October 2016 Independent Contractor Misclassification and Compliance News Update

by Pepper Hamilton LLP
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Our update for this past month is noteworthy for the fact that we report below on IC misclassification lawsuits plaguing some of the largest and most recognizable companies in the U.S. (like Uber, Amazon, and FedEx) as well as a small local business like a New York City yoga studio. IC misclassification claims are present in virtually every industry in the U.S., regardless of the size of the company. The only difference is that the financial viability of larger companies is not typically at risk, whereas that is not the case with smaller companies.

We also report on a New York City bill that is soon likely to become law. It is not an IC misclassification law, but rather IC protection law – an ordinance that seeks to protect independent contractors from non-payment of their fees. Whereas some laws seek to crack down on the misuse of ICs, other laws are intended to protect ICs. This dichotomy mirrors published statements by Thomas Perez, the Secretary of the U.S. Department of Labor, who has stated that “there’s an important place for independent contractors [in our economy], but I also believe that there’s ample evidence that that’s been abused,” and by Dr. David Weil, the Administrator of the Wage and Hour Division of the U.S. Labor Department, who has stated that “the use of independent contractors [is] not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy.”

What is the takeaway? Independent contractors are here to stay, but if a company does not structure, document, and implement its IC relationships and pay workers classified as ICs in accordance with their contract terms, there is considerable liability. Those who wish to minimize such liability can see how to do so by reference to our White Paper on the subject.

In the Courts (5 cases)

AMAZON DRIVERS FILE NATIONWIDE IC MISCLASSIFICATION CLASS ACTION. Drivers making deliveries for Amazon that have been classified as independent contractors have sued the giant internet shopping company in a proposed nationwide class action lawsuit brought in a federal district court in Washington state under the federal Fair Labor Standards Act. The drivers are claiming that as a result of their alleged misclassification as independent contractors, they have been denied minimum wage and overtime compensation for hours worked over 40 in a workweek under the FLSA. The plaintiff drivers also claim that Amazon has violated Washington state and local wage/hour laws. According to the complaint, the drivers are employees and not ICs because they receive unpaid training regarding how to interact with customers and how to handle issues they encounter while making deliveries; they must follow Amazon’s instructions regarding where to make deliveries, in what order and which route to take; drivers can be penalized or terminated for missing scheduled shifts; drivers must follow requirements and rules imposed on them by Amazon and are subject to termination at Amazon’s discretion for failure to adhere to these requirements. The drivers allege that their payment for expenses cause the drivers’ hourly wages to fall below the minimum wage. Rittman v. Amazon.com, Inc. and Amazon Logistics, Inc., No. 16-cv-1554-BAT (W.D. Wash. Oct. 4, 2016).

UBER RUSH AND UBER EATS SUED IN IC MISCLASSIFICATION CLASS ACTION BY NYC BIKE COURIERS. Uber Technologies has been sued in a proposed class and collective action in New York federal district court by bike couriers claiming that they were misclassified as ICs by UberEATS and UberRUSH. The plaintiffs seek to represent a class of bike and foot couriers providing services for Uber’s delivery services for alleged violations under the FLSA and New York Labor Law. Unlike the other UBER services involving deliveries by car or limousine, UberRUSH and UberEATS utilize bike and foot messengers to deliver packages, primarily food orders from restaurants to customers who have requested UberEATS or UberRush services through a mobile app. The claims asserted against Uber include Uber’s failure to pay the minimum wage; failure to pay drivers the service fees charged to customers that the drivers claim is a form of gratuities to them; and failure to reimburse the couriers for certain their expenses, such as costs for helmets and bike repairs. According to the complaint, under the New York State Department of Labor Guidelines for Determining Worker Status in the Messenger Courier Industry, it is standard practice that bike and foot messengers are considered to be employees of the messenger company providing delivery services to customers. Burgos v. Uber Technologies Inc., case no. 1:16-cv-08512 (S.D.N.Y. Nov. 1, 2016).

