While selected states are in the midst of trying to crack down on independent contractor misclassification, the federal government is trying to clear a path and clarify the tests for independent contractor status under various federal laws.  As reported below, New Jersey last month enacted a series of laws that, among other things, increases the penalties for IC misclassification under that state’s current “ABC” test for IC status. The existing “ABC” test in New Jersey was not amended by the Legislature, despite a strong push by some legislators in New Jersey to do so, but it remains a challenging test to meet for some companies using ICs in that state.  Meanwhile, the U.S. Labor Department issued its new joint employer regulation in January 2020, explaining and clarifying that some of the factors previously used by courts and administrative agencies to establish joint employer status are irrelevant to that issue but highly relevant to determinations of IC status.

As we noted in our commentary addressing what we have referred to as the “Five Degrees of Independent Contractor Misclassification,” the New Jersey “ABC” test is not as challenging as the “ABC” test under California’s new AB5 law.  Businesses operating with ICs in New Jersey, however, are now subject to harsher penalties in that state if they do not considerably elevate their level of IC compliance.  Many companies that have committed to enhancing their compliance with state and federal laws governing ICs have used a process such as IC Diagnostics™ to restructure, re-document, and/or re-implement their IC relationships in a customized and sustainable manner to minimize their risks of IC misclassification liability.

Part of a process such as IC Diagnostics™ includes the use of an effective arbitration agreement with a class and collective action waiver that will stand up to attacks from plaintiffs’ class action lawyers. As reported in the first case below, a large nationwide courier company effectively obtained a court order shutting down a class action based on an effective arbitration agreement requiring individual arbitrations instead of a class action.  Plaintiffs’ class action counsel have sought to raise a host of arguments in the recent past seeking to invalidate such clauses. In an article republished on this blog entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in Independent Contractor Agreements,” we provide ten tips as to how to craft such agreements in a manner that overcomes arguments by plaintiffs’ class action lawyers seeking to keep their lawsuits in court.  

In the Courts (3 cases)

COURIER COMPANY SUCCESSFULLY COMPELS ARBITRATION WHERE AGREEMENT DELEGATES ARBITRABILITY TO THE ARBITRATOR TO DECIDE. A Georgia federal court granted a motion to compel individual arbitration rof DoorDash drivers’ proposed class action claims where they did not elect to opt out of the arbitration provision in their independent contractor agreements, which contained a provision delegating the issue of arbitrability to the arbitrator. According to the class action complaint, the drivers alleged breach of contract by DoorDash, fraudulent inducement, and unjust enrichment because the company retained monies that were allegedly intended as tips for the plaintiffs. DoorDash moved to compel arbitration of the drivers’ individual claims under the Federal Arbitration Act. The drivers conceded that the independent contractor agreements were valid contracts, but argued that the FAA was inapplicable because the drivers fall within the exemption for transportation workers engaged in interstate commerce. The court granted the motion, noting that the independent contractor agreement expressly provided that the issue of exemption from the FAA was to be decided by the arbitrator. The class action waiver was enforceable, according to the court, because its terms were “clearly and comprehensibly written;” enforcement of the waiver would “not have the effect of immunizing” DoorDash from claims for unlawful behavior; the drivers had the opportunity to opt out of the arbitration provision including the class action waiver; and there was no claim by the drivers that the arbitration clause was unconscionable or in any manner limited the remedies that would be available in court. Webb v. DoorDash Inc., No. 19-cv-00665 (N. D. Ga. Jan. 9, 2020).

