We report on three case developments during July 2023 that raise the question whether last-mile, logistics, and delivery companies alleged to have misclassified drivers as independent contractors can compel arbitration of those types of claims when there is an arbitration agreement between the parties. In the first case, an Ohio federal district court judge ruled that such drivers are covered by the interstate transportation worker arbitration exemption in the Federal Arbitration Act (FAA) that excludes such workers – whether they are employees or independent contractors – from arbitration. The court acknowledged, though, that a state arbitration law may have provided an alternative basis to compel arbitration, but ruled that the language in the parties’ independent contractor agreement did not unambiguously provide for state arbitration law to govern if the FAA did not. The Ohio federal court decision is consistent with a New Jersey federal court opinion on which we commented in a blog post last year, where we noted that the failure to draft an effective arbitration agreement can doom a logistics company’s effort to compel arbitration of a class action IC misclassification suit. Any company utilizing drivers who may be covered by the interstate transportation worker arbitration exemption under the FAA should take heed. Beginning with a blog post we published nearly five years ago, we have provided readers with a number of tips as to how companies can effectively draft arbitration clauses with class action waivers in their independent contractor agreements – all as part of a process to enhance their independent contractor compliance efforts.  One of the most important tips is to update arbitration clauses in view of this evolving area of the law.

In the Courts (3 cases)

OHIO LAST-MILE DELIVERY COMPANY LOSES BID TO ARBITRATE INDEPENDENT CONTRACTOR CLASS ACTION.  An Ohio federal district court has denied a motion by a last-mile delivery company to compel arbitration of a proposed class and collective lawsuit brought under the FLSA and various state laws. Priority Dispatch, Inc. is in the business of last-mile delivery services for e-commerce and medical products as well as financial documents to locations across the Midwest. The lawsuit claimed that Priority Dispatch misclassified the drivers as independent contractors and made unlawful deductions from their pay and failed to pay them minimum wage and overtime compensation. The company moved to compel arbitration. In response, the drivers argued that they were exempt from arbitrating the claims under the FAA because they qualify for the FAA’s interstate transportation worker arbitration exemption. The court noted that ‎“the pleadings indicate that the drivers’ personal job responsibilities largely entail transporting ‎goods intrastate,”‎ but found “instructive” decisions by U.S. Circuit Courts of Appeal concluding that “last-mile delivery workers who haul goods on final legs of interstate journeys are transportation workers ‘engaged in … interstate commerce,’ regardless of whether the workers themselves physically cross state lines.” The court noted that Priority Dispatch argued that Ohio state arbitration law provides an alternative basis for compelling arbitration, but it found that the language in the parties’ arbitration clause “does not reflect the parties’ unambiguously intended to displace the FAA with state rules of arbitration.”  Peter v. Priority Dispatch Inc., No. 1:22-cv-00606 (S.D. Ohio July 5, 2023).

NEW JERSEY LOGISTICS COMPANY SUED BY DRIVERS IN CLASS ACTION INDEPENDENT CONTRACTOR MISCLASSIFICATION CASE.  TMX Intermodal Logistics LLC has been sued by a driver in a New Jersey state court alleging that he and other similarly situated owner-operator drivers have been misclassified as independent contractors in violation of New Jersey’s Wage Payment and Wage and Hour Laws. The class action complaint asserts the company exercises significant control over the drivers by issuing required daily work assignments; determining the time the drivers had to arrive at its cargo facility; mandating that the drivers return to the facility at the end of the workday to return paperwork and empty containers; requiring the drivers use electronic logging devices; and maintaining the ability to terminate the drivers’ services at will. The complaint also alleged that the work performed by the drivers was within the usual course of the company’s business, the work was performed at the company’s places of business, the drivers did not have independently established trades, occupations, professions, or businesses, and the drivers did not have their own customers, relying exclusively upon the company for work. The proposed class action further alleges that the company required the drivers to pay substantial fees to obtain work and made improper deductions from their wages for items such as fuel, EZ Pass charges, tolls, and taxes.  TMX is likely to file motion to compel arbitration. Guimaraes v. TMX Intermodal Logistics LLC, No. ESX-L-004530-23 (Super. Ct. N.J., Essex County, July 17, 2023).

MASSACHUSETTS APP-BASED DELIVERY COMPANY AND ITS GROCERY STORE CUSTOMER SUED FOR IC MISCLASSIFICATION BY DRIVERS.  Grocery Runners is an app-based delivery company that contracts with drivers to deliver groceries for supermarkets.  A driver has commenced a proposed class action lawsuit for independent contractor misclassification in a Massachusetts federal district court claiming he and the other drivers are employees of Grocery Runners and one of its customers, Roche Brothers supermarkets.  The driver claims all drivers are entitled as employees to minimum wage and overtime compensation under the Fair Labor Standards Act and Massachusetts state wage and hour law. Grocery Runners’ website describes the company as a B2B delivery platform that offers a white-label delivery solution for retailers wanting to offer same-day delivery to customers. The other defendant, Roche Brothers, allegedly outsources its grocery delivery services to Grocery Runners and uses the drivers’ services to make deliveries to its customers in Massachusetts. The complaint alleges that drivers’ locations and routes can be tracked online by Roche Brothers, Grocery Runners, and the customer; compensation for each job is unilaterally determined by Grocery Runners; drivers often work 45 hours per week or more without receiving overtime premiums; drivers must follow Grocery Runners’ instructions regarding where to make deliveries and can be terminated for failing to provide services that satisfy company standards; and drivers must pay expenses necessary to do their jobs such as the cost for vehicles, gas, and a smart phone with a data plan – all of which sometimes allegedly cause the drivers to receive less than the state minimum wage. The plaintiff driver also asserts that he does not operate his own independently established business and that his services are essential to and fully integrated into Grocery Runners’ business of providing last-mile delivery of retail products to customers in Massachusetts. One or both defendants likely will file motions to compel arbitration if there is an arbitration clause in the drivers’ independent contractor agreements. Sears v. Cherish Productions, LLC, No. 23-cv-11629 (D. Mass. July 21, 2023).

