Earlier this week, the San Diego Union Tribune, owned by The Copley Press Inc., was ordered by a state court judge in California to pay $6.1 million in legal fees to the attorneys for a class of over 1,200 paper carriers to whom the court had earlier awarded $3.2 million in damages and another $1.75 million in interest.  The final cost of the verdict against the newspaper for misclassification of the paper carriers as independent contractors totals $11 million.

As noted below, this is yet another financially crushing case involving a Southern California newspaper publisher that had classified paper carriers as independent contractors. The other case involved a $22 million settlement of similar allegations against Freedom Communications Inc. and its Orange County Register.

The Court’s Findings of Fact

Superior Court Judge John S. Meyer issued a Statement of Decision covering a class of 1,230 paper carriers that delivered newspapers for the San Diego Union Tribune, finding that the newspaper had misclassified the paper carriers. The court’s decision is noteworthy because it found that the paper carriers had entered into an independent contractor agreement and fully “understood they were independent contractors” and “would be their own boss.”  The court, however, found that while these factors and others favored independent contractor status, including the carriers’ right to use helpers and substitutes, there were an overwhelming number of factors favoring employee status under state law.

The principal findings supporting employee status included:

  • the paper carriers entered into contracts with the newspaper on a “take it or leave it basis” where many provisions of the contract favored the newspaper;
  • the rates paid to the paper carriers were not subject to negotiation;
  • the carriers were obliged to prepare newspapers for delivery according to specifications given by the defendants;
  • the carriers could only use bags approved by the newspaper and had to deliver the papers by a specified deadline;
  • the carriers could not deliver publications issued by a competitor of the newspaper;
  • the carriers had to be properly attired and wear closed toe shoes;
  • complaints by subscribers resulted in a reduction in compensation;
  • the carriers could not correct any complaints about their deliveries;
  • the newspaper’s personnel trained, mentored, coached, and supervised the paper carriers, who were evaluated by the newspaper’s employees;
  • the newspaper’s personnel conducted audits and field checks of the carriers;
  • the newspaper would unilaterally alter the routes of the carriers;
  • the carriers had to buy a bond from the newspaper’s bond broker; and
  • the newspaper required the carriers to inform it when it used substitutes.

Other factors that the court found to support employee status included that the newspapers employed some paper carriers directly; contracts were terminable at will; the carriers did not have an independent newspaper delivery business; delivery was an integral part of the newspaper’s business; a large percentage of carriers contracted with the newspaper for many years; the newspaper gave carriers advances in pay for family emergencies; and the newspaper was aware that its system of contracting directly with the carriers left it legally exposed to liability.

The Damages and Legal Fees Awards

The court awarded damages to the class members in the following amounts:  $2.2 million in mileage reimbursement; $618,000 in reimbursement for poly bags and rubber bands; $74,000 in reimbursement for insurance premiums; $116,000 for warehouse rent reimbursement; and $69,000 for reimbursement of “inserting” charges.

In addition, the court awarded reasonable attorneys’ fees of $6.1 million, only $1.25 million of which would be paid out of the class members’ common fund.  The court used a rate of $500 per hour for attorney time, but denied the class counsel’s request for a “multiplier” inasmuch as the newspaper had ceased its system of classifying the paper carriers as independent contractors prior to the institution of the lawsuit.

The Settlement in the Orange County Register Case

In November 2008, Freedom Communications settled a class action lawsuit brought by paper carriers of the Orange County Register for $22 million in damages (exclusive of legal fees and costs) for allegedly misclassifying the class members as independent contractors instead of employees during the period from July 1999 to August 2008.    

Analysis: A Failure to Properly Structure, Document, and Implement IC Relationships

This case demonstrates vividly how yet another company failed to structure, document, and implement its independent contractor relationships in a manner that complied with law.  Misclassification arises from a number of circumstances but one likely reason for the publisher’s misclassification of paper carriers is because it used both independent contractors and its own employees to perform similar functions.  Businesses that do so all too frequently make the costly mistake of treating both groups of workers in a roughly similar manner – instead of retaining and exercising direction and control over the manner and means that employees provide their services and refraining from doing so over workers classified as independent contractors.

While there is nothing under state or federal laws that prohibit a business from using both employees and independent contractors to perform the same function, many companies, as did the publisher in this case, fail to take steps to structure, document, and implement their IC relationships in a manner that demonstrates the important differences between independent contractors and their employees.  While these steps are essential for all companies using independent contractors, they are absolutely critical for any company that uses both employees and independent contractors to perform the same or a similar function.  Absent such steps, a business is advertising that it may be misclassifying a large portion of its workforce.

As seen in the bullets above, the types of control and direction exercised by the publisher in this case are precisely the types of control exercised routinely by companies over their employees – and probably was the same type of control exercised by the publisher over its employee newspaper carriers.

When companies fail to take clear steps to structure, document, and implement their independent contractor relationships in a manner that is notably different for its employees performing similar functions, the risk of a potentially catastrophic misclassification liability increases substantially. Here, the publisher was fortunate that the misclassification did not involve any minimum wage or overtime violations, which can be even more costly than the types of damages involved in the San Diego Union Tribune case, especially in light of California’s relatively recently enacted willful independent contractor misclassification law.

Takeaways and Best Practices

The position of newspaper carrier is an example of a function that can and should be legitimately structured and documented as an independent contractor, consistent with federal and most state law tests for independent contractor status. It is similar to the jobs of workers in many other industries that lawfully can exist either within a legitimate independent contractor or an employment relationship, depending on how that relationship with the hiring party is structured, documented, and implemented. Examples of some of the many workers that can lawfully be either independent contractors or employees under federal and most state laws include:

  • truck drivers and couriers transporting goods,
  • physicians and other medical personnel,
  • taxicab, car service, and limousine drivers,
  • recruiters,
  • interpreters and translators,
  • court reporters,
  • route sales persons and distributors,
  • computer technicians,
  • physical and occupational therapists,
  • designers,
  • models,
  • travel agents and consultants,
  • carpet installers,
  • writers and editors,
  • IT consultants,
  • insurance agents,
  • coaches, trainers, and officials,
  • tutors and instructors,
  • sales agents and consultants,
  • massage therapists,
  • cable television technicians and installers,
  • attorneys,

as well as many others. Some states have statutes specifically excluding certain types of workers from being considered employees, or specifically mandating that they be regarded only as employees. Further, many states have laws with different tests for determining if an individual is an employee or independent contractor. Only a few states have laws that are inhospitable to almost all types of independent contractors.

The San Diego Union Tribune case illustrates the value of using, in advance of a legal challenge, a methodology such as IC Diagnostics™ to (a) evaluate whether an existing position can be legitimately structured as an independent contractor relationship, and (b) if so, whether it needs to be restructured, re-documented, and re-implemented to maximize the likelihood that those workers will be held to be independent contractors and not employees.

As noted in my prior blog posts, the costs of misclassification do not always end in class action cases when the last payment is made to the prevailing workers. A company settling a class action lawsuit or a case brought by the U.S. Department of Labor or a state Labor Department may also be facing liabilities for unpaid payroll taxes at the federal and state levels, unpaid unemployment tax payments, and workers compensation premiums.

A settlement or adverse independent contractor determination, however, should not necessarily be regarded as an obligation on the part of the business to treat the workers in question as employees on a going-forward basis. If the liabilities from an adverse independent contractor  determination can be satisfied, many businesses can adopt an independent contractor model that may well survive future scrutiny under federal and most state laws, provided the business properly engages in bona fide restructuring, conducts proper re-documentation, and implements and follows new, state-of-the-art independent contractor practices.

Written by Richard Reibstein.