CALIFORNIA COURT REJECTS IC MISCLASSIFICATION SETTLEMENT AS INEQUITABLE TO ONE SET OF INSURANCE INDUSTRY CLASS MEMBERS.  A California federal district court has denied granting final approval to a $5.75 million proposed class action settlement between an insurance company and a class of 6,500 insurance salesperson trainees and agents. In their class action complaint against a life insurance company, the trainees and agents alleged wage and hour violations under the California Wage Orders and the Labor Code, the Private Attorneys General Act (PAGA), and unlawful business practices including misclassification of the trainees/agents as independent contractors and not employees. Among other things, the trainees/agents allege that they underwent training that lasted a week or more during which time they did not earn a commission and were not otherwise paid, and did not receive the minimum wage, overtime compensation, reimbursement for business expenses, or statutory meal and rest breaks. The federal court found that certification of the class for settlement purposes was appropriate. In considering whether the proposed settlement was “fair, reasonable, and adequate,” the court concluded that there was adequacy of representation, arms-length negotiations, and adequacy of relief, but that the trainees were not being treated equitably relative to the agents in terms of the funds being allocated to that segment of the class, particularly where the court found that the trainees’ claims were stronger than the claims of the agents.  Joh v. Am. Income Life Ins. Co., 18-CV-06364 (N. D. Cal. Jan. 9, 2020).

TRUCKERS OBTAIN PRELIMINARY INJUNCTION AGAINST ENFORCEMENT OF CALIFORNIA’S NEW IC MISCLASSIFICATION LAW.  A California state court granted a motion for a preliminary injunction that enjoined the State from enforcing California’s new IC misclassification statute, AB5, against motor carriers in California.  The basis for the motion to enjoin enforcement of the new law is that AB5 and the so-called ABC test for IC status that is codified in the new statute is preempted by the Federal Aviation Administration Authorization Act when applied to motor carriers in the trucking industry.

The defendants who obtained the injunction in an enforcement action by the State of California are a group of motor carriers that operate trucking and drayage companies serving the ports of Los Angeles and Long Beach.  The motor carriers use the services of independent owner-operator truck drivers to transport cargo short distances to and from the ports. The Los Angeles City Attorney’s Office filed suit in January 2018 against the companies alleging that the truckers were misclassified as independent contractors and not employees. The court concluded that the new California ABC test for IC status is preempted when applied to motor carriers because Prong B of the test – that the worker performs work that is outside the usual course of the hiring entity’s business – essentially prohibits motor carriers from using independent owner-operator contractors for its core transportation-related services, and that prohibition would have an impermissible direct or indirect effect on motor carrier prices, routes, and services.  The court concluded that the requirements of the ABC test in the Dynamex court decision and AB5 that codified Dynamex into law “clearly run afoul of Congress’ 1994 determination in the [FAAAA] that a uniform rule endorsing use of non-employee independent contractors … should apply in all 50 states to increase competition and reduce the cost of trucking services.” State of California v. Cal Cartage Transportation Express LLC, No. BC689320 (Super. Ct. L.A. County Cal. Jan. 8, 2020)

Administrative and Regulatory Initiatives (1 item)

U.S DEPARTMENT OF LABOR’S NEW JOINT EMPLOYER RULE WILL IMPACT INDEPENDENT CONTRACTOR MISCLASSIFICATION CLAIMS. On January 13, 2020, the U.S. Department of Labor released a new regulation setting forth its test for determining joint employer status under the Fair Labor Standards Act (FLSA). While the new rule did not expressly focus on the test for IC status, it made many references to its IC status test and will undoubtedly have an impact on certain types of IC claims – those where a business, which contracts with a third party company to provide services that are performed by workers classified as ICs, will also be liable under the joint employer doctrine if the third party is found to have misclassified the workers. As more fully discussed in our blog post of January 13, 2020, the new regulation makes it clear that the “economic realities” test for IC status under the FLSA rests on a different foundation than the test for joint employer status. The new rule clarifies that economic dependence, while relevant to a determination of IC status, has no relevance as to whether two or more companies are a worker’s joint employer. Whereas IC status generally focuses on the actions of the worker, joint employment status under the new regulation focuses on the actions of the potential joint employer. Additionally, unlike IC tests that focus on the right to control (even if not actually exercised), the new joint employer test requires the actual exercise of a factor establishing control.

