October 2018 Independent Contractor Misclassification and Compliance News Update

by Locke Lord LLP

October was an eventful month for legal developments in the area of independent contractor misclassification and compliance.  In one of the nine cases reported below, the U.S. Department of Labor continues to aggressively pursue an independent contractor misclassification claim against a franchisor in the cleaning contracting industry.  In that case, the U.S. Court of Appeals for the Tenth Circuit held that the Secretary of Labor may proceed with his claim under the Fair Labor Standards Act against a cleaning franchisor, alleging that it failed to maintain proper employment records for each of the franchisees, including those that incorporated at the direction of the cleaning franchisor. This decision confirms Labor Secretary Acosta’s commitment to pursue claims against companies he believes are violating federal wage and hour laws by misclassifying workers as independent contractors. As we indicated in a blog post shortly after President Trump’s election, “Companies using ICs to supplement their workforce or render services to their customers should not view Donald Trump’s election as an opportunity to misclassify employees as ICs.”

Other cases of significance last month include a claim against a public entity, the Metropolitan Transportation Authority of Harris County (Texas), for independent contractor misclassification. The county agency contracted with third parties to provide services to the public, and those third-party contractors in turn used ICs to provide the services – but instead of suing the contractors, the service providers sued the county authority. Even though the lawsuit was ordered to arbitration, it should send a message to public entities that they are not immune from class action independent contractor misclassification claims.

Another important case last month involved a decision by a California intermediate appellate court that last April’s decision in Dynamex, which we referred to at the time as a “bombshell for California businesses,” would not be applied to claims that are referred to in that state as “non-wage order” disputes, including claims for overtime and wrongful termination. We observed in a blog post issued shortly after Dynamex that “the decision in [that case] addressed only the test to be applied for determining employee status under wage orders promulgated by the Industrial Welfare Commissioner,” and did not by its terms cover non-wage order claims, including those for expense reimbursement under California Labor Code Section 2802. Fortunately for businesses using independent contractors in California, the two types of claims that often generate the highest damages exposure (overtime and expense reimbursement claims) should continue to be governed by the prior and more balanced test for independent contractor status, as set forth in the Borello case. This schizophrenic framework now in place in California for determining independent contractor status may prompt the state legislature to pass legislation adopting the longstanding Borello test for IC status in some if not all industries.

These cases and the others reported below, including a settlement for $4.75 million to be paid by a logistics company to delivery drivers, illustrate that IC misclassification claims have not diminished.  Indeed, they appear to be on the rise, as more and more companies elect to deploy business models reliant on independent contractors. Many of those companies continue to resort to a process such as IC Diagnostics™ to maximize their compliance with IC laws and minimize their IC misclassification risk.  By enhancing their IC compliance, such companies reduce the likelihood that they will be forced to defend legal challenges aimed at their use of ICs or, if subjected to a lawsuit or administrative proceeding alleging misclassification, increase the likelihood that they will prevail or, at worst, settle for a relatively modest amount.

In the Courts (9 cases)

U.S. LABOR DEPARTMENT MAY MAINTAIN FLSA LAWSUIT AGAINST LARGE CLEANING FRANCHISOR; FACT THAT SOME FRANCHISEES ARE LLC’S DOES NOT PRECLUDE THEIR COVERAGE UNDER FEDERAL WAGE AND HOUR LAW.  The U.S. Secretary of Labor can pursue his independent contractor/employee misclassification case under the FLSA against Jani-King of Oklahoma, Inc., a janitorial company providing cleaning services through franchisees in the Oklahoma City area, according to the U.S. Court of Appeals for the Tenth Circuit.  Jani-King engages individuals, pairs of related individuals, or small corporate entities that are allegedly composed predominantly or entirely of single individuals or pairs of related individuals to perform janitorial work on its behalf through franchise arrangements. Jani-King recently began to require all of those individuals to form corporate entities, which would then become the parties to franchise agreements.  Jani-King contended that those corporate entities are not covered by the FLSA, and a federal district court initially agreed, dismissing the original complaint without prejudice and permitting the Secretary of Labor to file an amended complaint. In response to yet another motion to dismiss by Jani-King, the lower court granted the motion, concluding the amended complaint “ignores corporate forms,” does not plausibly suggest the FLSA applies to all janitorial cleaners, and does not distinguish between those cleaners who are artificial entities and those who are individuals.

