The New York Times today reported that the New York State Department of Labor has found two Uber drivers as eligible for unemployment benefits after having rejected the company’s argument that the drivers are independent contractors. Uber has so far avoided any judicial determinations that its drivers are employees and not ICs, and has met with varying degrees of success across the country in getting courts to decline to exercise jurisdiction over class actions and instead enforce its arbitration agreements that contain class action waivers. Arbitration agreements between a company and a worker, however, are not applicable to state regulators, who are typically enforcing state laws that oftentimes include a presumption of employee status or are interpreted in an employee-friendly manner. Thus, companies that wish to minimize their IC misclassification exposure not only in courts but also before administrative agencies should avoid over-reliance on such arbitration agreements and take a broad approach to enhancing their IC compliance with the wide array of IC laws, including state laws governing unemployment and workers’ compensation. Otherwise, like Uber, they may find that the other shoe has dropped and they are exposed to the high costs of treating workers previously paid on a 1099 basis as “employees” for purposes of unemployment taxes and workers’ comp premiums, as well as penalties and interest for failure to cover those workers in the past.

Best practices for companies using ICs, both before and after they face claims for unemployment benefits and other IC misclassification claims, are set forth after an analysis of these latest Uber cases.

The State Unemployment Determinations Against Uber

The article by Noam Schreiber reports on determinations issued in August and September 2016 in connection with jobless benefits claims filed by the two Uber drivers. Such unemployment determinations are not generally available to the public and are likely to have been released to the Times directly by the drivers or indirectly through the New York Taxi Workers Alliance, which is trying to unionize Uber drivers.

As the article points out, these determinations are technically only applicable to the two claimants. However, most unemployment determinations, including those in New York, are not only applicable to the claimant but also to “all similarly situated workers.” Thus, unemployment decisions can be a form of “mini-class action” if there are many other workers in similar positions. In Uber’s case, there are likely thousands of Uber drivers in New York. Thus, a single unfavorable unemployment determination may have broad adverse impact on a company’s treatment of workers found to have been misclassified by a state unemployment agency.

The determinations themselves were not released to the public by the drivers, the Taxi Workers Alliance, or the Times, so the reasoning of the determinations is not known at this time. Determinations that workers are employees and not ICs, though, can be based on the provisions of an IC agreement, what a worker says he or she experiences in real life, or a combination.

As Schreiber notes, the New York unemployment decisions are subject to appeal. The first level of appeal is the New York State Unemployment Insurance Appeal Board; decisions by the Appeal Board are then subject to appeal to the Appellate Division in Albany. The entire appellate process can take more than two years.

Both Schreiber and other notable journalists covering the workplace, such as Anthony Noto in the New York Business Journal and Joe Tacopino in the New York Post, observe that a ruling by the New York courts in the area of unemployment benefits can impact decisions by other administrative agencies, including in this case the potential for an investigation into Uber by wage and hour regulators.

Best Practices for Companies Using ICs

  1. What should a business do today, before it receives notice that a worker it treats as an IC has made a claim for unemployment benefits (or filed some other type of misclassification claim)?

Companies can minimize or eliminate worker misclassification liability by enhancing their IC compliance before being challenged at the regulatory agency level or in court.

Companies that rely on ICs as one of their key sources of manpower or simply to supplement their existing workforce can take steps to minimize misclassification liability by ensuring that their relationships with such ICs are structured, documented, and implemented to enhance their level of compliance with applicable federal and state IC laws. Bona fide IC relationships with individual workers are permitted in all but one state in the U.S., although state law tests for IC status often vary from one state to another.

As described in our White Paper, businesses that rely on ICs should consider the use of IC Diagnostics™. This can start with an assessment of the company’s current level of IC compliance as measured on an IC Compliance Scale™. Depending on the level of IC compliance, alternatives to enhance compliance with IC laws may include restructuring, re-documentation, reclassification, or redistribution.

