Among the legal developments we report on below from October is a decision by a federal district court in California certifying a lawsuit for independent contractor misclassification as a collective action under the federal wage and hour law, allowing similarly situated individuals to join the lawsuit seeking unpaid overtime. What was most significant about the decision is that the certification was based on little more than threadbare allegations and conclusory declarations. Unlike the more rigorous standard for class action certification under Rule 23 of the Federal Rules of Civil Procedure governing class actions, federal court judges have traditionally been given wide latitude in deciding whether to grant collective action certification for alleged violations under the federal Fair Labor Standards Act. Few judges, however, have applied a more lenient standard than the one applied by the court in the first case summarized below, where it granted collective certification based on plaintiff’s declaration that she and other prospective members of the collective action “often worked more than 40 hours a week,” despite documentary evidence to the contrary. How can a business avoid the costs of defending against these types of claims that can turn into collective actions so easily? The answer is to elevate compliance with state and federal IC laws, minimizing the odds of being sued. Savvy companies have done so using a process such as IC Diagnostics (TM), which restructures, re-documents, and/or re-implements their IC relationships in a manner than maximizes IC compliance in a customized and sustainable manner consistent with their business models.
In the Courts (4 cases)
COLLECTIVE ACTION CERTIFICATION GRANTED TO “PAPA PALS” WITHOUT A SHOWING THAT ANY WERE DENIED OVERTIME PAY OR MINIMUM WAGES. A federal district court in California has granted conditional collective certification of claims brought under the federal Fair Labor Standards Act for minimum wage and overtime violations arising from the alleged misclassification of elder assistants who provide daily living tasks and companionship to seniors. The defendant in the lawsuit, Papa, Inc., operates a mobile phone app that allows seniors and their families to obtain services of “Papa Pals” to provide assistance with a variety of chores and companionship services. According to the collective action complaint, the company allegedly misclassified the Pals as independent contractors by conducting background checks before allowing them to connect with customers, providing them with training and strict policies, setting their pay structure, tracking their location and productivity, and retaining the right to terminate a Pal with no cause at all or for violating one or more of the rules that Papa imposed by contract. The company contends that the Pals are independent contractors who use the app as little or as much as they choose, and who operate primarily at the direction of the seniors or their families, free from the direct supervision of the company.
Although the company argued that the certification motion should be denied because the Plaintiff Pal and her co-declarant failed to establish that they suffered any failures to receive overtime or minimum wages because they worked so few hours, the court rejected the argument finding that they related to the merits of the claims and were not appropriate to consider “at this juncture.” Instead, the court concluded that the Pal “made an adequate showing that all Pals are treated as independent contractors, and therefore have the potential of not receiving the overtime and minimum wages to which they would be entitled if they in fact should be legally classified as employees.” Pardo v. Papa Inc., No. 3:21-cv-06326 (N.D. Cal. Oct. 5, 2022). This type of ruling stands in stark contrast to the 2021 Fifth Circuit decision we reported on in Swales v. KLLM Transport Services, LLC, which requires that “a district court … rigorously scrutinize the realm of ‘similarly situated’ workers, and must do so from the outset of the case, not after a lenient, step-one ‘conditional certification.’”
GIG SHOPPING COMPANY PAYS $46 MILLION TO SETTLE INDEPENDENT CONTRACTOR MISCLASSIFICATION LAWSUIT. Instacart has agreed to pay $46 million to settle an independent contractor lawsuit brought by the City of San Diego. In an October 10, 2022 press release, San Diego City Attorney Mara Elliott announced the settlement by the San Francisco-based online platform offering same-day grocery delivery. The settlement covers approximately 308,000 individuals known as “shoppers” and settlement funds will be distributed to them based on the number of hours each shopper worked during the operative timeframe. The complaint in the case alleged violations of the state wage and hour laws as well as the California Unfair Competition Law. While providing services to Instacart, the shoppers were responsible for maintaining and fueling their personal vehicles, using their own telephones, and paying for other equipment, including personal protective equipment to protect against COVID-19 infections. Instacart will pay no less than $37 million directly to the shoppers, or about $120 per shopper. The People of the State of California v. Maplebear Inc., No. 37-2019-00048731 (Super. Ct. Cal. San Diego Cty. Oct. 10. 2022).
