This Update covers the two-month period of December 2015 and January 2016. The headnote for this period is: don’t classify drivers as ICs unless you do it right!
Eight of the nine cases reported below involve drivers. None of the involved companies, including such giants as Uber, Lyft, and Amazon, appear to have structured, documented, or implemented their independent contractor relationships in a way to avoid legal challenges. Now, each of them either face an imminent risk of a judicial finding of IC non-compliance or having to pay multi-million dollar amounts to settle their IC misclassification lawsuits.
None of those companies appear to have undertaken a compliance initiative such as IC Diagnostics™ to enhance their level of compliance under governing state and federal IC laws. That proprietary process offers a number of practical, alternative ways to enhance compliance with those laws, including restructuring, re-documenting and re-implementing the independent contractor relationship; reclassifying 1099ers as W-2 employees; or redistributing those treated as ICs – as more fully described in our White Paper on the subject.
Meaningfully enhancing IC compliance in a state-of-the-art fashion substantially increases the likelihood that no legal challenges will ever be brought or, if they are, that the business will be able to successfully defend itself. Although most companies are best served if they evaluate their level of IC compliance before they are subject to a legal challenge, even companies like Uber and Amazon, which are embroiled in judicial or administrative battles over their IC business models, would be well served to further enhance their ICs compliance consistent with IC Diagnostics™ – and not wait until the legal challenges end by judgment or settlement. While many companies that are currently facing a regulatory or judicial challenge are reluctant to make a change in their business models out of concern that such actions will be misconstrued as an admission of liability, enhancing IC compliance is still usually the best route to take for companies faced with pending legal challenges. As a general rule, even companies with high levels of IC compliance should always be seeking to further enhance their compliance with applicable state and federal IC laws.
In the Courts (9 cases)
UBER AND LYFT: FLURRY OF LEGAL ACTIVITY FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION CONTINUES
Lyft was able to extricate itself from a potentially devastating independent contractor misclassification lawsuit at a modest cost, while still maintaining its IC business model. Meanwhile, ride-hailing giant Uber fell deeper into legal controversies with drivers that are challenging their IC classification in courts across the country. In addition to lawsuits in California, Texas, New York, and Arizona, new lawsuits were filed in Pennsylvania and Florida.
LYFT TO PAY $12.25 MILLION TO SETTLE ITS CALIFORNIA IC MISCLASSIFICATION CASE. In late January 2016, Lyft announced that it had settled a proposed class action brought against it in California following Lyft’s failure in March 2015 to persuade a California federal court judge that the drivers’ IC misclassification lawsuit should be dismissed on the law. That decision, which was the subject of a blog post on this site, found that the question of whether the drivers were ICs or employees should be decided by a jury trial. In the settlement, Lyft reportedly is paying $12.25 million to drivers and agreed to limit the grounds on which it could terminate its relationship with drivers. As the co-publisher of this blog, Richard Reibstein, was quoted in a Los Angeles Times article by Tracey Lien, while the settlement may put to rest one lawsuit against the company, “it doesn’t mean Lyft is in the clear. In fact, many states have more stringent tests for independent contractor status than California, and there’s nothing stopping another lawyer from filing a similar lawsuit in California”. The article continued: “‘Lyft would be well-served to reevaluate its structure and documentation,’ Reibstein said, ‘because just because you exit one lawsuit does not mean that there won’t be another coming right down the pipe tomorrow.’” Cotter v. Lyft, Inc., No. 3:13-cv-04065-VC (N.D. Cal.).
UBER SUFFERS FURTHER SETBACKS IN CALIFORNIA IC MISCLASSIFICATION CASE
As more fully detailed in our blog post of December 10, 2015, the federal district court judge overseeing the Uber IC misclassification case in California issued a ruling on December 9 invalidating the arbitration clauses in the drivers’ agreements that, if they were enforceable, would have foreclosed thousands of drivers from being covered under the class action and required them to bring individual claims against Uber. Additionally, the court ruled that the drivers could also proceed on a class-wide basis with the expense reimbursement claim seeking damages for costs incurred in operating their vehicles, including transportation and cell phone costs, in addition to their claim where they allege entitlement to the full amount of all tips received from customers. The expense reimbursement claim is likely to be very significant if Uber does not prevail in the case. As a point of reference, the overwhelming bulk of the $228 million settlement in the California IC misclassification case against FedEx was related to the expense reimbursement claim. O’Connor v. Uber Technologies, Inc., No. 3:13-cv-03826-EMC (N.D. Cal. Dec. 9, 2015).