FEDEX GROUND’S RECENT IC MISCLASSIFICATION COSTS NEARING $500 MILLION. An Oregon federal district court approved FedEx Ground’s $15.4 million class action settlement with nearly 400 Ground Division delivery drivers in Oregon, bringing FedEx’s costs due to IC misclassification over the past year to almost $500 million. The drivers had alleged violations for unpaid overtime and unlawful deductions under Oregon wage and hour laws arising from their alleged misclassification as ICs. This settlement followed the 2014 decision by the U.S. Court of Appeals for the Ninth Circuit that the FedEx Ground drivers in Oregon were employees and not ICs as a matter of law. As described in detail in our blog post of October 24, 2016, FedEx’s own IC agreements and other internal documents were found to have created an employment arrangement as a matter of law, without any need for the drivers to have to prove their case to a jury. The FedEx Operating Agreement and its policies and procedures were found by the appellate court to have retained sufficient direction and control over the drivers to turn them into employees. As noted in the blog post, the type of wording within the FedEx IC agreements and policies that the courts found to be non-IC compliant is rather commonplace, but there is no reason why IC relationships like the one between FedEx and the Ground Division drivers cannot be drafted in a manner that complies with applicable IC laws. Slayman v. FedEx Ground Package System, Inc., No. 05-cv-1127-HZ (D. Ore. Oct.  21, 2016).

NEW YORK’S HIGHEST COURT UPHOLDS YOGA COMPANY’S CLASSIFICATION OF INSTRUCTORS AS IC’S. New York’s highest court issued an important decision reversing a lower appellate court decision and holding that certain yoga teachers at Yoga Vida NYC are independent contractors and not employees for purposes of the unemployment laws in New York. Yoga Vida operates a yoga studio offering classes taught by staff instructors (who are classified as employees) and non-staff instructors (who are classified as ICs). In its decision, the Court of Appeals found that the non-staff instructors were ICs and not employees because Yoga Vida did not exercise control “over the results produced and the means used to achieve the results.” The Court found the following factors supported a finding of IC status: the non-staff instructors make their own schedules and choose their method of payment (hourly or percentage basis); are paid only if a certain number of students attend their classes (as opposed to staff instructors who are paid regardless of student attendance); are not restricted by Yoga Vida from teaching elsewhere and can inform Yoga Vida students of classes they teach at other studios (whereas staff instructors cannot work for competing studios in certain areas); and are not required to attend meetings or trainings (while staff instructors are). Although the court noted that there were some facts that represented a degree of control by Yoga Vida over the non-staff instructors, the Court regarded each of them as “incidental” and did not affect their IC determination. Those factors were that Yoga Vida  inquired if the non-staff instructors had proper licenses; Yoga Vida published the master schedule on its website; Yoga Vida provided the space for the classes; Yoga Vida determined what fee would be charged to customers and collects the fee directly from students; Yoga Vida provided a substitute instructor if the non-staff instructor was unable to teach a class and could not find a replacement; and Yoga Vida received feedback about the instructors from the students. While the decision may be limited to the particular facts of the case, it should afford businesses operating in New York a level of comfort that New York’s highest court supports the use of legitimate ICs, as we noted in our blog post of October 25, 2016. Yoga Vida NYC, Inc. v. Commissioner of Labor, No. 130 (C.A.N.Y. Oct. 25, 2016).

GAS AND ELECTRIC UTILITY COMPANY SUED FOR PENSION BENEFITS ALLEGEDLY DENIED TO WORKERS MISCLASSIFIED AS IC’S. Pacific Gas & Electric Company’s retirement plan has been sued by three contract workers who claim they have been misclassified by PG&E as independent contractors and therefore denied service credits for purposes of coverage under the PG&E pension plan. The complaint alleges that PG&E maintained its practice after its outside counsel questioned the company’s classification of contract workers. The complaint also alleges that, among other things, two of the plaintiffs had earlier been classified as employees but were later reclassified as independent contractors, yet continued to do the same work they did while classified as employees. The other plaintiff was allegedly treated by PG&E the same as regular employees in terms of controlling and supervising the manner in which he performed his work and providing him with tools, equipment, and training. Cooper v. Pacific Gas & Electric Retirement Plan, No. 16-cv-6355, N.D. Cal., Nov. 1, 2016).

