Immediately following the issuance of the U.S. Supreme Court’s decision in New Prime v. Oliveira on January 15, 2019, we stated in a blog post that “even if an individual or group of workers is excluded [from arbitration] under the federal arbitration law, state arbitration laws may cover them and provide a statutory basis for compelling arbitration.” Soon thereafter, in a Law 360 article discussing a Washington State federal district court ruling that independent contractor drivers providing services to Amazon could not be compelled to arbitrate their IC misclassification claims, the reporter Linda Chiem quoted the publisher of this blog: “There’s a ‘hidden lesson’ from the Amazon decision. Companies can get around ‘arbitration-unfriendly laws’ by making sure it’s spelled out that their independent contractor agreements are governed by state laws that do not have the type of exclusions found in the Washington state arbitration law that tripped up the Amazon agreement.” As noted in the first two case developments from March 2021 as reported below, that is precisely what companies are beginning to do and the courts have agreed that state arbitration laws are all that is needed to compel arbitration.
Arbitration provisions in IC agreements are constantly being attacked by plaintiffs’ class action lawyers, who advance new and different arguments to try to avoid arbitration. It is therefore prudent to constantly review and update those agreements and the class action waivers therein, to maximize their enforceability, as we first noted in our November 14, 2018 blog post entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in Independent Contractor Agreements.” But an effective arbitration clause is not enough; businesses should also take steps to enhance their underlying independent contractor relationships to minimize misclassification exposure. Many companies have done so using a process such as IC Diagnostics (TM).
In the Courts (7 cases)
FAA EXEMPTION FROM ARBITRATION DOES NOT STYMIE ARBITRATION WHERE STATE LAW SUPPORTS IT. A driver who contracted with ride-sharing company, Lyft, Inc., brought a putative class action lawsuit in a New York federal district court challenging Lyft’s practice of logging its drivers off of the Lyft app for performing too few rides. According to the complaint, plaintiff alleged that such practice violated the contract between Lyft and its drivers, which placed no limits on the drivers’ ability to access the app wherever and whenever they chose to do so. The contract also contained a clause requiring the drivers to arbitrate their disputes with Lyft on an individual basis. Lyft moved to compel arbitration under the FAA and New York state arbitration law. The court concluded that “rideshare drivers for companies like Lyft and Uber, as a nationwide class, perform sufficient numbers of interstate rides [even at 2-3% of overall rides], with sufficient regularity, to make them ‘engaged in’ interstate commerce” and, consequently, as interstate transportation workers, they are exempt from the FAA’s arbitration provisions. But despite their coverage under the FAA exemption, the court held that plaintiff and the proposed class must arbitrate their claims because New York state arbitration law provides an alternate basis to compel arbitration, and the contract’s arbitration clause can be enforced under that law alone. Islam v. Lyft, Inc., No. 1:20-cv-03004 (S.D.N.Y. Mar. 9, 2021).
DELIVERY WORKERS FOR AUTO PARTS COMPANY ARE COMPELLED TO ARBITRATE IC MISCLASSIFICATION CLAIMS PURSUANT TO PENNSYLVANIA LAW. A Pennsylvania federal district court has compelled arbitration of a proposed IC misclassification overtime claim by an automotive supply delivery driver, who is suing Parts Distribution Xpress, Inc. on behalf of herself and other drivers under the FLSA. The company engages drivers to deliver auto parts and supplies to its customers. The company moved to compel arbitration of the claims arguing that the broker and arbitration agreements signed by the driver constituted a valid, binding agreement covering the driver’s overtime claims. The court stated at the outset that “[a]lthough the Federal Arbitration Act authorizes, and in fact requires, courts to enforce most private arbitration contracts, employment contracts for ‘transportation workers’ are exempted from the FAA’s purview.” But the court concluded that, even assuming that the driver was a transportation worker exempted from the arbitration provisions of the FAA, the arbitration agreement was still enforceable under Pennsylvania state arbitration law. Adams v. Parts Distrib. Xpress Inc., No. 2:20-cv-00697 (E.D. Pa. Mar. 22, 2021).
