The cases reported in this update continue to reflect the fact that IC misclassification cases cut across virtually all industries. Below are IC misclassification cases from such diverse industries as insurance, ride-sharing, restaurant, and the home heating and alarm industries. A Forbes article entitled “Is Your Company on the Independent Contractor Hit List,” written by the publisher of this blog and posted last June by Daniel Fisher, a senior editor at Forbes, lists 13 industries as being “in the crosshairs of [federal] regulatory agencies” and another nine industries being specifically targeted by one state, New York, which published a list of industries with the “highest incidence of worker misclassification.”  The Forbes article also lists 22 industries “hit” by class action lawsuits.

What’s the takeaway from these industry-wide regulatory and class action proceedings? As the publisher of this blog was quoted in a March 28, 2016 article reported at the end of this update: “A business acts at its peril if it fails to properly structure and document the independent contractor relationship. That may seem like it’s just dotting your ‘i’s and crossing your ‘t’s, but many of the factors looked at by the courts are counter-intuitive. Most companies don’t even get close to doing it right. Even large companies like FedEx and Uber have had trouble getting it right, and their own documents have been used against them in misclassification lawsuits, sometimes at great expense.” While there is no simple answer, the publisher of this blog suggests how to do so in his White Paper on how to minimize the risks of independent contractor misclassification. 

In the Courts (5 cases)

  • INSURANCE AGENTS GAIN CLASS CERTIFICATION IN ERISA IC MISCLASSIFICATION CASE. An Ohio federal district court granted class certification in a class action lawsuit by insurance agents alleging that as a result of being misclassified as independent contractors by American Family Insurance Group, the agents were denied benefits to which they were allegedly entitled to as employees under the company’s ERISA-governed insurance and retirement plans. There were three proposed classes that were certified in this case, two relating to termination benefits and one relating to health, dental, life, and disability benefits. Jammal v. American Family Insurance Group, No. 13-cv-00437-DCN (N.D. Ohio Mar. 2, 2016).
  • SEATTLE ORDINANCE PERMITTING RIDE-SHARING DRIVERS TO UNIONIZE IS CHALLENGED BY BUSINESS GROUP. The U.S. Chamber of Commerce sued the City of Seattle in federal district court in Washington for allegedly violating federal antitrust laws by issuing an ordinance allowing for collective bargaining and unionization of for-hire taxi and limousine drivers and drivers for app-based companies such as Lyft and Uber, who are providing services as independent contractors. According to its complaint, the Chamber of Commerce alleged that the ordinance will burden innovation, increase prices, and reduce quality and service for consumers. It claims: “Absent judicial intervention, the City of Seattle and thousands of other municipalities would be free to adopt their own disparate regulatory regimes, which would balkanize the market for independent-contractor services and inhibit the free flow of commerce among private service providers around the nation.” Addressing this issue, Richard Reibstein, the publisher of this blog, was quoted in a Reuters News Service article by Heather Somerville and Dan Levine on March 4, 2016: “If a municipality could pass an ordinance of this nature addressed to the ride-sharing industry, it could pass an ordinance of this nature against any industry and all industries. The law is a threat to all businesses the Chamber represents.” Chamber of Commerce of the United States of America v. City of Seattle, No. 16-cv-00322 (W.D. Wash. Mar. 3, 2016).
  • RESTAURANT DELIVERY DRIVERS FOUND TO BE MISCLASSIFIED AS IC’S AS A MATTER OF LAW UNDER FEDERAL AND ILLINOIS LAW. A federal district court in Illinois granted summary judgment as a matter of law in favor of restaurant delivery drivers in their IC misclassification class action against two restaurants, Butterfly Sushi and Butterfly Thai Restaurant. The lawsuit sought recovery for minimum wage and overtime pay under the federal Fair Labor Standards Act (FLSA) and the Illinois Minimum Wage Law. The court applied the “economic realities” test for both the FLSA and state wage law claims, examining six factors: (1) the degree of control exerted by the company over the manner in which work was performed; (2) the workers’ opportunity for profit and loss; (3) the workers’ investment in equipment and materials needed for the task; (4) the specialized skill of the workers; (5) the degree of permanency of the relationship; and (6) the extent to which the services rendered were an integral part of the companies’ businesses. In concluding that the drivers were employees and not ICs, the court found that the restaurants retained significant control over the drivers’ work by setting the shift schedules, determining the delivery fees, and directing the drivers to more efficient routes; no profit or loss was dependent on the drivers’ initiative, judgment or energy, and any reduction in earnings due to fewer orders resulted in a loss of tips, not a loss of investment; there was no evidence that the drivers in fact made any investments in specialized equipment; no special skills were required; the drivers were hired to perform the work indefinitely; and food delivery was an integral part of the restaurants’ business. While the court expressed a willingness to consider other factors besides those six, it awarded judgment in favor of the drivers. Arunin v. Oasis Chicago Inc. d/b/a Butterfly Sushi and Butterfly Thai Restaurant, No. 14-cv-6870 (N. D. Ill. Mar. 4, 2016).
  • CONNECTICUT SUPREME COURT CLARIFIES STATE “ABC” TEST FOR IC’S IN UNEMPLOYMENT PROCEEDING INVOLVING HOME HEATING OIL INSTALLERS AND TECHNICIANS. The Connecticut Supreme Court reverses a lower court and holds that installers/technicians that provide services to home heating and alarm system customers of Standard Oil of Connecticut are ICs and not employees under the state’s three-pronged ABC test for purposes of unemployment insurance contributions. In analyzing Prong A, which requires the company to show that the worker is free from control and direction in connection with the performance of services both in contract and in fact, the court concluded that Prong A was met because, among other things: the installers/technicians were free to accept or reject engagements without adverse consequences by the company; they owned and operated their own tools, machinery, and heavy duty vehicles; they were licensed and certified under state law; they entered into IC agreements with the company expressly providing that each would use his/her independent judgment and control in the execution of services; they were not supervised by the company and their work was not inspected; they chose when they wanted to work; they had and advertised their own independent businesses; they realized a profit or loss; and they were not required to undertake any training or wear specific uniforms. As to Prong B, the company was required to show that the services performed by the installers/technicians was “performed outside of all the places of business of the enterprise for which the service is performed.” Connecticut courts and administrative agencies had previously held that the term “places of business of the enterprise” included the homes of the business’s customers, but the Connecticut Supreme Court disagreed, stating: “‘[P]laces of business’ in the present context should not be extended to the homes in which the installers/technicians worked, unaccompanied by the [company’s] employees and without the [company’s] supervision. The homes of the plaintiff’s customers, unlike the plaintiff’s business offices, warehouses and other facilities, were under the homeowners’ control.” The court noted that it was not the company, but rather the homeowners, that determined when access to their homes was convenient, brought the installers/technicians to locations within their homes where equipment was to be installed; and identified problems with the installation process or equipment during the warranty period. Because Prong C (requiring the business to show that the workers were customarily engaged in an independently established business, occupation, trade, or profession) had already been met in prior proceedings, it was not addressed by the Connecticut Supreme Court, which held that the company met each of the three prongs of the ABC test. Standard Oil of Connecticut, Inc. v. Administrator, Unemployment Compensation Act, No. SC 19493 (Sup. Ct. Conn. Mar. 15, 2016).
  • LYFT’S $12.25 MILLION PROPOSED SETTLEMENT WITH DRIVERS MAY BE IN JEOPARDY. On March 24, 2016, the federal district court judge overseeing the class action lawsuit brought by over 100,000 drivers for Lyft in California conducted a “fairness hearing” on the proposed $12,250,000 IC misclassification settlement between Lyft and the lawyers representing the drivers. As more fully discussed in my blog post of March 15, 2016, which was updated on March 24 following the hearing, five Lyft drivers and two Teamsters union councils objected to the terms of the proposed class action settlement, arguing that the proposed settlement does not require Lyft to reclassify the drivers as employees and allows Lyft to maintain its current IC business model. Both prior to and at the hearing, the judge expressed concern about a number of issues including the very modest amount of recovery, relatively speaking, for each driver in view of the amount of damages ($126,000,000) that the drivers would recover if they prevailed. Cotter v. Lyft, Inc., No. 3:13-cv-04065-VC (N.D. Cal. Mar. 24, 2016).

