September 2016 Independent Contractor Misclassification and Compliance News Update

Pepper Hamilton LLP

The past month’s judicial and administrative activity in the area of IC misclassification reflects the wide range of industries facing these types of claims: communications; cleaning services; transportation and delivery services; adult entertainment; hospitality; construction; and television production of professional sporting events. Almost all of these are industries that we have published blog posts where we suggest ways by which businesses in these industries can enhance their IC compliance. For example, we have blogged how cable companies can minimize their exposure to IC misclassification claims; how cleaning service companies can restructure, re-document, and re-implement their IC relationships; how even a strip club can avoid class action IC misclassification lawsuits; how transportation, delivery, and courier companies can avoid creating IC agreements and their own policy statements that are used against them to find IC misclassification; how the  hospitality industry can “play it smart” instead of “playing it safe”; and how the construction industry can comply with state laws setting strict tests for IC status. These cases and the others we report on each month demonstrate how few businesses have sufficiently enhanced their level of IC compliance to avoid judicial or regulatory attacks on their engagement  of ICs, franchisees, 1099ers and others not paid on a W-2 basis.

In the Courts (5 items)

STRIKEBREAKER MISCLASSIFICATION LAWSUIT: VERIZON SUED FOR CLASSIFYING REPLACEMENT CABLE SPLICING WORKERS AS IC’S. Verizon Communications, Inc. and three “subordinate entities” were sued in a Pennsylvania federal court by workers who provided temporary cable splicing services for Verizon.  The lawsuit is a proposed multi-state collective and class action for alleged violations of the Fair Labor Standards Act and Pennsylvania and New Jersey wage/hour laws.  The plaintiffs claim that they were misclassified as independent contractors instead of employees. According to the complaint, Verizon acted in a joint venture or as a joint employer with the other three entities, engaged hundreds of strike replacement wireline workers to service cabling used for cable TV, telephone and internet, and failed to pay them overtime compensation due to their alleged misclassification as ICs. The plaintiffs claim that Verizon “is responsible for a far reaching ‘fissured employment’ scheme” which they define as “the practice of a large company attempting to shed its role as a direct employer and purporting to disassociate itself from the workers responsible for its products (albeit maintain tight control over the method, manner, quantity and quality of production).”  Among the alleged factors supporting an employer-employee relationship are that Verizon and the three entities required the workers’ attendance at meetings and training sessions; determined the type, amount and frequency of work assigned each day; prohibited workers from rejecting assignments; and set the schedules of the workers. Donoghue v. Verizon Communications, No. 16-cv-4742 (E.D. Pa. Sept. 1, 2016).

CLEANING FRANCHISEES CERTIFIED TO PROCEED WITH CLASS ACTION FOR IC MISCLASSIFICATION AGAINST LARGE COMMERCIAL CLEANING FRANCHISOR. The U.S. Court of Appeals for the Third Circuit upheld a lower federal court decision against commercial cleaning franchisor, Jani-King of Philadelphia, Inc., certifying a class action in an independent contractor misclassification suit brought by franchisee cleaners under the Pennsylvania wage and hour laws. As discussed more fully in our blog post of September 23, 2016, the appellate court 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. The Third Circuit noted that while it was not determining the merits of the case, it found many factors that supported the lower court’s decision to allow the case to proceed on a class-wide basis, including Jani-King’s 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, how much advance notice the cleaners must give Jani-King before taking vacation, 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.  As noted in the blog post, this case confirmed that, all too often, companies that use ICs and franchisees are their own worst enemies in terms of drafting documents that needlessly afford them the right to direct or control the performance of the workers – although there are ways to structure and document an IC or franchisee relationship to minimize the likelihood of IC misclassification claims. Williams v. Jani-King of Philadelphia Inc., No. 15-2049 (3d Cir. Sept. 21, 2016).

AMAZON SUED AS “JOINT EMPLOYER” BY DRIVERS RETAINED BY STAFFING COMPANY TO DELIVER GOODS., the largest internet-based U.S. retailer, and one of the companies it uses for staffing have been sued by delivery drivers in a proposed class action for IC misclassification class in a California state court.  The drivers brought claims that they were not paid minimum wage and overtime under the state wage and hour laws, were denied meal and rest periods under the state’s labor laws, and were not reimbursed for expenses as required by state law. The named plaintiff alleged that she and those in the class she seeks to represent were employed by a California staffing agency providing services to customers including, which she alleges is a joint employer of the drivers. The complaint alleges that, in conjunction with the staffing agency, assigned routes/locations to the drivers, required delivery of packages to be delivered within a specific window of time, required adherence to’s company policies and procedures, mandated a dress code, required attendance at meetings and trainings, disciplined drivers for violation of policies, and set drivers’ schedules.  The complaint further alleged that and the staffing agency jointly managed, operated, and controlled all aspects of the manner and means of the drivers’ work and that both entities were liable for wage/hour violations  under California law.  As we stated in our blog post of August 30, 2015, state-of-the-art IC agreements can protect companies from claims of joint employer IC misclassification. Rwomwijhu v. Smx, LLC, and, LLC, No. BC634518 (Super. Ct. L.A. County, Cal. Sept. 20, 2016).

