April 2021 was a meaningful month for two industries that are hardly strangers to lawsuits involving the status of workers as independent contractors. A federal district court in the District of Columbia issued an extremely favorable decision for Lyft, holding that a driver and members of a class action are not covered by the interstate transportation worker exemption from arbitration under the Federal Arbitration Act, even though drivers in a locality such as D.C. often drive in interstate commerce. The court concluded that the arbitration exemption in the FAA must be determined by reference to all drivers providing services to a company’s customers nationally, not locally, and found that crossing state lines is not commonplace among Lyft drivers in most locations where Lyft operates. Meanwhile, in an appellate decision by a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit, two of the three panel judges determined that a federal transportation law with a strong preemption clause does not preempt the California ABC test. The dissenting judge disagreed, finding that the ABC test is precisely the type of state law that the federal transportation law was designed to preempt. Because one judge dissented, the full Ninth Circuit is likely to consider the panel decision. If the full appellate court affirms, the Supreme Court may well grant cert and determine this issue because the Ninth Circuit decision is directly at odds with a First Circuit ruling involving an identical Massachusetts law.
In one of the four other court cases reported below, a bankrupt newspaper trustee agreed to pay paper carriers $22 million to settle their IC misclassification class action following a judgment in the carriers’ favor. Newspapers, like most other businesses using an independent contractor model, can structure, document, and implement independent contractor relationships in a manner that maximizes compliance with applicable federal and almost all state laws, using a process such as IC Diagnostics (TM). Failure to do so increases needlessly the risks of IC misclassification liability. Part of the IC Diagnostics process is the effective use of state-of-the-art arbitration agreements with class action waivers. If the newspaper had enhanced its IC compliance prior to the misclassification lawsuit and used an effective arbitration agreement, the result in that case likely would have been dramatically different – indeed bankruptcy may have been averted altogether.
In the Courts (6 cases)
FEDERAL ARBITRATION ACT EXEMPTION FOR INTERSTATE TRANSPORTATION WORKERS TO BE VIEWED ON A NATIONAL NOT LOCAL BASIS. A federal district court has found that a Lyft driver must arbitrate her claims that Lyft engaged in a continuous violation of District of Columbia law by failing to provide sick leave during the COVID-19 pandemic. Lyft argued that the Federal Arbitration Act (FAA) required the court to enforce the arbitration agreement by compelling the driver to submit the dispute to individual arbitration. The plaintiff argued that the FAA did not apply to her agreement with Lyft because the FAA excludes from arbitration any “class of workers engaged in…interstate commerce.” In granting Lyft’s motion to compel arbitration, the court concluded that the exemption is not limited to transportation workers who transport goods rather than people, but the relevant “class of workers” must be assessed at a nationwide level rather than a specific geographic area. In rejecting the driver’s argument that the applicable “class of workers” are those drivers in and around the District of Columbia servicing other states, the court concluded that “[u]nlike seamen and railroad workers, for whom the interstate movement of goods and passengers over long distances across state lines is ‘a central part of the job description,’ Lyft drivers offer services that are primarily local and intrastate in nature.” The court described Lyft drivers as “in the business of giving people rides, not the particular business of offering interstate transportation to passengers.” Osvatics v. Lyft, Inc., No. 1:20-cv-01426 (D.D.C. Apr. 23, 2021).