Two weeks later, the judge in the Uber case in California also issued a ruling barring Uber’s use of a new arbitration agreement with all Uber drivers, including members of subclasses that were already certified. Just two days after the Court’s December 9, 2015 order finding that the arbitration agreements were unenforceable, Uber issued new agreements that “purport to require nearly all claims to be arbitrated and waive the driver’s right to bring or participate in class action litigation, unless he/she opted out of the arbitration agreement.” The court reasoned that “Uber’s efforts to seek drivers’ consent to the arbitration provision in the December 2015 Agreement during the pendency of the ongoing class action lawsuits is potentially misleading and threatens to interfere with the rights of both certified and putative class members.” O’Connor v. Uber Technologies, Inc., Case No. 3:13-cv-03826-EMC (N.D. Cal. Dec. 23, 2015); In Re Uber FCRA Litigation, Case No. 14-cv-5200-EMC (N.D. Cal. Dec. 23, 2015); Yucesoy v. Uber Technologies, Inc., Case No. 15-cv-0262-EMC (N.D. Cal. Dec. 23, 2015)
UBER CLASS ACTION IC MISCLASSIFICATION CASE FILED IN PENNSYLVANIA. Uber faces new class action misclassification complaint in Pennsylvania brought by UberBLACK limousine drivers claiming that Uber’s classification of them as ICs violates the FLSA, the Pennsylvania Minimum Wage Act, and Pennsylvania Wage Payment and Collection Law. In addition, the lawsuit claims that, by promoting UberX with lower rates as a competitor to UberBLACK, Uber breached its fiduciary duty to the UberBLACK drivers. The drivers allege that they are employees and not ICs because, among other things, Uber controls the number of fares the drivers receive, have the authority to suspend or terminate a driver’s access to Uber’s app, require the drivers to submit to coverage under the company’s liability insurance policy, automatically deduct insurance premiums from the driver’s weekly fees, require the drivers to transfer their vehicles’ titles to the company, require drivers to refuse gratuities, require drivers to submit to Uber’s customer rating system, have absolute discretion to set the rates that customers are charged, prohibit drivers from promoting their personal business to UberBLACK customers, control the types of luxury vehicles that may be used, and require a certain dress code. Razak v. Uber Technologies, Inc., No. 160100404 (Phila. Ct. of Common Pleas Jan. 6, 2016).
UBER IC MISCLASSIFICATION CLASS ACTION FILED IN FLORIDA. On January 22, 2016, Uber was sued in federal court in Tampa, Florida by drivers who allege that Uber misclassified them as ICs. The lawsuit alleges that Uber failed to pay them the federal minimum wage and overtime for hours worked over 40 in a workweek and deprived them of their right to workers’ compensation, unemployment insurance, disability insurance, Social Security and other benefits. The lawsuit adds a twist to the standard class action claim: it also seeks recovery under a little-used federal tax law for the willful filing of false information returns (Forms 1099, in this instance), where the damages are the greater of $5,000 or any actual damages sustained by the plaintiffs. Suarez v. Uber Technologies, Inc., No. 16-cv-00166-JSM-MAP (M.D. Fla. Jan. 22, 2016).
