November and December 2019 Independent Contractor Misclassification and Compliance Law News Update

Locke Lord LLP

Our combined news update provides guidance for companies that utilize independent contractors on what not to do.  The first lesson involves a company’s waiver of its best argument for compelling arbitration of an IC misclassification claim.  As we pointed out in our blog post analyzing the U.S. Supreme Court’s decision last year in Oliveira v. New Prime, Inc., that decision may have limited impact because, unlike the Federal Arbitration Act that excludes interstate transportation workers from the arbitration provisions of the FAA, state arbitration laws can provide an alternative basis for compelling arbitration.  New Prime, though, never sought to compel arbitration under the applicable state arbitration law, leading to a court decision that it waived its right to assert the applicability of the state arbitration law and therefore could not use its “get out of jail” card.  This case reinforces the importance of including state arbitration laws (in addition to the FAA) in a motion to compel arbitration at an early time frame or , like New Prime, a company may be found to have waived this valuable defense.

The second lesson involves a case in Florida where a company wisely put into effect an arbitration clause but failed to draft it in an effective manner, limiting it to claims by the workers’ corporate entities but not disputes with the workers themselves.  As we pointed out in an article published by Bloomberg Law’s Daily Labor Report about drafting effective arbitration agreements with class action waivers, these types of contractual provisions should be drafted with care and anticipate arguments by plaintiffs’ class action lawyers that the agreement does not cover the dispute or is unconscionable.

The final lesson derives from a court’s rejection of an $11.5 million settlement of an IC misclassification class action: even when the amount of the settlement is very substantial, the settlement terms must anticipate court concerns about the terms including whether the settlement fund is reasonable, the waiver is overbroad, and the suitability of the class representatives.  Otherwise, there is a higher likelihood that the proposed settlement will not be approved.  Indeed, the greater the settlement amount, the more likely the proposed settlement will be more closely scrutinized by a court.

In the Courts (7 cases)

WAIVER OF STATE ARBITRATION LAW IMPERILS TRANSPORTATION COMPANY.   A Massachusetts federal court has held that trucking company, New Prime, Inc., waived its right to compel arbitration under the Missouri Uniform Arbitration Act (MUAA) of a trucker’s class and collective action claims alleging violations of the federal Fair Labor Standards Act and Missouri Minimum Wage Law.  New Prime, Inc. (the defendant in the Supreme Court case that was the subject of one of our prior blog posts) attempted on three occasions to compel arbitration of those wage and hour claims under the Federal Arbitration Act (and not the MUAA) but failed.  Only after the Supreme Court concluded that the FAA exempted from arbitration all workers who are involved in interstate transportation including independent contractors did New Prime seek to compel arbitration under the MUAA. The court stated that New Prime “wants a fourth bite of the arbitration apple.” In concluding that New Prime waived its right to arbitrate under the Missouri law, the court determined that New Prime had knowledge of the existing right to arbitrate; acted inconsistently with that right; and prejudiced the truckers opposing arbitration. The court also found that the truckers suffered prejudice because a timely motion to compel arbitration under the MUAA could have saved the truckers, including the opt-ins, and the Court, unnecessary time and expense. Thus, any company seeking to compel arbitration under state law must do so promptly and take no steps that may constitute a waiver of the state arbitration law.  Oliveira v. New Prime, Inc., No. 15-10603 (D. Mass. Dec. 9, 2019).

