The first three cases reported below regarding legal developments in August 2021 have four common denominators: the defendants are all large gig economy companies; plaintiffs’ class action counsel is the same; the lawsuits are all situated in New York; and all four are already on their way to arbitration or are highly likely to end up there shortly.  Lyft, Uber, and Instacart have been the subject of independent contractor misclassification lawsuits around the country by many law firms, but the law firm with the most class action cases against those companies is Lichten & Liss-Riordan. When faced with one of these types of cases, it seems as though we are in a déjà vu environment:  the company’s counsel typically argue that, where there is an arbitration clause with a class action waiver, the Federal Arbitration Act commands a court to compel arbitration of the claims on an individual basis. Then, in cases involving workers who drive vehicles, plaintiffs’ lawyers, including the law firm in the first three cases below, invariably argue that the FAA is inapplicable because Section 1 of that statute has an arbitration exemption for interstate transportation workers.  Thus, many of these cases seem to present the same threshold issue: are the plaintiff and members of the proposed class covered by the arbitration exemption for interstate transportation workers? 

Most class action cases of independent contractor misclassification are brought against corporate entities. Yet many laws also permit plaintiffs to sue company executives or managers for personal liability in such cases. In our roundup below of last month’s legal developments in this area of the law, a court denied a motion to dismiss claims against the CEO of a company alleged to have misclassified workers as independent contractors, thereby exposing him to the potential for individual liability. Most lawsuits seeking to impose personal liability on officers and decision-makers for allegedly misclassifying workers are brought under state wage and hour laws, but the first case reported below involves a misclassification collective action under the federal Fair Labor Standards Act. That law permits nationwide class action type lawsuits and is the most common way by which plaintiffs can mount a multi-state lawsuit against companies that operate on a nationwide or regional basis. Because the FLSA exposes companies to broad exposure if their classification of independent contractors is not compliant with the test for independent contractor status, enhancing compliance with that federal law is imperative.  This objective is even more important because courts have held that the FLSA permits plaintiffs to sue executive decision-makers who play a role in their companies’ designation of a group of workers as independent contractors. Many businesses operating throughout the U.S. have therefore used a process such as IC Diagnostics (TM) to restructure, re-document, and re-implement their independent contractor relationships that minimizes misclassification liability consistent with the company’s business model and does so in a customized and sustainable manner.

June was a relatively slow month in the area of independent contractor misclassification and compliance. But it produced what may turn out to be one of the more important judicial decisions in years affecting last-mile drivers engaged as independent contractors: a federal appellate court decision that would exclude drivers who deliver goods to a final destination from a hub or interim location from the arbitration exemption for interstate transportation workers under the Federal Arbitration Act – and subject their independent contractor misclassification claims to arbitration.  However, as we have stated repeatedly in numerous blog posts, even if the arbitration exemption for interstate transportation workers under the FAA is found to apply to a class of workers, a well-drafted arbitration clause should still provide a valid basis to arbitrate – if it is also governed by a state law favoring arbitration. Drafting effective arbitration clauses is almost as important as structuring, documenting, and implementing independent contractor relationships in a manner that enhances compliance with independent contractor laws at the state and federal levels. Both are part of the IC Diagnostics (TM) process used by a number of companies in transportation and other related industries to minimize their exposure to IC misclassification liability.

Direct sellers and door-to-door salespersons are frequently classified as independent contractors – and that classification is increasingly under attack, both by class action lawyers and the U.S. Department of Labor, as reflected in two key case developments from May 2021.  It is undeniable that many door-to-door salespersons legitimately can be classified as independent contractors under federal and most state laws, yet at the same time some undoubtedly are misclassified.  That determination depends entirely on how the IC relationship is structured, documented, and implemented.  Direct sellers, on the other hand, are regarded as ICs under federal and most state tax laws and many state unemployment insurance laws by virtue of statutory provisions essentially excluding them from the definition of employee.  Yet, those direct seller laws have typically not been applied to claims arising under laws governing overtime pay, minimum wage, expense reimbursement, and other labor and employment laws – and the U.S. Department of Labor has adopted that position as described below. Direct selling companies and businesses using door-to-door salespersons can minimize IC misclassification risk by enhancing compliance with IC laws.  Many companies use a process such as IC Diagnostics (TM) to restructure, re-document, and re-implement their IC relationships in a customized manner, consistent with their existing business model.