AMAZON SUED BY “PRIME NOW” DRIVERS IN IC MISCLASSIFICATION CASE. Amazon.com has been sued again in an IC misclassification case, this time in Arizona federal court, by drivers who deliver its products to Amazon’s customers within one to two hours of being ordered through Amazon’s “Prime Now” app. The prior lawsuit was brought in Los Angeles Superior Court and was the subject of our blog post of October 28, 2015. The drivers in the new Arizona case claim that they have been misclassified as ICs by Amazon and Courier Logistics Services, LLC, the company providing delivery services to Amazon, and that they are entitled to, among other things, unpaid minimum wage and overtime compensation and liquidated damages under the Fair Labor Standards Act. The complaint alleges that the “Prime Now” app suggests a $5.00 tip for drivers (yet the drivers are prohibited from accepting cash tips); that the drivers receive multiple days of training in making Amazon Prime Now deliveries; that they are required to wear clothing bearing the Amazon Prime Now logo; that they are scheduled to work fixed shifts; that they are required to arrive at a designated warehouse ahead of the shift time and check in with a dispatcher; that they cannot reject work assignments or request particular geographical areas; that they are tracked while they are on deliveries; that the Prime Now app generates routes and directions they are expected to follow; that the fees received by the drivers are unilaterally determined by the defendants; and that they are required to use their own vehicles without reimbursement by the company. Curry v. Amazon.com, Inc., No. 2:16-cv-00007 (D. Ariz. Jan. 5, 2016).
NATIONAL ON-DEMAND PARKING SERVICE SUED FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION. National on-demand valet parking company, Zirx, was sued in a proposed class action in the state of Washington by a parking “agent” alleging, among other things, that she was misclassified as an independent contractor and thereby denied overtime compensation to which he was allegedly entitled under the federal Fair Labor Standards Act and the state’s Minimum Wage Act and that Zirx also violated the Washington Wage Rebate Act. The agents parked cars for the company’s customers at rented lots, returned the cars to the customers, and sold additional services such as filling the vehicles with gas, washing the cars, and selling monthly parking services. The proposed class action complaint is based on the allegations that the agents were misclassified because, among other things, training and equipment were provided by the company; the company directed and controlled the agents’ work; schedules were set by the company; the services had to personally performed; and a dress code was required to be followed. Pascual v. Zirx Consumer Services, Inc., No. 2:15-cv-01923 (W.D. Wash. Dec. 8, 2015).
DRIVERS FOR DELIVERY AND LAST-MILE LOGISTICS COMPANY 3P DELIVERY (NOW XPO) TO RECEIVE $2.8 MILLION IN SETTLEMENT OF THEIR IC MISCLASSICATION CLASS ACTION. An Illinois federal district court judge approves a $2.8 million settlement of an IC misclassification claims brought on behalf of 258-member class of drivers against delivery and logistics company, 3PDelivery (3PD), now known as XPO Last Mile d/b/a XPO Logistics. The class action lawsuit was filed in 2013 alleging that 3PD violated the Illinois Wage Payment and Collection Act by misclassifying its delivery service providers as ICs, failed to properly compensate them for all hours worked, and made deductions from their pay in violation of state law. Approximately $1.8 million will be awarded to the drivers and over $900,000 will be awarded as attorneys’ fees. As more fully detailed in our blog posts of April 14, 2013 and November 2, 2010, 3DP had previously settled similar claims with drivers in Oregon and Washington. Brandon v. 3PD Inc., case no. 1:13-cv-03745 (N.D. Ill. Jan. 26, 2016).
TAXICAB DRIVERS FOUND NOT TO BE IC’S FOR OREGON UNEMPLOYMENT PURPOSES. The Oregon Supreme Court affirmed the decision of the Oregon Court of Appeals that taxicab drivers performing services for Broadway Cab LLC are not independent contractors and, as such, Broadway Cab is liable for unemployment insurance taxes. In applying the four-part, conjunctive requirements of the independent contractor statute in Oregon, ORS 670.600(2), the Court determined that the definition was not met because the taxicab drivers were not “customarily engaged in an independently established business.” Among other things, the company failed to establish that the drivers maintained business locations separate from those of the company and did not give the drivers the authority to hire or fire other persons to perform or assist in providing services. Broadway Cab LLC v. Employment Department, No. S062715 (Sup. Ct. Ore. Dec. 10, 2015).
