Three of the five court cases of note in this monthly update involve California’s Assembly Bill 5, which has exponentially increased litigation involving independent contractor misclassification in that state. That development dispels any notion that that law would provide clarity, simplify the test for independent contractor status, and reduce litigation. Instead, it upended decades of settled law by codifying a strict test for IC status that now contains as many as 75 exemptions. Moreover, few businesses in California have reclassified workers from ICs to employees. The three cases summarized below include one that validates Proposition 22, a voter initiative that rejected A.B. 5 for app-based ride sharing and courier companies. Another involves a lawsuit by companies in those same industries alleging that A.B. 5 did not provide them with an exemption, as it does for dozens of other industries, due to the “animus” of the legislature toward those app-based businesses. A federal appellate court agreed that the lawsuit is plausible and may proceed. The third case involves litigation filed in 2015 that has seen a number of appeals over the application of A.B. 5. One way by which companies operating in California can minimize IC misclassification exposure is to utilize one of the exemptions in A.B. 5 and its successor law, A.B. 2257. Many have sought to do so by resorting to a process such as IC Diagnostics (TM), which enhances IC compliance by restructuring, re-documenting, and/or re-implementing IC relationships in a customized and sustainable manner in view of applicable law, including A.B 5.
In the Courts (5 cases)
PROP 22 MOSTLY UPHELD IN CALIFORNIA, REVERSING LOWER COURT RULING THAT IT WAS UNCONSTITUTIONAL. A California intermediate appeals court has upheld most of voter-approved Proposition 22, which permitted gig-economy companies such as Uber, Lyft, and DoorDash to classify workers as independent contractors. As we discussed in our blog post of November 4, 2020, “Essentially, [under Prop 22,] … unlike all other businesses in California required to meet the strict Dynamex ABC test or, if they are exempted from this test, the more rational multi-factor Borello test, companies in these two gig economy industries [ride share and app-based delivery services] now have a safe harbor, provided they confer the benefits set forth in Prop 22 to their independent drivers and couriers.” Although a majority of the judges on the appellate panel for the California Court of Appeal concluded that Prop 22 violated the separation of powers principles by limiting lawmakers’ ability to enact amendments, such as allowing gig workers to unionize, the panel severed that portion of the voter-backed initiative and “allow[ed] the rest of Proposition 22 to remain in effect, as voters indicated they wished.”
In a March 14, 2023 article by Max Kutner in Law360 addressing the significance of this appellate ruling, Law360 quoted Richard Reibstein, publisher of this blog, regarding the impact of this decision: “Prop 22 affects a very small sector of the independent contractor population. Well over 90% of independent contractors are not driving for Uber or Lyft or providing services for Instacart. They’re the entrepreneurs who have their own businesses and are upset with, and have been upset with, A.B. 5 and Dynamex for years. Those independent contractors would say Monday’s decision leaves them in the same place I’ve been at for the last five years, with uncertainty and legal exposure to myself and to companies that engage my services, and a shrinking amount of work, as a result.” Drivers and the Service Employees International Union, who oppose Prop 22, may seek to challenge the intermediate appellate decision in the California Supreme Court. Castellanos v. State of California, No. A163655 (Ct. App. Cal. Mar. 13, 2023).
RIDE-SHARING AND APP-BASED COMPANIES GET GO-AHEAD FROM APPELLATE COURT IN LAWSUIT SEEKING TO INVALIDATE A.B. 5. The U.S. Court of Appeals for the Ninth Circuit has concluded that that Uber, Lyft, and other app-based companies properly pleaded an equal protection constitutional challenge to Assembly Bill (“A.B.”) 5, as since amended and superseded by A.B. 2257. The Ninth Circuit concluded that the lawsuit may proceed on the basis that animus toward those companies – and not reason – motivated the legislature’s decision to exempt certain industries from the ABC test for independent contractor status but not companies like Uber, Lyft and Postmates. While Prop 22 provides an alternative means to legally validate the independent contractor status of drivers and couriers of app-based companies in California, this lawsuit may excuse liability for those plaintiffs for certain types of claims arising prior to the enactment of A.B. 5.
