The lead case in our review of last month’s legal developments in the area of independent contractor compliance and misclassification is a decision by the U.S. Court of Appeals for the First Circuit, in which it addresses the interstate transportation worker exemption to arbitration under the Federal Arbitration Act (FAA). That decision, at odds with a recent decision issued by another federal appellate court, treated the frequency of driving as the principal criterion in determining whether an independent distributor of food products engages in interstate transportation. As noted below, the First Circuit, applying the Supreme Court’s 2022 decision in Southwest Airlines v. Saxon, found that the distributors are exempt from arbitration because they “frequently perform transportation work [even if] they also have other responsibilities.” Decisions like the First Circuit’s have created confusion among businesses, independent contractors, employees, and their lawyers over the scope of the FAA’s interstate transportation exemption and the implications of Saxon. Many ICs and other workers that drive long distances every day have little or no relationship to the transportation industry. For example, many independent surveyors and insurance adjusters work at multiple locations in a multi-state area each day, some at significant distance from one location to the next. Are they interstate transportation workers simply because they drive frequently in different states? Likewise, incidental driving done by route sales employees who qualify as outside salespersons under the Fair Labor Standards Act, like driving by the independent distributors in the First Circuit case, is treated by the Labor Department and courts as work that is “incidental to … the employee’s own outside sales or solicitations.” 29 C.F.R. 541.504(a). One takeaway from the First Circuit decision is to make sure that agreements with independent contractors and other workers not engaged in the transportation industry describe their services in a manner that supports arbitration under the FAA. This is part of the IC Diagnostics (TM) process that has been the subject of other posts on this subject on this blog.

In the Courts (4 cases)

SPLIT IN CIRCUITS: BAKED GOODS DISTRIBUTORS ARE/ARE NOT INTERSTATE COMMERCE TRANSPORTATION WORKERS. Six months ago, the U.S. Court of Appeals for the Second Circuit held that distributors for a national baked foods company were not exempt from arbitration under the FAA’s exemption for interstate transportation workers, as we reported in an October 2022 blog post. Last month, a different federal appellate court reached the opposite conclusion when the U.S. Court of Appeals for the First Circuit affirmed a district court’s decision that distributors for the same baked foods company and its subsidiaries, which use a “direct-store-delivery” (DSD) delivery system “to get its products on the shelves of grocery stores,” satisfied the interstate transportation worker exemption from arbitration under the FAA. In the most recent case, two distributors brought an action for unpaid wages, overtime compensation and other damages allegedly arising from their classification as independent contractors. The distributors claimed that they were misclassified as ICs in violation of Massachusetts employment laws. The plaintiffs signed Distributor Agreements with the company that included arbitration clauses and granted them rights to distribute the company’s baked goods along certain routes. The distributors purchased the baked goods from the company and then resold the goods to stores along their routes.

In reaching its decision, the appeals court rejected the company’s argument that the arbitration exemption under the FAA does not apply because the distributors’ primary responsibilities were those of business owners, not transportation workers. The court rejected that argument and focused on the plaintiffs’ actual work, not the company’s business generally, and concluded that workers do not need to be “‘primarily’ devoted to transportation” to qualify for the exemption. Instead, the First Circuit stated that workers “who perform transportation work ‘frequently’ are transportation workers.” The First Circuit based its decision on the plaintiffs’ affidavits that they worked 50 hours a week “driving delivery routes” and another 20-30 hours per week “supervising other drivers.” Separate and apart from the implausibility of these allegations, the affidavits evidently did not address the fact that most DSD distributors focus their time and attention on their main responsibility of making and promoting sales in the stores, including ordering products and effectively placing and rotating the goods on the shelves and displays of the stores to which the distributors sell the baked goods.  The allegations also did not note that while some distributors may have to drive substantial distances to stores on their routes, others drive short distances. Thus, apart from the fact that the First Circuit’s decision is at odds with the decision by the Second Circuit on the same issue, the precedential value of this decision is questionable if it is based on factual assertions that are inconsistent with what typically transpires in the DSD industry.  Canales v. CK Sales Co., No. 22-01268 (‎1st Cir. May 5, 2023).

