The past month’s judicial and administrative activity in the area of IC misclassification reflects the wide range of industries facing these types of claims: communications; cleaning services; transportation and delivery services; adult entertainment; hospitality; construction; and television production of professional sporting events. Almost all of these are industries that we have published blog posts where we suggest ways by which businesses in these industries can enhance their IC compliance. For example, we have blogged how cable companies can minimize their exposure to IC misclassification claims; how cleaning service companies can restructure, re-document, and re-implement their IC relationships; how even a strip club can avoid class action IC misclassification lawsuits; how transportation, delivery, and courier companies can avoid creating IC agreements and their own policy statements that are used against them to find IC misclassification; how the hospitality industry can “play it smart” instead of “playing it safe”; and how the construction industry can comply with state laws setting strict tests for IC status. These cases and the others we report on each month demonstrate how few businesses have sufficiently enhanced their level of IC compliance to avoid judicial or regulatory attacks on their engagement of ICs, franchisees, 1099ers and others not paid on a W-2 basis.
In the Courts (5 items)
STRIKEBREAKER MISCLASSIFICATION LAWSUIT: VERIZON SUED FOR CLASSIFYING REPLACEMENT CABLE SPLICING WORKERS AS IC’S. Verizon Communications, Inc. and three “subordinate entities” were sued in a Pennsylvania federal court by workers who provided temporary cable splicing services for Verizon. The lawsuit is a proposed multi-state collective and class action for alleged violations of the Fair Labor Standards Act and Pennsylvania and New Jersey wage/hour laws. The plaintiffs claim that they were misclassified as independent contractors instead of employees. According to the complaint, Verizon acted in a joint venture or as a joint employer with the other three entities, engaged hundreds of strike replacement wireline workers to service cabling used for cable TV, telephone and internet, and failed to pay them overtime compensation due to their alleged misclassification as ICs. The plaintiffs claim that Verizon “is responsible for a far reaching ‘fissured employment’ scheme” which they define as “the practice of a large company attempting to shed its role as a direct employer and purporting to disassociate itself from the workers responsible for its products (albeit maintain tight control over the method, manner, quantity and quality of production).” Among the alleged factors supporting an employer-employee relationship are that Verizon and the three entities required the workers’ attendance at meetings and training sessions; determined the type, amount and frequency of work assigned each day; prohibited workers from rejecting assignments; and set the schedules of the workers. Donoghue v. Verizon Communications, No. 16-cv-4742 (E.D. Pa. Sept. 1, 2016).
CLEANING FRANCHISEES CERTIFIED TO PROCEED WITH CLASS ACTION FOR IC MISCLASSIFICATION AGAINST LARGE COMMERCIAL CLEANING FRANCHISOR. The U.S. Court of Appeals for the Third Circuit upheld a lower federal court decision against commercial cleaning franchisor, Jani-King of Philadelphia, Inc., certifying a class action in an independent contractor misclassification suit brought by franchisee cleaners under the Pennsylvania wage and hour laws. As discussed more fully in our blog post of September 23, 2016, the appellate court used Jani-King’s own franchise agreement and written policies and manuals to uphold the lower court’s finding that Jani-King retained sufficient direction and control over the manner in which the franchisee cleaners were required to perform their services to warrant the certification of the case as a class action. The Third Circuit noted that while it was not determining the merits of the case, it found many factors that supported the lower court’s decision to allow the case to proceed on a class-wide basis, including Jani-King’s right to control the franchisees’ communications with customers, how the cleaners must address customer complaints, what franchisees can wear, the types of records the cleaners must keep, how the franchisees must advertise, how much advance notice the cleaners must give Jani-King before taking vacation, Jani-King’s right to inspect the work of the cleaners, the franchisor’s right to control assignments of the cleaners, its right to change the policies and procedures that franchisees must follow; and the right to terminate the franchise agreements at any time. As noted in the blog post, this case confirmed that, all too often, companies that use ICs and franchisees are their own worst enemies in terms of drafting documents that needlessly afford them the right to direct or control the performance of the workers – although there are ways to structure and document an IC or franchisee relationship to minimize the likelihood of IC misclassification claims. Williams v. Jani-King of Philadelphia Inc., No. 15-2049 (3d Cir. Sept. 21, 2016).
