In October, a diverse group of industries experienced adverse court rulings defending independent contractor classification class and collective action cases. Two cases involved courts granting conditional certification of collective status: one involves Texas oil field workers; the other concerns Illinois cable technicians. Both industries have been targeted by multiple IC misclassification class actions, as reported on a number of occasions in this blog. Shipt, the personal shopping service, was subjected to a new IC misclassification lawsuit, also in Illinois, which uses a test for independent contractor status that is very unfavorable to companies with an independent contractor business model. A pet sitting company in Missouri also fared poorly when an appellate court affirmed an administrative decision finding the pet sitters with whom it contracts are employees and not independent contractors. A shipping company suffered the worst news last month for companies relying on the use of independent contractors when it lost its effort to bypass an administrative decision assessing it $1.8 million in unemployment tax liabilities for drivers found to be misclassified as independent contractors.
One notable aspect of these cases is that some of the companies subjected to these class and collective actions had not adopted effective arbitration clauses with a class action waiver. Another takeaway is that some of these companies had not elevated their level of independent contractor compliance but were allegedly operating in ways self-defeating to their contention that the workers involved were independent contractors. Many businesses utilizing ICs have resorted to the use of a process such as IC Diagnostics™ to enhance their compliance by restructuring, re-documenting, and/or re-implementing their IC relationships in a manner that is customizable and sustainable, consistent with their business model. A failure to elevate IC compliance all too often results in the filing of costly and avoidable class action misclassification lawsuits and administrative proceedings.
In the Courts (8 cases)
OIL FIELD WORKERS RETAINED BY STAFFING COMPANIES OBTAIN CERTIFICATION FOR COLLECTIVE ACTION AGAINST OIL AND GAS COMPANY IN IC MISCLASSIFICATION LAWSUIT. Oil field workers providing services to an oil and gas exploration company through a number of staffing agencies has been conditionally certified by a Texas federal court magistrate judge. The plaintiff claims that the company violated the overtime provisions of the Fair Labor Standards Act due to its alleged misclassification of the oil field worker as an independent contractor and not an employee. Anadarko Petroleum Corporation maintains operations and well sites throughout the United States and contracts with third party staffing companies to acquire laborers and consultants. The plaintiff was hired by one of those staffing companies to perform manual labor for the company, including operating oilfield machinery, performing routine maintenance on oilfield equipment, and building and dissembling oilfield tools. The plaintiff filed a motion seeking conditional certification of a collective action. The motion was granted by a magistrate judge, who concluded that there was a reasonable basis – in this instance, declarations submitted by several oilfield workers – for crediting the assertion that other aggrieved individuals exist and that members of the proposed class are similarly situated in terms of job requirements and payment provisions. According to the declarations, the workers were all classified as independent contractors, paid a day-rate, performed manual labor, worked more than 40 hours per week, and did not receive overtime compensation. The company argued that the class members could not be similarly situated because it contracted with at least 11 different staffing companies to hire and pay workers and had no control over how the workers were paid and what terms and conditions the workers were allegedly subjected to. Field v. Anadarko Petroleum Corp., No. 4:20-cv-00575 (S.D. Tex. Oct. 15, 2020 and Oct. 29, 2020).
CABLE COMPANY FAILS TO DEFEAT TECHNICIANS’ MOTION FOR COLLECTIVE CERTIFICATION IN IC MISCLASSIFICATION ACTION. An Illinois federal district court has granted conditional collective certification of an independent contractor misclassification claim by cable technicians, who claim that Elite Engineering, Inc. violated the wage and hour provisions of the Fair Labor Standards Act and the law of Missouri, New York, Ohio and Wisconsin. The technicians submitted declarations stating that they and other cable technicians were commonly assigned to work in excess of 40 hours per week, but were paid on a “per piece” basis and not paid overtime compensation; that there were common practices of assigning, scheduling, monitoring, and supervising the work of the technicians; and that the company exercised control over the technicians’ work, including assigning their routes and schedules. The plaintiffs also provided to the court voluminous electronic communications reflecting instructions from supervisors to the technicians. The court treated those records, together with the declarations, as materials that “suffice to suggest the existence of a common practice in violation of the FLSA.” In its decision granting certification, the court noted that the company did not dispute any of the evidence or offer any basis for concluding that the plaintiffs are not similarly situated to other cable technicians who provided services to the company. Rather, the company contested the merits of the plaintiffs’ FLSA claim, “pointing to contracts that they assert establish business-to-business relationships between [the company]…and businesses owned by plaintiffs.” The court stated, however, that at this particular stage, it does not engage in merits determinations, weigh evidence, determine credibility, or specifically consider opposing evidence presented by a defendant. Lechuga v. Elite Engineering, Inc., No. 20 C 3378 (N.D. Ill. Oct. 27, 2020).
