Last month, Illinois became the first state to enact legislation requiring companies using ‎independent contractors to offer contracts to ICs with prescribed terms and to pay such ‎freelance contractors all of their fees within a specified number of days. The legislation follows ‎on the heels of similar laws passed by several cities, including New York City, Los Angeles, and ‎Minneapolis. While all of these laws are a bit different in terms of their coverage and ‎obligations imposed on companies engaging independent contractors, more importantly each ‎provide for substantial damages and penalties if a freelance independent contractor is not paid ‎his or her fees within a relatively short period of time after service are rendered. We describe ‎below many of the features of this new Illinois law including a number of legislative defects. ‎On the one hand, these laws address the need to protect freelancers, yet on the other hand many ‎class action lawyers continue to bring independent contractor misclassification cases such as the ‎two new cases filed last month, which we summarize below. Those lawsuits claim that workers ‎classified as independent contractors are misclassified employees and entitled to minimum ‎wage and overtime compensation available under federal and state wage and hour laws. ‎Businesses that use independent contractors in Illinois and these other jurisdictions can ‎minimize their exposure to contractor pay dispute and misclassification lawsuits by using a ‎process such as IC Diagnostics (TM) to enhance compliance with both types of laws.‎

We report on three case developments during July 2023 that raise the question whether last-mile, ‎logistics, and delivery companies alleged to have misclassified drivers as independent contractors ‎can compel arbitration of those types of claims when there is an arbitration agreement between ‎the parties. In the first case, an Ohio federal district court judge ruled that such drivers are ‎covered by the interstate transportation worker arbitration exemption in the Federal Arbitration ‎Act (FAA) that excludes such workers – whether they are employees or independent contractors ‎‎– from arbitration. The court acknowledged, though, that a state arbitration law may have ‎provided an alternative basis to compel arbitration, but ruled that the language in the parties’ ‎independent contractor agreement did not unambiguously provide for state arbitration law to ‎govern if the FAA did not. The Ohio federal court decision is consistent with a New Jersey ‎federal court opinion on which we commented in a blog post last year, where we noted that the ‎failure to draft an effective arbitration agreement can doom a logistics company’s effort to ‎compel arbitration of a class action IC misclassification suit. Any company utilizing drivers who ‎may be covered by the interstate transportation worker arbitration exemption under the FAA ‎should take heed. Beginning with a blog post we published nearly five years ago, we have ‎provided readers with a number of tips as to how companies can effectively draft arbitration ‎clauses with class action waivers in their independent contractor agreements – all as part of a ‎process to enhance their independent contractor compliance efforts. The most important tip is to ‎update arbitration clauses in view of this evolving area of the law. ‎

We report below on four case developments during June 2023 in the area of independent ‎contractor misclassification: two of which are centered on Illinois. That state has one of the ‎most stringent statutory tests for independent contractor status. As construed by the courts in ‎that state, the Illinois ABC test for IC status is similar to the tests in California and ‎Massachusetts, creating a hotbed for IC misclassification cases. While states with ABC tests ‎make it more challenging for companies to survive a legal challenge to their IC classifications, ‎there are ways many companies doing business in such states can still comply with such laws. ‎Many companies operating nationwide and in “ABC states” have used a process such as IC ‎Diagnostics (TM) to enhance their compliance and minimize exposure to IC misclassification ‎liability in all states in which they operate or engage the services of independent contractors. ‎

Yesterday, June 13, 2023, the NLRB issued a lengthy decision in its Atlanta Opera case dealing ‎with the applicable test for independent contractor status under the National Labor Relations Act ‎‎(NLRA). This decision reversed the Board’s prior test for IC status as expressed in the ‎SuperShuttle case decided by the NLRB in 2019. In a lengthy decision, three of the four ‎members of the Board expressly declined to follow a 2017 decision by the U.S. Court of Appeals ‎for the District of Columbia Circuit in a case referred to as FedEx II, where the circuit court ‎concluded that the NLRB was seeking to “nullify this court’s [prior FedEx] decision” as to the ‎applicable test for independent contractor status. The bulk of the Board’s majority 19,000-word ‎decision focused on the supposed fallacies in the NLRB’s SuperShuttle decision and the ‎correctness of the NLRB’s prior FedEx decisions, which has twice been rejected by the D.C. ‎Circuit. But when the NLRB majority’s new decision is analyzed, does it really make a ‎difference what test the NLRB uses to determine IC status? As vividly demonstrated by the ‎Atlanta Opera case, nearly all of these independent contractor cases will be decided the same ‎way, regardless of which test is used. ‎