AMAZON SUED AS “JOINT EMPLOYER” BY DRIVERS RETAINED BY STAFFING COMPANY TO DELIVER GOODS. Amazon.com, the largest internet-based U.S. retailer, and one of the companies it uses for staffing have been sued by delivery drivers in a proposed class action for IC misclassification class in a California state court. The drivers brought claims that they were not paid minimum wage and overtime under the state wage and hour laws, were denied meal and rest periods under the state’s labor laws, and were not reimbursed for expenses as required by state law. The named plaintiff alleged that she and those in the class she seeks to represent were employed by a California staffing agency providing services to customers including Amazon.com, which she alleges is a joint employer of the drivers. The complaint alleges that Amazon.com, in conjunction with the staffing agency, assigned routes/locations to the drivers, required delivery of packages to be delivered within a specific window of time, required adherence to Amazon.com’s company policies and procedures, mandated a dress code, required attendance at meetings and trainings, disciplined drivers for violation of policies, and set drivers’ schedules. The complaint further alleged that Amazon.com and the staffing agency jointly managed, operated, and controlled all aspects of the manner and means of the drivers’ work and that both entities were liable for wage/hour violations under California law. As we stated in our blog post of August 30, 2015, state-of-the-art IC agreements can protect companies from claims of joint employer IC misclassification. Rwomwijhu v. Smx, LLC, and Amazon.com, LLC, No. BC634518 (Super. Ct. L.A. County, Cal. Sept. 20, 2016).
NEW JERSEY COURT DENIES MOTION TO DISMISS DRIVERS’ IC MISCLASSIFICATION CLAIM BROUGHT UNDER MASSACHUSETTS LAW. A New Jersey federal district court denied a motion to dismiss by National Freight, Inc. (NFI), a company providing transportation, logistics, and distribution services, in a proposed IC misclassification class action brought by delivery drivers under the Massachusetts independent contractor law. According to the complaint, the drivers, who would pick up merchandise from NFI’s distribution center warehouse in Pennsylvania and deliver it to Trader Joe’s stores in Massachusetts and other states, were misclassified as ICs and not employees. The drivers claimed, among other things, that they are required to: lease their trucks from NFI; perform delivery services only for NFI and not offer services to other companies; obtain insurance; work full time, six days per week; pick up merchandise outside their set routes without pay; and drive NFI’s assigned set route each day without deviating from the schedule. In its motion to dismiss, NFI argued that the drivers failed to state a viable claim under the Massachusetts independent contractor law because the Federal Aviation Administration Authorization Act of 1994 (FAAAA) pre-empts that state’s “ABC” test for employee status. The court rejected NFI’s position that the FAAAA preempted the entire ABC test. Instead, the New Jersey federal court noted that the U.S. Court of Appeals for the First Circuit, which covers Massachusetts, has held that only Prong B (which requires that “the service [be] performed outside the usual course of the business of the employer”) is pre-empted by the FAAAA, not prongs A or C. Portillo v. National Freight, Inc., No.15-cv-7908 (JBS/KMW) (D.N.J. Sept. 26, 2016).
TEXAS ADULT ENTERTAINMENT CLUBS PAY $1.1 MILLION TO SETTLE IC MISCLASSIFICATION CASES WITH EXOTIC DANCERS. A group of Texas adult entertainment clubs reached a $1.1 million settlement with exotic dancers in two collective actions claiming violations under the Fair Labor Standards Act due to IC misclassification. The dancers sued various Houston-based clubs (The Gold Cup, Cover Girls, Treasures, Centerfolds, and Splendor) alleging that they were denied minimum wage and overtime compensation, as well as the tips that they lawfully earned. In support of their IC misclassification claims, the dancers claimed that the clubs supervised the dancers; set the schedules for them; controlled the details of the dancers’ jobs, including setting the prices to charge customers for dances and choosing the dancers’ music, attire and make-up; and disciplined the dancers for failure to follow house rules. The proposed settlement, awaiting the Court’s approval, provides for a total settlement fund of $1.1 million with $440,000 to be paid in attorneys’ fees. Coronado v. DNW Houston Inc., No. 13-cv-2179 (S.D. Tex. Sept. 8, 2016); and Deshayes v. AHD Houston d/b/a Centerfolds, No. 15-cv-1243 (S.D. Tex. Sept. 8, 2016).
Administrative and Regulatory Initiatives (3 items)
NLRB FINDS BROADCAST SPORTS TELEVISION TECHNICIANS AND CAMERA OPERATORS TO BE EMPLOYEES, NOT IC’S. The NLRB Regional Director in Boston has determined that broadcast television technicians and camera operators working for Green Line Group Inc. (GLG), a company that provides technical crews primarily for professional sporting events including Red Sox, Bruins and Celtics games, to be employees under the National Labor Relations Act and may therefore be represented by a union. The IBEW, who filed a petition to represent the technicians, argued that the workers have been misclassified as ICs by GLG. In reaching his determination, the Regional Director found that while there were some factors that supported a finding of independent contractor status, the weight of the factors overall supported employee status. The facts that the Regional Director found supportive of employee status included the following: the technicians were clearly identified as working for GLG; they did not generally supply their own equipment or tools; their work is part of the regular business of GLG; many had long-term relationships with GLG; the technicians could not negotiate their fees with GLG; GLG failed to demonstrate that the parties believed they had entered into independent contractor relationships; and there was no evidence that the technicians were rendering services to GLG as independent businesses, as they had no entrepreneurial opportunities and bore no risk as a result of their work for GLG. The Regional Director’s decision stated that he did not find it significant that a few of the technicians were engaged by GLG as corporations. Green Line Group Inc., Case 01-RC-181492 (Sept. 16, 2016).