ANOTHER FED EX GROUND IC MISCLASSIFICATION CLASS ACTION CERTIFIED IN NEW JERSEY.  After settling independent contractor cases from around the country for hundreds of millions of dollars and despite changing its business operations, FedEx Ground is facing a new round of IC class actions, including one in federal court in New Jersey where a judge has granted class certification to drivers alleging violations of the New Jersey Wage Payment Act. The drivers claim that FedEx wrongfully withheld from the drivers’ wages amounts for workers’ compensation, employment taxes, and business expenses such as vehicle insurance and maintenance. The three named plaintiffs contracted with FedEx in their own corporate names under Operating Agreements that FedEx no longer uses.  The plaintiffs alleged that FedEx made deductions from drivers’ pay for workers’ compensation insurance, accident insurance, “business support” expenses, and liability insurance. The amended complaint also alleges that FedEx controls the drivers by requiring them to display the FedEx logo on their vehicles; wear approved uniforms; allow FedEx personnel to ride with them to gather data regarding the drivers’ routes; meet the FedEx “Standard of Service”; accept FedEx’s determination of the size and composition of the routes; accept the formula for payment of the drivers that FedEx established; and carry scanners while making deliveries.  A previous motion for class certification had been denied by the court because the drivers failed to provide any analysis, guidance or methodology to determine whether proposed class members experienced the same allegedly improper wage deductions. Carrow v. FedEx Ground Package Systems, Inc., No. 16-3026 (D.N.J. Dec. 26, 2019).

JANI-KING PREVAILS TO LIMITED EXTENT IN IC MISCLASSIFICATION CLASS ACTION IN CONNECTICUT.  A federal court in Connecticut has granted summary judgment to Jani-King, the largest commercial cleaning franchisor, on the “unjust enrichment” claims in an IC misclassification lawsuit brought by over 100 cleaning franchisees. The court, however, declined to award summary judgment with regard to the franchisees’ claim that Jani-King unlawfully classified them as independent contractors under the Connecticut’s ABC test for IC status.  Under the three-pronged ABC test in Connecticut for assessing independent contractor/employee status, the franchisees submitted evidence of Jani-King’s control over “nearly every aspect” of the franchisees’ cleaning services; argued that the customers’ homes constituted Jani-King’s places of business; and provided evidence that the franchisees did not have independent business enterprises in the commercial cleaning context outside of their work for Jani-King. The court concluded that the evidence submitted was sufficient to raise genuine issues of fact precluding a grant of summary judgment as to the misclassification issue. As we reported in this blog, Jani-King recently settled a similar case brought under Pennsylvania law for $3.7 million.  Mujo v. Jani King Int’l Inc., No. 3:16-cv-1990 (D. Conn. Dec. 21, 2019).

ARBITRATION AGREEMENT WITH IC’S CORPORATE COMPANY DOES NOT BIND WORKER TO ARBITRATION.  A Florida federal court has refused to compel arbitration of plaintiffs’ individual claims where the arbitration clause contained in the Independent Contractor Agreement was expressly limited to disputes between the plaintiffs’ corporate entities and the defendant company, Eagle Painting. A collective action was filed on behalf of a class of painters against the painting company alleging that the company failed to provide overtime compensation in violation of the Fair Labor Standards Act due to misclassification of the painters as independent contractors and not employees. Conditional certification was granted and at least two individuals opted in as individual plaintiffs. Subsequently, the defendant requested that the court compel arbitration of those two claims pursuant to the terms of the Independent Contractor Agreements executed by each one. The Agreement provided the following relevant language: “Contractor and Company agree that final and binding arbitration will be the exclusive means of resolving any disputes between Contractor and Company…” In denying the company’s motion to compel arbitration, the court stated that the Agreements explicitly defined the terms “Contractor” as each of the painters’ respective corporations and “Company” as the Defendant, Eagle Painting. Because the arbitration clause was expressly limited to disputes between the plaintiffs’ corporations and the company, the court found that the workers’ individual claims were not subject to arbitration. The court stated:  “Had the parties intended to bind the Plaintiffs individually, the Agreements could have expressly stated as such. However, the Agreements do not, and, therefore, Plaintiffs have not agreed to arbitrate their individual claims.” Garcia v. J&J, Inc., No. 19-cv-60728 (S.D. Fla. Nov. 8, 2019).