The lead case in our review of last month’s legal developments in the area of independent contractor compliance and misclassification is a decision by the U.S. Court of Appeals for the First Circuit, in which it addresses the interstate transportation worker exemption to arbitration under the Federal Arbitration Act (FAA). That decision, at odds with a recent decision issued by another federal appellate court, treated the frequency of driving as the principal criterion in determining whether an independent distributor of food products engages in interstate transportation. As noted below, the First Circuit, applying the Supreme Court’s 2022 decision in Southwest Airlines v. Saxon, found that the distributors are exempt from arbitration because they “frequently perform transportation work [even if] they also have other responsibilities.” Decisions like the First Circuit’s have created confusion among businesses, independent contractors, employees, and their lawyers over the scope of the FAA’s interstate transportation exemption and the implications of Saxon. Many ICs and other workers that drive long distances every day have little or no relationship to the transportation industry. For example, many independent surveyors and insurance adjusters work at multiple locations in a multi-state area each day, some at significant distance from one location to the next. Are they interstate transportation workers simply because they drive frequently in different states? Likewise, incidental driving done by route sales employees who qualify as outside salespersons under the Fair Labor Standards Act, like driving by the independent distributors in the First Circuit case, is treated by the Labor Department and courts as work that is “incidental to … the employee’s own outside sales or solicitations.” 29 C.F.R. 541.504(a). One takeaway from the First Circuit decision is to make sure that agreements with independent contractors and other workers not engaged in the transportation industry describe their services in a manner that supports arbitration under the FAA. This is part of the IC Diagnostics (TM) process that has been the subject of other posts on this subject on this blog.

We reported in our October 10, 2022 blog post that Uber had agreed to pay $100 million in back ‎unemployment taxes to the New Jersey Department of Labor for having classified drivers as ‎independent contractors. Another state workforce agency has now joined New Jersey in ‎obtaining substantial tax payments from a gig economy company for unpaid unemployment taxes ‎related to its designation of workers as ICs instead of employees.‎ Last month, an appellate court in Wisconsin, a state which has a challenging independent ‎contractor test for unemployment insurance purposes, affirmed the state Labor Commissioner’s ‎assessment of unemployment taxes against Amazon with regard to drivers who deliver the ‎company’s products. With interest, the assessment per gig worker in Wisconsin is likely to exceed ‎the per-worker amount that Uber paid to New Jersey. What does this mean for companies using ‎an IC business model? For those companies that have chosen to utilize a compliance process such ‎as IC Diagnostics (TM), the typical starting point is a review of the IC relationship under federal ‎and state wage and hour laws. That is followed by a review of the varying IC tests under ‎applicable state unemployment insurance, workers’ compensation, and wage payment laws – all ‎part of a process to restructure, re-document, and/or re-implement IC relationships in a ‎customized and sustainable manner designed to minimize liability for independent contractor ‎misclassification.