HAWAII HOTEL PROJECT WORKERS FOUND MISCLASSIFIED AS IC’S. The Hawaii Department of Labor & Industrial Relations (DLIR) issued penalties of $767,000 against R&R Construction Services for misclassification of 65 employees as independent contractors at a hotel project in Waikiki. According to the DLIR news release dated September 19, 2016, the penalties were assessed because the company allegedly avoided requirements to provide Unemployment, Workers’ Compensation, Prepaid Health Care, and Temporary Disability Insurances to the workers. R&R Construction is also facing an investigation by the U.S. Department of Labor that is looking into whether R&R violated the minimum wage and overtime requirements of federal law.
NEBRASKA AND OKLAHOMA SIGN IC MISCLASSIFICATION PARTNERSHIP AGREEMENTS WITH U.S. LABOR DEPARTMENT. Nebraska and Oklahoma became the 34th and 35th states to sign Memoranda of Understanding with the U.S. Department of Labor (DOL) targeting IC misclassification. On September 1, 2016, the DOL announced that it entered into a three-year Memorandum of Understanding (MOA) with the Nebraska Department of Labor and on September 13, 2016, it entered into an MOA with the Oklahoma Employment Security Commission. The goals of these partnerships include coordinating efforts to provide clear, accurate, and easy-to-access compliance information for businesses, employees, and other stakeholders, and sharing of resources and enhancing enforcement by conducting coordinated enforcement actions and sharing of information consistent with applicable laws. David Weil, the Wage and Hour Administrator of the DOL, stated in its press release announcing the Nebraska MOA: “The Wage and Hour Division continues to attack this problem head on through a combination of a robust education and outreach campaign, and nationwide, data-driven strategic enforcement across industries.” He continued: “Our goal is always to strive toward workplaces with decreased misclassification, increased compliance, and more workers receiving a fair day’s pay for a fair day’s work.”
Written by Richard Reibstein.
Compiled by Janet Barsky, Managing Editor.
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Earlier today, Uber was dealt yet another setback in its efforts to settle the IC misclassification lawsuits brought against it by Uber drivers in California and Massachusetts. As readers of this legal blog will recall from our post of April 22, 2016, Uber entered into a proposed settlement with counsel for the drivers that would pay them $84 million at a minimum with the potential of up $100 million, and afford them additional protections from unilateral termination by the company of their status as Uber drivers. Despite the large size of the proposed settlement, numerous objections were filed by proposed class members, by unions seeking to represent the drivers, and by other interested persons and entities. On August 18, 2016, Judge Edward Chen issued a 35-page Order denying the motion filed by the drivers’ counsel and supported by Uber that sought approval of the proposed settlement. Judge Chen expressed concerns about a number of provisions of the proposed settlement, but one reservation about the terms of the proposed settlement overwhelmed all others: Judge Chen found that the proposed payment of $1 million by Uber to settle the claims brought by the drivers under the California Private Attorneys General Act (PAGA) was only one-tenth of one percent of the value of that claim.
Analysis of the Court’s Decision
A claim under the California PAGA law is a private action on behalf of the State. The PAGA claim had been estimated by the drivers’ counsel to be worth up to $1 billion in damages. In order to determine whether the estimate was genuine, the Court had asked the California Labor and Workforce Development Agency (LWDA) to provide its estimate of the potential penalty that Uber would face if the LWDA sought to enforce its penalties against Uber for alleged misclassification of employees – and the LWDA confirmed that the $1 billion amount was accurate. In their negotiations of the proposed settlement, both counsel for the drivers and Uber appeared to shortchange the State of California by allocating only $1 million to the PAGA claim. According to Judge Chen, “the court cannot find that PAGA settlement is fair and adequate . . . .” Rather, Judge Chen concluded that the 99.9% reduction in the amount of the proposed penalty to Uber “has no rational basis.” In a rather harsh comment, the judge stated that “Plaintiffs appear to treat the PAGA claim simply as a bargaining chip in obtaining a global settlement for Uber’s benefit.”