On appeal, the Tenth Circuit reversed, agreeing with the Secretary’s argument that individuals who form corporate entities and enter franchise agreements required by Jani-King yet who  personally performed the work on behalf of Jani-King can be Jani-King’s employees under law. According to the appeals court, “in determining whether an individual is an employee under the FLSA, the inquiry is not limited to the contractual terminology between the parties or the way they choose to describe the working relationship.” It further stated, “the fact that these individuals are franchisees or have formed corporations does not end the inquiry;” rather, one must still apply the six-factor economic realities test. Finally, the Tenth Circuit rejected Jani-King’s contention that the Secretary failed to plead sufficient facts regarding each individual franchise owner.  It concluded there was no need for the Secretary to do so at this stage of the proceedings, where the specific act of wrongdoing in which Jani-King allegedly had engaged (violating record-keeping requirements) and the descriptive identity of those individuals or entities to which those requirements allegedly apply (janitorial cleaners who personally perform the cleaning) were sufficient to permit the case to proceed. Acosta v. Jani-King of Okla., Inc., No. 17-6179 (10th Cir. Oct. 3, 2018).

CALIFORNIA INTERMEDIATE APPELLATE COURT CONFIRMS THAT DYNAMEX IS LIMITED TO CALIFORNIA WAGE ORDER CLAIMS ONLY.  Applying the blockbuster April 30, 2018 decision by the California Supreme Court in Dynamex, a California appeals court reversed a lower court’s issuance of summary judgment in favor of a taxi driver who had sued a taxi company, Border Transportation Group, Inc., for allegedly misclassifying him as an IC.  The appellate court held that the Dynamex decision, which the California Supreme Court applied to certain claims arising under wage orders issued by the Industrial Welfare Commission, required the appellate court to reverse the grant of summary judgment in favor of the taxi company with regard to the wage order claims (for unpaid wages, minimum wage, meal and rest periods, itemized wage statements, and unfair competition based on such violations) covered by Dynamex. It reached that conclusion because the taxi company had not produced any evidence regarding prong “C” of the new Dynamex ABC test – that the driver was customarily engaged in an independently established trade, occupation or business.” The appellate court stated, “Defendants presented no evidence in their moving papers that [the driver] in fact provided services for other entities ‘independently’ of his relationship with [the company].” It was not enough, according to the court, that the company only suggested that the driver was “free to offer his services as an entrepreneur to anyone he chose.”

The appellate court, however, affirmed the grant of summary judgment on the non-wage order claims (for overtime, wrongful termination, and waiting time penalties, and an unfair competition claim based thereon). It ruled that the test for IC status for those claims was not changed by Dynamex.  In addition, the court in a footnote briefly addressed the issue of retroactive application of Dynamex, finding that the defendant taxi company “implicitly assume[d] retroactivity, and we therefore do not address that issue today.” Garcia v. Border Transportation Group, LLC, No. D072521 (Cal. Ct. App. 4th Dist. Oct. 22, 2018).

CLASS ACTION BY VAN DRIVERS FOR TEXAS PUBLIC TRANSIT AGENCY ALLEGING IC MISCLASSIFICATION MUST BE ARBITRATED. A Texas federal district court granted a motion to compel arbitration of a proposed collective action brought by a Houston public transportation driver alleging the Metropolitan Transit Authority of Harris County misclassified him and other van drivers as independent contractors.  The van driver brought the lawsuit under the FLSA, claiming that he and other van drivers were owed overtime compensation for their services to the MetroLift program, which provides affordable transportation services to elderly and disabled passengers. The plaintiff entered into an independent contractor agreement with Yellow Cab, one of the private companies that engages drivers for MetroLift. That contract contained an arbitration clause. The arbitration clause in the County’s agreement with Yellow Cab and in the Yellow Cab agreement with the van driver contained virtually identical arbitration provisions “for the resolution of all disputes and claims arising out of or in any way relating to this Services Agreement, whether in tort or in any other cause of action.”

In granting the County’s motion to compel arbitration, the court concluded that the County, a non-signatory to the drivers’ agreements with Yellow Cab, obligated the van driver to arbitrate any claim he had arising out of his agreement with Yellow Cab, including this lawsuit against the County.  The court based its holding on the doctrine of “direct benefits estoppel,” which generally requires that a signatory arbitrate claims that derive from that party’s contract containing an arbitration clause.  As the court noted, “a party cannot both ‘knowingly exploit the agreement containing the arbitration clause’ and avoid the arbitration clause’s requirements.” In this case, the court found that the plaintiff received direct benefits from the Yellow Cab agreement with the County, which provided him with a MetroLift route, insurance that qualified him to drive for the MetroLift service, and MetroLift-compliant equipment.  Although the van driver asserted that his claims arose under the FLSA and not his agreement with Yellow Cab or Yellow Cab’s agreement with the County, the court found that to prove his claims against County or Yellow Cab under the FLSA, the driver necessarily relies on the agreements, each of which contained arbitration provisions. Randle v. Metropolitan Transit Authority of Harris County, No. H-18-1770 (S.D. Tex. Oct. 1, 2018).