HANDY SUED BY SAN FRANCISCO AND LOS ANGELES DISTRICT ATTORNEYS FOR IC MISCLASSIFICATION. Handy also faces a new civil enforcement action brought in San Francisco County Superior Court by the San Francisco and Los Angeles District Attorneys alleging violations of California’s Labor Code (AB5) and the unfair competition laws as a result of Handy’s alleged misclassification of thousands of cleaners and handypersons (called Pros) as independent contractors. In support of the misclassification claims, the complaint alleges that Handy utilizes an “omnipresent app” and imposes company policies as means of direction and control; determines the eligibility requirements that Pros must meet before they may provide services to Handy customers; controls access to cleaning and handyman jobs by mandating that Pros use a smartphone equipped with Handy’s app in order to have access to any gigs; requires Pros to contact Handy, not the customers, to change future assignments; sets the parameters of the gigs, including the hours that Pros must be available to customers to provide services; controls how it expects the work to be done, including the order and sequence, and the preferred supplies to use; tracks and monitors the Pros; and levies monetary fines on Pros to enforce platform standards. Additionally, according to the complaint, the Pros perform services that are not outside the usual course of Handy’s business, and they are not customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed for Handy. California v. Handy Technologies, Inc., San Francisco County Super. Ct. Mar. 17, 2021).
CONSTRUCTION MATERIAL DRIVERS FILE NEW IC MISCLASSIFICATION CASE IN GEORGIA. A driver for a company that produces, sells, and distributes construction aggregates has filed a collective action complaint under the Fair Labor Standards Act in a Georgia federal court claiming Vulcan Materials Company and one of its divisions misclassified a proposed class of drivers as independent contractors. The driver’s lawsuit claims that Vulcan failed to pay overtime as allegedly required under the FLSA. The drivers allege that the company, which operates quarries and produces, sells, and distributes crushed stone, sand, gravel, asphalt, and concrete, transport such products from the quarries to the worksites of Vulcan’s customers. According to the complaint, the drivers are allegedly supervised by management employees of the company; must submit their vehicles for inspection by the company; hold themselves out to customers and the general public as company representatives; are restricted from providing work for competitors of the company while concurrently working for the company; have no right to determine their own scheduling/hours of work; must follow certain company-directed work methods; have their locations and progress tracked by GPS by the company; and are not free to negotiate any terms of their independent contractor agreement. It is anticipated that the company will deny these allegations and/or make a motion to compel arbitration if the IC agreement contains an arbitration clause. Bailey v. Vulcan Materials Co., No. 1:21-cv-00998 (N.D. Ga. Mar. 10, 2021).
FREIGHT BROKER’S EFFORT TO OBTAIN SUMMARY JUDGMENT IN IC MISCLASSIFICATION CASE IS DENIED. A New York federal district court has denied a freight broker’s motion for summary judgment in an IC misclassification class and collective action lawsuit brought by drivers under the FLSA and New York Labor Law. The court held that there were genuine issues of material fact that could only be determined by a jury as to whether the drivers were independent contractors or employees, including the company’s degree of control over the drivers, the drivers’ opportunity for profit or loss and investment in the company’s business, the degree of skill and independent initiative required to perform the work, the permanence or duration of the working relationship, and the extent to which the work was an integral part of the company’s business. TXX engages in operations in foreign or interstate commerce as a broker, arranging for the transportation of freight other than household goods by motor vehicle. As part of its business, the company brokers the provision of transportation services for a drug distribution network handling freight, including pharmaceuticals and controlled substances. The district court also denied summary judgment as to the New York Labor Law claims concluding that there were questions of material fact as to the degree of control exercised by the company over the drivers, as well as whether they were free to work on their own terms or on a fixed schedule. Thomas v. TXX Services Inc., No. 2:13-cv-02789 (E.D.N.Y. Mar. 15, 2021).
