The poster children of IC misclassification cases dominated the news in June: Uber, Lyft, GrubHub, FedEx, an exotic dance club, and a trucking transport company. It was not a good month for any of them, yet as we have articulated in this legal blog on numerous occasions, every one of those companies as well as most businesses in the adult entertainment and transport industries can lawfully use ICs – if they properly structure, document, and implement their IC relationships in a manner that enhances compliance with IC laws instead of retaining needless direction and control over the ICs, much of which is non-essential to their business models.

Earlier this month, we noted in a blog that if FedEx and its lawyers had simply drafted their IC agreements with a sharp eye on clever compliance, they may well have prevailed in many of their class actions or settled them for a fraction of what FedEx eventually agreed to pay to its Ground Division drivers and their class action lawyers: over $468 million since June 2015.

Similarly, in our recent blog post on Uber and Lyft’s proposed settlements for $100 million and $27 million, respectively, we noted that even if Uber and Lyft implemented the provisions that they included in their proposed settlement agreements, where they relinquished the absolute right to terminate drivers, those changes alone may not be sufficient to forestall new lawsuits or insulate those companies from IC misclassification liability in similar cases pending against them. Rather, we remarked that both companies needed to minimize the types of direction and control that the judges in both of those cases focused on, including control expressed in their driver handbooks where they gave the drivers instructions to “dress professionally”, “send the client a text message 1-2 minutes from the pick-up location”, “make sure the radio is off or on soft jazz or NPR”, “make sure to open the door for your client”, “have an umbrella in [your] car for clients to be dry until they get in your car or after they get out”, “no talking on the phone (unless it’s the passenger)”, and “greet every passenger with a big smile and fist bump”.

Similarly, in our recent blog post on Uber and Lyft’s proposed settlements for $100 million and $27 million, respectively, we noted that even if Uber and Lyft implemented the provisions that they included in their proposed settlement agreements, where they relinquished the absolute right to terminate drivers, those changes alone may not be sufficient to forestall new lawsuits or insulate those companies from IC misclassification liability in similar cases pending against them. Rather, we remarked that both companies needed to minimize the types of direction and control that the judges in both of those cases focused on, including control expressed in their driver handbooks where they gave the drivers instructions to “dress professionally”, “send the client a text message 1-2 minutes from the pick-up location”, “make sure the radio is off or on soft jazz or NPR”, “make sure to open the door for your client”, “have an umbrella in [your] car for clients to be dry until they get in your car or after they get out”, “no talking on the phone (unless it’s the passenger)”, and “greet every passenger with a big smile and fist bump”.

We also noted in a prior blog post that “even an exotic dance club (a.k.a strip joint) can comply with independent contractor laws – and avoid or [successfully] defend against class actions.”

Likewise, over five years ago, we stated in one of our blog posts that focused on drivers in the transportation industry: “There are ways to minimize or eliminate independent contractor misclassification; neither disguising nor ignoring it appear to be sound alternatives….This…[d]elivery case is an example of how a company can become a casualty of failing to structure its relationship with its drivers in a bona fide manner that complies with applicable employment, tax, benefits, and independent contractor laws.

The method by which those and similar companies can enhance their compliance with IC laws is described in those blog posts and in our Updated White Paper on minimizing IC misclassification liability.

In the Courts (9 cases)

UBER REMAINS A MOVING IC MISCLASSIFICATION TARGET AROUND THE COUNTRY. Following lawsuits filed against it in Florida, Arizona, and Pennsylvania, Uber was sued by drivers this past month in Indiana and New York for IC misclassification, and in California for federal WARN Act violations.

