One of last month’s legal developments on which we report below is a decision by a federal court in New Jersey that should serve as a reminder to companies: arbitration clauses need to be drafted well in order to succeed. New Jersey courts for many years have been perhaps the most finicky in the country when reviewing language informing their workers that they are waiving their rights to have a court or jury decide their claims. As we observed in a 2021 blog post, plaintiffs’ class action lawyers bringing independent contractor misclassification claims have succeeded on occasion in punching holes in arbitration clauses with class action waivers. As we remarked in an extensive blog post on the subject in 2018: “Whether an arbitration agreement in an independent contractor or employment setting will bar a class action depends as much on the wording in the arbitration clause as the applicable law, which is in flux and continues to evolve. That reality strongly suggests that existing arbitration clauses used in independent contractor agreements should be reexamined and updated periodically in tandem with the company’s effort to enhance its compliance with laws governing the use of independent contractors.” Companies seeking to elevate their IC compliance and avoid class action misclassification lawsuits by the use of arbitration agreements with class action waivers have effectively used a process such as IC Diagnostics (TM) to accomplish these objectives.
In the Courts (6 cases)
FAILURE TO DRAFT AN EFFECTIVE ARBITRATION AGREEMENT DOOMS LOGISTICS COMPANY’S EFFORT TO AVOID CLASS ACTION IC MISCLASSIFICATION SUIT. US Pack Logistics, LLC moved to compel arbitration in an IC misclassification class action lawsuit by couriers seeking relief for alleged improper pay deductions and denial of overtime compensation under New Jersey law. The couriers, who delivered pharmacy products for US Pack’s customers, signed “employment” contracts that contained an arbitration agreement that provided: “THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION AND CLASS-ACTION WAIVER WHICH AFFECTS YOUR LEGAL RIGHTS AND MAY BE ENFORCED BY THE PARTIES.” The couriers opposed the motion and argued that the arbitration agreement did not clearly and unambiguously explain their waiver of rights to seek relief in court under the prevailing law in New Jersey. A federal magistrate judge issued an order finding that the arbitration agreement “does not contain wording sufficient for plaintiff to have had a clear understanding that by agreeing to arbitration, [plaintiff] waived the right to bring certain claims in a court of law before a judge or jury.” A federal district court judge agreed that the provision does not state that “there is a difference between resolving a dispute in arbitration and in a judicial forum.” The New Jersey Supreme Court has held that “no magical language is needed to accomplish a waiver of rights in an arbitration agreement.” But, in the couriers’ case, the federal court stated that, “What is fatal to Defendant’s argument, however, is the lack of a clear and unambiguous waiver in the Arbitration Provision.” Easterday v. USPACK Logistics LLC, No. 15-7559 (D.N.J. Mar. 23, 2022).
MEDICAL DEVICE COMPANY TO PAY $7.38 MILLION TO SETTLE IC MISCLASSIFICATION CLASS ACTION AND RECLASSIFY SALESPERSONS AS EMPLOYEES. A California federal court has approved a $7.38 million settlement between Biomet Holdings, Inc., a medical device company, and 251 sales associates in an independent contractor misclassification class action. The sales associates’ claims for allegedly unpaid overtime and meal and rest breaks were earlier dismissed after the court determined that the plaintiffs qualified as “outside salespersons” under the federal Fair Labor Standards Act and the state’s wage law, leaving claims for reimbursement of business expenses and unfair business practices as well as a Private Attorney Generals Act (PAGA) claim. Under the settlement terms, $5.4 million is being allocated to the class with each class member to receive an average of $21,691; $83,000 is earmarked for resolution of the PAGA claim; and $1.8 million will be allocated to attorneys’ fees. In a rare feature of any IC misclassification settlement, Biomet agreed to reclassify the sales representatives as W-2 employees, although “highly compensated” sales associates will have the option to remain ICs. Karl v. Zimmer Biomet Holdings, Inc., No. C 18-04176 (N. D. Cal. Mar. 4, 2022).
