This month’s headline developments are a set of cases reported in February dealing with class action IC misclassification claims: the highest court in a key state agreeing to decide what test to apply in determining the IC status of a group of workers asserting minimum wage and overtime claims; a new class action IC misclassification claim brought under the federal wage and hour law by a group of on-demand security-clearance investigators; and three more cases involving exotic dancers who allege they were misclassified as ICs. These cases demonstrate the wisdom of companies that have enhanced their IC compliance to avoid these types of lawsuits, instead of having to expend considerable financial resources to defend claims based on factual allegations that are difficult to overcome – and may be more challenging if courts choose more worker-friendly legal standards for class action liability. Companies that wish to minimize exposure to IC misclassification liability, including firms using an on-demand business model and those that simply wish to supplement their workforce with 1099ers, may wish to examine our White Paper on the subject. It discusses three alternative means to minimize IC misclassification risk: restructuring, re-documenting, and re-implementing IC relationships; re-distributing workers using staffing and workforce management firms; and reclassifying workers currently treated as 1099ers.

Another noteworthy development is an article in the Huffington Post by former Labor Secretary Robert Reich, who advocates a simple numerical test for determining independent contractor status under federal law. The test, however, would effectively overturn most court cases and administrative determinations in favor of companies found to have properly classified individuals as 1099ers, requiring them to abandon their lawful enterprises or face IC misclassification liability. The proposed test also seems to have overlooked the array of state law tests for IC status that differ from current federal laws and cannot be preempted by federal legislation.

In the Courts (4 cases)