A.B. 5 codified for all wage and hour purposes the ABC test adopted by the California Supreme Court in Dynamex for classifying workers as independent contractors or employees. A.B. 5 included exemptions from the ABC test for dozens of industries, but not ride-hailing or app-based delivery services. Among other issues, the Ninth Circuit concluded that the California federal district court erred in dismissing the Equal Protection argument for those engaged in the ride-hailing and app-based delivery service. The court concluded that the exemptions were granted in a “piecemeal fashion” and that the plaintiffs “plausibly allege that the primary impetus for the enactment of A.B. 5 was the disfavor with which the architect of the legislation viewed Uber, Postmates, and similar gig-based business models.” Further, while dismissing the other constitutional law challenges to A.B. 5, the Ninth Circuit held that the plaintiffs “plausibly allege that their exclusion from wide-ranging exemptions, including for comparable app-based gig companies, can be attributed to animus rather than reason.” Olson v. California, No. 21-55757 (9th Cir. Mar. 22, 2023).
GRUBHUB DELIVERY DRIVER CASE ALLEGING IC MISCLASSIFICATION REVERSES COURSE AGAIN. A federal court has reversed course and held that a Grubhub delivery driver is an employee, not an independent contractor, and that Grubhub had been unable to establish the “business-to-business” exemption to California’s ABC test. The driver brought suit against Grubhub in 2015 alleging that he had been misclassified as an IC under California law and that in doing so Grubhub violated California’s minimum wage, overtime, and employee reimbursement laws. As discussed in detail in our blog post of February 8, 2018, the court concluded, following a bench trial in 2017, that Grubhub properly classified the driver as an IC under the then-existing Borello test and entered judgment in Grubhub’s favor. Subsequently, the California Supreme Court issued its decision in Dynamex, which enunciated that a new test – the so-called three-pronged ABC test and not the multi-factor test under Borello – governed the driver’s minimum wage and overtime compensation claims. Thereafter, as noted above, the legislature passed A.B. 5, containing a number of exemptions from the ABC test for certain industries.
Ultimately, the Grubhub case reached the U.S. Court of Appeals for the Ninth Circuit, which vacated and remanded the matter back to the district court for review under the ABC test and any applicable exemptions in A.B. 5. Although Grubhub argued that the “business-to-business” exemption applied, following remand the district court disagreed and concluded that Grubhub failed to demonstrate two of the eleven factors necessary to satisfy the exemption – that the driver advertised and held himself out to the public as available to provide services, and that he actually negotiated his own rates or could do so. Having failed to satisfy the exemption, the court then considered whether Grubhub met the ABC test. The court concluded that Grubhub failed to meet its burden to establish prong B of the ABC test. That prong requires a showing that the driver “performs work that is outside the usual course of [Grubhub’s] business,” which the court found was connecting restaurants with diners to facilitate food ordering. Because Grubhub failed to establish Prong B, the court held that it did not meet the ABC test and, as a result, the driver was properly classified as an employee for purposes of his minimum wage and overtime claims. The court clarified that although the driver was entitled to judgment on his minimum wage claim, Grubhub was entitled to judgment on the overtime claim because the driver did not work more than 40 hours per week. Lawson v. Grubhub, Inc., No. 3:15-cv-05128 (N.D. Cal. Mar. 30, 2023).
