Among the legal developments we report on below from October is a decision by a federal district court in California certifying a lawsuit for independent contractor misclassification as a collective action under the federal wage and hour law, allowing similarly situated individuals to join the lawsuit seeking unpaid overtime.  What was most significant about the decision is that the certification was based on little more than threadbare allegations and conclusory declarations. Unlike the more rigorous standard for class action certification under Rule 23 of the Federal Rules of Civil Procedure governing class actions, federal court judges have traditionally been given wide latitude in deciding whether to grant collective action certification for alleged violations under the federal Fair Labor Standards Act.  Few judges, however, have applied a more lenient standard than the one applied by the court in the first case summarized below, where it granted collective certification based on plaintiff’s declaration that she and other prospective members of the collective action “often worked more than 40 hours a week,” despite documentary evidence to the contrary. How can a business avoid the costs of defending against these types of claims that can turn into collective actions so easily? The answer is to elevate compliance with state and federal IC laws, minimizing the odds of being sued. Savvy companies have done so using a process such as IC Diagnostics (TM), which restructures, re-documents, and/or re-implements their IC relationships in a manner than maximizes IC compliance in a customized and sustainable manner consistent with their business models.

The Biden Administration’s Labor Department earlier today issued a proposed regulation that seeks to define the worker classification test for independent contractor or employee status under the Fair Labor Standards Act (FLSA). Once finalized, the regulation would alter the test for IC status under the FLSA as last articulated by the Trump Administration, which had likewise changed the FLSA test for IC status previously issued by the Obama Administration. What does this mean legally for both workers and businesses who are currently classified as ICs?  Not much, as explained below, since it is the courts that create law on this subject, not regulatory agencies.  But as a practical matter, the issuance of the proposed regulation, once finalized, will likely create anxiety among businesses and many of those who currently receive 1099s that the ground beneath them is shifting.  It will also give impetus to some workers who currently receive 1099s to file class actions seeking minimum wage or overtime payments under federal and state laws. Prudent businesses should anticipate an increased risk of litigation and seek to minimize their exposure to IC misclassification liability in a two-pronged approach, as discussed below in our “Takeaway.”

Undoubtedly the most meaningful legal development in September 2022 was Uber’s agreement to pay $100 million in settlement to the New Jersey Department of Labor and Workforce Development for back unemployment taxes. As described below, Uber settled for a fraction of the amount it had been assessed, did not admit to liability, and did not agree to reclassify drivers providing services to its customers in New Jersey.  Yet the amount of the settlement is so substantial that, as the publisher of this blog was quoted in an article about the settlement, “When a company pays a nine-figure amount dealing with the classification of their workers, other states … ‎take note.”  This settlement should prompt other gig economy companies using independent contractors to take action that an increasing number of companies have taken: restructuring, re-documenting, and/or re-implementing their independent contractor relationships, using a process such as IC Diagnostics (TM), to enhance compliance with federal and state independent contractor laws.  That process allows companies to minimize misclassification liability in a customized and sustainable manner consistent with the company’s business model, affording it far better defenses not only to class action lawsuits, but also when workforce or tax agencies conduct an audit seeking taxes on the payments to independent contractors.  

We highlight below the independent contractor misclassification and compliance developments that occurred in July and August 2022, but three deserve special mention. One of the most important judicial developments is a new lawsuit alleging that Perdue Farms misclassifies chicken growers as independent contractors. This lawsuit may signal that agribusiness is the next industry being targeted by class action lawyers. Another key legal development is a bipartisan initiative in Congress to propose legislation recognizing the legitimate use of independent contractors.  While there is little likelihood that the pending bill will become law in this Congress, the fact it has bipartisan support suggests that it will be reintroduced in future sessions of Congress and may gain momentum.  A third legal development is a regulatory initiative by the National Labor Relations Board and the Federal Trade Commission to coordinate agency action against companies, particularly those in the gig economy, regarded as undermining competition and the right to unionize through the misclassification of employees as independent contractors.  There have been many coordinated agency efforts in the past that have focused on misclassification of independent contractors, but they have failed to result in any meaningful enforcement actions. Moreover, as explained below, the NLRB is not statutorily authorized to investigate companies referred to it by other administrative agencies, making any coordinated enforcement action between the NLRB and the FTC highly unlikely.  Nonetheless, the heightened focus on the use independent contractors since President Biden’s election has sent a strong message to companies that use contractors: enhance your compliance with federal, state, and local independent contractor laws.  Many companies have utilized a process such as IC Diagnostics (TM), which restructures, re-documents, and/or re-implements independent contractor relationships in order to minimize risk of misclassification liability in a customized and sustained manner, without altering the company’s business strategy or objectives.

The U.S. Labor Department has been playing musical chairs in its approach to classifying workers as independent contractors or employees under the federal Fair Labor Standards Act since the middle of the Obama Administration.  But the regulatory initiatives by the Obama, Trump, and Biden administrations have little impact on the legal landscape of independent contractor law.  In 2015, when the Administrator of the Wage and Hour Division of the Obama Administration’s Labor Department issued an Administrator’s Interpretation, our blog post was titled: “The Labor Department’s New Guidance on Independent Contractor Misclassification Is Nothing New Legally.” Five years later, when the Labor Department under the Trump Administration issued a proposed regulation that was finalized just before the onset of the Biden Administration, our blog post bore the heading “Much Ado About (Almost) Nothing.”  And when the Biden Administration issued a rule withdrawing the prior administration’s regulation, our blog post was called “Independent Contractor Misclassification Ping Pong.” Last month, the Labor Department notified the public that it plans to issue yet another regulation on this issue.  When issued, it too will have little legal significance because the U.S. Department of Labor does not decide FLSA cases, only the courts do.  Indeed, the federal courts have been doing so for decades, developing their own versions of the so-called “economic realities test” for independent contractor status, based on a standard first enunciated by the U.S. Supreme Court many years ago.