Today President Biden announced that he is nominating Dr. David Weil as his Wage and Hour Administrator, the same person who served in that capacity during the Obama presidency.  During the Trump Administration, Dr. Weil returned to academia and published a book addressing the classification of workers in the U.S. as independent contractors.  He is well known for issuing an Administrator’s Interpretation in July 2015 that set forth the test that the Obama Administration’s Labor Department used to determine if a worker had been misclassified as an independent contractor. The nomination of Dr. Weil comes within a week after the Biden Administration issued its Fiscal Year 2022 Budget, including an increase of $30 million for the Wage and Hour Division. Labor Secretary Marty Walsh explained that increase will “allow the division to aggressively combat worker misclassification” by adding 175 enforcement personnel. This increased financial commitment is reminiscent of the Obama Administration’s 2015 Fiscal Year Budget, where then-Labor Secretary Thomas Perez used similar language in describing a budget increase of “[n]early $14 million to combat the misclassification of workers as independent contractors.” This focus on increased enforcement, together with the nomination of Dr. Weil, sends a clear message that companies using independent contractors should enhance their compliance with applicable laws. We explain how that can be done below.

A set of bills being finalized by the New York State legislature would, if enacted, dramatically ‎alter the landscape of laws affecting independent contractor drivers who provide services to ‎customers of ride-sharing technology companies like Uber and Lyft and delivery technology ‎companies such as DoorDash, Instacart, and Amazon Flex. If enacted, it would establish ‎‎“sectoral” bargaining, for the first time in the U.S., between a number of such companies ‎negotiating as an industry with a union for wages, hours, and terms and conditions of work. ‎What this potentially means for companies in other industries using independent contractors is ‎also addressed below.‎

April 2021 was a meaningful month for two industries that are hardly strangers to lawsuits involving the status of workers as independent contractors.  A federal district court in the District of Columbia issued an extremely favorable decision for Lyft, holding that a driver and members of a class action are not covered by the interstate transportation worker exemption from arbitration under the Federal Arbitration Act, even though drivers in a locality such as D.C. often drive in interstate commerce.  The court concluded that the arbitration exemption in the FAA must be determined by reference to all of a company’s drivers nationally, not locally, and found that crossing state lines is not commonplace among Lyft drivers in most locations where Lyft operates.  Meanwhile, in an appellate decision by a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit, two of the three panel judges determined that a federal transportation law with a strong preemption clause does not preempt the California ABC test. The dissenting judge disagreed, finding that the ABC test is precisely the type of state law that the federal transportation law was designed to preempt.  Because one judge dissented, the full Ninth Circuit is likely to consider the panel decision.  If the full appellate court affirms, the Supreme Court may well grant cert and determine this issue because the Ninth Circuit decision is directly at odds with a First Circuit ruling involving an identical Massachusetts law. 

The U.S. Department of Labor today issued a rule yesterday that withdraws the Trump Administration’s regulation setting forth a test to classify workers as independent contractors or employees under the federal Fair Labor Standards Act. Ordinarily, rules set forth new standards, but this one was quite unusual – it essentially rejected a rule issued by a prior Administration and, in doing so, foretells a return to the Obama era in terms of the Labor Department’s position as to who is and who is not an independent contractor. The Labor Department’s view, however, is not particularly meaningful, at least from a legal perspective. But it sends a signal to businesses that this Administration views IC misclassification through a different lens.  As a result, more companies are likely to ask, do we now need to enhance our independent contractor compliance? We address that issue below and provide some guidance for businesses seeking ways to minimize their exposure to IC misclassification liability.

Immediately following the issuance of the U.S. Supreme Court’s decision in New Prime v. Oliveira on January 15, 2019, we stated in a blog post that “even if an individual or group of workers is excluded [from arbitration] under the federal arbitration law, state arbitration laws may cover them and provide a statutory basis for compelling arbitration.” Soon thereafter, in a Law 360 article discussing a Washington State federal district court ruling that independent contractor drivers providing services to Amazon could not be compelled to arbitrate their IC misclassification claims, the reporter Linda Chiem quoted the publisher of this blog: “There’s a ‘hidden lesson’ from the Amazon decision. Companies can get around ‘arbitration-unfriendly laws’ by making sure it’s spelled out that their independent contractor agreements are governed by state laws that do not have the type of exclusions found in the Washington state arbitration law that tripped up the Amazon agreement.” As noted in the first two case developments from March 2021 as reported below, that is precisely what companies are beginning to do and the courts have agreed that state arbitration laws are all that is needed to compel arbitration.