Last Friday, April 18, 2014, Sunny’s Limousine Services, Inc. entered into a proposed class action settlement with its drivers who allege they were misclassified as independent contractors (ICs) from March 2007 until November 2011, when Sunny’s reclassified them as W-2 employees. The proposed settlement amount is $3,500,000 and is to be shared by 489 drivers and plaintiffs’ class counsel, who seeks up to one-third of the settlement amount. Munir v. Sunny’s Limousine Service, Inc., No. 13-cv-1581 (VSB) (S.D.N.Y. Apr. 18, 2014).

The drivers alleged in their federal court complaint in New York that they were employees under the Fair Labor Standards Act (FLSA) and New York Labor Law; that they had been misclassified as 1099ers; and that they had been deprived of statutory amounts for overtime pay. In addition, the drivers claimed that Sunny’s made unlawful wage deductions for items such as the drivers’ use of the vehicles outside of work, use of the company radios for dispatch purposes, and purchases for required car washes, fuel payments, and amenities such as magazines and bottled water for customers. The drivers also alleged that following reclassification in late 2011, Sunny’s failed to pay the drivers for all hours worked and did not pay them for all overtime hours at the proper overtime rate. Lastly, the drivers alleged that Sunny’s retained charges identified as gratuities.

Sunny’s did not oppose the drivers’ motion for conditional class certification. The parties then engaged in what they referred to as “expansive targeted discovery,” which included the production by Sunny’s of over 1,000 pages of documents, plus detailed information about some 91,000 rides during a representative period of 3 years covering 82 drivers. Thereafter, the parties engaged in mediation, which produced a negotiated $3.5 million resolution that was just submitted to the Court for approval last Friday.

Analysis and Takeaways

Under the FLSA, there are a number of “exemptions” from the overtime provisions covering workers in different industries. Here, if Sunny’s had chosen to litigate instead of settling, the court may have  found ultimately that an exemption applied, such as the taxicab industry exemption and/or the Motor Carrier Act exemption. In the car service industry, the taxicab industry exemption remains an open question and there are only a few reported cases on the issue. While no appellate court has yet to issue a definitive judicial ruling on the scope of that exemption, the principal author of this post recently secured the dismissal of a proposed class action brought under the FLSA and New York Labor Law by a car service driver after the federal judge offered his preliminary view that the taxicab industry exemption may well be applicable and, as a result, he intended to limit discovery initially to that issue.

Class action cases involving drivers of taxicabs, car service vehicles, and limousines are proliferating both in New York and around the country. Two other notable class actions brought in New York against car service companies include those against Executive Transportation Group and Corporate Transportation Group. The publisher of this legal blog in August 2013 reported on a class action brought in a California federal district court against Uber Technologies, Inc., a car service company, seeking a minimum of $5 million in damages.  The complaint alleged that Uber misclassified the drivers as ICs, breached the drivers’ contracts, and engaged in tortious interference when the company advised clients not to tip the drivers. O’Connor v. Uber Technologies, Inc. et al., CV No.13-3826 (N.D. Cal. Aug. 16, 2013).

The potential application of one or more exemptions under the FLSA for drivers of taxicabs, car service vehicles, and limousines provides a potentially protective additional defense against these types of class actions brought by drivers. The first layer of protection, however, should be the proper classification of drivers as ICs. Remarkably, few companies in this industry have seen fit to structure, document, and implement an IC relationship that offers maximum protection from judicial scrutiny in class action cases. Oftentimes, the companies themselves have created an abundance of documentary evidence that is then used against them. Further, judges may choose to give little if any credence to prior determinations by state courts or regulatory agencies if the record at an earlier judicial or administrative proceeding differs from the evidence submitted in a new lawsuit. Thus, companies that have prevailed in unemployment or workers compensation hearings and secured rulings that their drivers are ICs may be under the mistaken impression that such rulings provide a complete defense to a new class action lawsuit.

Companies that have been seeking to enhance their level of IC compliance under an array of different laws at the state and federal level have found a process such as IC Diagnostics™ to be useful to minimize the risks of IC misclassification liability. This process uses comprehensive tools to diagnose a company’s level of IC compliance and then to restructure, re-document, and re-implement IC relationships in a state-of-the-art manner consistent with applicable laws and nuances of the industry.

Unlike what happened to Sunny’s, companies can obtain the benefits of an IC business model while diminishing the potential of spending hundreds of thousands of dollars in legal fees and millions of dollars in settlement costs to defend class action lawsuits that can usually be avoided.

Written by Richard Reibstein.