ENERGY AND PETROCHEMICAL SERVICES COMPANY IS NOT ENTITLED TO SUMMARY JUDGMENT IN IC MISCLASSIFICATION COLLECTIVE ACTION BY CONSULTING “COACHES”.  An Oklahoma federal court has denied the summary judgment motion of Check-6, Inc., a company in the business of providing consulting services in the energy, manufacturing, mining, petrochemical and transportation industries brought against it by consulting “coaches” who provided services at the work sites of Check-6’s clients. A collective group of coaches, consisting of the named plaintiff and 18 opt-ins, claimed that they were denied overtime compensation under the FLSA due to their alleged misclassification as independent contractors and not employees.  In its decision, the court stated that the Court of Appeals for the Tenth Circuit has “repeatedly denied summary judgment motions where there remained disputed facts material to the classification of workers as employees or independent contractors.” Applying the six-factor “economic realities” test, the court found that a reasonable trier of fact could find that the facts supported a determination that the coaches were employees and not independent contractors; therefore, the court held, summary judgment must be denied. Specifically, the court found that the evidence was in dispute as to four of the six factors:  the degree of control over the coaches; their opportunity for profit and loss; their investment in the their individual business; and the permanence of the parties’ working relationship. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N.D. Okla. Oct. 18, 2018).

LOGISTICS COMPANY AGREES TO SETTLE IC MISCLASSIFICATION CLASS ACTION FOR $4.75 MILLION.  Logistics company, TFI International Inc., has reached a proposed settlement with a class of 367 delivery drivers who delivered parcels to TFI customers throughout the U.S. The parties now seek approval of the proposed settlement resolving this 6-year-old litigation in which the drivers alleged that TFI violated the FLSA and California state laws by failing to pay overtime compensation and reimbursement for mileage due to its alleged misclassification of the drivers as independent contractors and not employees. The drivers claimed that they operated under the managerial control of the company with no material deviations in job duties or descriptions from location to location; the company deducted a percentage of the drivers’ pay from each paycheck to pay the drivers’ estimated federal and self-employment taxes; they had to arrive at the warehouse one to two hours early to sort packages for their routes; they were assigned routes and were provided with route sheets containing suggested stops; they were not able to negotiate the rates for their routes; and they had to wear company uniforms. If approved, the settlement provides that the participating drivers will receive $1.85 million, with individual awards based on the driver’s number of weeks of service, while $2.9 million is earmarked for attorneys’ fees. Flores v. TFI International Inc., No. 3:12-cv-05790 (N.D. Cal. Oct. 26, 2018).

CELL PHONE SALES COMPANY SETTLES CLASS ACTION LAWSUIT FOR IC MISCLASSIFICATION BY OUTSIDE SALES REPRESENTATIVES.  A California federal court has approved a settlement of a proposed class and collective action by sales representatives against cell phone marketing company, Open Door Marketing, LLC, and others, alleging wage and hour violations of the FLSA and various California labor laws due to the sales reps’ alleged misclassification as independent contractors. The sales reps claimed they worked for Defendants to promote free cell phones and wireless service plans for low-income individuals who meet the plans’ requirements. The complaint alleged that the defendants exercised direction and control over the sales reps by requiring they send a picture of themselves at work each morning to prove their attendance at the required time; use a script when providing services; regularly attend meetings; attend pre-employment training; wear a uniform; use company-provided tablets; and advise their “supervisors” how many customers they signed up each day. The settlement includes: $82,000 to the opt-in plaintiffs; $8,000 to the two named plaintiffs as enhancement awards; $10,000 in penalties under the California Private Attorneys General Act; and $25,000 to the plaintiffs’ lawyers as attorneys’ fees. The proposed settlement was found by the court to be fair and reasonable because a significant amount of discovery had been taken thereby enabling the parties to obtain an adequate appreciation of the merits of the case; and a significant risk existed that litigation might result in a lesser recovery or no recovery at all, especially since the defendants claimed that the sales reps were “outside salespersons” who were exempt from the FLSA and state wage and hour laws. Jennings v. Open Door Mktg., LLC, No. 15-cv-04080-KAW (N.D. Cal. Oct. 3, 2018).

ALABAMA PACKAGE DELIVERY COURIERS’ CLASS ACTION LAWSUIT FOR IC MISCLASSIFICATION IS DISMISSED FOR FAILURE TO PLEAD SPECIFIC VIOLATIONS OF THE FLSA.  Couriers suing Express Courier International, Inc., a courier and package delivery company, for minimum wage and overtime compensation violations under the FLSA due to their alleged misclassification as independent contractors, may not maintain their lawsuit according to a decision by an Alabama federal court granting the company’s motion to dismiss – but they may seek to amend their complaint. Over 200 couriers, each of whom signed owner-operator agreements, picked up parcels from the company’s warehouses and delivered them to the company’s customers using the couriers’ own personal vehicles. In granting the company’s motion, the court found that the couriers did not identify which of them received less than the minimum wage; the complaint referred only to “some” couriers whose “pay fell below the minimum wages”; the couriers failed to allege that any courier received less than minimum wage or worked more than 40 hours in a week without overtime pay; and they only alleged that the company “generally” did not pay overtime compensation and had a “policy” not to pay overtime if any courier worked more than 40 hours per week. Bascomb v. Express Courier Int’l, Inc., No. 2:18-CV-00064-KOB (N.D. Ala. Oct. 5, 2018).