Since the inception of this blog in 2010, we have reported on independent contractor misclassification class actions filed against hundreds of companies in scores of industries. Yet some industries seem to have been targeted in particular. As we stated in a guest blog published in Fortune in June 2015 and entitled “Is Your Company on the Independent Contractor Hit List,” we provided a short hit list of industries that were under attack in these types of cases, including janitorial; staffing; transportation, courier, and trucking; cable installation; oil and gas; landscaping; and ride sharing. Only a few industries have been immune from these types of legal challenges in lawsuits or workforce and tax agency audits and proceedings, as can be seen in our monthly review of legal developments in this area of the law over the past decade. For that reason, businesses in a vast array of industries have utilized a process such as IC Diagnostics (TM) to enhance their compliance with federal, state, and local independent contractor laws.

Three industries suffered setbacks last month in independent contractor misclassification cases, while another targeted industry targeted scored a success.  As we have reported in many prior blog posts, class action lawyers who regularly pursue IC misclassification cases have had in their crosshairs, for over a decade, a number of industries including home health care, franchise, and food manufacturing and distribution businesses.  One of the cases reported below involves a court decision granting summary judgment against a Florida home health care company and in favor of a home health aide / companion where the court found that the company misclassified the aide as an independent contractor.  Another case relates to a franchisor of tool distributorships that settled with California franchisees for $15 million.  A third case pertains to a $23 million settlement between a large baked goods manufacturer and those who distribute its products to grocery stores in Maine.  A logistics company serving as a freight forwarder broker, however, was successful in decertifying a class action by drivers in New York.  Prudent companies in each of those and other industries can and should take steps to minimize their exposure to these types of lawsuits by using a process to restructure (even if only modestly), re-document, and re-implement their independent contractor and franchisee relationships in a manner that not only substantially minimizes the likelihood of such lawsuits but also, if sued, reduces considerably the amounts for which such lawsuits are oftentimes settled. One process used by many companies is IC Diagnostics (TM). That process includes the use of state-of-the-art arbitration clauses with class action waivers, which may not have been deployed by some or all of the companies in the four cases below.

One of last month’s legal developments on which we report below is a decision by a federal court in New Jersey that should serve as a reminder to companies: arbitration clauses need to be drafted well in order to succeed.  New Jersey courts for many years have been perhaps the most finicky in the country when reviewing language informing their workers that they are waiving their rights to have a court or jury decide their claims. As we observed in a 2021 blog post, plaintiffs’ class action lawyers bringing independent contractor misclassification claims have succeeded on occasion in punching holes in arbitration clauses with class action waivers. As we remarked in an extensive blog post on the subject in 2018: “Whether an arbitration agreement in an independent contractor or employment setting will bar a class action depends as much on the wording in the arbitration clause as the applicable law, which is in flux and continues to evolve. That reality strongly suggests that existing arbitration clauses used in independent contractor agreements should be reexamined and updated periodically in tandem with the company’s effort to enhance its compliance with laws governing the use of independent contractors.”  Companies seeking to elevate their IC compliance and avoid class action misclassification lawsuits by the use of arbitration agreements with class action waivers have effectively used a process such as IC Diagnostics (TM) to accomplish these objectives.

Does the strict ABC test set forth in the Massachusetts independent contractor law apply to the relationship between a franchisor and its franchisee where the franchisor must also comply with the FTC’s Franchise Rule?  That was the question that the U.S. Court of Appeals for the First Circuit in Boston asked the Massachusetts Supreme Judicial Court to answer in an appeal of a lawsuit brought by a group of store managers who claimed that 7-Eleven had misclassified them as independent contractors instead of employees. The Massachusetts high court ruled earlier today, March 24, that the FTC’s Franchise Rule only governs disclosures by franchisors to franchisees, not the manner in which franchisors control the performance of franchisees, and therefore does not preempt the state’s independent contractor statute.  But while the franchise industry argued that such as decision will be the death-knell of franchising in Massachusetts and other states for individuals who wish to own and operate a franchise, the decision will not likely have the doomsday effect that the franchising industry predicted.  Why?  Because with the proper structuring, documentation, and implementation of the franchise relationship, franchisors should be able to classify individual franchisees as independent contractors, even in Massachusetts, as we discuss below.

Late last week, the National Labor Relations Board last week issued a Complaint and Notice of ‎Hearing that could, if successful, make the act of misclassifying workers as independent contractors ‎a violation of the National Labor Relations Act. The complaint was issued despite a time-honored ‎statutory defense available to companies that likely will prevent the NLRB from succeeding in its ‎efforts to support organizing efforts by the Teamsters seeking to represent drivers in the ‎intermodal, drayage, cargo, last mile, and logistics industries. ‎