U.S. Labor Department Acknowledges “Important Role Legitimate Independent ‎Contractors Play in Our Economy”: June 2022 IC Legal News Update

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The U.S. Labor Department has been playing musical chairs in its approach to classifying workers as independent contractors or employees under the federal Fair Labor Standards Act since the middle of the Obama Administration.  But the regulatory initiatives by the Obama, Trump, and Biden administrations have little impact on the legal landscape of independent contractor law.  In 2015, when the Administrator of the Wage and Hour Division of the Obama Administration’s Labor Department issued an Administrator’s Interpretation, our blog post was titled: “The Labor Department’s New Guidance on Independent Contractor Misclassification Is Nothing New Legally.” Five years later, when the Labor Department under the Trump Administration issued a proposed regulation that was finalized just before the onset of the Biden Administration, our blog post bore the heading “Much Ado About (Almost) Nothing.”  And when the Biden Administration issued a rule withdrawing the prior administration’s regulation, our blog post was called “Independent Contractor Misclassification Ping Pong.” Last month, the Labor Department notified the public that it plans to issue yet another regulation on this issue.  When issued, it too will have little legal significance because the U.S. Department of Labor does not decide FLSA cases, only the courts do.  Indeed, the federal courts have been doing so for decades, developing their own versions of the so-called “economic realities test” for independent contractor status, based on a standard first enunciated by the U.S. Supreme Court many years ago.

While the Labor Department has no final say about who is and who is not an independent contractor or employee under the FLSA, each administration’s articulation of a (slightly) different classification test has received outsized attention in mainstream media and in business and legal publications.  Last month, the Labor Department conducted two public forums, one designed to capture the views of businesses and the other to hear the thoughts of workers, as a prelude to the Department formulating a new regulation on independent contractor classification.  Most informative about the announcement of the forums in a June 3 blog post by the Acting Wage and Hour Administrator was the acknowledgment that, although there are businesses that have misclassified employees as independent contractors, the Labor Department nonetheless “recognize[s] the important role legitimate independent contractors play in our economy.” This recognition should prompt businesses to enhance their independent contractor compliance to better demonstrate that their relationships with independent contractors are indeed legitimate. Many companies do that using a process such as IC Diagnostics (TM), a customized and sustainable way to structure, document, and implement independent contractor relationships consistent with each company’s business strategy.

In the Courts (3 cases)

MASSACHUSETTS HIGHEST COURT REJECTS VERSION OF PROP 22 TYPE OF VOTER INITIATIVE.   The Massachusetts Supreme Judicial Court unanimously rejected two ballot initiatives that would have provided additional rights to about 200,000 ride hail and delivery app drivers in that state while maintaining their independent contractor status. The Massachusetts ballot initiative was similar to Prop 22, the California voter initiative supported by an overwhelming majority of voters but later found by a court to violate that state’s Constitution in a decision that is currently on appeal.  In the Massachusetts case, twelve registered voters challenged Attorney General Maura Healey’s certifications of two initiative petitions, each proposing “A Law Defining and Regulating the Contract-Based Relationship Between Network Companies and App-Based Drivers.” Plaintiffs argued the ballot petitions were unconstitutional because they did not “contain only related or mutually dependent subjects,” and the Attorney General’s summaries of the proposed laws were unfair because they did not adequately explain how the petitions, if approved by the voters, would change existing law.

The laws proposed by the ballot petitions would have allowed companies like Uber, Lyft, Instacart and others to continue to classify drivers as independent contractors, but also provide the drivers with a minimum level of compensation and other benefits such as a health care stipend and earned paid sick time. Additionally, the petitions would have “extend[ed] the classification of app-based drivers as independent contractors rather than employees or agents to potential lawsuits involving third parties….” Those provisions apparently would have relieved the companies of any negligence liability related to a traffic accident or assault by independent contractor drivers. The court rejected both initiatives concluding that they contained at least two substantively distinct policy decisions, one of which (the limitation of tort liability) is “buried in obscure language at the end of the petitions,” thereby violating the related subjects requirement. The court stated that, “limiting the scope of third parties’ tort recovery for injuries caused by app-based drivers is a substantively distinct policy issue from defining the wage and benefit structure of those drivers.”  The court concluded that “[p]etitions that bury separate policy decisions in obscure language heighten concerns that voters will be confused, misled and deprived of a meaningful voice – the very concerns that underlie art. 48’s related subjects requirement.”  El Koussa v. Attorney General, No. SJC-13237 (Sup. Jud. Ct. Mass. June 14, 2022).                     .