Where restructuring is suitable, some businesses may need only restructure a little while others may benefit from moderate to substantial restructuring to enhance the likelihood of a successful defense to an unemployment proceeding or other IC misclassification challenge.

Regardless of whether a business’s IC relationships need restructuring or not, documentation of the IC relationship can be critical under most state and federal laws governing the status of workers. Many IC agreements have not been updated since the crackdown on IC misclassification began in 2007 or were never drafted in a manner that minimizes IC misclassification liability. Thus, re-documentation of the IC agreement, including use of provisions keyed to the relevant legal tests for IC status and the 48 Factors-Plus™, is an essential aspect of IC Diagnostics™. The recent situation with FedEx demonstrates the importance of the documentation process.

Following an avalanche of adverse appellate court rulings, FedEx went into settlement mode and in the past two years committed $466 million to settle a number of class actions. As we noted in one of our recent blog posts, the appellate court decisions ruled against FedEx principally due to the language in the FedEx independent contractor agreement, which FedEx itself drafted and used with all its Ground Division drivers. One appellate court was not particularly soothing in its critique of the contract, noting that it agreed with yet another appellate court that FedEx’s independent contractor agreement is a “‘brilliantly drafted contract creating the constraints of an employment relationship with [the drivers] in the guise of an independent contractor model—because FedEx not only has the right to control, but has close to absolute actual control over [the drivers] based upon interpretation and obfuscation.’” Thus, re-documentation needs to be done in a state-of-the-art manner.

Many companies utilizing ICs are well aware that they may not be in full compliance with laws affecting ICs, but find themselves in a form of corporate paralysis, unaware that there are a number of ways they can minimize or avoid IC misclassification liability. Indeed, for most of those businesses, IC compliance in the areas of labor, tax, and employee benefits is readily attainable under IC Diagnostics™.

  1. What should a business do when it receives notice that a worker, whom it classifies as an independent contractor, is seeking unemployment benefits or that an unemployment agency is conducting an audit?

Assuming there is a valid argument that the worker is an IC and not an employee, including situations where the worker is in the “grey area,” the following are suggested best practices, using IC Diagnostics™ tools where applicable. These best practices apply specifically to claims for unemployment benefits but are applicable in varying degrees to other types of regulatory audits, investigations, or proceedings.

First, recognize the potential consequences of an adverse determination by the unemployment agency. A finding that a single worker is not an IC but rather an “employee” eligible for unemployment benefits is not typically limited to the claimant. Rather, as noted above, the decision is usually accompanied by an order directing the business to pay back contributions for the claimant “and all similarly situated workers.” Thus, in many ways, an unemployment claim can have the same effect as an audit covering most or all of the ICs retained by a business.

Second, submit a comprehensive position statement to the claims examiner or auditor. Address not only the factors listed in an unemployment statute or a publication published by the state agency for determining the status of the worker, but also other applicable indicia of employment status, such as those in the 48 Factors-Plus™ that the courts and administrative agencies have found to be pertinent to the issue of IC status. Sometimes, this submission must be done in a matter of days, so it is advisable to be prepared in advance.

Third, if an initial determination by a claims examiner or auditor is adverse, request a hearing – and treat the hearing as a mini-trial. The same comprehensive set of 48 Factors-Plus™ should be addressed at the hearing to the extent they are applicable, with admissible evidence and suitable witnesses to briefly introduce documentary and testimonial evidence. (A word of caution:an appeal of a decision by a referee or ALJ ordinarily may only address evidence introduced into the record; therefore, a full record should be made at the hearing.)

Fourth, in the event the hearing officer, referee, or administrative law judge rules against the business, file an appeal. Brief the appeal as you would a court case; it is important and beneficial to win at the administrative level. Indeed, winning early before the issue of IC misclassification gains traction can avoid further legal fees and lessen considerably the likelihood that further administrative or judicial claims will ever be brought. (A word of comfort:if a company receives an adverse determination, there are still ways to avoid adverse determinations in other legal proceedings – if the company takes certain of the steps described above.)