  • In Indiana, the new federal class action complaint alleges, among other things, that the drivers lack discretion in the performance of their relationship with Uber; that Uber regulates and monitors the drivers’ performance and sets all fares; and that Uber requires all drivers to maintain an average customer star evaluation of 4.5 out of 5 or face deactivation of the drivers’ ability to access Uber’s app. The drivers seek damages in this new lawsuit for expense reimbursement, overtime pay, rest and meal breaks, and minimum wages. Scroggins v. Uber Technologies, Inc., No. 16-cv-1419 (S.D. Ind. June 9, 2016).
  • In New York, the New York Taxi Workers Alliance and ten drivers brought a federal class action lawsuit alleging that Uber requires drivers to strictly follow a litany of very specific company imposed regulations that govern how, when, where and who gets to work; requires them to lease or purchase specific types of expensive vehicles; sets the fares and fees; tells drivers what to wear and what routes to take; requires and provides training; and deactivates drivers for failure to accept a required percentage of dispatches or failure to maintain a minimum rating from customers. The drivers seek damages for minimum wage and overtime compensation; recovery of equipment costs; and recovery of unlawful deductions for taxes, surcharges, or deductions including iPhone leases and fuel cards. New York Taxi Workers Alliance v. Uber Technologies, Inc., No. 16-cv-04098 (S.D.N.Y. June 2, 2016).
  • Lyft and Uber were both sued by drivers in separate California federal class actions for their alleged failure to provide advance notice of mass layoffs/plant closings in violation of the federal Worker Adjustment Retraining Notification (WARN) Act. Under the WARN Act, aggrieved or affected “employees” are entitled to the WARN Act notice. While Uber and Lyft will undoubtedly assert that the WARN Act does not apply to these workers because they are ICs and not employees. These lawsuits stem from the recent political fallout in Austin, Texas. In December 2015, the Austin, Texas City Council approved an ordinance requiring transportation network company to subject drivers to fingerprint-based background checks. Lyft and Uber opposed the ordinance and engaged in a political campaign to roll it back. A referendum to repeal the ordinance failed. Immediately thereafter, Lyft and Uber indefinitely terminated their Austin operations, which resulted in thousands of Lyft and Uber drivers in that market losing their jobs and incomes. The class action complaints, which are virtually identical, allege that the drivers were affected or aggrieved “employees”; that the companies’ withdrawal from Austin constituted a “plant closing” or “mass layoff” under the WARN ACT; that the affected Austin area is a “single site of employment”; and that legally sufficient notice was not provided to the drivers. Thornton v. Lyft, Inc., No. 16-cv-03135 (N.D. Cal. June 9, 2016); Johnston v. Uber Technologies, Inc., No. 16-cv-03134 (N.D. Cal. June 9, 2016).

LYFT’S $27 MILLION SETTLEMENT PROPOSAL GETS PRELIMINARY APPROVAL FROM COURT. A California federal judge has granted preliminary approval of a proposed $27 million class action settlement in the IC misclassification suit brought by drivers against Lyft, the on-demand ride-sharing company, after the original $12.25 million settlement proposal was rejected by the court. As we discussed in a prior blog post, the original settlement proposal provided that the average payment to the drivers would be modest, well under $1,000 per driver, to cover their out-of-pocket car expenses, allegedly unpaid tips, and any unpaid overtime and minimum wages. In rejecting that proposal in April of this year, Judge Chhabria stated that “[t]he modest nonmonetary relief set forth in the agreement does not come close to making up for…serious defects in the monetary aspect of the settlement.” Most importantly, the judge concluded that “[t]he drivers were…shortchanged by half on their reimbursement claim alone.” This past month, though, the judge found that new proposal adequately addressed the flaws in the original proposal. Cotter v. Lyft Inc., No. 13-cv-04065 (N.D. Cal. June 23, 2016).

FEDEX CLOSES CHAPTER IN IC MISCLASSIFICATION CLASS ACTION WAR WITH ANOTHER HUGE SETTLEMENT PAYOUT: $240 MILLION. FedEx announced this past month that it settled the remaining independent contractor class action lawsuits in 20 states with its Ground Division drivers for $240 million. In our blog post of June 16, 2016, we noted that this proposed settlement, which now awaits court approval, follows the recent $226 million settlement in the California class action lawsuit involving Ground Division drivers who claimed to have been misclassified as ICs. The blog post provided a brief chronology of the key legal challenges that FedEx lost in the past two years because, as one court noted, 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.” Yet another court was equally uncharitable as to FedEx’s legal drafting: “FedEx has established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing.” As a result, unlike Uber and Lyft, whose settlements were reached before their cases reached a final determination, FedEx essentially had no choice but to pay huge settlements in the face of appellate court decisions that could fairly be characterized as catastrophes for FedEx.

GRUBHUB FACES NEW IC MISCLASSIFICATION CLASS ACTION IN ILLINOIS. On-demand food delivery company, GrubHub, faces a nationwide lawsuit for IC misclassification covering all states other than California, where a similar lawsuit has been pending. The proposed class and collective action was filed in Illinois federal court by delivery drivers. According to the complaint, GrubHub schedules and dispatches drivers through mobile phone apps or GrubHub’s website to pick up and deliver food orders from restaurants to customers’ homes or businesses. The drivers allege that by misclassifying them as ICs instead of employees, GrubHub has violated the federal Fair Labor Standards Act (FLSA) as well as the wage and hour laws of Illinois, Connecticut, New York, Oregon and Pennsylvania. The complaint alleges that GrubHub directs drivers’ work in detail; instructs drivers where to report, how to dress, and where to go to pick up or await; requires drivers to follow requirements of GrubHub regarding food handling and timelines of deliveries; and may terminate drivers at-will. Souran v. GrubHub Holdings Inc., No. 16-cv-6720 (N.D. Ill. June 28, 2016).

