September 2018 Independent Contractor Misclassification and Compliance News Update

by Locke Lord LLP
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Independent contractor misclassification lawsuits swept across a swath of businesses last month, affecting companies in both the gig economy and traditional industries.  Discussed below are class action and individual plaintiff cases involving on-demand dog walkers, community living support specialists, oil field workers, cable installers, truckers, ride-share drivers, and exotic dancers.

We also report on two significant cases involving a large ride-sharing technology company: one where it succeeded in compelling arbitration of class members’ IC misclassification claims, and the other where it has been sued not by workers claiming misclassification but by another business – one that does not use ICs – in a class action lawsuit for unfair competition.

What does this mean for businesses?  Because there are plaintiffs’ class action lawyers willing to invest their time and resources in filing and maintaining class action lawsuits against companies in virtually every industry that use business models dependent on the use of ICs, companies should consider doing the following: enhancing their level of compliance with IC laws, and entering into arbitration agreements containing class action waivers with workers classified as independent contractors.  The most prudent companies do both, many starting with a process such as IC Diagnostics™ to restructure, re-document, and re-implement their IC relationships, and then adding or updating an arbitration clause with a class action waiver that is drafted in a manner likely to be enforced by the courts.

In the Courts (8 cases)

ON DEMAND DOG WALKING COMPANY TO PAY $1.1 MILLION TO SETTLE IC MISCLASSIFICATION CLASS ACTION.  A class of dog walkers seeks a federal court’s preliminary approval of a class and collective action settlement in an IC misclassification suit alleging violations of the federal Fair Labor Standards Act (FLSA) and the California Labor Code.  The dog walkers sued Wag Labs Inc., an on-demand company that dog owners use to engage dog walkers through a mobile app.  The proposed settlement provides that Wag Labs agrees to pay $1,050,000 into a Settlement Fund plus an additional $75,000 for Settlement Administration Costs.  $50,000 of the settlement will be paid in settlement of a claim under the  California Private Attorneys General Act (PAGA); under that law, 75% ($37,500) would be paid to the State of California via payment to the Labor and Workforce Development Agency and the remaining 25% ($12,500) would go to the class members as part of their Net Settlement Amount. Additionally, attorneys’ fees would be set at $375,000 – one-third of the total of the Settlement Fund plus Settlement Administration Costs. The motion for settlement approval notes that “were this litigation to proceed, [Wag Labs] would invoke individual arbitration agreements to bar a vast majority of settlement class members from participating or attack Plaintiff’s typicality…, leaving only a handful of class members.” Darsey v. Wag Labs, Inc., No. 2:17-cv-07014 (C. D. Cal. Sept. 27, 2018).

KENTUCKY DISABILITY SUPPORT SERVICES COMPANY SETTLES IC MISCLASSIFICATION CASE.  A Kentucky federal court has been asked a second time to approve a proposed settlement reached between a community living support specialist and A Brighter Future, Inc., which provides support services to individuals with disabilities.  In this FLSA case, the plaintiff alleged that the company’s failure to provide him with overtime compensation was a result of his classification as an independent contractor and not an employee. The first request for approval of the proposed settlement was denied because the parties had not provided sufficient information to allow the court to determine whether the agreement represented a fair and reasonable resolution of a bona fide dispute. The parties subsequently provided additional information including the plaintiff’s allegations that he consistently worked 75-80 hours per week for the company; his job required specialized knowledge, but not much skill or initiative; provided the plaintiff with materials; he had no control over profit or loss; he received hourly compensation; and his supervisors exercised extensive control over his work hours and job duties. The company asserted that the plaintiff was an independent contractor because he signed an IC agreement; his relationship was non-exclusive; he could choose as many or as few hours as he wished; and his work was not supervised. The proposed settlement would award the plaintiff $33,000, of which nearly $16,000 is to be earmarked for attorneys’ fees. Although the court has now concluded that the parties established sufficiently that the plaintiff’s “true employment status” constitutes a bona fide dispute, it ruled that it still could not approve the proposed settlement because plaintiff’s counsel had not provided the court with any documentation in support of the request for fees and costs, nor had she provided any information regarding the “reasonable hourly rate” for an attorney of her experience and practice area. The plaintiff was afforded yet another opportunity to provide the missing information and to request that the settlement then be approved.  Southerland v. A Brighter Future, Inc., No. 6:17-268-DCR (E. D. Ky. Sept. 19, 2018).

DRILLING/WELL SITE CONSULTANT FILES IC MISCLASSIFICATION CLASS ACTION IN PENNSYLVANIA. A drilling consultant/well site supervisor has filed a proposed class and collective action on behalf of himself and other oil field personnel against EdgeMarc Energy Holdings, LLC, an oil and natural gas company primarily doing business in Pennsylvania, Ohio, and West Virginia. The lawsuit is aimed at recovering unpaid overtime compensation under the FLSA and wage and hour laws of Pennsylvania and Ohio that the plaintiff claims is due because he and the other oil field workers were classified as independent contractors and not employees.  This lawsuit is one of an increasing number of IC misclassification challenges that have recently been brought against companies in the oil and gas industry, as we have previously reported in a blog post earlier this year.