SUPREME COURT DECIDES ARBITRATION CASE WITH IMPLICATIONS FOR COMPANIES USING IC’S, BUT PRACTICAL IMPACT IS SLIGHT.  The United States Supreme Court unanimously held that a Southwest Airlines cargo ramp supervisor belongs to a class of workers engaged in foreign or interstate commerce, exempting the worker from arbitration under the Federal Arbitration Act.  Plaintiff trained and supervised teams of airline ramp agents who physically load and unload baggage, air mail, and freight, and she herself also loaded and unloaded cargo alongside ramp agents about three times per week.  The worker agreed to arbitrate any wage disputes individually as part of her employment contract.  Nonetheless, she brought a proposed FLSA collective action in federal court against the airlines claiming that she was exempt from arbitration under the FAA’s interstate transportation worker exemption because ramp supervisors, like seamen and railroad employees, were an exempt class of workers engaged in foreign or interstate commerce. The case reached the Supreme Court to resolve conflicting opinions of the U.S. Courts of Appeal for the Fifth and Seventh Circuits.

Justice Clarence Thomas authored the Court’s opinion, writing, “one who loads cargo on a plane bound for interstate transit is intimately involved with the commerce (e.g. transportation) of that cargo.” He further stated that the plaintiff “frequently loads and unloads cargo on and off airplanes that travel in interstate commerce. She therefore belongs to a “‘class of workers engaged in foreign or interstate commerce’ to which section 1’s exemption applies.” The opinion made clear that it based its decision on the work plaintiff did at Southwest Airlines and not on the services provided by Southwest generally. The author of this blog was quoted in Bloomberg Law’s Daily Labor Report on June 6, 2020 in an article by Erin Mulvaney, stating:  “The Supreme Court’s decision may be limited in its practical effect. Even if a worker’s claims are exempt from arbitration under the federal law, companies can still compel arbitration under most state arbitration laws.”  Southwest Airlines Co. v. Saxon, No. 21-30 (U.S. Sup. Ct. June 6, 2022).

LOGISTICS COMPANY FOUND TO HAVE MISCLASSIFIED OWNER-OPERATOR DRIVERS IN NEW JERSEY CLASS ACTION FOR IC MISCLASSIFICATION.  A New Jersey federal court has found a class of about 250 owner-operator commercial truck drivers for a related group of trucking and logistics companies had been misclassified as ‎independent contractors and not employees in violation of New Jersey wage laws. As discussed in our prior blog post of August 20, 2020, drivers from Pennsylvania and Rhode Island made deliveries to a retail grocery ‎store’s locations throughout many East Coast states on behalf of National Freight, Inc. and NFI Interactive Logistics, Inc. (NFI).  The plaintiffs claimed that NFI was liable for ‎statutory wage and hour violations, unjust enrichment, and payment of unlawfully deducted expenses under New Jersey law as a result of ‎their alleged misclassification. NFI is a third-party logistics company that provides transportation services to its clients. Those services include “dedicated contract carriage,” where NFI provides trucks, trailers, drivers, and other personnel necessary to transport a client’s goods from one location to another.

In granting the drivers’ summary judgment motion, the court applied the New Jersey version of the ABC test under the New Jersey Wage Payment Law and determined that neither of the two components of the B prong was satisfied.  The first part of prong B examines whether the delivery services performed by NFI by the drivers were part of NFI’s usual course of business.  The second part of prong B examines whether the services provided were performed outside of all the places of business of the enterprise.  In reaching its decision on prong B, the court relied on the facts that NFI hired employee drivers in addition to contracting with owner-operator drivers; advertised that it provides dedicated transportation services, as well as freight brokerage and logistics services; and did not simply connect its clients with drivers, but used personnel and infrastructure to facilitate the delivery services. In addition, the court held that the second component of Prong B failed because the drivers performed services in physical locations where NFI conducted an “integral part” of its business.  The court had no need to address prong A (dealing with control) or prong C (addressing whether the service provider has an independently established trade, occupation, profession, or business) because all three prongs of the New Jersey ABC test must be satisfied to establish independent contractor status. Portillo v. Nat’l Freight, Inc., No. 15-cv-07908 (D.N.J. June 9, 2022).