Judge Chen also expressed concerns about the sweeping scope of the waiver and release that was part of the proposed settlement. He found that it covered workers who were not part of the class, covered claims that were not part of the lawsuits, and may adversely affect the prosecution of a number of other cases brought against Uber. While he found the average amount of recovery for unreimbursed expenses and tips to be modest – only $24 for California drivers and $12 for Massachusetts drivers who drove under 750 miles for Uber, and $1,950 for California drivers and $979 for Massachusetts drivers who drove over 25,000 miles for Uber – the judge concluded that such amounts, although low, were about 10% of their potential recovery and therefore legally “adequate.”
On a more technical issue, the judge expressed concern that the proposed settlement would require him to vacate his prior decision finding the arbitration agreement that Uber sought to impose on drivers to be unenforceable because it contained a waiver of the drivers’ rights to bring a PAGA claim in court and was issued under circumstances that did not adequately explain the nature of the arbitration agreement to the drivers.
The Significance of the Court’s Decision
What exactly does all this mean? First, the parties may seek to negotiate a higher amount of a proposed settlement. As illustrated recently in the case involving Uber’s ride-sharing competitor, Lyft, the parties in that case substantially increased the amount of the settlement following a rejection by a court of the initial proposed resolution. As we noted in our blog post of July 6, 2016, the increase from $12.25 million to $27 million, along with non-economic advantages for the drivers, led the court to eventually approve that settlement following its initial rejection. However, here in the Uber case, the PAGA claim would have to be increased to $100 million to reach the same 10% figure that the judge found minimally adequate with respect to the non-PAGA claims. Uber may have little willingness in essentially doubling its offer to $200 million, including $100 million for the PAGA claims – and the Uber drivers may not insist on that much to settle their PAGA claims. It is expected, therefore, that the parties may seek to increase the PAGA claim to a range of between $25-50 million and take a shot that the court will approve it.
Second, at the end of the court’s decision, it terminated its order prohibiting Uber from seeking to have drivers enter arbitration agreements. Thus, it is expected that Uber may promptly require drivers to sign a new arbitration agreement, presumably without waiving their right to litigate their PAGA claims in court, and allowing the drivers to opt-out if they wish to bring their claims in court. It has been estimated that as few as 8,000 of the hundreds of thousands of Uber drivers in California may remain in the class action if that occurs. However, Uber would be required to arbitrate thousands of cases of IC misclassification.
Third, Uber may simply wish to try the case to a jury. While few companies find that option to be worthwhile, it is by no means unheard of. FedEx tried a case to a jury in an IC misclassification case and won a jury verdict, as the overwhelming number of FedEx Ground drivers wanted to remain their own bosses. Although the verdict in that case was overturned on appeal due to faulty jury instructions, Uber claims that the overwhelming number of drivers want to be their own bosses and not Uber employees.
A court conference in this case is scheduled for September 15, 2016. Presumably, the parties will tell the court then how they wish to proceed.
How Can Other Companies Avoid Being “Uberized” by an IC Misclassification Class Action?
As we have stated in an earlier blog post commenting on the legal challenges confronting Uber, many companies that use independent contractors have resorted to IC Diagnostics™ to enhance their level of compliance and determine whether a group of 1099ers would pass the applicable tests for independent contractor status under governing state and federal law. That proprietary process also offers a number of practical, alternative solutions to enhance compliance with those laws, including: restructuring, re-documenting and re-implementing the independent contractor relationship; reclassifying 1099ers as W-2 employees; and redistributing 1099ers – as more fully described in our White Paper on the subject.
Companies that wish to retain an independent contractor business model generally elect to restructure, re-document, and re-implement their independent contractor relationships. While not all companies can eliminate most control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their independent contractor relationships to comply with federal and most state laws. If the independent contractor relationship can be effectively restructured to comply with such laws, the next step in the process is re-documentation. What seems like a simple act of dotting your i’s and crossing your t’s, though, is anything but; indeed, many independent contractor statutes and most judicial and administrative decisions in this area are often counter-intuitive.
As we noted in our August 29, 2014 blog post entitled “Earthquake in the Independent Contractor Misclassification Field,” we concluded that FedEx Ground lost a key case because of its misplaced reliance on an independent contractor agreement and its policies and procedures that were good, but not good enough. While FedEx is a savvy company, close scrutiny by a court found that the very documents FedEx created were sufficient in degree to lead the court to rule against FedEx. As we noted then in that blog post, “IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”
Of course, the implementation of a legitimate IC relationship is also essential. As shown in the Uber case, even when its contractual provisions were drafted in a manner intended to be consistent with independent contractor laws, evidence was introduced by the drivers in Uber’s motion for summary judgment that it failed to strictly follow in practice the contractual limitations on direction and control it had put into its independent contractor agreements. There is no reason, however, why a company committed to complying with independent contractor laws cannot, when exercising both rigor and restraint, implement and carry out in practice an enhanced independent contractor relationship. Had Uber undertaken the above steps, I may have been spared the lawsuits it has worked so hard to defend and settle.