According to the complaint, the workers operate oilfield machinery; perform manual labor and work long hours in the field, and are paid a day-rate with no overtime compensation.  The complaint further alleged, among other things, that the daily activities of the workers were mostly governed by EdgeMarc’s or its clients’ standardized plans, procedures and checklists; virtually every job function was pre-determined by EdgeMarc or its clients, including what tools to use, what data to compile, the schedule of work and related work duties; and the workers were prohibited from varying their job duties outside pre-determined parameters. The plaintiff also alleges that no substantial investment was required of him; that EdgeMarc or the company it contracted with exercised control over all aspects of the plaintiff’s job, including the hours and locations of work, tools used, and rates of pay received; he did not incur operating expenses like rent, payroll, marketing and insurance; he was prohibited from working other jobs for other companies; and his work required little skill, training or initiative.  Larsen v. EdgeMarc Energy Holdings LLC, No. 2:18-cv-01221 (W. D. Pa. Sept. 13, 2018).

CABLE INSTALLATION COMPANY UNABLE TO FORESTALL CLASS AND COLLECTIVE CERTIFICATION IN IC MISCLASSIFICATION LAWSUIT COVERING INSTALLERS IN TEN STATES. IC misclassification class and collective actions have been prevalent in the cable installation industry, and we have reported on many of them in past blog posts.  Last month, a Missouri federal district court granted the plaintiff’s motion for conditional certification in a proposed nationwide FLSA collective action brought by a cable installation technician alleging that she and similarly situated cable installers in ten states were improperly classified as ICs and thereby denied overtime compensation by Communications Unlimited Inc. In reaching its decision to grant conditional certification, the district court concluded that the plaintiff’s assertions in her complaint based on personal knowledge, as well her submission of detailed declarations by five other installers, were enough to establish that the installers were all subject to a single decision, policy, or plan – the company’s decision to classify installers at all of its offices as independent contractors. Specifically, the declarations all provided that the installers were assigned 2-hour timeframes in which to complete work; required to maintain and report metrics to the company; required to wear “Communications Unlimited” uniform shirts; had to carry an ID badge; were provided with equipment; and were denied overtime compensation despite working more than forty hours a week. The installers who provided the declarations worked in seven of the ten states where the company provides installation services. Fair v. Communications Unlimited Inc., No. 4:17 CV 2391 RWS (E.D. Mo. Sept. 19, 2018).

CALIFORNIA TRUCKING ASSOCIATION LOSES EFFORT TO PREEMPT STATE LAW TEST FOR IC STATUS IN THAT STATE. The U.S. Court of Appeals for the Ninth Circuit has affirmed a district court’s ruling that a federal law does not preempt the common law test for independent contractor status in California.  The Ninth Circuit held that the Borello test used by the Labor Commissioner of the California Department of Industrial Relations to determine whether drivers providing trucking services for the California Trucking Association (“CTA”) had been properly classified as independent contractors is not preempted by the Federal Aviation Administration Authorization Act (“FAAAA”). The CTA had alleged that the Commissioner’s application of the Borello standard disrupted the contractual arrangements between owner-operator drivers and motor carriers, thereby causing inefficiencies in the transportation market and, hence, was inconsistent with Congress’s goal under the FAAAA of preventing states from undermining federal deregulation of interstate transportation.

The court explained that its task was “to discern on which side of the line the Borello standard falls: a forbidden law that significantly impacts a carrier’s prices, routes, or services; or, a permissible one that has only a tenuous, remote, or peripheral connection.” CTA argued that the FAAAA preempts the Borello test because use of that standard can replace freely bargained, efficiency-driven contract terms with a state’s policy judgment about what those terms ought to be with respect to the service providers who engage in interstate transportation. In rejecting CTA’s arguments, the court stated that even if there was “a line between the permissible enforcement of contractual terms and the preempted enforcement of normative policies, the line does not control when the contractual relationship is between a carrier and its workforce, and the impact is on the protections afforded that workforce.” Likewise, the court stated that, “At most, carriers will face modest increases in business costs, or will have to take the Borello standard and its impact on labor laws into account when arranging operations.” Finally, the court addressed the recent Dynamex decision by the California Supreme Court.  As noted in a number of our blog posts, over the past six months, the California Supreme Court in Dynamex concluded that its decades-old precedent in Borello would no longer be followed in decisions involving certain California Labor Code violations that were the subject of that appeal. The Ninth Circuit noted that the CTA only sought to preempt Borello, which continues to be applied by the Labor Commissioner to laws not addressed in the Dynamex decision. California Trucking Association v. Su, No. 17-55133 (9th Cir. Sept. 10, 2018).

