May 2020 was not a busy month for the filing of new independent contractor misclassification lawsuits, as some courts were closed for new filings and many lawyers were working remotely. But five cases came to our attention that provide meaningful lessons for companies seeking to comply with laws impacting independent contractors or defending against class or collective actions brought under such laws.
The first lesson is to anticipate new types of independent contractor claims, such as the type of lawsuit reported below against FedEx. That company, which was the subject of dozens of class actions alleging that drivers for its Ground and Home Delivery divisions had been misclassified as ICs, sought to insulate itself by changing its business model for deliveries. Instead of engaging individual drivers who had claimed FedEx misclassified them as ICs, FedEx embarked on a new business approach by only contracting with corporations that operated multiple route businesses. In that fashion, each owner that drove a vehicle and made deliveries presumably became a business owner and employer of other drivers who operated the other routes. But what if the multi-route corporate business owner in turn engages drivers to cover the other routes and classifies them as ICs and not as employees? Is FedEx free from IC misclassification exposure? Not according to an IC misclassification lawsuit filed against FedEx as the alleged joint employer of the drivers that are being engaged by multi-route corporate business owners and classified as ICs.
The second lesson is that while some settlements of class or collective action IC misclassification lawsuits can be settled in the high six-figure or low seven-figure range, many of these cases have a lot more at stake, even when the number of proposed class or collective members are in the hundreds and not thousands. As reported below, one baking goods manufacturer has now paid close to $40 million in settling IC misclassification cases.
The third lesson is to shore up your IC agreements including arbitration provisions with class action waivers. As we informed our readers in a post based on an article published in Bloomberg Law’s Daily Labor Report, some arbitration clauses in IC agreements may not be sufficient to forestall a class or collective action lawsuit. They need to be drafted effectively to resist anticipated challenges by plaintiffs’ class action lawyers, who typically challenge virtually every arbitration agreement that contains a class action waiver. But, even if drafted effectively, arbitration agreements cannot insulate companies from IC misclassification liability including exposure to proceedings and audits brought by administrative or regulatory agencies, which are not bound by arbitration agreements. The starting point to minimize IC misclassification exposure to is to focus on structuring, documenting, and implementing IC relationships in a manner that enhances compliance with IC laws, as many companies have done using a process such as IC Diagnostics.™
Finally, we report below on New Jersey’s issuance of a new IC misclassification notice that all employers in that state are now required to post conspicuously. The poster, however, would not likely reach independent contractors that work off-site. Further, ICs do not have access to company intranets, if companies decide to post the notice electronically as well as at their workplaces. The law creating this paperwork obligation therefore appears to be of marginal value in trying to curtail IC misclassification.
In the Courts (5 cases)
FEDEX UNABLE TO DISQUALIFY PLAINTIFFS’ CLASS ACTION COUNSEL IN NEW TYPE OF IC MISCLASSIFICATION CLAIM. After protracted litigation, FedEx began to implement in the 2010’s a business model that it hoped would forestall future class action lawsuits for independent contractor misclassification by drivers providing services for its Ground and Home Delivery divisions. The business model relies on what FedEx calls Independent Service Providers (ISPs). FedEx enters into contracts with ISPs as independent corporations serving multiple routes with their own vehicles, drivers, and other employed personnel. According to FedEx, the ISPs agree to treat all of their drivers and helpers as employees of the ISP; agree to comply with applicable law; and retain the sole and complete discretion staffing, hiring, assignment, and all other terms and conditions of employment.
The new complaint filed in federal court in Pennsylvania alleges that the drivers and other personnel making deliveries for the ISP are actually employed by FedEx through intermediary employers – the ISPs – to perform delivery services for FedEx and that FedEx is the joint employer of the drivers along with the ISP companies. Because the drivers’ counsel, Lichten & Liss-Riordan, P.C., also represent a group of ISPs claiming that they are employees who have been misclassified as ICs by FedEx, the company brought a motion to disqualify the law firm. FedEx argued that the law firm’s representation of the drivers in this case against the company and its representation of a class of ISPs against FedEx in another pending federal court case has created a conflict of interest for the law firm under the applicable Rules of Professional Conduct because the new lawsuit asserts that FedEx is a joint employer with the ISPs of the drivers and helpers.