SHIPT IS TARGET OF NEW INDEPENDENT CONTRACTOR MISCLASSIFICATION CLASS ACTION IN ILLINOIS. Shipt, an on-demand shopping and delivery service company whose workers shop for groceries and other items mainly from Target stores and deliver them to customers’ homes and businesses, is facing a proposed collective and class action by a plaintiff seeking to represent herself and hundreds of similarly situated personal shoppers, drivers, and delivery persons alleging violations of the minimum wage and overtime compensation provisions of the FLSA and Illinois wage law. The plaintiffs allege they have been misclassified as independent contractors and not employees. According to the collective and class action complaint, Shipt offered these services through a mobile phone app or over the Internet and had the items delivered within one or two hours by the shoppers. The shoppers allege that Shipt controlled when, where, and how the Shoppers performed their services; controlled their wages; enforced behavioral codes of conduct; and controlled the means, manner, and method by which they perform their work. Additionally, they claim that Shipt told them how to interact with the customers, retained the right to terminate the shoppers’ employment relationship with Shipt, directed the shoppers to hold themselves out as Shipt employees, provided them with a Shipt bag, lanyard, and shirt to identify themselves as Shipt workers, required the shoppers to accept every job that Shipt sends to their cell phone within a set time, used a grading system to evaluate shoppers, monitored and tracked the location and speed of shoppers while they were completing orders, and subjected the shoppers to reduced pay, discipline, and deactivation from the app if the shoppers did not comply with Shipt’s work requirements. It is anticipated that Shipt will make a motion to compel arbitration. Young v. Shipt, Inc., No. 1:20-cv-05858 (N.D. Ill. Oct. 1, 2020).
PET SITTING SERVICE LOSES INDEPENDENT CONTRACTOR MISCLASSIFICATION PROCEEDING. Pet sitters are employees and not independent contractors according to a Missouri appeals court, which affirmed a state Labor Commission’s decision against 417 Pet Sitting, LLC. The company is a residential pet care operation offering services such as feeding, walking, entertainment, medication administration, and general household chores. Using the 20-factor IRS test as the basis for its decision, the Missouri appeals court reviewed the many factors found by the Labor and Industrial Relations Commission as favoring employee status and, on balance, concluded that it had not erred in its decision that the pet sitters were employees and not independent contractors. The court determined that the following 13 factors supported employee status: the company reserved the right to and did, in actual practice, direct and control the manner in which the pet sitters performed their services by counseling sitters concerning client complaints; the sitters could not assign or delegate their responsibilities unless they received prior consent from the company and they were not free to hire assistants; the company controlled the sequence of the sitters’ work; the company furnished tools and materials in the form of office equipment, time-keeping and invoice software, and documents for each client; sitters had no opportunity to realize a profit or suffer a loss; they did not advertise or hold themselves out as independent pet sitters to the general public; the company could discharge the sitters without liability and the sitters had the right to terminate their relationship at any time. 417 Pet Sitting LLC v. Division of Employment Security, No. WD83833 (Ct. App. Missouri Oct. 27, 2020).
