective action claims under the Fair Labor Standards Act and Illinois and California state law claims brought by delivery drivers against GrubHub, an on-demand food delivery service.  The drivers had alleged wage and hour violations due to their alleged misclassification as independent contractors and not employees.  GrubHub moved to dismiss the case for improper venue, arguing that pursuant to the terms of the Delivery Service Provider Agreement signed by the drivers, all of their claims must be resolved by arbitration and not by a federal court. The drivers asserted that the court could not compel arbitration because they are exempt from the Federal Arbitration Act (“FAA”) under the transportation-worker exemption which excludes from the FAA’s coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in … interstate commerce.”

In rejecting the drivers’ argument and compelling arbitration, the court concluded that the drivers were not engaged in interstate commerce as “[t]heir day-to-day duties do not involve handling goods that remain in the stream of interstate commerce, traveling to and from other states.” The court stated: “The Seventh Circuit held that – even though the milk used to make the ice cream came from out of state – the ice cream maker only made intrastate sales, so it was not acting ‘in’ interstate commerce. The same conclusion holds for GrubHub drivers here, who do not allege they were delivering food for interstate sales.”  Wallace v. GrubHub Holdings Inc., No. 18-C-4538 (N. D. Ill. Mar.‎ 28, 2019).

LYFT SUCCEEDS IN COMPELLING ARBITRATION OF DRIVERS’ IC MISCLASSIFICATION CLAIMS.  Drivers for Lyft must arbitrate their misclassification claims individually, according to the U.S. Court of Appeals for the First Circuit, which affirmed the validity and enforceability of the arbitration clause contained in Lyft’s Terms of Service Agreement accepted by each driver. The plaintiff’s complaint, originally brought in state court and later removed to federal district court, was brought on behalf of a class of Massachusetts drivers alleging that Lyft violated the Massachusetts Wage Act by misclassifying drivers as independent contractors rather than employees and by requiring drivers to bear expenses for items such as gas and car maintenance. Before starting to drive for Lyft, the driver completed an online Terms of Service Agreement as part of the registration process and, by clicking the “I accept” button, agreed, among other things, to the arbitration clause and a class action waiver.

Lyft made a motion to dismiss the complaint and to compel individual arbitration under the Federal Arbitration Act (“FAA”). In opposing the motion, the driver argued that no valid contract to arbitrate had been formed under state law, and even if a valid contract had been formed, it was unconscionable due to its selection of the American Arbitration Association’s rules that included the requirement that the driver and Lyft would equally split the costs of arbitration. The district court rejected the driver’s arguments and compelled arbitration. The First Circuit affirmed the district court’s decision concluding that the agreement was not unconscionable because Lyft offered to pay all of the fees of the arbitration – and, nonetheless, in Massachusetts, an arbitration-fee-splitting arrangement is not substantively unconscionable when the arbitration fees a plaintiff would owe amount to less than the damages the plaintiff claims. Bekele v. Lyft, Inc., No. 16-2109 (1st Cir. Mar. 13, 2019).

TRUCKING ASSOCIATION LOSES FIRST ROUND IN CALIFORNIA IN ITS BID TO PREEMPT DYNAMEX WITH FEDERAL DEREGULATION ACT.  A California federal district court has rejected the arguments of Western States Trucking Association in its efforts to avoid the restrictive IC classification test set forth in the Dynamex decision.  That decision was issued by the California Supreme Court on April 30, 2018.  As explained in our blog post that day, the Court “created a new test that is modeled after the so-called ‘ABC’ test used in Massachusetts, widely viewed as the toughest test in the country for ICs.” That state’s ABC test for IC status was held to be preempted in part in a 2016 decision by the U.S. Court of Appeals for the First Circuit in Boston, and the Western States Trucking Association was seeking a similar ruling. As the publisher noted in an article by Linda Chiem published on April 4, 2019 in Law360:  “‘The transportation industry groups have been waging war for years on laws that use an ABC test to determine independent contractor status, and have obtained mixed results,’ said Richard Reibstein, a partner with Locke Lord LLP and co-head of its independent contractor misclassification and compliance practice, adding that the trucking industry might look . . . to [have the U.S. Supreme Court] resolve this ‘split in the circuits.’”

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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