NINTH CIRCUIT HOLDS THAT FEDERAL TRANSPORTATION LAW DOES NOT PREEMPT CALIFORNIA INDEPENDENT CONTRACTOR TEST. Two of three judges on a panel of the U.S. Court of Appeals for the Ninth Circuit reversed a California district court’s preliminary injunction barring the state from enforcing AB5 and its ABC test for IC status against any motor carrier doing business in California. The majority of the panel held that the application of AB5 is not preempted by the Federal Aviation Administration Authorization Act (FAAAA). The FAAAA preempts any state law “related to a price, route, or service of any motor carrier…with respect to the transportation of property.” The California Trucking Association (CTA), a trade association representing motor carriers that engage independent contractors who own their own trucks, and two independent owner-operators commenced the suit originally seeking to enjoin the enforcement of AB5. The CTA viewed Prong B of the new ABC test in California, which statutorily classifies a worker as an employee unless it is demonstrated that the worker performs “work that is outside the usual course of the hiring entity’s business”, as “effectively precluding the business model employed by CTA’s members.” After the district court enjoined the state from enforcing AB5 against any motor carrier doing business in California, the State and the International Brotherhood of Teamsters (purportedly representing owner-operators) filed an appeal. On review, the Ninth Circuit panel majority concluded that the district court abused its discretion in issuing the injunction: “because AB5 is a generally applicable labor law that affects a motor carrier’s relationship with its workforce and does not bind, compel, or otherwise freeze into place the prices, routes, or services of motor carriers, it is not preempted by the FAAAA.” The dissenting judge, finding that AB5 both affects the motor carriers’ relationship with their workers and significantly impacts the services that motor carriers provide to their customers, concluded that the new law is preempted as applied to CTA’s members. Additionally, he reasoned that because the ABC test requires an employer to hire employees, rather than engage independent contractors, applicable case law “compels us to conclude that AB5 is related to the prices, routes, and service of a motor carrier [and should, therefore, be preempted].”
In an April 29, 2021 Employment Law360 article entitled, “Trucking Industry Braces after 9th Circuit Preemption Loss,” the publisher of this blog was quoted as follows: “This decision is hardly dispositive. On any three-member panel decision that includes a dissent, en banc consideration is likely, especially in a case like this that has outsized significance to a critical industry like trucking. In fact, the dissent pointed out that the Ninth Circuit majority’s decision deviates from the First Circuit’s 2016 decision in Schwann v. FedEx , which found that Prong B of Massachusetts’ ABC test was preempted by the FAAAA. The Massachusetts ABC test is virtually identical to the ABC test in California. No other state’s ABC test is like those in California and Massachusetts, so decisions on FAAAA preemption applying different ABC tests by other circuit courts, such as the Third and Seventh circuits, are like comparing apples and oranges.” Calif. Trucking Ass’n v. Bonta, No. 20-55106 (9th Cir. Apr. 28, 2021).
IN IC MISCLASSIFICATION CASE INVOLVING BANKRUPT PUBLISHER, NEWSPAPER CARRIERS AND THEIR LAWYERS TO RECEIVE $22 MILLION SETTLEMENT. A class of nearly 5,000 newspaper carriers and the bankruptcy trustee for the Sacramento Bee have reached a proposed $22 million settlement of an independent contractor misclassification class action. Among other things, the class alleged that its members were entitled as employees to unreimbursed mileage plus costs. In 2014, a California Superior Court rendered a decision in favor of the class, finding its members were misclassified as independent contractors and that the newspaper had failed to reimburse them for reasonable business expenses. Before the court could address the amount due to the class members, the newspaper filed for bankruptcy. The terms of the proposed settlement include $7 million for class members representing mileage reimbursement and prejudgment interest, along with $15 million for class counsel fees and costs. In re JCK Legacy Co., No. 20 – 10418 (Bankr. Ct. S.D.N.Y. Apr. 7, 2021).
BAKING COMPANY TO PAY $3.15 MILLION TO DISTRIBUTORS IN IC MISCLASSIFICATION CLASS ACTION SETTLEMENT. Distributors and Tasty Baking Company, a brand under the Flowers Foods umbrella, received tentative approval from a federal court of a proposed $3.15 million settlement in an IC misclassification collective and class action lawsuit under the FLSA and Pennsylvania, New Jersey, and Maryland wage laws. The distributors sought allegedly unpaid overtime, improper pay deductions, and recovery of business expenses. Tasty Baking manufactures, distributes, and sells baked products, and the distributors purchase rights to sell and distribute the company’s products to customers in Pennsylvania, New Jersey, or Maryland. The distributors alleged that the company directed and controlled their performance; the company denied those allegations. The parties chose to settle the case “to avoid the risks and uncertainty of further litigation.” Pursuant to the terms of the $3.15 million settlement, an additional $3,500 is payable to each current distributor who signs, dates, and cashes their settlements as consideration for their agreement to terms of an arbitration agreement with a class action waiver. While this settlement is consistent with the results in other Flower Foods cases, food manufacturers that structure, document, and implement their IC relationships in a manner that maximizes compliance with IC laws are far more likely to prevail when legally challenged, as we reported in a blog post in a case involving Bimbo Foods. Caddick v. Tasty Baking Co., No. 2:19-cv-02106 (E.D. Pa. Apr. 12, 2021).