GOLF EQUIPMENT AND PROMOTION COMPANY SUED BY MANAGERS ALLEGEDLY MISCLASSIFIED AS IC’S. Dixon Golf Inc., a nationwide manufacturer and seller of golf equipment and apparel, is sued in Illinois federal court by former employees in class and collective action alleging violations of the Fair Labor Standards Act and the Illinois Minimum Wage Law due to intentional misclassification of employees as independent contractors. The plaintiffs are Regional Managers, Territory Managers, and Representatives who generally perform services for the company by procuring and working events such as golf outings where the company’s products are promoted. The complaint alleges that significant control is exercised by the company over the plaintiffs by, among other things, Dixon’s providing of training manuals, uniforms, and promotional materials, its requirement that the plaintiffs sign an independent contractor agreement that includes non-solicitation and non-compete clauses, and the company’s mandate that the plaintiffs use a script with potential customers. York v. Dixon Golf Inc., No. 1:15-cv-11699 (N.D. Ill. Dec. 28, 2015).
Regulatory and Enforcement Initiatives (6 matters)
PORT DRIVERS AWARDED $6.9 MILLION AGAINST TRUCKING COMPANY. The California Commissioner of Labor awarded 38 port truckers found to have been misclassified as ICs a total of $6.9 million for expenses incurred during the course of their “employment” by trucking company, Pacific 9 Transportation (Pac 9). The Commissioner’s decision reportedly was reached after six weeks of back-to-back hearings held between July and September 2015 about each of the 38 individual drivers. Applying the common law Borello test, the Commissioner determined that each of the 38 drivers was an employee and not an independent contractor, and that Pac 9 owed each of them business expenses that had been unlawfully deducted from their paychecks for truck rental payments, permits and licenses, truck insurance, parking fees, inspections, and fuel. In addition, the drivers were awarded liquidated damages for all hours that they were paid below the minimum wage, as well as meal and rest period premium pay for missed meal periods.
U.S. DEPARTMENT OF LABOR CRACKING DOWN ON GEORGIA HOTEL AND HOSPITALITY INDUSTY. Georgia’s hotel and hospitality industry is the subject of on-going education and enforcement initiatives by the U.S. Department of Labor’s Wage and Hour Division, according to a News Release from the agency dated January 25, 2016. Eric Williams, Director of the Wage and Hour Division’s Atlanta District Office, stated in the news release: “This industry employs some of the most vulnerable workers we see. Our initiative works to ensure that Georgia’s workers are protected against exploitation and that law-abiding hotel employers aren’t placed at a disadvantage for playing by the rules and paying fair wages. We will continue to use every tool at our disposal to make sure that happens.” In fiscal years 2014 and 2015, investigations reportedly recovered over $283,000 in back wages due to more than 400 workers.
SECRETARY OF LABOR ENDORSES USE OF IC’S WHERE IN COMPLIANCE WITH LAW. Labor Secretary Thomas Perez, in anticipation of meeting with Silicon Valley high-tech industry leaders, workers, venture capitalists, and other community leaders, expressed the need to encourage innovation while coming to terms with changes in the world of work, such as the growth of the gig or on-demand economy where independent contractors are prevalent. In his Department of Labor blog post of January 25, 2016, Secretary Perez wrote: “This is an exciting, entrepreneurial development that is tapping into powerful consumer demand while giving workers flexibility and enabling them to monetize existing assets, like their cars or extra rooms in their homes. At the same time, the on-demand economy raises important questions about how to continue upholding time-honored labor standards and how to promote economic security for American workers in a changing labor market.” Specifically, Secretary Perez announced that the Bureau of Labor Statistics currently is working with the Census Bureau to rerun the Contingent Worker Supplement to the Current Population Survey in order to provide “reliable, credible insight into what’s going on across a range of work arrangements – from independent contractors to temporary employees to workers holding multiple jobs at the same time.”