  • CALIFORNIA TO DECIDE WHETHER TO USE A MORE WORKER-FRIENDLY TEST FOR BRINGING IC MISCLASSIFICATION CLAIMS SEEKING UNPAID OVERTIME AND MINIMUM WAGES. The California Supreme Court agreed to decide which test should be applied to certify a class of delivery drivers who alleged they were misclassified as ICs by their employer, Dynamex Operations West Inc., a nationwide courier and delivery service. The specific question to be considered is: in a wage and hour class action involving state law claims that the plaintiffs were misclassified as independent contractors, may a class be certified based on the California Industrial Welfare Commission (IWC) definition of “employee” as construed in Martinez v. Combs, 49 Cal.4th 35 (2010), or must the court apply the common law test for distinguishing between employees and independent contractors, as set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989)? The common law test is the standard that the courts have generally applied in the past in California. The IWC test is far less challenging for workers to satisfy, and would likely result in far more IC misclassification claims being brought – and won – in California. Dynamex Operations West Inc. v. S.C., No. S222732 (Cal. Sup. Ct.).
  • INVESTIGATORS CONDUCTING SECURITY CLEARANCE BACKGROUND CHECKS SUE GOVERNMENT CONTRACTOR FOR IC MISCLASSIFICATION. A collective action brought under the federal Fair Labor Standards Act was filed in California federal court on behalf of a class of investigators for KeyPoint Government Solutions, Inc., a company that provides security-clearance background checks and screening services to the United States government. The complaint alleges, among other things, that KeyPoint classified some investigators as employees yet misclassified others as ICs, even though all investigators were subject to the same rules, procedures, responsibilities and level of control; that KeyPoint failed to pay investigators allegedly misclassified as ICs the same overtime wages and other benefits paid to employee investigators; that the ICs were required to attend training sessions on how to perform background checks, had to obtain preapproval before delegating work, could not negotiate their fees, and were required to perform their services according to the instructions provided by KeyPoint. Smith v. KeyPoint Government Solutions, Inc., No. 3:15-cv-00429 (N.D. Cal.).
  • STRIP CLUBS REMAIN AN EASY TARGET FOR IC MISCLASSIFICATION CLAIMS.Class actions involving exotic dancers suing strip clubs remain a prevalent type of IC misclassification lawsuit. As discussed in our blog post of February 8, 2015, a class action complaint was filed in federal court in New York against Cheetah’s Gentlemen’s Club & Restaurant alleging that the club violated the federal Fair Labor Standards Act by failing to pay minimum wages and overtime, and violated the New York Labor Law by, among other things, misappropriating tips, making unlawful deductions from the dancers’ pay, requiring them to purchase and wear uniforms, and failing to reimburse them for laundering their outfitsSimilarly, a proposed class action was filed against the Hustler Club in the same New York federal court, also alleging that the club misclassified its exotic dancers resulting in a denial of minimum wage and overtime. Additionally, a jury in a Maryland federal court lawsuit awarded just under $200,000 to a class of six misclassified exotic dancers who worked at Fuego’s Exotic Dance Club and Club Extasy. The judge also added an award of liquidated damages under federal law. Rodriguez v. Three Amigos SJL Inc., No. 15 CV 823 (S.D.N.Y. Feb. 5, 2015); Rodriguez v. Larry Flynt’s Hustler Club, No.1:15-cv-01181 (S.D.N.Y. Feb. 18, 2105); McFeeley v. Jackson Street Entertainment LLC, No. 8:12-cv-01019 (D. Md. Feb. 9, 2015).
  • U.S. SUPREME COURT CHOOSES NOT TO HEAR DEFENSE THAT FEDERAL TRANSPORTATION LAW PREEMPTS STATE LAW RELIED UPON IN IC MISCLASSIFICATION CLASS ACTION. The U.S. Supreme Court declined to review a California Supreme Court’s holding that a federal transportation law, the Federal Aviation Administration Authorization Act of 1994 (FAAAA), does not preempt a class action lawsuit under the California Unfair Competition Law alleging that Pac Anchor Transportation Inc., a trucking company, misclassified its drivers as ICs and violated the state’s labor, unemployment, and unfair competition laws. The complaint alleged that because of the IC misclassification, the company illegally lowered their costs of doing business by engaging in acts of unfair competition including, but not limited to, failing to take certain statutorily mandated actions such as paying unemployment insurance and employment training taxes, withholding state disability insurance and income taxes, providing worker’s compensation, and ensuring payment of California’s minimum wage. The California high court had upheld an appellate court’s finding that the unfair competition law was not preempted by the FAAAA because the claim was not related to Pac Anchor’s price, routing, or service as a motor carrier. Pac Anchor Transportation v. California ex rel. HarrisNo. 14-491 (Feb. 23, 2015).

Regulatory and Enforcement Initiatives (4 matters)

