Undoubtedly the most meaningful legal development in September 2022 was Uber’s agreement to pay $100 million in settlement to the New Jersey Department of Labor and Workforce Development for back unemployment taxes. As described below, Uber settled for a fraction of the amount it had been assessed, did not admit to liability, and did not agree to reclassify drivers providing services to its customers in New Jersey. Yet the amount of the settlement is so substantial that, as the publisher of this blog was quoted in an article about the settlement, “When a company pays a nine-figure amount dealing with the classification of their workers, other states … take note.” This settlement should prompt other gig economy companies using independent contractors to take action that an increasing number of companies have taken: restructuring, re-documenting, and/or re-implementing their independent contractor relationships, using a process such as IC Diagnostics (TM), to enhance compliance with federal and state independent contractor laws. That process allows companies to minimize misclassification liability in a customized and sustainable manner consistent with the company’s business model, affording it far better defenses not only to class action lawsuits, but also when workforce or tax agencies conduct an audit seeking taxes on the payments to independent contractors.
In the Courts (4 cases)
CONVENIENCE STORE FRANCHISEES IN MASSACHUSETTS WERE PROPERLY CLASSIFIED AS INDEPENDENT CONTRACTORS. A federal district court has once again ruled in favor of 7-Eleven in its long-running defense in an independent contractor misclassification lawsuit filed by a number of convenience store franchisees. A group of store managers/franchisees brought a putative class action in 2017 alleging that the company had misclassified them as independent contractors instead of employees under the Massachusetts Independent Contractor Law and also violated the Massachusetts Wage Act. They alleged that they should have been classified as employees because of the high degree of control they claimed 7-Eleven exerted over them under their 7-Eleven franchise agreements. After an initial ruling by the district court in favor of 7-Eleven, plaintiffs appealed to the U.S. Court of Appeals for the First Circuit, which asked the Massachusetts Supreme Judicial Court to answer a certified question: does the three-part ABC test set forth in the Massachusetts independent contractor law apply to the relationship between a franchisor and its franchisee where the franchisor must also comply with the FTC’s Franchise Rule. The state court found that the ABC test applied, as we noted in a blog post on March 24, 2022.
On remand, both sides filed motions for summary judgment. In granting 7-Eleven’s motion, the federal district court concluded that because plaintiffs do not perform any services for 7-Eleven, they fail to meet the threshold inquiry for the Massachusetts Independent Contractor Law to apply, finding as follows: “7-Eleven does not pay the franchisees for the performance of any alleged obligations. In fact, the opposite is true, because 7-Eleven actually provides the franchisees with services in exchange for franchise fees.” Such services rendered by 7-Eleven to the franchisees included initial and ongoing training programs, access to the Operations Manual, the grant of a license to operate the store at the specified location, bookkeeping records and payroll software, store audits, maintenance of 7-Eleven equipment, performance of store repairs, and advertising services. The district court also concluded that the mere fact that the parties share an economic interest in the stores’ sales and revenue does not imply that plaintiffs perform services for 7-Eleven; rather, the court found that that is simply inherent in a legitimate franchise relationship. Plaintiffs are expected to appeal the decision. The final chapter of this case has not yet been written. Patel v. 7-Eleven, Inc., No. 17-11414 (D. Mass. Sept. 28, 2022).
SOCCER COACH FILES PAGA CLAIM FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION. A soccer coach has filed a Private Attorneys General Act (“PAGA”) claim in a California state court on behalf of the State of California involving coaches engaged by the Los Angeles Breakers FC that failed to receive overtime compensation and other wage and hour benefits under the state Labor Code. The PAGA complaint alleges that all coaches are subject to the club’s direction and control; that the website refers to them as employees and as part of the club’s professional coaching staff; that all coaches must wear Breakers’ uniforms; and that hours of work and terms of their service are determined by the club. The complaint, filed in Los Angeles County Superior Court, claims that the Breakers’ “misclassification of Coaches as independent contractors is willful and done in order to deprive the Coaches of benefits due them, and to gain an economic advantage, with the full knowledge that the law requires the Coaches to be classified as employees.” Gonzalez v. LA Breakers FC, No. 22STCV30489 (Sept. 19, 2022).
EXPENSE REIMBURSEMENT CLAIM IN CALIFORNIA IC MISCLASSIFICATION CASE IS NOT GOVERNED BY THE ABC TEST. A California federal court has held that the strict ABC test for worker classification does not apply to a GrubHub delivery driver’s claim for expense reimbursement under the California Labor Code in his independent contractor misclassification lawsuit against the company. In his complaint, the driver alleged, among other things, that because the online food delivery marketplace misclassified him as an independent contractor and not an employee, GrubHub failed to reimburse him for expenses, such as use of his vehicle and cell phone, in violation of California Labor Code sec. 2802. In denying the driver’s motion for partial summary judgment, the court concluded that the multi-factor Borello test, and not the more employee-friendly ABC test, applied for determining independent contractor/employee status for purposes of the expense reimbursement claim, relying on the Ninth Circuit’s recent decision in Bowerman v. Field Asset Services, Inc. Lawson v. Grubhub, Inc., No. 15-05128 (N.D. Cal. Sept. 13, 2022).