AEROSPACE INSPECTORS FOUND TO BE MISCLASSIFIED; COMPANY OWES BACK UNEMPLOYMENT TAXES. A California state appeals court, applying the multi-factor Borello test, has concluded that Vendor Surveillance Corporation, a company that provides source inspectors to aerospace and defense manufacturers, misclassified inspectors as independent contractors and not employees. Source inspectors typically inspect, at the supplier’s facility, component parts that are provided by suppliers and are used by aerospace manufacturers in producing aircrafts. The company maintains a database of qualified inspectors and subcontracts with its parent company to provide qualified inspectors to clients for part-time, project based engagements. The company appealed from an adverse judgment of the San Diego County Superior Court where it sought a refund of $278,692 in unemployment insurance taxes assessed by the California Employment Development Department (EDD) following an audit covering calendar years 2011 through 2013 during which time the company was found to have misclassified the inspectors as ICs. Before the Superior Court level, the EDD asserted that the ABC test used in Dynamex applied retroactively to unemployment insurance assessments. The company maintained that the more favorable test in Borello applied. The Superior Court applied both tests and concluded that under either of them, the inspectors were misclassified as independent contractors.
On appeal to the California Court of Appeal, the decision of the Superior Court was affirmed. The appellate court concluded that Borello was the proper test to apply in determining liability for unemployment insurance tax for work performed during the 2011-2013 audit years. The court stated, “this recent legislation [AB5, which has been replaced by AB2257] reflects an express legislative understanding that for purposes of calculating unemployment insurance taxes, EDD would transition from applying Borello factors to utilizing the Dynamex ABC test only for work performed on or after January 1, 2020.” In support of its conclusion that the inspectors were misclassified under Borello, the court noted that the company had the right to and actually exercised actual control over the work; the inspectors were not engaged in a distinct business; no evidence was produced that the work was usually done in the locale without supervision; the work was continuous; the inspectors were paid on an hourly basis; and source inspection was part of the company’s regular business. Vendor Surveillance Corp. v. Henning, No. D076079 (Cal. Ct. App. 4th Dist. Mar. 18, 2021).
Regulatory and Legislative Developments (2 items)
LABOR DEPARTMENT DELAYS FINAL INDEPENDENT CONTRACTOR REGULATION. The U.S. Department of Labor has delayed from March 8, 2021 until May 7, 2021 the implementation of the final independent contractor regulation issued in last month of the Trump Administration. As we previously noted in our February 5, 2021 blog post, on January 20, 2021, President Biden directed that a regulatory freeze be placed on that regulation and certain opinion letters issued by the Trump Administration Labor Department. In our January 6, 2021 blog post, we noted that the final regulation, issued earlier that day to be effective March 8, 2021, faced a questionable future. On March 4, Jessica Looman, the Labor Department’s Wage and Hour Division’s principal deputy administrator, stated in a proposed agency action published in the Federal Register: “After reviewing timely comments submitted, the Department has decided to delay the Independent Contractor Rule’s effective date from March 8, 2021, to May 7, 2021, as proposed. This delay will allow the Department additional time to review the multiple issues of law, policy, and fact that warrant additional review and consideration in accordance with the Regulatory Freeze Memorandum before the Independent Contractor Rule goes into effect.” The significance of the regulation was dubious even before the Biden Administration Labor Department placed it on hold. As the publisher of this blog was quoted in an article in the January 7, 2021 issue of the Bloomberg Daily Labor Report: “This [Regulation] hasn’t changed the law. Basically, this is destined to the legal junkyard. Even if it did take effect, it doesn’t do much more than set forth a preferred analysis for businesses.”
CARES ACT III EXTENDS PANDEMIC UNEMPLOYMENT ASSISTANCE FOR INDEPENDENT CONTRACTORS ONCE AGAIN. On March 11, 2021, President Biden signed into law the latest stimulus bill called the American Rescue Plan Act of 2021. As detailed in our prior blog post that same day, the bill (H.R. 1319) includes the “Crisis Support for Unemployed Workers Act of 2020,” providing for yet another extension of the CARES Act unemployment provisions until September 6, 2021. The new law, which we refer to as the CARES Act III, includes a type of benefit called pandemic unemployment assistance (PUA) for self-employed individuals including independent contractors and gig workers. The new stimulus bill maintains the $300 amount in PUA benefits as provided by the CARES Act II, and appears to retain the supplemental $300 per week enhancement through September 6, 2021. The law also includes a new and valuable provision that addresses the impact of taxes on past PUA benefits, and continues to provide independent contractors with paid sick and paid family leave benefits through September 6, 2021 under the Families First Coronavirus Response Act, as did the December 2020 stimulus bill.