CALIFORNIA TRUCKING ASSOCIATION CHALLENGES AB5 AND SECURES TEMPORARY RESTRAINING ORDER FOR ITS MEMBERS.  Seven weeks before California’s AB5 law took effect, the California Trucking Association (CTA) challenged the legality of Assembly Bill 5 (AB5), which took effect in California on January 1, 2020.  The CTA alleges that AB5 violates the Supremacy Clause and Commerce Clause and that the new state ABC test for independent contractor/employee status set forth in AB5 is preempted for their members by the Federal Aviation Administration Authorization Act (FAAAA). The lawsuit filed in a California federal court seeks declaratory and injunctive relief prohibiting the application and enforcement of California’s new, restrictive test for determining worker status under AB5, a law we have commented upon frequently and was the subject of a recent commentary published in Law360 and republished in this legal blog. CTA alleges in its amended complaint that the trucking industry has relied upon the owner-operator model for decades and its “ability to contract with independent contractors is necessary because of the demand for, duration of, and volume of trucking services by individual motor carriers fluctuates significantly.” CTA claims that prior to the California Supreme Court’s Dynamex decision, which AB5 sought to codify in the state’s Labor Code, it was lawful for CTA’s members who contracted with owner-operators to treat them as independent contractors and not employees for purposes of California’s labor laws.  With the new statute’s adoption of the Dynamex ABC test for IC status, each CTA member that continues to use individual owner-operators to provide services to their customers must treat these workers as employees and provide them with all of the protections afforded to California employees.

One of the main thrusts of the CTA lawsuit is that Prong B of the ABC test “is expressly preempted by the FAAAA because the requirement that motor carriers treat all drivers as employees and the concomitant de facto prohibition on motor carriers contracting with independent owner-operators to perform trucking services in California directly impacts the services, routes, and prices offered by CTA’s motor-carrier members to their customers.”  This same argument has succeeded in before the First Circuit but failed before the Third Circuit, creating the likelihood that the U.S. Supreme Court may eventually rule on whether the FAAAA preempts the most challenging prong of the ABC test.  California Trucking Association v. Becerra, No. 3:18-cv-02458 (S.D. Cal. Nov. 12, 2019). Just hours before the new law was set to take effect, Judge Roger Benitez granted a temporary restraining order and set a date, January 14, 2020, for a hearing on the CTA’s request for a preliminary injunction.

POSTMATES’ $11.5 MILLION SETTLEMENT OF IC MISCLASSIFICATION CLASS ACTION REJECTED BY COURT.  A California state court has refused to approve Postmates’ $11.5 million settlement with a proposed class of approximately 380,000 couriers who are claiming that they were misclassified as independent contractors and not employees.  The court issued a “tentative ruling” identifying sections of the proposed settlement agreement that require further explanation. Postmates is an on-demand delivery service that offers clients delivery from restaurants and stores by couriers engaged by Postmates to make the requested deliveries. The court stated, “Significant concerns are present both by what is contained in the language of the settlement and what facts are missing from the motion [for preliminary approval of class settlement.]”  Included among the further information sought by the court was: the maximum value of all the class claims and PAGA claims or the bases for their valuation; declarations from the named plaintiffs setting forth the basic material facts about their employment to demonstrate their adequacy to represent a settlement class; justification by the named plaintiffs for the reasonableness of their proposed settlement discount; and justification for the broad release of claims and for the plaintiffs’ additional release of claims without proper compensation.  Rimler v. Postmates Inc., No. CGC-18-567868 (Super. Ct. County of San Francisco Nov. 21, 2019).

CALIFORNIA SUPREME COURT TO DECIDE RETROACTIVITY OF DYNAMEX.  The California Supreme Court will decide the issue of the retroactivity of its Dynamex decision upon request of the U.S. Court of Appeals for the Ninth Circuit. As we discussed in our prior blog post of August 8, 2019, the U.S. Court of Appeals for the Ninth Circuit withdrew its prior decision to apply Dynamex retroactively in an independent contractor misclassification case and placed the question of retroactivity squarely before the California Supreme Court. On November 20, 2019, the California high court agreed to address that question. We noted in our prior blog post of June 10, 2019 that the Ninth Circuit had held that the California Supreme Court’s decision in Dynamex applied retroactively to an 11-year class action lawsuit brought against a nationwide janitorial cleaning business, Jan-Pro International Franchising, Inc., by franchisees who claimed they were misclassified as independent contractors. The Dynamex decision, which post-dated the district court’s decision in Jan-Pro, adopted a strict form of the “ABC” test for determining whether workers are independent contractors or employees for claims brought under the state’s wage orders. The issue of the retroactivity of Dynamex is likely to be influenced by the passage of AB5, which codified Dynamex and went into effect on January 1, 2020. Vazquez v. Jan-Pro Franchising International, Inc., No. S258191 (Cal. Sup. Ct. Nov. 20, 2019).