EXOTIC DANCERS FOUND TO HAVE BEEN MISCLASSIFIED BY FEDERAL APPELLATE COURT. The U.S. Court of Appeals for the Fourth Circuit affirmed a federal district court’s decision that exotic dancers were misclassified as independent contractors by two Maryland dance clubs – Fuego Exotic Dance Club and Extasy Exotic Dance Club – in violation of the FLSA and state wage/hour laws. In upholding the district court’s decision, the Fourth Circuit reached the same result under the FLSA’s economic realities test. The Fourth Circuit concluded that the adult entertainment clubs exercised significant control over the dancers by, among other things, requiring them to pay “tip-in” or entrance fees; work schedules that were set by the club; follow written guidelines and one-on-one instructions on behavior and conduct at work; and choosing the dancers’ music and lighting. The Court also rejected the clubs’ arguments that they were not liable for liquidated damages when the clubs sought counsel to help them enhance their IC compliance and that the tips received by the dancers should have offset the minimum wage they were required to pay the dancers. McFeeley v. Jackson St. Entertainment, No. 15-1583 (4th Cir. June 8, 2016).

TRUCKING COMPANY TO PAY $4.25 MILLION TO SETTLE IC MISCLASSIFICATION CLASS ACTION. Pacer Cartage Inc., a trucking transport company, has reached a proposed $4.25 million settlement with a class of 625 current and former California truckers. The drivers alleged that Pacer misclassified them as ICs, failed to pay them overtime and minimum wage compensation, failed to provide meal and rest breaks or premium pay in lieu thereof, and failed to reimburse their business expenses. The proposed settlement provides that class counsel would receive an unopposed fee amount of 30% of the settlement award, or $1,250,000. Mendoza v. Pacer Cartage Inc., No. 13-cv-02344 (S.D. Cal. June 14, 2016).

Administrative and Regulatory Initiatives (2 matters)

U.S. LABOR DEPARTMENT ASSESSES STAFFING COMPANY $173,000 FOR MISCLASSIFYING HOTEL EMPLOYEES. An investigation by U.S. Department of Labor’s Wage and Hour Division (WHD) has resulted in a $173,000 assessment against Allstars Staffing LLC, an Arizona-based staffing agency, for misclassifying as ICs 275 hotel employees, including servers, bussers, cooks, dishwashers, and banquet staff. The staffing agency will pay $75,683 in overtime back wages and an equal, additional amount in damages to the employees. In addition, the hotel will pay a $22,094 civil penalty for the misclassification. In a WHD News Brief issued June 2, 2016, Eric Murray, director of the Wage and Hour Division in Phoenix, stated: “Staffing agencies and their employer clients share responsibility to ensure that all employees working on their behalf are paid the wages they are entitled to by law. These violations are all too common in the hotel industry. Our agency will do everything in its power to end the willful misclassification of employees as independent contractors. This practice deprives workers of basic wage and employment rights and allows an employer to illegally spare the costs of full wages, payroll taxes and other employment related expenses. This cheats not just the workers and their families – it also the undercuts the competition.”

VIRGINIA IS 31ST STATE TO SIGN JOINT ENFORCEMENT PACT WITH U.S. LABOR DEPARTMENT. Virginia has become the 31st state to sign a joint enforcement agreement with the U. S. Department of Labor. On June 16, 2016, the Virginia Employment Commission signed a Memorandum of Understanding with the U.S. Labor Department’s Wage and Hour Division. The three-year agreement sets forth specific mutual goals of “providing clear, accurate, and easy-to-access outreach to employers, employees, and other stakeholders, and of sharing resources and enhancing enforcement by conducting coordinated investigations and sharing information.” In a June 16, 2016 news release, the Administrator of the Wage and Hour Division, Dr. David Weil, stated: “The Wage and Hour Division continues to attack this problem head on through a combination of a robust education and outreach, 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.” In the same news release, the Virginia Employment Commissioner Ellen Marie Hess stated: “Virginia is excited to partner with the U.S. Department of Labor’s Wage and Hour Division on this important issue. Virginia has increased its emphasis on identifying misclassified workers. This MOU is another tool Virginia has in our effort to end misclassification of workers and the harm it causes.”