PENNSYLVANIA MEDICAL MARIJUANA COMPANY UNABLE TO DISMISS DELIVERY DRIVERS’ CLASS ACTION ALLEGING IC MISCLASSIFICATION. A Pennsylvania federal court has denied a motion to dismiss filed by a medical marijuana company in a class and collective action claim asserting independent contractor misclassification of cannabis delivery drivers. The drivers’ lawsuit involves claims for overtime compensation under the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act. Applying a six-part economic realities test, the court concluded that the drivers alleged sufficient facts that, if accepted as true, would establish that they were misclassified. Specifically, the court relied on the drivers’ allegations that the company and related other defendants controlled the drivers’ work schedules, compensation, and benefits; subjected them to company policies; managed their day-to-day work; disciplined the drivers; failed to provide the drivers with the opportunity for profit or loss; and provided the drivers with vehicles and equipment for transporting medical marijuana products. Additionally, the court relied on the drivers’ allegations that they were not required to have any specialized training; there was permanence and exclusivity in their working relationships; and their delivery of products to customers was an integral part of the company’s business. The court also concluded that the allegations in the drivers’ amended complaint were sufficient to support a reasonable inference that the corporate defendants and individual defendants could be joint employers under the FLSA. DeMarco v. FarmaceuticalRX LLC, No. 2:22-cv-01164 (W.D. Pa. Mar. 7, 2023).
10-YEAR LITIGATION SETTLED BY TRANSPORTATION COMPANY SUED BY NEW YORK DRIVERS WHO DELIVER PHARMACEUTICAL GOODS. TXX Services, Inc., which brokers transport services for pharmaceutical companies and shippers, has reached a $3.5 million settlement of a proposed class and collective action by drivers alleging violations of the Fair Labor Standards Act and New York Labor Law. In their class and collective action complaint, the drivers alleged that the company failed to pay them overtime compensation for hours worked over 40 in a workweek, made certain improper deductions from their pay, and failed to provide them with wage notices and wage statements required for employees. After nearly ten years of litigation and two failed prior mediations, the proposed $3.5 million settlement provides that each of the 99 plaintiffs shall receive at least $1,500 depending upon the number of weeks worked. Of the $3.5 million, $1.2 million is earmarked for payment of the plaintiffs’ attorneys’ fees. Thomas v. TXX Services, Inc., No. 2:13-cv-02789 (E.D.N.Y. Mar. 13, 2023).
Administrative and Regulatory Initiatives (2 matters)
MASSACHUSETTS ISSUES CITATIONS OF $6.2 MILLION AGAINST HOUSEHOLD DELIVERY COMPANY ACCUSED OF IC MISCLASSIFICATION. The Massachusetts Attorney General’s Office has issued citations of more than $6.2 million against a national delivery service company, Gopuff, due to its alleged misclassification of 986 delivery drivers as independent contractors and its alleged failure to furnish suitable paystubs and maintain an earned sick leave policy. The company, which operates in Europe and various states in the United States including Massachusetts, delivers groceries, alcohol, home essentials, and other products directly to customers’ homes. According to a press release issued by the Office of the Attorney General on March 30, 2023, an investigation was undertaken after the AG’s Office received complaints against the company by current and former employees. The AG’s Office concluded that the company failed to prove its workers met the criteria of the ABC test contained in the state’s independent contractor misclassification statute. Additionally, the AG’s Office determined the company failed to furnish a suitable paystub for its delivery drivers by failing to include the number of hours worked, hourly rate, and deductions in their pay, and failed to maintain an earned sick time policy for its delivery drivers, effectively leaving them with no access to paid sick time during the COVID-19 pandemic.
SPEECH, PHYSICAL, AND OCCUPATIONAL THERAPY COMPANY ASSESSED $9,000,000 BY CALIFORNIA FOR IC MISCLASSIFICATION. The California Labor Commissioner has assessed a therapy provider for over $9 million due to its allegedly willful misclassification of 1,280 speech, physical and occupational therapists. According to a news release issued on March 7, 2023 by the California Department of Industrial Relations, Feld Care Therapy, Inc. has been the focus of an investigation that began in November 2020, after the Labor Commissioner’s Office received a report claiming that the company was misclassifying workers as ICs. The Commissioner assessed the company and its CEO $1,134,500 in damages along with a civil penalty of $1,677,500. Additionally, the company is being assessed civil penalties of $2,710,000 for willful misclassification of employees as independent contractors, damages of $1,707,350 for failure to provide written notice of sick leave balance/usage, $1,554,850 for the violation of supplemental sick leave provisions, and $256,900 for failure to maintain paid sick leave recordkeeping.
Written by Richard Reibstein