Last week, a federal district court judge assigned to an independent contractor misclassification case granted class certification to workers who were treated as independent contractors but allegedly were misclassified as employees.  In Norris-Wilson v Delta-T Group, Inc., the U.S. District Court for the Southern District of California, applying California’s common law test for independent contractor status, found that the plaintiffs’ claims for overtime compensation against a healthcare referral agency for independent contractor services,” which the plaintiffs called a “temporary staffing agency,” met the requirements for class action certification.  (Click “More” for two “Takeaways” below)

In granting the plaintiffs’ motion for class action status, the district court noted that the defendant company’s arguments against class action certification actually favored plaintiffs’ motion.  The court found that Delta-T’s statements that they treated all of the workers in the same way (e.g., that they did not establish any workers’ hours or duties, did not supervise any of  the workers, and that all workers were free to accept or reject referral opportunities) “undercuts its argument that [class] claims are impossible because individual issues predominate.”  Stated in the context of the common law test for independent contractor status, the court remarked that “just because the test for making the determination [of whether the workers are employees or independent contractors] takes into account a multitude of factors doesn’t mean it’s not susceptible to common proof.”

Delta-T argued that “many behavioral healthcare professionals who work with DTG prefer to be independent contractors, and that this creates a conflict of interest.”  The court dismissed that argument, saying that it will “almost always be the case” that some putative class members are happy with things as they are.”

Finally, the court made it clear that just because it was granting class certification doesn’t mean there is merit to the lawsuit.  “[T]he possibility that a plaintiff will be unable to prove his allegations . . . [is not] a basis for declining to certify a class which apparently satisfies the [class action certification] Rule.”

An interesting part of the court’s decision made reference to an argument by the plaintiffs that “DTG knows it’s a staffing agency and goes to great lengths not to sound like one.”  Plaintiffs refer to DTG’s training manual and its “Do’s and Don’ts,” which states:  “DTG provides Independent Contractors not employees.  Therefore, we must use the correct terminology when speaking to our customers.  We have to be mindful of words that would imply we have an employer/employee relationship with our professional for legal and liability reasons.”

Two Takeaways: 

1.  Although Delta-T may have some factual defenses to the case, the cost of defending a class action can be prohibitive.  But where a business is highly reliant on the services of a relatively large number of independent contractors or its business is built on an independent contractor model, the business has little choice but to defend itself vigorously once this type of lawsuit is filed. Apart from the damages being sought in a class action, if the workers are found to be employees and not independent contractors then an employer like Delta-T will also have substantial exposure to liability for:

  •  unpaid unemployment taxes,
  • workers compensation premiums,
  • payroll taxes, and
  • employee benefits,

just to name a few of the many types of claims made by workers who claim they were misclassified as independent contractors.

2.  Businesses that use many independent contractors or pay workers on a 1099 basis are well advised to address the issue of their independent contractor compliance before being served with  a summons and complaint, before receiving a notice from a state unemployment or workers compensation office, or before opening up your business mail only to see that the IRS wishes to conduct a tax audit.

Regardless of any business’s current state of compliance with such laws, there are a number of ways by which organizations can enhance their current state of compliance and minimize their exposure to misclassification liabilities, including the costs of defending class actions by workers who receive 1099s instead of W-2s.  See the White Paper “Independent Contractor Misclassification: How Companies Can Minimize the Risks,” Apr. 26, 2010, by the publisher of this blog post.  Indeed, some of these class actions seek damages for unpaid employee benefits – an area of exposure that can often be avoided simply by properly amending the language of your benefit plans – even if the workers in question are later recharacterized by a court as common law employees, as explained in the above article.

While efforts today to enhance independent contractor compliance cannot eliminate past exposure to misclassification liability, any changes that enhance compliance with the independent contractor laws will not only minimize or avoid future liability but also lessen the likelihood that the business will become a target for class action lawyers and government agencies.

Written by Richard Reibstein.