RIDE-SHARING COMPANY AGREES TO PAY $8.4 MILLION TO LIMITED CLASS OF DRIVERS IN SETTLEMENT OF IC MISCLASSIFICATION LAWSUIT. A federal court has given preliminary approval to an $8.4 million settlement of an IC misclassification class action settlement between Uber and a class of over 1,300 California drivers. The proposed agreement provides an average settlement amount of $4,750 for each class member. The settlement covers a limited timeframe that begin on February 28, 2019, the end of the period covering the class action settlement in O’Connor v. Uber Techs., Inc., and continues until the date of Proposition 22’s enactment, December 17, 2020. In their motion papers, the drivers also stated: “Although this settlement (once again) does not resolve the question of whether Uber drivers are employees under California law, it is nonetheless of significant value to class members.” A final hearing on the settlement has been set for July 14, 2022. James v. Uber Technologies Inc., No. 3:19-cv-06462 (N.D. Cal. Mar. 24, 2022).
MASSACHUSETTS HIGH COURT DEALS BLOW TO FRANCHISORS SEEKING JUDICIAL EXEMPTION FROM THAT STATE’S STRICT INDEPENDENT CONTRACTOR TEST, BUT ALL IS NOT LOST. As detailed in our blog post of March 24, 2022, the U.S. Court of Appeals for the First Circuit in Boston had asked the Massachusetts Supreme Judicial Court to determine whether the strict ABC test set forth in the state’s independent contractor law applies to the relationship between a franchisor and its franchisee in view of the franchisor’s obligation to also comply with the FTC’s Franchise Rule. The question was raised in response to an appeal of a lawsuit brought by a group of store managers who claimed that 7-Eleven had misclassified them as independent contractors instead of employees. The Massachusetts high court ruled on March 24, 2022 that the FTC’s Franchise Rule only governs disclosures by franchisors to franchisees, not the manner in which franchisors control the performance of franchisees’ services, and therefore does not preempt the state’s independent contractor statute. Although the franchise industry argued that such a decision would be the death-knell of franchising in Massachusetts and other states for individuals who wish to own and operate a franchise, the decision will not likely have the doomsday effect that the franchising industry predicted. This is so because, as noted in our blog post, with the proper structuring, documentation, and implementation of the franchise relationship, franchisors should be able to classify individual franchisees as independent contractors, even in Massachusetts. In addition, the Massachusetts high court did not foreclose an effort by 7-Eleven to satisfy the strict ABC test in that state, and articulated a potential pathway for the franchise giant to ultimately prevail. Patel v. 7-Eleven, Inc., No. SJC-13166 (Sup. Jud. Ct. Mass. Mar. 24, 2022).
FEDERAL COURT STRIKES BIDEN ADMINISTRATION’S WITHDRAWAL OF A TRUMP REGULATION SETTING STANDARD TO DETERMINE IC STATUS. A regulation seeking to clarify the legal standard for determining independent contractor status under the Fair Labor Standards Act was promulgated by the Trump administration’s U.S. Department of Labor shortly before the Biden Administration took office. Soon after, the Biden Administration’s Labor Department delayed enforcement of the regulation (commonly called the Independent Contractor Rule) and then withdrew it. A federal district court in Texas has ruled that the Labor Department under President Biden violated the Administrative Procedure Act when it first delayed and then withdrew the Independent Contractor Rule. In reinstating the Regulation, the court concluded that the Biden Administration’s Labor Department failed to provide a meaningful opportunity for comment when it delayed the enforcement of the Independent Contractor Rule and acted in an arbitrary and capricious manner in withdrawing it. In a March 15, 2022 article by Jon Steingart in Law360, the publisher of this blog was quoted: “Reinstating the Trump administration’s rule should not have a major impact because companies shouldn’t have been relying on it in the first place. As a practical matter, any guidance or regulation issued by the U.S. Department of Labor on independent contractor status has marginal legal relevance. The Labor Department has no final say on who is and who is not an independent contractor because only the courts determine worker status under the federal Fair Labor Standards Act. The only thing that companies should do is enhance their compliance with applicable court decisions, restructuring, re-documenting, and re-implementing their independent contractor relationships to minimize exposure to misclassification liability.” Coalition for Workforce Innovation v. Walsh, No. 1:21-cv-00130 (E.D. Tex. Mar. 14, 2022).