SAME-DAY DELIVERY SERVICE SUED FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION IN MINNESOTA. A same-day delivery service has been sued by the Attorney General of Minnesota for alleged violations of the state’s wage and hour laws due to its classification of workers as independent contractors. Shipt, Inc., a wholly owned subsidiary of Target, offers an app that, according to its website, “makes online grocery delivery easy, connecting Shipt Shoppers with stores near you to get the things you need – fast.” Shipt engages “Shoppers” who are classified as independent contractors by the company to provide same-day delivery of groceries and household goods ordered by consumers and processed through the company’s online platform. In his complaint against the company, the Attorney General alleges that the Shoppers must comply with detailed company instructions and rules on how to perform every facet of their duties; are required to personally render services and are prohibited from hiring assistants; are subject to review by the company based on detailed reports regarding their activities; have an indefinite, continuing relationship with the company; are required to participate in onboarding and corrective training; are reimbursed for certain expenses related to customer orders; and must generally schedule their work hours with the company in advance. The Attorney General further alleges that the company can discharge the Shoppers at any time for virtually any reason; that Shopper services are only available to the public through the company; that Shoppers are unable to realize a profit or loss based upon their job performance; that Shoppers are not required to make a substantial investment in the business; and that Shoppers are fundamental to the viability of the company’s same-day delivery business. It is anticipated that the company will deny the allegations. Ellison v. Shipt, Inc., No. 27-cv-22-15991 (Dist. Ct. 4th Jud. Dist. Minn. Oct. 27, 2022).
INDEPENDENT CONTRACTOR MISCLASSIFICATION JURY TRIAL SETTLED AFTER FIRST DAY OF TESTIMONY. FedEx Ground reached a settlement with two delivery drivers following the first day of a federal jury trial in an action to determine potential joint employer liability of FedEx for California wage and hour violations. According to the class action complaint in the case filed in 2018, FedEx Ground operates distribution facilities at numerous locations throughout California and contracts with numerous small “motor carriers” to provide vehicles and drivers to pick up packages from a FedEx Ground distribution facility, deliver those packages to FedEx Ground customers, pick up packages from FedEx Ground customers, and deliver those packages back to the facility. The complaint alleged that FedEx and Bay Rim Services Inc., the “independent service provider” that engaged the two drivers, were joint employers and they together violated, among other things, California Labor Code provisions governing overtime compensation, meal and rest breaks, and maintenance of time records. Last year, the district court denied the drivers’ motion to certify a class of drivers, concluding that the drivers failed to establish that common issues predominated among the drivers who provided services to various carriers. At the first and only day of trial before settlement, plaintiffs’ counsel reportedly argued that independent service providers like Bay Rim are typically “mom-and-pop” operations working exclusively with FedEx with few drivers and trucks, and are required by FedEx to become LLCs and comply with company rules. FedEx’s counsel reportedly told the jury that FedEx did not qualify as a joint employer, that trial evidence would show that FedEx had no role in the hiring or termination of the drivers, and that Bay Rim, not FedEx, controlled all paychecks and employment conditions related to the drivers. The terms of the settlement reached between the parties are confidential. Hinds v. FedEx Ground Package System Inc., No. 4:18-cv-01431 (N.D. Cal. Oct. 25, 2022).
Regulatory and Administrative Actions
U.S. LABOR DEPARTMENT ISSUES PROPOSED REGULATION ON IC STATUS. The Biden Administration’s Labor Department last month issued a proposed regulation seeking to define the worker classification test for independent contractor or employee status under the Fair Labor Standards Act. As discussed in detail in our blog post issued the day the proposed regulation was published, the new rule, once finalized, would alter the Labor Department’s test for IC status under the FLSA. The prior rule had been issued by the Trump Administration’s Labor Department, which had changed the FLSA test for IC status previously issued by the Obama Administration. The proposed new regulation states that it seeks to “restore” the test to determine IC status that had been used by the courts prior to the Trump regulation.
Under the proposed regulation, the Labor Department focuses on six factors to determine the so-called “economic reality” of the parties’ relationship: opportunity for profit or loss depending on managerial skill; investments by the worker and the purported employer; degree of permanence of the work relationship; nature and degree of control over the performance of the work and the economic aspects of the working relationship; extent to which the work is an integral part of the purported employer’s business; and skill and initiative of the worker. The Biden Rule then adds a seventh factor, aptly referred to as “Additional Factors,” which considers any factors that “in some way indicate whether the worker is in business for themsel[ves], as opposed to being economically dependent on the employer for work.” As stated in the proposed Rule’s Executive Summary, instead of focusing on two “core” factors that were the central considerations in the Trump Rule, the new regulation focuses on “the totality-of-the-circumstances” in which the economic reality factors are not assigned a predetermined weight and each factor is given full consideration.” As we noted in our blog post, the proposed rule, once finalized, has limited legal significance, as the courts that create the law on this subject, not regulatory agencies. But as a practical matter, the issuance of the proposed regulation, once finalized, will likely create anxiety among businesses and many of those who currently receive 1099s, feeling that the ground beneath them may be shifting.
Written by Richard Reibstein