The Pennsylvania federal court denied FedEx’s motion to disqualify the drivers’ counsel. The court concluded that although the plaintiffs will attempt to prove that FedEx is a joint employer under the FLSA, the ISPs are not a party to the action and “there is no circumstance wherein this Court or a jury will be required to find that [Independent] Service Providers are Plaintiffs’ employers.” It further found that “[w]hile FedEx may pursue indemnification and contract termination following the conclusion of the action, a finding of liability on FedEx’s part in no way establishes FedEx’s right to recover from [Independent] Service Providers,” and that the court would not be required to determine whether the ISPs, who are not parties to the action, are liable for FLSA violations in order for the drivers to recover. Sullivan-Blake v. FedEx Ground Package System, Inc., No. 18-cv-01698 (W. D. Pa. May 21, 2020).
BAKING COMPANY’S SECOND SETTLEMENT WITH DISTRIBUTORS IN TWO MONTHS IN IC MISCLASSIFICATION CASES COST $21.6 MILLION. Flowers Foods, Inc., which makes Wonder Bread, Tastykake, and other brands of baked goods, has settled yet another independent contractor misclassification case with distributors that purchase distribution rights to sell and distribute such bakery products to retail stores. The settlement in this case was for $8.3 million covering distributors in North Carolina, and the one in April was for $13.3 million for distributors in Pennsylvania, Maryland, and New Jersey. Flowers Foods has settled similar lawsuits in the past for another $18 million: $9 million covering distributors in Alabama, Kentucky, Texas, Mississippi, Tennessee, Virginia, and Missouri, and before that for $9 million in yet another case involving North Carolina distributors.
According to the complaint in the most recent case that Flowers Foods has settled, the distributors alleged that they were required to arrive at specified warehouses at specified times to stock their vehicles with the company’s products; delivery was expected to be made to customers at the times and places determined by the company; and the distributors had no ownership or entrepreneurial influence over their day-to-day activities, including sale prices, shelf space at retail locations, orders, product selection, and work schedules. The company denied the allegations and contended that the distributors are responsible for controlling the manner, method, and means of performance of their distributorship services. The most recent settlement not only includes payments to settlement class members, service awards to each of the named plaintiffs, and attorneys’ fees and costs, but also additional payments to each of the current distributors who elect to arbitrate applicable disputes; a Buy Back Option where settlement class members who are current distributors may be eligible to have their territories repurchased by the company; creation and staffing of a Distributor Advocate position to oversee an internal, alternative dispute resolution process for independent distributors; and the creation of a distributor review panel regarding contract-related disputes. Rosinbaum v. Flowers Foods Inc., No. 16-cv-00233 (E.D.N.C. May 12, 2020).
CLEANING FRANCHISOR PREVAILS IN PART ON MOTION TO COMPEL ARBITRATION OF IC MISCLASSIFICATION CASES BY FRANCHISEE CLEANERS. In a case that came to our attention in early May, the United States Court of Appeals for the Third Circuit partially reversed a federal district court judge in an IC misclassification case by franchisees against a large commercial cleaning franchisor, Coverall North America, and one of its master franchisors, both of which sought to compel arbitration of the franchisees’ claims. The Third Circuit disagreed with the lower court judge, who had found that the terms of the arbitration provisions, which incorporated the rules of the American Arbitration Association, in the agreement between the master franchisor and the cleaning franchisees, were unclear to “unsophisticated parties” such as the cleaning contractors. The district court had also concluded that Coverall North America was not a third-party beneficiary of the master franchisor’s agreement with the franchisees, but the Third Circuit remanded that issue to the lower court for further consideration. Richardson v. Coverall North America Inc., Nos. 18-3393 and 18-3399 (3d Cir. Apr. 28, 2020).
HOME HEALTH FRANCHISOR’S MOTION TO COMPEL ARBITRATION OF CAREGIVERS’ IC MISCLASSICATION CLASS ACTION CLAIMS IS DENIED. A home health franchisor was unable to short-circuit a class and collective action lawsuit for independent contractor misclassification under Connecticut wage laws and the federal Fair Labor Standards Act by a home health aide. The franchisor made a motion to compel arbitration of the claims but its motion was denied because the arbitration agreement did not clearly cover the franchisor. The facts indicated that the parties signing the Caregiver Agreement on behalf of the defendant franchisors were less than precise as to who was signing on behalf of whom, and the agreement left blank the name of the franchising entity covered by the agreement. In denying the motion to compel and ordering litigation of the claims, the federal court concluded that there was no meeting of the minds between the defendants and the plaintiff regarding the parties to the Caregiver Agreement. The court found that the plaintiff’s argument that she was not reasonably certain about with whom she was contracting was supported by the record and that the defendants failed to demonstrate that they entered into an enforceable agreement to arbitrate with the plaintiff. Scott v. Griswold Home Care, No. 19-cv-00527 (D. Conn. May 26, 2020).