NINTH CIRCUIT AGREES WITH RIDE-SHARING TECHNOLOGY COMPANY THAT ARBITRATION AGREEMENTS WITH CLASS ACTION WAIVERS ARE VALID.  In a decision affecting hundreds of thousands of drivers who claim that they were misclassified as ICs, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s denial of a number of motions filed by Uber Technologies, Inc. to compel arbitration in class actions brought against it by Uber drivers.  Current and former drivers have alleged violations of various state and federal statutes due to their alleged misclassification as independent contractors and not employees. Although the court had previously considered and reversed the district court’s orders denying Uber’s motion to compel arbitration in Mohamed v. Uber Technologies, Inc., the drivers offered additional arguments in this appeal why the arbitration agreements were unenforceable: first, that even if the arbitration agreements were otherwise enforceable, they are irrelevant because the lead plaintiffs in O’Connor (among the many cases consolidated in this appeal) constructively opted out of arbitration on behalf of the entire class; and second, the arbitration agreements are unenforceable because they contain class action waivers that violate the National Labor Relations Act. The court rejected both arguments.  It first ruled that nothing gave the lead plaintiffs in one of the class action lawsuits the authority to take any action on behalf of any other drivers.  It next ruled that the U.S. Supreme Court in Epic Systems Corp. v. Lewis found arbitration agreements with class action waivers to be enforceable. The court also concluded that because the arbitration agreements were enforceable, the district court’s class certification orders must be reversed. Other than PAGA claims, these misclassification claims now will have to litigated in arbitration in individual arbitration proceedings.  O’Connor v. Uber Technologies, Inc., Nos. 14-16078, 15-17420, 15-17532, 16-17475,  No. 15-15000,  16-15595; Yucesoy v. Uber Technologies, Inc., Nos. 15-17422, 15-17534, 16-15001; Mohamed v. Uber Technologies, Inc.,  Nos. 15-17533, 16- 15035; DelRio v. Uber Technologies, Inc., No. 15-17475 (9th Cir. Sept. 25, 2018).

EEOC PREVAILS IN CLASS ACTION ON BEHALF OF EXOTIC DANCERS ALLEGEDLY DISCRIMINATED AGAINST ON THE BASIS OF RACE WHO HAD BEEN CLASSIFIED AS IC’S.  Exotic dancers at Danny’s Downtown Cabaret, a Missouri gentlemen’s club, were found to be “employees,” and not independent contractors, and therefore  covered by Title VII of the federal Civil Rights Act protecting employees from workplace discrimination. This lawsuit was brought by the Equal Employment Opportunity Commission (EEOC) on behalf of a group of black female dancers to correct allegedly unlawful employment practices of the club based on race. In its motion for partial summary judgment regarding whether the dancers were independent contractors or employees, the EEOC prevailed under a test that assessed the extent to which the employee was economically dependent upon the business, i.e. “whether the individual is, as a matter of economic reality, in business for herself.” In granting the EEOC’s motion and concluding that the dancers were employees, the court relied on the following evidence: the club exercised significant control over the dancers, including establishing work schedules and implementing workplace rules such as fines for lateness; setting the amounts charged to customers for private dances; and approving the music used. The court noted that the club failed to provide any evidence of its alleged lack of control over the dancers. Equal Employment Opportunity Commission v. Danny’s Restaurant, LLC, No. 3:16-cv-00769 (S. D. Mo. Sept. 11, 2018).

NEW TYPE OF LEGAL CHALLENGE POSED TO COMPANIES WHO USE IC’S AS PART OF THEIR BUSINESS MODEL. A new type of independent contractor misclassification lawsuit was filed last month – a legal challenge by a business that does not use independent contractors accusing another business that uses them of violating state unfair competition laws. As discussed in our blog post of October 1, 2018, Diva Limousine, Ltd., a provider of livery services who classifies its drivers as employees, has sued Uber Technologies, Inc., the largest ride sharing technology company in the U.S., in federal court. The lawsuit was brought as a class action on behalf of an array of class members. The class action complaint alleges that Uber continues to misclassify the drivers as independent contractors when California law requires them to be paid minimum wage, overtime compensation and other wage/hour protections as employees, and that Uber uses those cost savings to price rides far below their true cost, which allegedly takes business and market share from competitors who are complying with the law by classifying its drivers as employees. It is expected that Uber will deny the allegations and vigorously defend the case, pointing to arbitration, administrative, and court decisions where it has succeeded in establishing that the drivers are ICs and not employees. Diva Limousine v. Uber Technologies Inc., No. 18-cv-05546 (N. D. Cal. Sept. 10, 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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