  • THE PRESIDENT’S 2016 BUDGET REQUEST FOR THE U.S. DEPARTMENT OF LABOR SEEKS TO TARGET THE “FISSURED WORKPLACE.” President Obama’s proposed 2016 budget targets independent contractor misclassification as part of the “fissured workplace.” As more fully discussed in our blog post of February 2, 2015, the Labor Department’s Wage and Hour Division (WHD) submitted a lengthy budget justification to Congress focusing on its continued goal of detecting and penalizing instances of misclassification. The budget justification noted that workplaces are becoming “fissured” because some IC relationships and other business models “function to obscure, or eliminate entirely, the link between the worker and the business.”
  • TELEMARKETING FIRM ORDERED TO PAY $560,000 FOR MISCLASSIFYING TELEMARKETERS AS IC’S. The Wage and Hour Division of the U.S. Department of Labor secured a consent judgment in a Nevada federal court in favor or 398 telemarketers whom the WHD found to be misclassified as ICs by a telemarketing company, Intelliconnect Communications LLC. Intelliconnect was ordered to pay $560,000 in unpaid minimum wages, overtime compensation and liquidated damages. In its press release dated February 2, 2015, the WHD in Las Vegas reported that the company had paid the telemarketers based on a percentage of individual sales, resulting in many of them working for days and weeks for little or no pay. Among other things, the court ordered that the company be independently monitored for three years to ensure future compliance with the labor laws; that members of the company attend compliance training sessions for a period of three years; and that the company not engage in any retaliation against those employees who accept back wages or exercise their FLSA rights.
  • U.S. LABOR DEPARTMENT TARGETS JANITORIAL FIRMS MISCLASSIFYING CUSTODIANS AS INDEPENDENT CONTRACTORS. The U.S. Department of Labor’s Wage and Hour Division in Seattle undertakes a multi-year enforcement and outreach initiative within the janitorial industry regarding employee misclassification. According to apress release issued on February 5, 2015 by the WHD: “Of the division’s 1,221 janitorial industry investigations [conducted nationwide], 76 percent resulted in violations and to the recovery of $7.9 million in unpaid wages for nearly10,000 workers.” Under the initiative, the Seattle WHD will audit local janitorial businesses to ensure workers are paid in compliance with federal labor laws and “encourage employer engagement with key industry, government and community stakeholders to inform them of the initiative and to increase awareness about labor law compliance obligations.”
  • NEW YORK TASK FORCE REPORTS 12,000 IC MISCLASSIFICATION AUDITS CONDUCTED LAST YEAR. The New York Joint Enforcement Task Force on Employee Misclassification reported that its audits discovered over 133,000 workers were misclassified in 2014. As noted in our blog post of February 5, 2015, over 12,000 audits were conducted by the task force in New York in 2014, resulting in the discovery of $316 million in unreported wages, leading to assessments of $40.4 million in unemployment insurance contributions. (This did not include recovery of unpaid overtime and minimum wages.) The Task Force Report listed the “top dozen” industries and businesses that it found had the highest incidence of worker misclassification in New York in 2014, including: professional, scientific and technical services; construction of buildings; food services and drinking places; publishing industries; administrative and support services; specialty trade contractors; ambulatory health care services; personal and laundry services; performing arts, spectator sports and related industries; educational services; motion picture and sound recording industries; and merchant wholesalers and nondurable goods.

On the Legislative Front (5 matters)