Legislative Developments (2 items)

NEW JERSEY ENACTS SERIES OF NEW LAWS CRACKING DOWN FURTHER ON IC MISCLASSIFICATION.  New Jersey Governor Phil Murphy signed into law six bills that aim to crack down on IC misclassification by employers in that state. The six-bill legislative package, an outgrowth of the Governor’s misclassification task force, includes new laws that: permit the Department of Labor and Workforce Development to post to a list on its website of those persons found to be in violation of any State wage, benefit, or tax law and prohibit them from contracting with a public body until the liability for violations have been resolved to the satisfaction of the commissioner ‎(S.4226)‎; allow the State Treasury to share with the state Labor Department any information such as tax returns, audit files, or other reports to assist in the investigation of New Jersey wage, benefit, or tax law violations ‎(S.4228)‎; allow stop work orders to be issued against violators of wage and hour laws, including misclassification of employees as ICs (A.5838); provide an administrative “misclassification penalty” of up to a maximum of $250 per misclassified employee for a first violation and up to a maximum of $1,000 per misclassified employee for each subsequent violation (A.5839); impose joint liability for client employers and labor contractors, who violate any provision of New Jersey wage, hour, or tax laws including those concerning the misclassification of workers as ICs ‎(A.5840)‎; and require employers to post notices for employees about employee misclassification, including the prohibition against employers misclassifying employees as ICs and the standard that is applied by the state Labor Department to determine whether a worker is an employee or an independent contractor. In a press release issued on January 20, 2020, the Governor stated: “We cannot build a stronger and fairer economy without strong workplace protections that ensure fairness for employees. I am proud to sign these bills today to curb this unethical and illegal practice that hurts our working families and exploits New Jersey’s workers.” Notably, the package of bills did not include a controversial Senate bill (S.4204) intended to codify the New Jersey Supreme Court’s 2015 decision establishing an ABC test for determining IC status in that state.

NEW YORK CITY LAW PROTECTING INDEPENDENT CONTRACTORS FROM DISCRIMINATION AND HARASSMENT GOES INTO EFFECT.  The protections for employees in New York City from employment discrimination and workplace harassment that are set forth in the New York City Human Rights Law now extend to independent contractors and freelancers effective January 11, 2020. An amendment to the New York City Human Rights Law provides that ICs and freelancers are not only protected from discrimination and harassment under that law, but also have the right to receive reasonable accommodations for needs related to disabilities, pregnancy, lactation, religious observances, and status as victims of domestic violence, sexual offenses, or stalking. In a 2-page Guidance issued by the NYC Commission of Human Rights on January 13, 2020, the Commission answers questions related to the amendment. Specifically addressed are the requirement that certain employers must provide sexual harassment prevention training to ICs who work more than 80 hours in a calendar year and for at least 90 days; that employers will be liable for discriminatory acts committed by ICs and freelancers under certain circumstances; and that apps and platforms may be liable if they engage in discrimination against an IC who uses the platform. Prior to the passage of the amendment, the publisher of this blog was quoted on the new law in a September 12, 2019 article by John Herzfeld in Bloomberg Law’s Daily Labor Report, stating: “The Council bill, by ensuring that freelancers shouldn’t be subject to discrimination by a company that utilizes them to further its business, is consistent with a growing trend in the city and the state to give additional protections to freelancers and independent contractors.” Finding the bill to be vastly “overbroad,” this blog’s publisher added: “It goes [well] beyond only a company’s decisions to retain or let go an independent contractor, and encompasses everything in between: their compensation, promotion, benefits, and other terms and conditions or privileges of employment.”

Other Noteworthy Matters (1 item)

A REVIEW OF INDEPENDENT CONTRACTOR MISCLASSIFICATION AND COMPLIANCE LAW OVER THE PAST DECADE. In our January 2, 2020 blog post entitled “The Past Decade of Independent Contractor Misclassification and Compliance Law,” the publisher of this blog reviewed the last ten years of legal developments in this area of the law.  The article addressed (1) the progression of legislative developments over the past ten years, culminating with the recent enactment of the AB5 law in California; (2) the now commonplace occurrence of eight-figure settlements of IC misclassification cases; (3) the successes by some companies defending against IC misclassification class actions and regulatory challenges; (4) the dramatic impact of the key court decisions in Dynamex, Epic Systems, and New Prime on the litigation of claims against companies utilizing an IC business model; and (5) administrative and regulatory developments and how they have been changed from the Obama to Trump Administrations in Washington, D.C.  The blog post was based on an article by the publisher that was published in Bloomberg Law Reports on January 2, 2020.

Written by Richard Reibstein