HANDY SETTLES IC MISCLASSIFICATION CLAIM BY DISTRICT ATTORNEYS FOR $6 MILLION.  Gig company Handy has agreed to a $6 million settlement with the District Attorneys for Los Angeles and San Francisco Counties resolving a civil enforcement action brought in San Francisco County Superior Court claiming violations of California’s Labor Code  as a result of Handy’s alleged misclassification of thousands of cleaners ‎and handypersons (called Pros) as independent contractors.‎ According to its website, “From home cleaning to handyman services, Handy [through its platform] instantly matches thousands of customers every week with top-rated professionals in cities all around the world.” As discussed in more detail in our blog post of April 9, 2021, the complaint alleged, among other things, that Handy utilizes an “omnipresent app” and imposes company policies as means of direction and control; determines the eligibility requirements that Pros must meet before they may provide services to Handy customers; controls access to cleaning and handyman jobs by mandating that Pros use a smartphone equipped with Handy’s app in order to have access to any gigs; sets the parameters of the gigs, including the hours that Pros must be available to customers to provide services; controls how it expects the work to be done, including the order and sequence, and the preferred supplies to use; and tracks and monitors the Pros. The settlement provides that Handy will pay $4.8 million in restitution to the Pros and a civil penalty of $1.2 million. Additionally, the settlement requires Handy to allow the Pros to negotiate their hours and pay while remaining free to accept or reject engagements without repercussions. In a May 1, 2023 article written by Jon Steingart for Law360 Employment Authority, the publisher of this blog was quoted as follows: “Letting workers set their own rates is a compelling data point in the constellation of factors that go into demonstrating independent contractor status. Allowing contractors to set their own prices is a compliance method that we use often because it is clearly a factor that favors independent contractor status. Price is one of the most important elements of a transaction, and it helps demonstrate a lack of direction and control when contractors have authority to determine it themselves.”  California v. Handy Technologies Inc., No. CGC-21-590442 (Cal. Super. Ct. San Francisco County May 18, 2023).

HEALTH AND WELLNESS COMPANY SUED BY COACH FOR IC MISCLASSIFICATION. A health and wellness coach has filed a proposed class action and PAGA complaint against The Beachbody Company alleging wage and record-keeping violations of the California Labor Code due to its alleged misclassification of coaches as independent contractors. According to the complaint, the company is a “multi-level marketing business” that is dependent upon a salesforce of “coaches” who work under Beachbody’s direction to market and sell company products such as expert-led workouts, positive mindset master classes, nutrition guides, calendars, and ‎supplements. In exchange for their work promoting the brand on social media, referring new customers, providing customer service, and driving traffic to the company’s website, the coaches allegedly receive “a paltry commission.”  In support of her misclassification claim, the plaintiff alleges that the company closely directs and controls the coaches’ online marketing; Beachbody exerts control over coaches’ actions in recruiting; the coaches’ work is not outside the company’s usual course of business; and the coaches are not customarily engaged in a separate business.  The complaint further alleges that Beachbody charges its coaches for products and access to the instrumentalities needed to sell products, further increasing its profits and decreasing their pay. Lyons v. Beachbody Co., Cal. Super. Ct. Los Angeles County (May 22, 2023).

EXOTIC DANCERS OBTAIN COLLECTIVE CERTIFICATION IN IC MISCLASSIFICATION LAWSUIT AND UNIONIZED STATUS BEFORE THE NLRB.  We have previously commented in a post on this blog that even strip clubs can properly classify exotic dancers as independent contractors if they structure, document, and implement their IC relationships in a compliant manner.  Few clubs have yet to do so effectively, however.  Instead, most exotic clubs have evidently kept their operations unchanged.  Last month, yet another class of exotic dancers was granted conditional collective certification by a South Carolina federal magistrate judge in their lawsuit seeking damages against an adult entertainment club under the Fair Labor Standards Act for alleged failure to pay minimum wage. The court concluded that, “Based on the allegations in the complaint and the declarations of the named plaintiffs,‎ the undersigned finds that the named plaintiffs have met the lenient standard at this stage for demonstrating that the potential opt-in plaintiffs are similarly situated and recommends that the named plaintiffs’ motion for conditional certification be granted….” Jones v. Shaum’s Casablanca d/b/a Lady Godiva’s / Casablanca, No. 22-cv-02307 (D.S.C. May 24, 2023).

Meanwhile, a regional director for the NLRB’s Los Angeles regional office reached a settlement with adult entertainment venue, Star Garden, requiring the company to reinstate and bargain with unlawfully terminated exotic dancers. After a 15-month campaign to win union representation, the dancers and DJs voted 17-0 on May 18, 2023 to be represented by Actors Equity Association, reportedly becoming the first gentlemen’s club in the U.S. in 30 years with unionized exotic dancers.  Failure to follow the same steps that adult entertainment clubs should follow to avoid or minimize IC misclassification exposure can be used to avoid unionization of exotic dancers because the National Labor Relations Act does not cover workers who are properly classified as independent contractors.

Legislative Developments (1 matter)

LEGISLATION ENACTED IN WASHINGTON STATE RECOGNIZING IC STATUS OF RIDE-SHARE DRIVERS. Washington State has become the first state in the nation to guarantee drivers for app-based rideshare companies like Uber and Lyft access to paid family and medical leave and unemployment insurance. Under the bill (H.B. 1570) that was signed into law by Governor Inslee on May 15, 2023, in addition to gaining access to unemployment insurance benefits, eligible drivers may enroll for up to 12 weeks of paid family and medical leave beginning in July 2024 with the ride-sharing company bearing the cost of the leave. The new law is an extension of the Washington Expand Fairness Act (H.B. 2076), which already guaranteed ride-share drivers minimum pay and other benefits such as workers’ compensation insurance while still maintaining their independent contractor status. The bill had the support of the Drivers Union as well as industry giants, Lyft and Uber. Governor Inslee stated, “We know the nature of work is evolving and so must the programs and policies that support workers and their families.”  ‎

By Richard Reibstein