November 2016 Independent Contractor Misclassification and Compliance News Update

Pepper Hamilton LLP

Our news update for last month highlights the fact that IC misclassification lawsuits are happening across the country and in virtually every industry, both in the on-demand economy and in more traditional business sectors. Cases reported below for November 2016 involve misclassification lawsuits prosecuted by administrative agencies and class action lawyers affecting companies and workers located from coast to coast and from the upper Midwest to the Gulf of Mexico. They affect such diverse industries as cable equipment recovery, commercial cleaning, transportation, ride-sharing, and adult entertainment. We also report on articles we have published in the past month on the recently enacted New York City Freelancer law, which imposes hefty liabilities on business that fail to make prompt payment to independent contractors, and the effect of the new Trump Administration on IC misclassification enforcement initiatives at the federal and state level.

We also mention below one of our articles that was published in November entitled “Your Own Agreements Can Be Your Worst Enemy in IC Misclassification Cases.” In each of the cases reported below, the companies involved could each have minimized their likelihood of being sued or maximized their chances of prevailing in the lawsuits brought against them if they had undertaken the type of compliance enhancement process that we have long suggested in this legal blog.

In the Courts (5 cases)

INTERMODAL DRIVERS SEEK FINAL APPROVAL OF $2 MILLION SETTLEMENT IN IC MISCLASSIFICATION CLASS ACTION. Drivers who claim they were misclassified as independent contractors filed a motion seeking the final approval of a California federal district court for their proposed $2 million settlement with Genesis Intermodal Delivery, Inc., a drayage company.  The complaint alleged multiple causes of action against Intermodal including willful misclassification of the drivers as ICs; failure to pay the minimum wage; failure to provide certain meal and rest periods; failure to reimburse expenses; failure to provide complete and accurate wage statements; unfair business practices; and civil penalties pursuant to the Private Attorneys General Act (PAGA). According to the complaint, Intermodal retained and exercised significant control over details of the drivers’ work, including unilaterally setting fees to be paid to drivers for their services and requiring drivers to conduct safety inspections prior to and after deliveries. Under the terms of the proposed settlement, Intermodal would pay the participating members of the class $1.4 million; class counsel would receive fees of $500,000 and costs of $18,000; the class representative would receive $15,000; and the Labor and Workforce Development Agency would receive $10,000 under PAGA. Cabrera v. Genesis Intermodal Delivery, Inc., No. 15-cv-551 (C.D. Cal. Nov. 22, 2016).

MISSISSIPPI SHIPPING COMPANY SUED IN CALIFORNIA BY DRIVERS OF REFRIGERATED TRUCKS. Mississippi-based KLLM Transport, a provider of refrigerated shipping and trucking services nationwide, has been sued in a California federal district court by two drivers seeking to represent a class of drivers in California and Florida alleging that they were misclassified as ICs.  The complaint alleges that KLLM violated various California and Florida wage and labor laws, including failing to pay the minimum wage and overtime compensation, unlawful deductions of business expenses such as fuel, insurance and truck/trailer maintenance, failure to furnish accurate wage statements, and unfair competition. Etienne v. KLLM Transport Services, LLC, No. 5:16-cv-02534 (C.D. Cal. Nov. 14, 2016).

PENNSYLVANIA FEDERAL COURT DENIES MOTION TO DECERTIFY CLASS OF EXOTIC DANCERS IN IC MISCLASSIFICATION CLASS ACTION. A Pennsylvania federal court denies the motion by an adult entertainment club seeking to decertify a conditional class of exotic dancers and grants the dancers’ motion for final FLSA collective action certification and partial certification of the state law claims.  The action brought against 3001 Castor, Inc. d/b/a The Penthouse Club includes nationwide collective claims under the FLSA to recover unpaid wages, as well as state claims including failure to pay minimum wage and overtime compensation under Pennsylvania law. The court found that the dancers are not paid an hourly wage and that the Club paid the dancers nothing to perform on stage. The club argued that the monies received by the dancers from patrons were wages, but the court concluded they were tips. Additionally, the court found that the dancers were required to rent stage time from the Club for each shift; provide designated tips to the disc jockey, “house mom,” and podium host; and pay fines for violations of house rules. As to the FLSA claims, the court determined that the dancers were similarly situated because all worked in the same location; all were advancing similar misclassification claims; all sought the same form of relief; and all were paid nothing by the Club and shared similar employment circumstances. Verma v. 3001 Castor, Inc., d/b/a The Penthouse Club, No. 13-3034 (E.D. Pa. Nov. 29, 2016).  This case is an example of what adult clubs should refrain from doing; there are also steps that entertainment emporiums can follow to enhance their IC compliance. As the title of our February 8, 2015 blog post states: “Even an Exotic Dance Club (a.k.a. Strip Joint) Can Comply with Independent Contractor Laws – And Avoid or Defend Against Class Actions.”