FEDEX TO PAY $2.5 MILLION TO SETTLE YET ANOTHER IC MISCLASSIFICATION CLASS ACTION. A New Jersey federal district court has approved a $2.5 million settlement of an IC misclassification class action brought by a class of delivery drivers against FedEx Ground Package System Inc. The drivers alleged that as a result of their misclassification as independent contractors and not employees, FedEx illegally deducted amounts from their wages in violation of the New Jersey Wage Payment Law. Under the terms of the settlement, the class claimants will receive a total of $1.6 million with an average payout per class member of $15,700; $800,000 is earmarked for attorneys’ fees and costs; and $15,000 will go to each of the three named plaintiffs as incentive payments. This settlement package is far less than amounts previously paid by FedEx to settle similar cases, as we reported previously in this blog. Carrow v. FedEx Ground Package Systems, Inc., No. 1:16-cv-3026 (D.N.J. Apr. 21, 2021).
SINGLE-MEMBER LLC’S ARE NOT TO BE TREATED AUTOMATICALLY AS DISREGARDED ENTITIES UNDER NEW JERSEY UNEMPLOYMENT LAW. A New Jersey appeals court, applying the state’s ABC test, affirmed a state Labor Commissioner’s finding that five drywall installers were misclassified as independent contractors, but reversed as to eleven others. East Bay Drywall, LLC, is a drywall installation business that engages independent contractors to perform drywall installation on an as-needed basis according to the installers’ availability. An audit conducted by the New Jersey Department of Labor and Workforce Development found that all 16 installers had been misclassified by the company as ICs. The appellate court found that the Commissioner of Labor had incorrectly interpreted a New Jersey administrative regulation as meaning that single-member LLCs automatically should be treated as disregarded entities – the same position taken by taxing authorities – overlooking the fact that 11 of the 16 installers “had provided certificates of insurance to [the company], which is significant, albeit not necessarily dispositive, indicia of their business status.” Of the remaining five installers, the court affirmed the Commissioner’s decision that two respondent companies failed to establish that they were independent businesses because no corporate reports had been filed with the state and their corporate status had been revoked, and there was no proof that the other three companies operated as independent businesses rather than as single workers. East Bay Drywall LLC v. Department of Labor and Workforce Development, No. A-2467-19 (Super. Ct. N.J. App. Div. Apr. 20, 2021).
A NEW ALABAMA LAW PROVIDES A UNIFORM TEST FOR IC STATUS. On April 19, 2021, Alabama Governor Kay Ivey signed into law House Bill 408, which sets forth a uniform test for IC status in the state. It will become law on July 1, 2021. The Alabama statute requires the Alabama Department of Labor and its Department of Revenue to use the 20-factor IRS common law test for determining independent contractor status. The IRS’s traditional standard contains the most business-favorable test for IC status. The new law states specifically that the IRS test shall be used to determine whether a worker is an employee or independent contractor. It appears that the IRS test will be applicable to wage and hour as well for unemployment insurance purposes. The new law does not apply to determinations of worker status under the Alabama workers’ compensation law, however. In addition, it adopts for tax and labor purposes the “safe harbor” test in Section 530 of the federal Revenue Act of 1978, available to businesses even if they fail the 20-factor IRS common law test. That statute requires the alleged employer to prove it (a) had a “reasonable basis” for having classified the workers in question as independent contractors; (b) issued Forms 1099 each year to those workers; and (c) treated similar workers as contractors and not employees. As reported by Alabama attorney Bruce Ely in his recent article, the vice president of Governmental Affairs for the Business Council of Alabama stated: “This new law will provide a safety net for employers when it comes to properly classifying their workers. This will also provide small businesses with clear and uniform guidelines on employee classification and will create an environment where [in most cases] they only have to be concerned with following one set of standards…”