DOOR DASH COURIERS MUST ARBITRATE CLASS ACTION CLAIMS IN IC MISCLASSIFICATION LAWSUIT. A California federal court has compelled arbitration of a proposed misclassification class action lawsuit brought by a delivery driver on behalf of himself and other delivery drivers against DoorDash, Inc., a technology company that facilitates food delivery through its on-line platform that connects customers, restaurants and delivery drivers. The complaint asserted claims for failure to reimburse for business expenses; failure to pay at least the minimum wage; willful misclassification as independent contractors and not employees; inaccurate pay statements; and unlawful business practices under California state wage and hour laws. The named plaintiff driver had signed an agreement with DoorDash that included an arbitration provision with a class action waiver and 30-day opt-out terms, and he did not choose to opt out. Shortly before the named plaintiff filed his proposed class action, a driver opted out of DoorDash’s arbitration agreement.  DoorDash subsequently filed its motion to compel arbitration, asserting that the plaintiff present his claims in an individual arbitration.

The plaintiff then filed a motion to amend his complaint to add the driver who opted out as a plaintiff. Relying on a single case from another jurisdiction, the named plaintiff argued that “drivers who agreed to binding arbitration may now be ‘deemed’ to have opted out of arbitration because a single driver opted out of arbitration . . . .” The court rejected that argument, which was based on a claim under Georgia’s contract law and its class action statutes, neither of which the court found to be applicable in this case. The court also rejected the plaintiff’s argument that the driver’s contract was exempt from coverage under the federal transportation worker exemption, instead finding that because the plaintiff failed to allege that he ever crossed state lines as part of his services for DoorDash, he did not satisfy the terms of the exemption requiring that he engaged in interstate commerce. Rather, under the Federal Arbitration Act, the court found there was a valid agreement to arbitrate, and that the agreement encompassed the dispute at issue. Magana v. DoorDash, Inc., No. 18-CV-03395-PJH (N.D. Cal. Oct. 22, 2018).

TRUCK DRIVER’S CORPORATE ENTITY DOES NOT INSULATE FREIGHT FORWARDER FROM IC MISCLASSIFICATION CLASS ACTION CLAIM.  A truck driver’s class action complaint against freight forwarding company, Interglobo North America, Inc., has been revived after a New Jersey intermediate appeals court held that the lower court improperly granted Interglobo’s motion to dismiss the lawsuit based solely on the pleadings. The court concluded that the lower court improperly considered only the contract terms of the pertinent independent contractor agreement and failed to apply the three-part “ABC” test enunciated in January 2015 by the New Jersey Supreme Court in Hargrove v. Sleepy’s, LLC to determine independent contractor or employee status. In his complaint, the driver alleged that the company failed to pay overtime compensation to himself and other members of the proposed class in violation of the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law due to their alleged misclassification as independent contractors. The driver had entered into a contractor lease agreement with the company through his own Florida corporation, J&K Trucking Solutions, Inc. The contract identified J&K as an independent delivery operator with its own vehicle, equipment, and employees; provided that J&K must pay all expenses in the operation of “his business” including rent, wages, overhead, maintenance, and repair/insurance of vehicles; and stated that J&K had “the sole and complete discretion to hire, regulate, discipline or discharge all personnel engaged by the Contractor to carry out the Contractor’s obligations . . . .”

According to the complaint, Interglobo controlled the manner and means in which duties were performed; the driver’s work was performed from Interglobo’s New Jersey location; the driver was required to wear an Interglobo uniform; driving directions were issued by Interglobo; the driver was subject to discipline and termination by Interglobo; funds were withdrawn from the driver’s pay to reimburse Interglobo for truck insurance and gas; and the driver routinely worked in excess of 40 hours per week without receiving overtime pay. On appeal, the driver argued that the court failed to consider anything other than the contract terms when it should have applied the ABC test. The appeals court agreed and concluded: “To consider only the agreement, and not the totality of the facts surrounding the parties’ relationship, would be to place form over substance.”  The court added: “We are obliged to look behind contractual language to the actual situation – the status in which parties are placed by relationship that exists between them.” The court concluded its decision with the following remark: “It is rare for a court to determine a worker’s status on summary judgment after discovery is completed. It is even more unlikely that the issue can be resolved on the pleadings alone.”  Veras v. Interglobo North America Inc., No. A-3313-16T1 (N.J. App. Div. Oct. 26, 2018).

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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  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.