PENNSYLVANIA HOME HEALTH CARE COMPANY AND ITS OWNER TO PAY $4.5 MILLION FOR MISCLASSIFYING HOME HEALTH AIDES AS INDEPENDENT CONTRACTORS. Successful Aging Care Net Inc. and its owner entered into a consent judgment against it in a lawsuit brought by the U.S. Department of Labor in a Pennsylvania federal court. After the court granted summary judgment to the Labor Department, the Pennsylvania home health care company agreed to pay $4.5 million in back wages and liquidated damages to 503 home health workers for the misclassification of aides as independent contractors resulting in the company’s failure to pay overtime for hours worked over 40 in a workweek. According to a News Release issued on March 8, 2022 by the Wage and Hour Division of the Labor Department, $2.27 million of the consent judgment represented back wages and an equal amount of $2.27 million represented liquidated damages payable to the affected workers. The average amount per home health worker was almost $9,000 per worker.
Regulatory and Administrative Developments
NLRB GENERAL COUNSEL SEEKING TO EXPAND FEDERAL LABOR LAW TO MAKE IC MISCLASSIFICATION A STAND-ALONE VIOLATION, BUT EFFORT IS UNLIKELY TO SUCCEED. A complaint issued last month by a Regional Director for the National Labor Relations Board against a logistics company alleges that misclassification of drivers as independent contractors is alone sufficient to violate the National Labor Relations Act as a so-called “stand-alone” unfair labor practice. The complaint, on behalf of the General Counsel of the NLRB, was issued in the face of the time-honored statutory “free speech” defense explicitly set forth in the Act. This defense will likely prevent the NLRB from succeeding in its efforts to support organizing efforts by the Teamsters local seeking to represent drivers in the intermodal, drayage, cargo, last mile, and logistics industries.
As discussed in our blog post of March 22, 2022, the complaint against Deco Logistics, Inc. d/b/a Container Connection and other affiliates alleges that the companies violated Section 8(a)(1) of the NLRA by misclassifying drivers as independent contractors and also violated Section 8(a)(1) by engaging in other activities in violation of the workers’ Section 7 rights to organize, such as interrogating a driver about his union activities and retaliating against drivers because they assisted the Teamsters Union in seeking to organize drivers. The relief sought includes an order that the companies “[r]eclassify independent contractors as employees and make them whole including direct and foreseeable consequential harm they incurred as a result of the Respondents’ misclassification and other unlawful conduct.”
By issuing the complaint in this case, the new General Counsel of the NLRB, Jennifer Abruzzo, who was appointed by President Biden and began serving in that capacity in July 2021, effectively seeks to overturn the NLRB’s 2019 decision in Velox Express, Inc. That NLRB decision, issued by a Republican-appointed majority over the dissent of the current NLRB Chair, Lauren McFerran, held that a courier company’s act of misclassifying couriers as ICs was not, standing alone, a violation of the NLRA. The Board majority in Velox also rejected the argument that it should issue an order mandating that the courier company reclassify its drivers as employees and notify them that they are not ICs under the NLRA. As we noted in our blog post, the Board majority in Velox held that an employer’s classification of workers as ICs and its “mere communication to its workers that they are classified as independent contractors” does not violate the NLRA because Section 8(c) provides that “[t]he expressing of any views, argument, or opinion, or the dissemination thereof, whether in written, printed, graphic, or visual form, shall not constitute or be evidence of an unfair labor practice . . . , if such expression contains no threat of reprisal or force or promise of benefit.” The Board majority in Velox Express concluded that when an employer decides to classify its workers as independent contractors, it forms a legal opinion regarding the status of those workers and “its communication of that legal opinion to its workers is privileged by Section 8(c) of the Act…” Deco Logistics, Inc. d/b/a Container Connection, Case 21-CA-272323 (Mar. 17, 2022).
Written by Richard Reibstein