NEW JERSEY COURT DENIES MOTION TO DISMISS DRIVERS’ IC MISCLASSIFICATION CLAIM BROUGHT UNDER MASSACHUSETTS LAW. A New Jersey federal district court denied a motion to dismiss by National Freight, Inc. (NFI), a company providing transportation, logistics, and distribution services, in a proposed IC misclassification class action brought by delivery drivers under the Massachusetts independent contractor law. According to the complaint, the drivers, who would pick up merchandise from NFI’s distribution center warehouse in Pennsylvania and deliver it to Trader Joe’s stores in Massachusetts and other states, were misclassified as ICs and not employees. The drivers claimed, among other things, that they are required to: lease their trucks from NFI; perform delivery services only for NFI and not offer services to other companies; obtain insurance; work full time, six days per week; pick up merchandise outside their set routes without pay; and drive NFI’s assigned set route each day without deviating from the schedule. In its motion to dismiss, NFI argued that the drivers failed to state a viable claim under the Massachusetts independent contractor law because the Federal Aviation Administration Authorization Act of 1994 (FAAAA) pre-empts that state’s “ABC” test for employee status. The court rejected NFI’s position that the FAAAA preempted the entire ABC test.  Instead, the New Jersey federal court noted that the U.S. Court of Appeals for the First Circuit, which covers Massachusetts, has held that only Prong B (which requires that “the service [be] performed outside the usual course of the business of the employer”) is pre-empted by the FAAAA, not prongs A or C. Portillo v. National Freight, Inc., No.15-cv-7908 (JBS/KMW) (D.N.J. Sept. 26, 2016).

TEXAS ADULT ENTERTAINMENT CLUBS PAY $1.1 MILLION TO SETTLE IC MISCLASSIFICATION CASES WITH EXOTIC DANCERS. A group of Texas adult entertainment clubs reached a $1.1 million settlement with exotic dancers in two collective actions claiming violations under the Fair Labor Standards Act due to IC misclassification. The dancers sued various Houston-based clubs (The Gold Cup, Cover Girls, Treasures, Centerfolds, and Splendor) alleging that they were denied minimum wage and overtime compensation, as well as the tips that they lawfully earned. In support of their IC misclassification claims, the dancers claimed that the clubs supervised the dancers;  set the schedules for them; controlled the details of the dancers’ jobs, including setting the prices to charge customers for dances and choosing the dancers’ music, attire and make-up; and disciplined the dancers for failure to follow house rules. The proposed settlement, awaiting the Court’s approval, provides for a total settlement fund of $1.1 million with $440,000 to be paid in attorneys’ fees. Coronado v. DNW Houston Inc., No. 13-cv-2179 (S.D. Tex. Sept. 8, 2016); and Deshayes v. AHD Houston d/b/a Centerfolds, No. 15-cv-1243 (S.D. Tex. Sept. 8, 2016).

Administrative and Regulatory Initiatives (3 items)

NLRB FINDS BROADCAST SPORTS TELEVISION TECHNICIANS AND CAMERA OPERATORS TO BE EMPLOYEES, NOT IC’S. The NLRB Regional Director in Boston has determined that broadcast television technicians and camera operators working for Green Line Group Inc. (GLG), a company that provides technical crews primarily for professional sporting events including Red Sox, Bruins and Celtics games, to be employees under the National Labor Relations Act and may therefore be represented by a union. The IBEW, who filed a petition to represent the technicians, argued that the workers have been misclassified as ICs by GLG. In reaching his determination, the Regional Director found that while there were some factors that supported a finding of independent contractor status, the weight of the factors overall supported employee status. The facts that the Regional Director found supportive of employee status included the following: the technicians were clearly identified as working for GLG; they did not generally supply their own equipment or tools; their work is part of the regular business of GLG; many had long-term relationships with GLG; the technicians could not negotiate their fees with GLG; GLG failed to demonstrate that the parties believed they had entered into independent contractor relationships;  and there was no evidence that the technicians were rendering services to GLG as independent businesses, as they had no entrepreneurial opportunities and bore no risk as a result of their work for GLG. The Regional Director’s decision stated that he did not find it significant that a few of the technicians were engaged by GLG as corporations. Green Line Group Inc., Case 01-RC-181492 (Sept. 16, 2016).

HAWAII HOTEL PROJECT WORKERS FOUND MISCLASSIFIED AS IC’S. The Hawaii Department of Labor & Industrial Relations (DLIR) issued penalties of $767,000 against R&R Construction Services for misclassification of 65 employees as independent contractors at a hotel project in Waikiki. According to the DLIR news release dated September 19, 2016, the penalties were assessed because the company allegedly avoided requirements to provide Unemployment, Workers’ Compensation, Prepaid Health Care, and Temporary Disability Insurances to the workers. R&R Construction is also facing an investigation by the U.S. Department of Labor that is looking into whether R&R violated the minimum wage and overtime requirements of federal law.

NEBRASKA AND OKLAHOMA SIGN IC MISCLASSIFICATION PARTNERSHIP AGREEMENTS WITH U.S. LABOR DEPARTMENT. Nebraska and Oklahoma became the 34th and 35th states to sign Memoranda of Understanding with the U.S. Department of Labor (DOL) targeting IC misclassification.  On September 1, 2016, the DOL announced that it entered into a three-year Memorandum of Understanding (MOA) with the Nebraska Department of Labor and on September 13, 2016, it entered into an MOA with the Oklahoma Employment Security Commission. The goals of these partnerships include coordinating efforts to provide clear, accurate, and easy-to-access compliance information for businesses, employees, and other stakeholders, and sharing of resources and enhancing enforcement by conducting coordinated enforcement actions and sharing of information consistent with applicable laws.  David Weil, the Wage and Hour Administrator of the DOL, stated in its press release announcing the Nebraska MOA: “The Wage and Hour Division continues to attack this problem head on through a combination of a robust education and outreach campaign, and nationwide, data-driven strategic enforcement across industries.” He continued: “Our goal is always to strive toward workplaces with decreased misclassification, increased compliance, and more workers receiving a fair day’s pay for a fair day’s work.”

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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