Regulatory and Administrative Initiatives (2 matters)

MINNESOTA CREATES WORKER MISCLASSIFICATION TASK FORCE.  Minnesota Attorney General Keith Ellison announced in a Press Release on July 6, 2023 that he is forming a new Advisory Task Force on Worker Misclassification. According to the Press Release, members of the Task Force will study the issue of worker misclassification and its impacts on workers, the business community, and the public at large; explore best practices in policy and enforcement; and propose a set of recommendations for both enforcement and regulatory reform. Attorney General Ellison stated, “Misclassifying workers hurts not only those who are misclassified and their families, it hurts all Minnesotans, including businesses who do the right thing by their employees by playing by the rules, and every Minnesotan taxpayer who has to make up the slack for law breaking employers.”

NLRB FILES COMPLAINT SEEKING TO OUTLAW INDEPENDENT CONTRACTOR MISCLASSIFICATION.  The General Counsel of the National Labor Relations Board has issued a complaint through the Regional Director for its Los Angeles Region alleging a number of unfair labor practices against a freight delivery and logistics ‎company. One of the charges alleges the company misclassified “employee-drivers” as independent ‎contractors and thereby inhibited them from engaging in Section 7 activity ‎under the National Labor Relations Act (NLRA). As part of the remedy for the alleged unfair labor practices, the NLRB General Counsel seeks an ‎order requiring XPO to reclassify drivers as employees and make them whole with regard to certain types of harm they suffered ‎as a consequence of the misclassification.

The NLRB’s complaint faces considerable hurdles, as we detailed in our March 22, 2022 blog post, when the NLRB’s General Counsel first attempted to assert that the very act of misclassifying workers as independent contractors violated the NLRA. As we pointed out, section 8(c) of the Act, added to the NLRA in 1959, states as follows: “The 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 General Counsel may be seeking to sidestep section 8(c) in this case by alleging threats, interrogations, and other alleged violations of the Act, but that will not likely justify an order requiring not only a cease and desist order but also the reclassification of workers as employees.  In addition, another hurdle for the NLRB is whether it will use in this case a valid test for independent contractor status under the NLRA. As we recently explained in a blog post on June 14, 2023, the NLRB majority has issued a test for independent contractor status that is not likely to be enforced by the courts, which have the final say regarding any NLRB decision and remedial order. STG Cartage, Inc. d/b/a XPO Logistics and International Brotherhood of Teamsters, Case Nos. 21-‎CA-289133 and 21-CA-296505 (NLRB Region 21, July 20, 2023).

Legislative Developments (1 matter)

LOS ANGELES’S FREELANCE PROTECTIONS ORDINANCE BECAME EFFECTIVE JULY 1, 2023.  California has severely limited the use of independent contractors since the enactment of a strict “ABC test” for independent contractor status that went into effect on January 1, 2020. Some freelancers and other independent contractors may, however, provide services that are “outside the usual course of the hiring entity’s business” or qualify for one of the 65 or so exemptions from the ABC test, as we discussed in our September 2020 blog post.  Effective July 1, 2023, any freelancer that performs work within the City of Los Angeles and otherwise qualifies for independent contractor status under California law is now protected under a new law enacted by that municipality – the Freelance Worker Protection Ordinance.  The Los Angeles freelance protection law, like New York City’s Freelance Isn’t Free Act enacted in 2017, only covers work performed “entirely” by a single individual for what the law refers to as a “Hiring Entity.”  The law covers such freelancers whether they provide such services as a sole proprietor or through an entity they own exclusively, such as a single-member limited liability company. The ordinance does not, however, cover work performed by freelancers who use one or more other workers to perform some or all of the services for the Hiring Party. The new law also excludes app-based transportation and delivery services that engage drivers to provide prearranged services.

The purpose of the ordinance is to protect freelancers from non-payment for their services, delayed payment, and less than full payment. It requires a Hiring Entity to enter into a written contract with a freelancer that provides certain terms including a specification of the parties’ contact information, services to be performed, date by which compensation must be paid, and manner by which such date will be determined.  Where no such date is provided in the contract or if there is no written agreement, payment must be made within 30 days “after services are rendered.” While there is only a $250 penalty for a Hiring Entity’s refusal to provide a written contract to the freelancer upon request, there are costly penalties for violations of the new law. These include double damages for amounts unpaid and “damages equal to the value of the contract or the work performed, whichever is greater” for any other violations of the law.

Freelancers who believe a Hiring Entity violated the law can file a complaint with a designated City agency or file a lawsuit where, if they prevail, they are entitled to all reasonable attorney’s fees and costs in addition to any penalties and damages. The law has many defects, including the absence of a good faith defense to double damages and no means by which a Hiring Party can know for sure if the work is being performed within the City of Los Angeles and whether the freelancer is the sole person providing services.  Companies engaging freelancers in California should take extra caution to determine if this new law is applicable and, if it is, to take steps to ensure compliance.  Many of the suggestions we offered in a blog post to hiring entities seeking to comply with the New York City freelancer law are equally applicable to companies seeking to comply with the new Los Angeles freelancer protection law.

By Richard Reibstein