LYFT PREVAILS IN EFFORT BY DRIVERS TO ENJOIN IT FROM CLASSIFYING THEM AS INDEPENDENT CONTRACTORS. Lyft drivers suing the company in a class action claiming independent contractor misclassification under Massachusetts law were denied an emergency preliminary injunction that would have enjoined Lyft from continuing to classify the drivers as independent contractors. The drivers had filed a proposed class action alleging that, based on their misclassification as independent contractors and not employees, Lyft has unlawfully required drives to pay business expenses such as the cost of maintaining their vehicles, gas insurance, cell phone and data expenses, in violation of the Massachusetts state independent contractor law. Additionally, the drivers alleged that Lyft violated the state wage and hour laws through its failure to pay minimum wages, overtime compensation, and sick leave. According to the motion for an emergency preliminary injunction, “Faced with the choice of staying home [during the coronavirus pandemic] without pay and risking losing their access to their livelihood, including housing, food, and other necessities of living, Lyft drivers across Massachusetts will continue working and risk exposing hundreds of riders who enter their car on a weekly basis to the deadly disease.” The drivers viewed their purported misclassification by Lyft as creating an immediate danger, not only to the drivers, but the general public as well.
The court disagreed with the drivers, and concluded that although they demonstrated that there is a substantial likelihood of success on the merits of their underlying misclassification claim, the drivers failed to establish that they would face irreparable harm if they were not immediately reclassified as employees. Among other things, the court pointed out that the drivers did not establish that Lyft was the cause of any irreparable harm to the drivers’ own health where because Lyft actually instructed drivers not to drive if they felt their health was endangered. In a ruling that may suggest that the court will eventually rule in favor of the drivers on their underlying claim, the court focused on Prong B of the Massachusetts Independent Contractor Law’s ABC test for determining worker status and found, under a narrow interpretation, that Lyft would likely not be able to establish that the drivers’ services are performed outside of Lyft’s usual course of business. Although Lyft argued that its core business is as a “platform service,” connecting drivers and riders and that it does not provide transportation services, the court did not agree. It stated that “despite Lyft’s careful self-labeling, the realities of Lyft’s business – where riders pay Lyft for rides – encompasses the transportation of riders.” In an analogy that seems rather far-afield and inapposite, the court stated: “The ‘realities’ of Lyft’s business are no more ‘connecting’ riders and drivers than a grocery store’s business is merely connecting shoppers and food producers….” Cunningham v. Lyft, Inc., No. 19-cv-11974 (D. Mass. May 22, 2020).
Administrative Initiatives (1 item)
In an undated publication issued in late May, the New Jersey Department of Labor and Workforce Development issued a poster for employers to post conspicuously in each of the employer’s workplaces. This bill was one of a number of new laws that was part of a package of legislative initiatives signed by the Governor of New Jersey in January 2020 addressing independent contractor misclassification, as we noted in a prior blog post. The poster, entitled “New Jersey Law Prohibits Worker Misclassification: Notice of Employee Rights and Employer Responsibilities,” provides answers to seven questions: (1) What is misclassification? (2) Am I an employee or an independent contractor? (3) Do I have to prove that I am an employee? (4) Does it matter if I received an IRS form 1099, as opposed to IRS form W-2? (5) If my employer had me sign an independent contractor agreement before hiring me, does that make me an independent contractor? (6) What happens when it is found by a state agency or court that an employer misclassified an employee as an independent contractor? (7) Am I protected from retaliation by my employer for reporting misclassification?
The poster, which is required to be posted immediately, includes a reference to the three-prong test for independent contractor status in New Jersey. This standard is commonly referred to as an ABC test. New Jersey is one of four states that use a form of the ABC test not only for unemployment insurance benefit eligibility but also for compliance with wage and hour laws. The ABC test for independent contractor status has had a great deal of media attention due in large part to enactment of the AB5 law in California that established a different version of that test, which is more challenging for companies to meet than the version used in New Jersey. The poster also advises readers that they should go to www.myworkrights.nj.gov for information about the factors considered for each of the three prongs of the New Jersey ABC test, but that link does not actually address the ABC test. Presumably, the link will be fixed or a new link will be provided.
While the notice requires posting “in a place or places accessible to all employees in the employer’s workplaces,” it is unclear if the notice needs to be posted not only at all fixed company worksites but also on a company’s intranet site to inform employees that are working remotely. Of course, like any poster addressing independent contractor misclassification, the workers whom the legislature was presumably seeking to inform – those who are classified as independent contractors – are not always working on site and do not (and should not) have access to a company’s intranet. This may therefore be one of those laws intended to curtail misclassification that does little more than impose additional paperwork obligations on employers.