  • HAWAII. Proposed bill (HB1213) was introduced in state House of Representatives would allow the state Department of Labor and Industrial Relations (DLIR) to set criteria for determining independent contractor status and when that status is presumed in the unemployment compensation context. The bill would establish certification procedures to be followed by the DLIR after identifying those individuals meeting the definition of an IC under Hawaii law.
  • KENTUCKY. A bill (15 RS BR 819) was introduced in state House of Representatives on February 3, 2015 addressing misclassification of employees in the construction industry. The General Assembly declared that Kentucky’s unemployment insurance system lost an average of $1,750,000 each year in the construction sector for the period 2007-2010 in unemployment insurance taxes not levied due to IC misclassification, and that construction employers that misclassify employees as ICs could reduce payroll costs by about 30%, creating a significant unfair competitive advantage over construction employers that comply with the law. The proposed bill would create a presumption that a worker is an employee of the construction contractor and not an IC unless the person is a separate business entity and meets a series of seven criteria, including freedom from direction and control; the right to perform similar services and make those services available to the general public/business community; an investment of capital by the worker beyond ordinary tools, equipment and a personal vehicle; and furnishing the tools and equipment necessary to perform the services. Proposed penalties would include a civil penalty of up to $1,000 for a first violation, up to $5,000 per occurrence for each subsequent violation within a five year period, and a doubling of fines for willful violations.
  • OHIO. Senate bill (SB25) was introduced on February 2, 2015 that seeks to create a uniform standard for determining IC/employee status under the wage and hour, unemployment compensation and workers’ compensation statutes. The bill would require a showing of all of the following seven factors: (a) the individual is free from control and direction in connection with the performance of the service; (b) the individual customarily is engaged in an independently established trade, occupation, profession, or business; the individual is a separate and distinct business entity from the entity for which the service is being performed or, if the individual is providing construction services and is a sole proprietorship or a partner in a partnership, the individual is a legitimate sole proprietorship or a partner in a legitimate partnership; (d) the individual incurs the main expenses and has continuing or recurring business liabilities related to the service performed; (e) the individual is liable for breach of contract for failure to complete the service; (f) an agreement, written or oral, express or implied, exists describing the service to be performed, the payment the individual will receive for performance of the service, and the time frame for completion of the service; and (g) the service performed by the individual is outside of the usual course of business of the employer.
  • VERMONT. Senate bill (SB82) was introduced on February 12, 2015 seeking to establish an interagency commission to investigate and evaluate the problem of employee misclassification in Vermont with respect to payroll taxes, occupational safety, unemployment insurance, and workers’ compensation. As proposed, the Vermont Commission on Employee Misclassification would be composed of the following individuals or their designees: Commissioner of Labor, Commissioner of Financial Regulation, Commissioner of Taxes, Commissioner of Buildings and General, Attorney General, Secretary of Transportation, Secretary of Human Services, Secretary of Commerce, Commissioner of Liquor Control, a member of the Hose of Representatives and a member of the Senate. 
  • WASHINGTON, D.C. The District of Columbia’s Wage Theft Prevention Amendment Act of 2014 became effective February 26, 2015. According to the Department of Employment Services (“DOES”), the Act makes broad changes to D.C.’s wage and hour laws, which include the Minimum Wage Act Revision Act, the Living Wage Act, the Wage Payment and Wage Collection Law, and the Accrued Sick and Safe Leave Act. The Act enhances remedies, fines, administrative penalties, and enforcement of wage payment and collection laws by increasing the accountability of employers and strengthening worker protection laws.  From the standpoint of IC misclassification liability, the WPTAA makes general contractors jointly and severally liable for violations of the D.C. wage and hour laws by their subcontractors, including the failure to pay wages properly. Generally, subcontractors must indemnify their general contractors for any penalties for the subcontractor’s violations. In addition, employers that use temporary staffing agencies may be held jointly and severally liable for violations by those agencies. However, the temporary staffing agency must indemnify the employer, unless the employer and temporary staffing agency agreed to a different arrangement before the effective date of the Act. The DOES also advised on its website that the Act increases penalties for employers who commit wage/hour violations; provides anti-retaliation protections for workers who hold employers accountable for failing to pay wages owed; establishes a formal hearing process with enforceable judgments; and provides for better access to legal representation for victims of wage payment violations, while making it easier for workers to collect awards from businesses who fail to pay, either in whole or in part, an employee’s regular wages.

Other Noteworthy News (1 matter)

  • Robert Reich, former Secretary of Labor under President Bill Clinton from 1993 to 1997, authored an article in the Huffington Post on February 22, 2015 sharing his viewpoint that “The rise of ‘independent contractors’ is the most significant legal trend in the American workforce –contributing directly to low pay, irregular hours and job insecurity.” In his mind, “It’s become a race to the bottom; once abusiness cuts costs by making its workers ‘independent contractors, every other business in that industry has to do the same — or face shrinking profits and a dwindling share of the market.”  He continued: “The law is still up in the air. . . . It’s absurd to wait for the courts to decide all this case-by-case. We need a simpler test for determining who’s an employer and employee. I suggest this one: Any corporation that accounts for at least 80 percent or more of the pay someone gets, or receives from that worker at least 20 percent of his or her earnings, should be presumed to be that person’s ‘employer.’ Congress doesn’t have to pass a new law to make this the test of employment. Federal agencies such as the Labor Department and the IRS have the power to do this on their own, through their rule making authority. They should do so. Now.” As noted in the introduction to this month’s update, this proposed new law would effectively overturn most court cases and administrative determinations in favor of companies found to have properly classified individuals as 1099ers, requiring them to abandon their lawful enterprises after years of being in full compliance, or face IC misclassification liability if they wished to continue their business. This proposal also addresses federal law only; many state IC laws vary from those in other states, and many vary widely from current federal laws.