LYFT’S $27 MILLION IC MISCLASSIFICATION SETTLEMENT LIKELY TO RECEIVE FINAL APPROVAL FROM THE COURT. Lyft’s $27 million settlement proposal is likely to receive final approval from a California federal district judge in a highly-publicized IC misclassification class action brought on behalf of California drivers who claim they were not properly reimbursed for fuel and other expenses, paid the full amount of their tips, or paid overtime and minimum wages. At a hearing last week, Judge Chhabria reportedly considered objections by a few drivers to the proposed settlement, forms of notice, and a provision releasing future FLSA claims, but he reportedly did not appear to view those objections as fatal to the proposed settlement. As we noted in our prior blog posts of May 9, 2016 and July 6, 2016, preliminary approval of the proposed $27 million class action settlement was granted by the court in June 2016 after the original $12.25 million settlement proposal was flatly rejected by the court as woefully inadequate. The original settlement proposal provided that the average payment to the drivers would be modest, well under $1,000 per driver. In rejecting that proposal in April of this year, Judge Chhabria stated that “[t]he modest nonmonetary relief set forth in the agreement does not come close to making up for…serious defects in the monetary aspect of the settlement.” Most importantly, the judge concluded that “[t]he drivers were…shortchanged by half on their reimbursement claim alone.” In June, though, the judge found that the new $27 million proposal adequately addressed the flaws in the original proposal. To date, 84,000 class members have submitted claims in response to the class notices. Cotter v. Lyft Inc., No. 13-cv-4065 (N.D. Cal. Dec. 1, 2016).

FIVE UBER IC MISCLASSIFICATION CLASS ACTIONS STAYED PENDING APPELLATE REVIEW OF UBER’S ARBITRATION CLAUSE. Five Uber class action lawsuits were temporarily stayed until at least February 2, 2017 by California federal court judge on November 21, 2016, pending review by the U.S. Court of Appeals for the Ninth Circuit regarding the validity of Uber’s arbitration clause with a class action waiver. The Ninth Circuit is currently addressing the issue of whether to reverse the federal district court’s decision certifying a class of about 240,000 drivers in California and Massachusetts who claim they were misclassified by Uber as ICs. Plaintiffs’ counsel reportedly argued that some non-class issues were ripe for trial and that thousands of drivers were not bound by the arbitration provisions, but Judge Chen disagreed and issued the stay. O’Connor v. Uber Technologies, Inc., No. 13-cv-3826 (N.D. Cal. Nov. 21, 2016).

Administrative and Regulatory Initiatives (1 item)

MINNESOTA CABLE EQUIPMENT RECOVERY COMPANY CONSENTS TO JUDGMENT; LABOR DEPARTMENT CONCLUDES IT MISCLASSIFIED MARKET CONTRACTORS AS IC’S. Following an investigation by the Wage and Hour Division of the U.S. Department of Labor in Minneapolis, a now-defunct Minnesota cable equipment recovery company, Cable Equipment Services, Inc., has entered into a consent order in court to settle an IC misclassification suit under the FLSA for $350,000.  According to a News Release issued by the Labor Department on November 10, 2016, the company violated overtime, minimum wage and recordkeeping requirements of the FLSA with regard to 41 market contractors and drivers that were misclassified as ICs and who recovered cable equipment for TimeWarner, Comcast, and Charter Communications.  David King, district director for the Wage and Hour Division in Minneapolis stated: “Far too often, employers misclassify workers as independent contractors when the law defines them as employees. In this case, Cable Equipment Services denied workers overtime, minimum wage, and access to employee benefits, unemployment insurance and the payment of federal and state taxes on their behalf. In these instances, not just the workers, but the whole economy loses. We are committed to rooting out misclassification and, as this case shows, will continue to use every enforcement tool available to us to achieve that goal.” Of the $350,000 to be paid to the workers, $196,000 represents unpaid minimum wage and overtime compensation and $153,000 constitutes liquidated damages. Perez v. Cable Equipment Services, Inc., No. 15-cv-416 (D. Minn. Nov. 7, 2016).