UBER WINS AN ADMINISTRATIVE UNEMPLOYMENT CASE IN FLORIDA. The Florida Department of Economic Opportunity (DEO) rules that two former drivers for Uber’s Florida subsidiary, Rasier LLC, are independent contractors and not employees, and are therefore not eligible for unemployment compensation. The DEO reportedly found that the agreement between Uber and the drivers identified the relationship as an IC arrangement and the underlying facts supported that categorization. Among other things, the DEO found that drivers had substantial control over the details of their services, including their hours; used their own vehicles; need not display Uber signage; had no direct supervisors; were not directly evaluated; chose which engagements to accept; and had a non-exclusive relationship with the company. The Order stated: “These platforms are helping people pursue what has always been an important part of the American dream: to be one’s own boss.” It also described Uber as a middleman or broker for transportation services, not as an employer and found that “Uber is no more an employer to drivers than is an art gallery to artists.” Rasier LLC v. State of Florida Department of Economic Opportunity, No. 0026 2834 90-02 Ewers; 0026 2834 68-02 McGillis.
NORTH CAROLINA GOVERNOR ISSUES EXECUTIVE ORDER ON IC MISCLASSIFICATION. North Carolina Governor McCrory issues Executive Order 83 (E.O. 83) on December 18, 2015 to address problem of employee misclassification. E.O. 83, entitled the “Employee and Employer Fairness Initiative,” directs the appointment of a Director to oversee a new Employee Classification Section within the state’s Industrial Commission to serve as the primary contact for reported instances of employee misclassification that will be referred to relevant state agencies for investigation and enforcement action. The Governor also directs the Department of Revenue, the Industrial Commission, and the Division of Employment Security to each appoint liaisons that will work with the new Director to ensure their respective agencies are taking proper enforcement actions and sharing information. An annual report is to be prepared by January 1 of each year publishing to the Office of the Governor a report of the Section’s activities and any recommended or proposed legislative changes. Legislative action is still necessary to promulgate fines and penalties and to create the authority to issue stop work orders.
SEATTLE PASSES ORDINANCE FOR RIDE-SHARING DRIVERS TO UNIONIZE. Seattle City Council unanimously approved an ordinance (CB 118499, Version 2) on December 14, 2015 permitting drivers for taxi, transportation network companies, and for-hire drivers, including those who provide services as independent contractors to ride-hailing companies like Uber and Lyft, to unionize and have the right to collectively bargain for better terms and conditions of their service arrangements. The ordinance, the first of its kind nationwide, was supported by the App-Based Drivers Association of Seattle, an organization of on-demand contract workers that lobbied with the local Teamsters union. Seattle Mayor Ed Murray did not sign the bill due to concerns over the relatively unknown costs of administration and the burdens that may be placed on city staff regarding related rule-making, but allowed it to become law without his signature. Legal commentators have expressed questions as to whether the ordinance will survive legal scrutiny as it may be pre-empted by federal labor laws and/or stricken down under federal antitrust laws. As the co-publisher of this blog was quoted in an article by Heather Somerville in Reuters US Edition News: “The Seattle law does not rule on whether drivers are employees or contractors but extends to drivers rights usually reserved for employees. ‘It’s a reaction to the employment issue without solving that bigger problem,’ said Richard Reibstein, a labor lawyer who runs the independent contractor practice at Pepper Hamilton. ‘Until such time as their status is resolved in each state, those who are unhappy will seek political action to advance their causes.’”
Other Noteworthy Matters
ARE DIRECT SELLING COMPANIES THE NEXT TARGET FOR IC MISCLASSIFICATION CLAIMS? In our blog post of December 2, 2015, we questioned whether the recent IC misclassification class action against direct selling giant Mary Kay, Inc. signaled that direct sellers are next up as targets of plaintiffs’ class action law firms. In that case, Mary Kay, Inc. was sued in New Jersey federal district court in a proposed class action alleging that beauty consultants had been misclassified as ICs in violation of the New Jersey Wage Payment Law. As discussed more fully in our blog post, while there are direct seller exemptions from laws relating to unemployment insurance, workers’ compensation, and the payment and withholding of employment taxes, such exemptions do not exist in every state. Further, there are no exemptions for direct sellers under either the federal wage and hour law and most state wage payment laws. The complaint in that case alleges that Mary Kay, Inc. exercised extensive direction and control over the manner in which the Independent Beauty Consultants perform their services including the requirements that they follow “rigid rules”; purchase products at fixed prices; buy minimum quantities of products directly from the company; pay for marketing materials; only advertise using pre-approved ads created by the company; and wear certain uniforms sold by the company at fixed prices.