Regulatory and Enforcement Initiatives (2 items)

  • IRS NEARING COMPLETION OF ANALYSIS OF DATA COLLECTED FROM NATIONAL EMPLOYMENT TAX SURVEY. Over the past three years, the IRS conducted 6,000 comprehensive employment tax audits. One of the objectives was to determine which industries have higher incidences of noncompliance in areas including worker misclassification. At the American Payroll Association Capital Summit held on March 21, 2016, John Tuzynski, Chief of Employment Tax and Specialty Programs for the Small Business Self-Employed Division (SB/SE) of the IRS, reportedly explained that the results of the study, due in early 2017, will help the IRS more efficiently direct its limited resources to specific examination efforts and bolster its compliance programs.
  • U.S. LABOR DEPARTMENT TO UPDATE SURVEY MEASURING INCIDENCE OF CONTINGENT AND ALTERNATIVE WORK ARRANGEMENTS. The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor announced that it is updating a survey last conducted in 2005 measuring contingent and alternative work arrangements. According to a BLS blog post on March 3, 2016, the survey is to be conducted as part of the May 2017 Current Population Survey and will pose questions that will identify workers with contingent or alternative arrangements; measure workers’ satisfaction with their current arrangement; and measure earnings, health insurance coverage, and eligibility for employer-provided retirement plans. President Obama’s latest proposed budget requests funding for BLS to permanently conduct a supplement to the survey annually. The blog post noted that if Congress approves the requested funding, BLS’s goal is to ask the questions regarding contingent and alternative arrangements every two years, with questions on other topics in the alternating years.

Other Noteworthy Matters (1 item)

  •  “Contractor or New Hire?” In a March 28, 2016 article by Audrey Henderson in IE3 Media entitled “Contractor or New Hire?” Richard Reibstein, the publisher of this blog, set forth his views on whether a company should engage ICs or hire employees. He stated that there should be a threshold analysis of a company’s structure and needs and that “[t]he key is whether the business [must] tell the individual how to do the job.” He continued: “If you only need to tell the person what to do and not how to do it, then hiring a contractor is a cost-saving option under most state and federal laws.” He also identified some of the pitfalls of not being proactive in identifying areas where IC compliance can be enhanced: “A business acts at its peril if it fails to properly structure and document the independent contractor relationship. That may seem like it’s just dotting your “i”s and crossing your “t”s, but many of the factors looked at by the courts are counter-intuitive. Most companies don’t even get close to doing it right. Even large companies like FedEx and Uber have had trouble getting it right, and their own documents have been used against them in misclassification lawsuits, sometimes at great expense.”

Written by Richard Reibstein.