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.

Micro-mobility company Lime, which provides electric scooter and bike sharing to customers through its mobile app, has been targeted by plaintiffs’ lawyers in class action and representative lawsuits attacking one of the core components of its business model.  Lime engages drivers to recharge the batteries of electric scooters and bikes for its customers.  It treats the drivers as independent contractors.  As detailed below, on the same day a state court rejected Lime’s effort to settle four related representative lawsuits for $5 million, it was sued again in the same court in a proposed class action lawsuit. The litigious assault Lime has experienced mirrors the challenges other companies using an independent contractor business model have experienced: multiple lawsuits.

January 2021 may well be remembered in the independent contractor area of law as the “not so fast” month. The Fifth Circuit Court of Appeals told lower courts “not so fast” when it comes to certifying collective actions.  That appellate court imposed a new and more rigorous standard that plaintiffs will have to meet to attain certification of their collective actions under the Fair Labor Standards Act. GrubHub and other companies that engage couriers to deliver food from restaurants have generally succeeded in compelling arbitration of courier claims for independent contractor misclassification.  These companies have avoided application of the arbitration exemption in the Federal Arbitration Act for interstate transportation workers.  As we reported here on September 18, 2020, the United States Court of Appeals for the Seventh Circuit held that couriers providing deliveries for customers of GrubHub were not involved in interstate commerce. But only last week, as reported below, a Massachusetts court essentially said, “not so fast,” reaching the opposite conclusion when it held that couriers providing deliveries to GrubHub customers of pre-packaged and non-food items originating outside of Massachusetts (such as soft drinks, chips, toilet paper, cleaning products, and flowers) were exempt from arbitration under the interstate transportation worker exemption. This area of the law is evolving with new arguments by plaintiffs’ class action lawyers seeking to circumvent arbitration agreements.