SHIPPING COMPANY UNSUCCESSFUL IN EFFORT TO USE FEDERAL COURT TO BYPASS STATE STATE IC MISCLASSIFICATION ASSESSMENT OF $1.8 MILLION. A shipper of automotive parts was assessed $1.8 million in unemployment taxes by the New Jersey Department of Labor and Workforce Development for drivers found to have been misclassified as independent contractors. It sought to circumvent the state administrative process by filing a lawsuit in federal court contending that the state’s classification test was preempted by the Federal Aviation Administrative Authorization Act (FAAAA). The U.S. Court of Appeals for the Third Circuit put a halt to that effort, finding that federal courts were barred by the “abstention doctrine” from interfering in this type of state enforcement action. However, a separate shipping company that had intervened in the federal case was permitted to maintain its challenge under the FAAAA to the New Jersey ABC test. The Third Circuit remanded the intervenor’s case to the district court for determination of the preemption issue. PDX North Inc. v. Commissioner New Jersey Department of Labor, No. 19-2968 and 19-2993 (3d Cir. Oct. 22, 2020).
CALIFORNIA APPELLATE COURT RULES THAT PAGA MISCLASSIFICATION CLAIMS ARE NOT SUBJECT TO ARBITRATION. Lyft drivers need not arbitrate their Private Attorneys General Act (PAGA) claims alleging independent contractor misclassification, according to a unanimous California appeals court panel. Plaintiff, a driver whose terms of service included an agreement that disputes with Lyft must be resolved by individual arbitration, had filed a class action complaint in 2018 against Lyft alleging violations of the California Labor Code because it allegedly misclassified him and other similarly situated drivers. He also alleged six PAGA claims. Lyft petitioned the court to compel arbitration. The trial court denied the petition and the appeals court affirmed. In reaching its decision, the appeals court agreed with the numerous state Court of Appeal and federal decisions that previously found that the U.S. Supreme Court’s 2018 decision in Epic Systems Corp. v. Lewis (which had held that class action waivers were enforceable in arbitration agreements) did not override California precedent that specifically deems waivers of PAGA claims to be unenforceable. Instead, it concluded that the 2014 California Supreme Court decision in Iskanian v. CLS Transportation Los Angeles LLC remains good law and still prohibits enforcement of PAGA waivers. Olson v. Lyft, Inc., No. A156322 (1st App. Dist. Cal. Oct. 29, 2020).
INSTACART PREVAILS IN COMPELLING ARBITRATION OF PROPOSED IC MISCLASSIFICATION LAWSUIT. An Instacart personal shopper must arbitrate his claims of violations of the California wage and hour, unfair competition, and public nuisance laws due to Instacart’s alleged misclassification of him as an independent contractor and not an employee. The shopper also alleged that Instacart failed to provide him with adequate sanitizing materials and personal protective equipment to protect him from exposure to COVID-19 while providing services. It was undisputed that plaintiff, who seeks to represent himself and all similarly situated “Shoppers,” assented to Instacart’s Independent Contractor Agreement, which contains an arbitration agreement and waives Plaintiff’s right to bring class claims. Under the Agreement, Plaintiff and Instacart also agreed that Instacart’s business and shopper services were to be governed by the Federal Arbitration Act, even if Instacart and/or Plaintiff was otherwise exempted from the FAA. In granting Instacart’s to compel arbitration, the court concluded that plaintiff is not exempt from the FAA under the Section 1 exemption for “workers engaged in foreign or interstate commerce” as “the stream of commerce concludes at the local grocery stores, shops, etc. that Plaintiff then picks up from and delivers the goods locally.” Plaintiff’s other causes of action under the Unfair Competition Law and public nuisance law for relief as to worker classification and health and safety measures involving COVID-19 were likewise found to be subject to arbitration because they seek private, not public, injunctive relief. McDonnell v. Maplebear Inc., No. CGC-20-585037 (Super. Ct. Cal. Oct. 22, 2020).