INDEPENDENT CONTRACTOR DISTRIBUTORS FOR BAKED FOODS COMPANY’S PRODUCTS ARE NOT EXEMPT FROM ARBITRATION UNDER THE FAA. The U.S. Court of Appeals for the Second Circuit has held that a national baked foods company and its affiliates may compel arbitration under the Federal Arbitration Act (FAA) of a class action lawsuit alleging independent contractor misclassification by independent distributors because the independent distributors are not excluded from arbitration under the interstate transportation industry exemption in the FAA. Instead, the Second Circuit held the independent distributors are in the bakery industry, not the transportation industry, and they are therefore bound to arbitrate their disputes under the terms of the arbitration agreement they signed with the baked goods companies. The Second Circuit concluded that the recent decision by the U.S. Supreme Court in Southwest Airlines Co. v. Saxon, which provides guidance on the meaning of the arbitration exemption in the FAA for interstate transportation workers, supports the conclusion that the independent distributors do not work in the transportation industry because the baked foods company does not “peg its charges [to customers] chiefly to the movement of goods or passengers.”
One judge on the panel deciding the appeal filed a lengthy dissent, equating the independent distributors with long-haul drivers carrying goods for Wal-Mart because the contracts in question are called “Distributor Agreements.” The majority opinion, in contrast, did not look simply at the title of the distributors’ contracts. Rather, it noted that the contracts provide that distributors “undertake to maximize sales; solicit new locations; stock shelves and rotate products; remove stale products; acquire delivery vehicles; maintain equipment and insurance; distribute Flowers’ advertising materials and develop their own (with prior approval by Flowers); retain legal and accounting services; and hire help.” Such functions are standard for distributors operating in the direct store door (DSD) business model and have little to do with transportation. Bissonnette v. Lepage Bakeries Park Street LLC, C.K. Sales Co. LLC, and Flowers Foods, Inc., No. 20-1681-cv (2d Cir. Sept. 26, 2022).
Regulatory and Administrative Actions (3 matters)
RIDE-SHARING COMPANY AGREES TO PAY $100 MILLION TO STATE AGENCY FOR UNEMPLOYMENT TAX PAYMENTS RELATED TO IC STATUS OF DRIVERS. Uber and a subsidiary have agreed to pay $100 million after an audit by the New Jersey Department of Labor and Workforce Development identified what the Department determined were violations due to the classification of hundreds of thousands of drivers as independent contractors. According to a news release from the NJDOL dated September13, 2022, the nearly 300,000 workers were deprived of “safety-net benefits,” such as unemployment insurance and temporary disability and family leave coverage. The release states that the $100 million assessment is “the largest such payment ever received in New Jersey.” Uber had initially been assessed more than $600 million; thus, its settlement is a small fraction of the amount it could have been ordered to pay if, after all appeals, the Department was successful. Further, under the settlement, which presumably includes a non-admission clause, Uber is not required to reclassify the drivers. The publisher of this blog commented on the settlement in a September 27, 2022 Law360 Employment Authority article by Max Kutner entitled, “State Tax Recoveries Don’t Help Worker Wage Issue,” noting: “[M]ore states could take similar action to seek back taxes. When a company pays a nine-figure amount dealing with the classification of their workers, other states … take note.”
HOME HEALTH CARE AGENCIES ASSESSED $1.8 MILLION FOR IC MISCLASSIFICATION INCLUDING $1 MILLION AGAINST THE OWNERS PERSONALLY. Following an audit by the California Labor Commissioner’s Office, two home health care agencies have been ordered pay over $1.8 million for wage and hour violations of the state’s Labor Code due to the misclassification of 66 workers as independent contractors. As reported in a September 28, 2022 news release issued by the State of California Department of Industrial Relations, Angel Connection Nursing Care and Angel Connection Nursing Services misclassified employees as independent contractors to avoid paying required wages, workers’ compensation insurance and payroll taxes. The owners of the companies were jointly and severally liable for $1 million due the workers. The home health agencies and owners have appealed the assessment.
FTC ISSUES POLICY STATEMENT INDIRECTLY ADDRESSING INDEPENDENT CONTRACTOR MISCLASSIFICATION IN THE GIG ECONOMY INDUSTRY. The Federal Trade Commission has announced enforcement priorities designed to protect gig workers from unfair, deceptive and anti-competitive practices by gig economy companies. In a policy statement adopted on September 15, 2022 and discussed in a press release by the FTC that same day, the agency noted multiple areas where it believes there is potential for harm to workers in the gig economy, including misrepresentations about the independent nature of gig work, diminished bargaining power, and concentrated markets resulting in reduced choices for workers, customers, and businesses. The policy statement also states that the FTC intends to hold companies accountable for claims and conduct about costs and benefits; combat unlawful practices and constraints imposed on workers; police unfair methods of competition that harm gig workers; investigate evidence of agreements between gig companies to illegally fix wages, benefits, or fees for gig workers that should be open to competition; and investigate exclusionary or predatory conduct that could cause harm to customers or reduced compensation or poorer working conditions for gig workers. The Commission also notes in the statement that it will partner with other governmental agencies to protect gig workers. The issuance of the policy statement comes on the heels of the FTC’s memorandum of understanding with the NLRB that was discussed in our September 9, 2022 blog post, where we observed that any coordinated enforcement action between the FTC and NLRB is highly unlikely. In our view, enforcement actions by the FTC against a gig economy company is likewise improbable. However, the heightened focus by the Biden Administration on the use of independent contractors should send a strong message to companies that use contractors: enhance their compliance with federal, state, and local independent contractor laws.