Administrative and Regulatory Initiatives (2 matters)

MASSACHUSETTS ATTORNEY GENERAL REACHES “LANDMARK SETTLEMENT” WITH GIG ECONOMY COMPANY TO RECLASSIFY IC’S.  The Office of Massachusetts Attorney General Maura Healy reportedly reached a “landmark settlement” with Stynt, a Boston-based company that provides a digital platform for healthcare workers who wish to search, apply, and get hired for short- and long-term staffing opportunities posted by thousands of dental and medical practices nationwide. It was further reported that as of January 1, 2020, those who chose to use Stynt’s platform will be treated as employees and not independent contractors. This settlement is likely to cause repercussions throughout other gig economy businesses in Massachusetts.

VIRGINIA RELEASES TASKFORCE REPORT ON WORKER MISCLASSIFICATION.  Virginia Governor Ralph Northam has released the final report of the Inter-Agency Taskforce on Worker ‎Misclassification and Payroll Fraud, outlining recommendations intended to promote fair pay, workplace protections, and benefits. According to a News Release issued by ‎the Office of the Governor on November 22, 2019, the Taskforce determined that ‎approximately 214,000 Virginia employees are currently misclassified as independent ‎contractors by their employers, and that Virginia is deprived of an estimated $28 million in ‎tax revenues each year due to such misclassification. Among other remedies, the Taskforce ‎recommends increased education about worker misclassification for employers and employees, formally adopting and continuing to apply the IRS test for determining worker status; creation of a private right of action that permits misclassified workers to sue for wages, lost benefits, taxes, and attorneys’ fees; additional funding for ‎investigations into possible wrongdoing; and harsher penalties for businesses that illegally ‎misclassify their workers. Governor Northam stated: “It’s clear that misclassification is ‎robbing Virginia workers of the pay, benefits, and protections they have earned. These concrete ‎policy changes will make a tremendous difference for thousands of Virginians and their ‎families, and I look forward to working with the General Assembly to turn these ‎recommendations into law.”

Other Noteworthy Matters

FIVE DEGREES OF INDEPENDENT CONTRACTOR MISCLASSIFICATION.  In our December 17, 2019 blog post entitled, “A Solution to the ‘Five Degrees of Independent Contractor Misclassification,’” written by the publisher of this blog, “independent contractor misclassification” is described as a phrase that is “misunderstood, misapplied, and misused – constantly.” The blog post was based on the commentary that appeared in Law360 on December 16, 2019.  The commentary describes in detail how there are at least five different degrees of IC misclassification: unpardonable, uninformed, unprepared, unintentional, and unjust. Given the state of affairs in California involving fall-out from the new Assembly Bill 5 (AB5), which was signed into law on September 18, 2019 and is effective January 1, 2020, the commentary cautions that legislative efforts to deter and eliminate unpardonable IC misclassification, as well as uninformed and unprepared misclassification, may also sweep in all forms of unintentional misclassification and may even unjustly outlaw IC relationships that have for years been legitimate and lawful under almost all state and federal laws.  The commentary suggests that instead of other state legislatures seeking to change existing law in a manner that would effectively eliminate legitimate ICs, legislators should seek greater enforcement of existing laws in lieu of changing the tests for IC status. That suggestion was informed in part by studies and reports that an overwhelming number of ICs would prefer not to be converted into employees but would rather remain as ICs.

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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