Administrative and Regulatory Initiatives (3 matters)

NEW YORK LABOR DEPARTMENT SIDES WITH UBER DRIVERS THAT THEY ARE EMPLOYEES AND NOT IC’S FOR UNEMPLOYMENT PURPOSES. The New York State Department of Labor has determined that two Uber drivers were employees and not independent contractors, thereby rendering them eligible for unemployment benefits. As reported in the New York Times by Noam Scheiber on October 13, 2016, these determinations were issued in August and September 2016 in connection with jobless benefits claims that the two drivers filed. As discussed in our blog post of October 19, 2016, these two determinations are technically only applicable to the two claimants, although most unemployment determinations (including in New York) also apply to all “similarly situated employees.” Because the determinations themselves were not released to the public, the reasoning used by the Labor Department is unknown at present. We presume that these determinations are already under appeal.

EEOC ISSUES 4-YEAR STRATEGIC PLAN THAT INCLUDES IC MISCLASSIFICATION. In its newly published Strategic Enforcement Plan, the Equal Employment Opportunity Commission included among its “Emerging and Developing Issues” the changing nature of the workplace including ICs and the gig economy. On October 17, 2016, the EEOC released its strategic plan covering Fiscal Years 2017-2021, adding “a new priority to address issues related to complex employment relationships and structures in the 21st century workplace, focusing specifically on temporary workers, staffing agencies, independent contractor relationships and the on-demand economy.” While many federal and state agencies are cracking down on IC misclassification, it is unlikely that the EEOC’s focus will impact many ICs, as few workers classified as ICs make claims of discrimination.

PENNSYLVANIA LABOR DEPARTMENT COMMENCES IC MISCLASSIFICATION AWARENESS CAMPAIGN. The Pennsylvania Department of Labor and Industry kicked off a statewide public awareness campaign about worker misclassification according to a department news release dated October 19, 2016. Funded by a nearly half million dollar grant from the U.S. Department of Labor, the Pennsylvania agency has developed a new website that includes links to the federal website about misclassification myths and a worker misclassification inquiry form for workers questioning their IC classification. In announcing the awareness campaign, the Pennsylvania Labor Secretary, Kathy Manderino, stated: “Incorrectly classifying a worker as an independent contractor causes harm to the worker by withholding rights that belong to legitimate employees. Our goal for this campaign is to educate workers and employers about the important differences between an employee and a contractor.”

On the Legislative Front (1 matter)

NEW YORK CITY COUNCIL PASSES FREELANCER PAYMENT PROTECTION BILL. On October 27, 2016, the New York City Council passed a bill, commonly referred to as the Freelance Isn’t Free Act (No. 1017-2015), which is likely to be signed by the Mayor shortly. The bill seeks to ensure that freelancers  and other ICs providing services as individuals are offered a written contract and are paid by the date specified in the agreement or, if not so specified, within 30 days after the completion of services under the contract. The bill covers any contract between freelance workers and a non-governmental “hiring party” that has a value of $800 or more, by itself or when aggregated with all contracts between the parties over the prior 120 days. Additionally, under the bill, a freelance worker who prevails on a claim for late payment or non-payment “is entitled to an award of double damages, injunctive relief and other such remedies as may be appropriate.” As noted in our article published in the November 3, 2016 edition of the New York Law Journal entitled “Defects in NYC’s Freelance Bill,” we noted that the most serious defect was the failure to include a good faith defense to double damages – a defense commonly found in wage protection laws across the country including in the New York Labor Law. We warned that the bill may lead to adverse consequences for freelancers and companies, predicting that some businesses would choose not to retain ICs with New York City mailing addresses out of concern that an IC would seek a windfall recovery whenever a company chooses not to pay a freelancer in whole or in part based on a bona fide, legitimate belief that the IC did not complete the work or did not do so satisfactorily.

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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