On the Legislative Front (1 item)

BUSINESSES ACROSS THE COUNTRY THAT USE IC’S MAY BE IMPACTED BY A NEW NYC FREELANCER LAW. New York Mayor de Blasio signed into law the “Freelance Isn’t Free Act” (No. 1017-2015) on November 16, 2016.  That bill was the subject of an article we published in the New York Law Journal on November 3, 2016, shortly after the New York City Council passed the bill, and the second in a comprehensive blog post on November 16, 2016, the day the Mayor signed the bill into law. The “Freelance Isn’t Free Act” gives independent contractors a right to sue for double damages if they are not provided with a written contract with specified terms and are not paid by the date provided in the agreement or, if not so specified, within 30 days after completion of services under the contract. The law covers any contract between a freelance worker and a “hiring party” that has a value of $800 or more. Although the new law has laudable objectives, it is likely to have unintended but serious consequences for both New York City-based independent contractors and for businesses that retain them. For example, there is a provision awarding double damages for failure to pay for services on a timely basis even if the service recipient has a good faith belief that the services were not completed or performed in a satisfactory manner or that payment is not due for a host of other legitimate reasons. As we noted in the blog post: “Because of the absence of a good faith defense to the double damages penalty in the law, unintended adverse consequences are likely once the new law goes into effect. Some companies will undoubtedly choose to only use independent contractors with mailing addresses outside of New York City. As a result, independent contractors with New York City mailing addresses would lose potential work. Meanwhile, businesses that continue to use independent contractors associated with New York City, especially companies operating there, will be at risk for lawsuits from freelancers seeking double damage awards, even where there is a legitimate dispute as to whether the work met the contract specifications.”  The blog post offers a number of tips for businesses who contract with ICs, especially ICs with NYC mailing addresses, to the extent such businesses may be covered by this new law.

Other Noteworthy Items (2 items)

EVEN IF A TRUMP ADMINISTRATION IS LESS AGGRESSIVE IN IC MISCLASSIFICATION ENFORCEMENTS, MOST STATES ARE LIKELY TO CONTINUE THEIR CRACKDOWNS. In our blog post of November 10, 2016, which is a reprint of our article published in the Class Action and Employment sections of Law360, we discussed how over the past eight years, the Obama Administration made IC enforcement initiatives a priority, including the development of joint/coordinated enforcement efforts between the U.S. Department of Labor and the state labor departments. Currently, 35 state labor departments have signed a Memorandum of Understanding with the U.S. Labor Department, and over half of the states currently have Republican governors.  Thus, regardless of whether the new Administration dials down its enforcement efforts in this area, it is unlikely that state labor departments will be any less aggressive in their crackdown on IC misclassification, as this issue enjoys bipartisan support in most states.

THE CAUTIONARY TALE OF JANI-KING: FRANCHISEES CAN BE MISCLASSIFIED EMPLOYEES. In an article we authored in the November 2016 issue of HR Specialist entitled “Your Own Agreements Can Be Your Worst Enemy in IC Misclassification Cases,” we analyzed Williams v. Jani-King of Philadelphia, No.15-2049 (3d Cir. Sept. 21, 2016), citing it as an example of how poorly drafted independent contractor agreements and other corporate documents can be the kiss of death when defending against an IC or franchisee misclassification class action.  In the article, as well as our blog post of September 23, 2016, we reported that the U.S. Court of Appeals for the Third Circuit affirmed a federal district court ruling that cleaning franchisees could proceed with their class action for IC misclassification against Jani-King under the Pennsylvania wage and hour laws. The Third Circuit used Jani-King’s own franchise agreement and written policies and manuals to uphold the lower court’s finding that Jani-King retained sufficient direction and control over the manner in which the franchisee cleaners were required to perform their services to warrant the certification of the case as a class action. Although not determining the merits of the case, the appellate court found many factors set forth in the company’s franchise agreement and franchise policies that supported the lower court’s decision to allow the case to proceed on a class-wide basis, including provisions affording Jani-King the right to control the franchisees’ communications with customers, how the cleaners must address customer complaints, what franchisees can wear, the types of records the cleaners must keep, how the franchisees must advertise, Jani-King’s right to inspect the work of the cleaners, the franchisor’s right to control assignments of the cleaners, its right to change the policies and procedures that franchisees must follow, and the right to terminate the franchise agreements at any time.  This case confirmed that, all too often, companies that use ICs and franchisees can be their own worst enemies in terms of drafting documents that needlessly accord them the right to direct or control the performance of the workers.

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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