Three of the five court cases of note in this monthly update involve California’s Assembly Bill 5, ‎which has exponentially increased litigation involving independent contractor misclassification in ‎that state. That development dispels any notion that that law would provide clarity, simplify the ‎test for independent contractor status, and reduce litigation. Instead, it upended decades of ‎settled law by codifying a strict test for IC status that now contains as many as 75 exemptions. ‎Moreover, few businesses in California have reclassified workers from ICs to employees. The ‎three cases summarized below include one that validates Proposition 22, a voter initiative that ‎rejected A.B. 5 for app-based ride sharing and courier companies. Another involves a lawsuit by ‎companies in those same industries alleging that A.B. 5 did not provide them with an exemption, ‎as it does for dozens of other industries, due to the “animus” of the legislature toward those app-‎based businesses. A federal appellate court agreed that the lawsuit is plausible and may proceed. ‎The third case involves litigation filed in 2015 that has seen a number of appeals over the ‎application of A.B. 5. One way by which companies operating in California can minimize IC ‎misclassification exposure is to utilize one of the exemptions in A.B. 5 and its successor law, ‎A.B. 2257. Many have sought to do so by resorting to a process such as IC Diagnostics (TM), ‎which enhances IC compliance by restructuring, re-documenting, and/or re-implementing IC ‎relationships in a customized and sustainable manner in view of applicable law, including A.B 5. ‎

Ever since the New Jersey Supreme Court issued its 2015 decision in the Sleepy’s case, establishing an ABC test for wage and hour lawsuits, class action lawyers have targeted companies operating in that state for IC misclassification class actions.  We summarize below four developments in lawsuits and administrative proceedings in New Jersey: two settlements involving last-mile logistics firms; a case involving a lengthy appellate court process and legislation involving an industry seeking an exemption from the ABC test for independent contractor status; and an administrative investigation and assessment following a joint enforcement initiative by regulatory agencies.  The ABC test has triggered more litigation recently than any other test for independent contractor status.  Not surprisingly, five of the six legal developments we report on below involve three states with ABC tests: California, Massachusetts, and New Jersey.  While proponents of the ABC test argue that that this three-factor test simplifies this area of the law, experience has shown that it creates more litigation and uncertainty than multi-factor tests.  As we commented in a prior blog post, a professor who has studied the matter concluded that the ABC test “does not make the law of employee status clearer, simpler or more uniform [but rather] … makes the law more complex and less uniform than it was before.” That challenge has prompted more companies to undertake a process such as IC Diagnostics(TM) to restructure, re-document, and/or re-implement their IC relationships in a customized and sustainable manner to minimize misclassification liability, regardless of the IC tests that may be applicable.

Case developments last month involved independent contractor misclassification lawsuits in the Southwest, Southeast, and Mid-Atlantic states. While more IC misclassification lawsuits have been brought in California than any other state, a quick search of our 250-plus posts published since we began this blog includes reports on several thousands of cases, legislative developments, and administrative initiatives in all 50 states and the District of Columbia. In terms of lawsuits, class action lawyers have taken the lead in filing IC misclassification class and collective actions across the county.  But many cases have also been brought by federal and state enforcement agencies, such as the first of four cases reported below, which was commenced by the U.S. Department of Labor and resulted in a mid-seven figure judgment against two related companies.  In the face of these types of litigation risks, many companies have taken steps to minimize IC misclassification exposure by using a process such as IC Diagnostics (TM) to restructure, re-document, and/or re-implement their IC relationships in a sustainable and customizable manner, consistent with their business models. Had the two companies targeted by the Labor Department in the first case we discuss below used a process such as IC Diagnostics, they likely would have avoided the lawsuit altogether or, even if sued, would have maximized their chances of success.    

Half of the court cases that we report on below from last month involve legal proceedings related to the sports industry: golf caddies, tennis pros, and sports editors.  Misclassification within the multi-faceted sports and athletics industry has been addressed by courts and administrative agencies in many of the cases about which we have reported over the years, including high school referees, security representatives for the NFL, tennis officials at the U.S. Open, lacrosse officials, pro football cheerleaders, and basketball arena crew members including camera, audiotape, and replay operators, to name just a few.  Sports and athletics businesses including golf courses, instructional firms, professional leagues, amateur athletic organizations, stadiums, tournaments, sports publishers, and a host of others that use independent contractors can minimize their IC misclassification exposure by using a process such as IC Diagnostics (TM) that many companies in other industries have used for years.  That type of process restructures, re-documents, and/or re-implements independent contractor relationships in a manner than maximizes compliance with federal and state IC laws and regulations in a customized and sustainable manner.