Recently, Mary Kay, Inc. was sued in New Jersey for allegedly misclassifying a class of direct sellers as independent contractors in violation of the New Jersey Wage Payment Law. While there are direct seller exemptions from laws governing unemployment insurance, workers’ compensation, and the payment and withholding of employment taxes, such exemptions have not been enacted in every state.  More importantly, there are no exemptions for direct sellers under either the federal wage and hour law and most state wage payment laws. This new lawsuit against one of the largest direct sellers in the U.S. may represent a start to the next wave of IC misclassification class actions. Unless direct selling companies take steps described below to enhance the structure and documentation of their independent contractor relationships, they run the risk that they, like other companies that use ICs, will be exposed to considerable IC misclassification liability.

The Direct Seller Class Action Lawsuit and Mary Kay’s Response

The complaint was filed in federal district court in New Jersey by a direct seller, Collins, who has been a Mary Kay “Independent Beauty Consultant” since 2004 and an “Independent Sales Director” since 2005.  Collins alleges that Mary Kay, Inc. exercises extensive control and direction over the manner she and all other New Jersey beauty consultants perform their work. Collins claims that she and the proposed class members are subject to “rigid rules for Beauty Consultants” and are required to purchase at fixed prices minimum amounts of products directly from Mary Kay and pay for materials created by Mary Kay to be used in marketing and sales.  Collins also alleges that Mary Kay prohibited her from using her own marketing schemes and was only permitted to advertise using pre-approved advertisements created by Mary Kay.  In addition, Collins alleges that she was required to wear certain uniforms sold by Mary Kay at fixed prices. Although there is no claim that Mary Kay failed to pay any wages due her, Collins alleges that that the “required payments and deductions imposed by Defendant violated the New Jersey Wage Payment Law . . . .”  Collins v. Mary Kay, Inc., No. 2:15-cv-07129 (MCA-LDW) (D.N.J.).

Mary Kay, Inc. responded by filing a motion to dismiss on several grounds including: (a) the lawsuit should have been brought in Dallas, Texas because Collins signed two agreements that include a “forum selection” clause requiring that any lawsuit “concerning any matter relating to this Agreement” be brought in a court in Dallas County, where Mary Kay is located; and (b) the complaint did not sufficiently allege a violation of the New Jersey wage payment law.  Mary Kay included in its motion to dismiss a copy of two agreements signed by Collins: one in 2004 and the other in 2005. No opposition has yet been filed by Collins, and a decision by the court is expected in the first quarter of 2016.

Legal Analysis

While it may well be that the lawsuit will have to proceed in a Texas court instead of New Jersey, nothing prevents a court in Texas from applying the law of another state, including a wage payment law. Further, although the complaint may not have met minimal pleading requirements (a defect that can often be cured), a dismissal of the lawsuit would not be a signal to direct selling companies that they have no exposure to these types of claims. Indeed, most states’ wage payment and labor laws prohibit employers generally from charging fees to employees for work-related expenditures or making deductions from the compensation of workers (other than for limited exceptions such as taxes, benefits, contributions, and the like). An improper wage deduction claim is one of the types of allegations in the IC misclassification lawsuits recently brought against Uber. It is also the primary type of claim that was alleged against FedEx Ground, which recently settled an IC misclassification class action in California for $228 million.

Because direct sellers typically incur considerable expenses, including marketing, advertising, and transportation costs, direct selling companies may well be at risk under state wage payment laws if a court determines that the direct sellers are employees and not independent contractors.

Similarly, direct selling companies may have exposure under federal and state laws for minimum wage violations. For example, unproductive direct sellers may receive less in commissions per week than the minimum wage multiplied by the number of hours that they claim to have worked in such week.

Notably, there was no claim in the Collins lawsuit for violation of the federal or state law requiring payment of minimum wages.  Evidently, Collins is likely to be a relatively productive “independent beauty consultant” and “independent sales director” and presumably earns commissions each week in excess of the minimum wage for the hours she works.

Likewise, because Collins did not plead a claim for overtime pay under federal or state law, it appears that she may not typically work over 40 hours per week.  Some direct selling employees may claim that they work over 40 hours in a workweek, and in that event they may file an overtime claim against their direct selling company claiming (as does Collins) that they are employees and not ICs.

Takeaways

While the direct seller exemptions found in the Internal Revenue Code and many state employment tax, unemployment, and workers comp laws are enormously beneficial to direct selling companies, they have not been enacted in every state.  And, as noted above, there are no exemptions for direct selling companies under either the federal wage and hour law or most state wage payment laws. Therefore, the best (and maybe only) defense to IC misclassification claims brought against direct selling companies under state wage payment laws or under a federal or state wage and hour law is that the direct sellers are ICs both in fact and under their contract.

Our review of a number of IC agreements being used by direct selling companies indicates that the structure and documentation of their IC relationships can be substantially enhanced from a compliance standpoint. Many of those agreements appear to have been drafted quite a few years ago and well before the recent crackdown on IC misclassification. Our experience with most companies’ IC agreements, even those updated in the past few years, is that they have not been drafted in a state-of-the-art manner and contain provisions that the courts find to be inconsistent with IC laws. Even the updated FedEx Ground IC agreements, revised by their counsel, were found by both a federal and state appellate court to have created an employment relationship.

One of the likely reasons why many direct seller IC agreements are inartfully drafted from an IC compliance perspective is because many such companies wrongly assume that, because direct sellers are exempt from some laws, they are exempt from all of the laws governing employees and ICs.  This leads to the mistaken belief that direct selling companies need not worry about the government crackdown on IC misclassification and the array of such class action lawsuits being brought with increased frequency against businesses in other industries.  The Collinslawsuit in New Jersey should serve as a form of wake-up call to the direct selling industry that enhancing IC compliance should be a priority, especially in view of the large number of direct sellers associated with those companies.

How can a direct selling company minimize its exposure to IC misclassification liability?  One way is by the use of IC Diagnostics™ to evaluate and elevate a company’s level of IC compliance.  This proprietary process facilitates the restructuring of the IC relationship in a customizable manner consistent with the business needs of the company. IC Diagnostics™ then focuses on the re-documentation of the IC relationship in a manner that seeks to avoid the types of disastrous results experienced by companies like FedEx Ground, which was undermined by its own words in the contract it drafted. Finally, IC Diagnostics™ ensures that a company’s implementation of the IC relationship is fully consistent with the restructured IC relationship and the re-documentation, so that the company is not undermined by its own actions.