INSURANCE AGENT’S INDEPENDENT CONTRACTOR MISCLASSIFICATION CLAIMS MUST BE ARBITRATED. An Arkansas federal district court has ordered the arbitration of a former insurance agent’s claims that her former employer, American Income Life Insurance Company, and a branch manager violated the minimum wage provisions of the FLSA and the Arkansas Minimum Wage Act due to their alleged misclassification of the agent and those similarly situated as independent contractors and not employees. In her complaint, the agent alleged that as an insurance sales worker, she and the other agents were required to attend a five-day training to familiarize themselves with the company’s life insurance plans, learn specific sales tactics, and understand how they were to be paid. She asserted that the agents were not paid for the training time because they were classified as independent contractors. The company filed motions to compel individual arbitration contending that the agent had entered into a valid arbitration agreement with the company that covered all of her claims. The agent argued that the arbitration clause did not survive termination of her contract with the company. Rejecting the agent’s position, the court concluded that “[The agent’s] arguments, while not entirely without merit, are insufficient to overcome the presumption in favor of post-expiration arbitration of disputes ‘unless negated expressly by clear implication.’” The court also found that the agent’s wage and hour claims under the FLSA and state minimum wage law “arise out of or relate to” her employment relationship with the company and consequently, were covered by the contract and its arbitration clause. Patterson v. American Income Life Insurance Co., No. 4:19-cv-00918 (E.D. Ark. Oct. 30, 2020).
PENNSYLVANIA ENACTS MISCLASSIFICATION TASK FORCE LAW. Pennsylvania Governor Tom Wolf has signed into law an employee misclassification bill (HB716). In a Press Release issued by the Pennsylvania House Democratic Caucus dated October 29, 2020, State Rep. John Galloway, the sponsor of the bill now called Act 85 of 2020, announced that a joint agency task force would be established to address the misclassification of employees in Pennsylvania. Members of the task force would include Pennsylvania’s attorney general, secretary of Labor and Industry, and the secretary of Revenue, in addition to individuals with experience in industries affected by misclassification. The task force will examine the state’s current classification and enforcement system and make recommendations to strengthen enforcement, as well as educate employers and the public about employee classification. Rep. Galloway stated, “Some employers have taken advantage of loopholes to misclassify workers to deliberately cut labor costs, pay fewer tax dollars and avoid paying people a fair day’s wage for a fair day’s work. A misclassified worker also loses an estimated $6,000 in overtime pay due to this illegal practice. Our workers aren’t the only ones who are losing out. Pennsylvania also could be losing $200 million or more a year in federal income taxes, $10 million in unemployment taxes, at least $15 million in income tax revenues, and as much as $83 million in workers’ compensation premiums.”
Regulatory and Administrative Developments
LABOR DEPARTMENT COMMENT PERIOD HAS CLOSED, OVER 1,800 COMMENTS FILED. The publisher of this blog and organizations both favoring and opposing the Labor Department’s proposed rule governing independent contractor status filed comments by the close of the comment period on October 26, 2020. As we discussed in detail in our prior blog post of September 22, 2020, the U.S. Department of Labor issued a proposed regulation addressing the classification criteria of workers as independent contractors or employees under the FLSA. The comments provided by the publisher of this blog, which can be found in our blog post of October 26, 2020, neither support nor oppose the proposed rule. Rather, they suggest the Labor Department make certain clarifications to the proposed rule; re-focus the regulation’s test for independent contractor status on the type of control deemed most relevant by the courts; de-emphasize the significance of skill or provide examples where less skilled workers can qualify for independent contractor status; include a recognition that permanence of work does not necessarily suggest employee status; and offer examples of some of the factors to be considered in determining whether a worker or group of workers should be classified as independent contractors or rather employees under the FLSA. In addition to providing the publisher’s comments in their entirety, the October 26, 2020 post analyzes and offers readers a takeaway: regardless of the issuance of the final rule impacting this particular federal law (the FLSA), companies should take steps to enhance their compliance with all applicable federal and state IC laws and thereby minimize their potential exposure to IC misclassification liability.
Other Noteworthy Matters
In an October 9, 2020 article published in Law360 and entitled, “3 Things to Watch for in the California Driver Classification Battle,” author Jon Steingart reported that attorneys for Lyft and Uber would be arguing that a California appeals court “should overturn a judge’s order directing them to immediately reclassify drivers as employees, in a battle that could cause them to pause operations in the Golden State while they figure out how to comply.” In that article, the publisher of this blog was quoted: “Many companies that developed a business model that relies on independent contracting will not convert workers to employees. Most of those companies will either shut down and either sell or license their assets, or just continue operating in the same manner knowing they now have a heightened risk of misclassification liability. The overwhelming number of companies that have created a viable business based on an independent contractor model have no intention of converting contractors to employees, even when a state changes its classification laws.