Regulatory and Administrative Developments (1 item)

U.S. LABOR DEPARTMENT HOLDS PUBLIC FORUMS AS IT CONTEMPLATES A NEW REGULATION GOVERNING THE CLASSIFICATION OF WORKERS AS INDEPENDENT CONTRACTORS.  In connection with its consideration of a new regulation regarding the classification of workers as independent contractors or employees, the Wage and Hour Division of the U.S. Department of Labor invited workers and employers to share diverse viewpoints at two public forums concerning worker classification. In a Labor Department blog post dated June 3, 2022, Jessica Looman, Acting Administrator of the Wage and Hour Division, stated that “Misclassified workers are denied basic workplace protections including rights to minimum wage and overtime pay, making it harder for them to support themselves and their families,” and “employers who comply with the law are at a competitive disadvantage when competing against employers who misclassify employees and pay them less than the law requires and fail to provide other employment-based worker protections.”  On the other hand, Acting Administrator Looman repeated a key commentary articulated by the Wage and Hour Administrator during the Obama administration, when she wrote, “At the same time, we recognize the important role legitimate independent contractors play in our economy.”

The new regulation, once promulgated, is expected to replace the regulation regarding IC classification under the Fair Labor Standards Act issued during the final two weeks of the Trump Administration.  The Biden Administration’s Labor Department had delayed the effectiveness of the regulation on March 4, 2021, and then withdrew the regulation on May 6, 2021, stating that it was inconsistent with the FLSA’s text and purpose.  However, on March 14, 2022, a federal district court vacated the Department’s rules that first delayed and then withdrew the rule.  The court held that the prior Administration’s rule took effect as of its original effective date, March 8, 2021, and remains in effect.

The Labor Department now plans to engage in rulemaking on how to determine whether a workers is an employee or independent contractor under the FLSA, having collected information from stakeholders on both sides of the issue. Once a proposed regulation is published in the Federal Register, there will be a notice and comment period allowing all interested parties an opportunity to provide formal written comments.

Legislative Update (2 items)

SEATTLE MAYOR SIGNS ORDINANCE PROVIDING WAGE GUARANTEES TO APP-BASED DELIVERY WORKERS.  Seattle Mayor Bruce Harrell signed into law on June 13, 2022 an ordinance aimed at app-based delivery workers. As detailed in our blog post of June 13, 2022, the so-called “PayUp” legislation was unanimously passed by the Seattle City Council on May 31, 2022.  The bill, now enacted, will guarantee app-based delivery drivers certain wage protections including at least a minimum wage plus expenses and tips. According to the Council’s official website posting on May 31, 2022, this law, among other things, makes Seattle the first city in the nation to provide such a guarantee. In addition to securing a minimum wage, the law increases transparency in how ‎payments are split between workers and app-based companies, and protects flexibility in work arrangements. One of the bill’s sponsors, Lisa Herbold, stated in a press release: “We live in an expensive city; many delivery workers earn below the minimum wage after expenses and tips are accounted for. App-based work is one of the fastest growing sectors of our economy with more workers turning to this type of work. The passage of this legislation will help tens of thousands of delivery workers make ends meet while maintaining their flexibility.”

NEW YORK STATE LEGISLATURE PASSES BILL PROVIDING PAYMENT PROTECTIONS FOR FREELANCE WORKERS AND OTHER IC’S.  On June 2, 2022, both houses of the New York legislature passed a bill (S 8369B) entitled “Freelance Isn’t Free” providing for payment protections for freelance workers in New York, requiring written contracts with minimum terms and conditions for such workers, providing a private right of action for freelancers to sue so-called “hiring parties” who fail to pay independent contractors in full for their services on a timely basis, and setting forth double and possibly treble damages for violations of the law.  The bill has not yet been delivered to Governor Kathy Hochul for signature, but it is anticipated the Governor will sign the bill, although some bills are returned to the legislature in New York for clarification of certain terms that are unclear in the legislation.  This bill, which was modeled in large part after the law of the same name enacted in New York City in 2016, unfortunately contains a number of uncertainties, similar to those we pointed out in a blog post dealing with the New York City law.  We will provide a comprehensive review of the new law once it is signed by Governor Hochul in the form originally passed by the legislature on June 2 or as modified by the legislature, if returned there by the governor for clarification.

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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