In early 2015, New Jersey borrowed the state’s strict ABC test under its unemployment law and adopted it as the new test for independent contractor status under its wage laws. That change in the law was not an act by the state legislature; instead, it was created entirely by the judiciary – much the same way the judiciary in California borrowed the test for IC status from Massachusetts when creating an ABC test for certain wage claims for California. These judicial decisions have created havoc for businesses and legitimate independent contractors that had developed business relationships based on then-existing law. Nine years later, that case has settled for $4.5 million, as noted below in our summary of legal developments for January 2024. Today, New Jersey is one of a few states in the U.S. where businesses and freelancers are in peril if they seek to create or maintain IC relationships including those that would otherwise be compliant with the test for IC status under the federal wage and hour law and most state wage laws. As a result, while IC misclassification claims are not nearly as ubiquitous in New Jersey as they are in California and Massachusetts, they have become quite prevalent in New Jersey. Indeed, the title of our blog post for February 2023 legal developments was “New Jersey is Becoming the Next California.” As a result, more companies operating in that state have undertaken a process such as IC Diagnostics (TM) to restructure, re-document, and/or re-implement their IC relationships in a customized and sustainable manner to minimize misclassification liability.

In the Courts (3 cases)

NEW JERSEY MATTRESS COMPANY SETTLES IC MISCLASSIFICATION CASE WITH DRIVERS FOR $4.5 MILLION.  Sleepy’s LLC and mattress delivery drivers reached a proposed $4.5 million class action settlement after nearly 14 years of litigation in an independent contractor misclassification action under New Jersey law. Three plaintiff drivers sued Sleepy’s on behalf of themselves and others similarly situated alleging that Sleepy’s violated the overtime compensation provisions of the New Jersey Wage and Hour Law and unlawfully made deductions from the drivers’ fees for uniforms, delivery delays, and unsatisfactory customer service in violation of the New Jersey Wage Payment Law by misclassifying the drivers as independent contractors and not employees. The drivers previously secured a favorable decision in the New Jersey Supreme Court, which adopted the ABC test from the state’s unemployment law as the law for determining IC status under the state’s wage laws, as we discussed in our blog post of January 15, 2015. Following a third mediation, a proposed settlement was reached covering the named plaintiffs and 111 class members. The settlement terms include payments to over half of the class members of more than $10,000 each, and to 30 drivers of over $30,000 per driver. Hargrove v. Sleepy’s LLC, No. 3:10-cv-01138 (D.N.J. Jan. 5, 2024).

E. JEAN CARROLL COMPANY SUCCEEDS IN COMPELLING ARBITRATION OF IC MISCLASSIFICATION LAWSUIT INITIATED BY MATCHMAKERS. A matchmaker who filed a proposed collective action complaint in a Florida federal court against the online matchmaking company, Tawkify,‎ must arbitrate her wage claims on an individual basis. The company, founded by E. Jean Carroll, secured an order from the court granting Talkify’s motion to compel arbitration on the matchmaker’s allegations of independent contractor misclassification. The matchmakers allegedly were required to sell expensive dating packages to clients seeking dates. In her collective action complaint, the matchmaker claimed that the company misclassified matchmakers as independent contractors and not employees and, in so doing, failed to pay them at least the minimum wage plus overtime compensation for hours worked in excess of 40 per workweek. In support of her claim, the plaintiff asserted that the company instructed the matchmakers where, when, and how to perform their work; had the sole right to hire and fire the matchmakers; selected which clients were assigned to each of the matchmakers; controlled the matchmakers’ opportunity for profit; set the matchmakers’ schedules; controlled the matchmakers’ appearance; and disciplined them for failing to follow company rules. Larue v. Tawkify Inc., No. 0:23-cv-61686 (S.D. Fla. Jan. 9, 2024).

CALIFORNIA B2B EXEMPTION FROM ABC TEST TO APPLY ON A CLASS MEMBER BY CLASS MEMBER BASIS.  A California federal court rejected a motion for summary judgment by a pre-foreclosure property preservation company that the business-to-business exemption to California’s strict ABC misclassification test applies to property preservation service workers. The company argued that the B2B exemption from the ABC test applied to all of the workers, thereby allowing it to establish their IC status under the less strict test in the Borello case. The complaint, filed in 2013, had alleged that the company misclassified the named plaintiff and over 150 similar workers as independent contractors and not employees, and that by doing so it allegedly resulted in the company’s failure to pay overtime compensation and to reimburse the proposed class members for their business expenses. The court, which had previously been reversed by the U.S. Court of Appeal for the Ninth Circuit on the issues of class certification and which test to apply to expense reimbursement and overtime claims, determined that some of the workers did not meet at least one of the 12 criteria needed to satisfy the B2B exception for certain of the remaining claims. Therefore, the district court ruled, the ABC test would apply to such claims. For other workers, however, “the question would go to a jury regarding whether any of the exceptions are met and whether the ABC test or Borello govern.” Based on the history of this case, an appeal is likely. Bowerman v. Field Asset Servs. Inc., No. 3:13-cv-00057 (N.D. Cal. Jan. 19, 2024).

Regulatory and Administrative Initiatives (3 matters)

DENVER WORKFORCE AGENCY ASSESSES MILLION DOLLAR PENALTIES AGAINST APP-BASED STAFFING COMPANIES.  Denver Labor, the agency that enforces that City’s wage laws and state laws within the City of Denver, reportedly assessed over $1 million in penalties against two on-demand app-based staffing companies serving the hospitality and retail industries for alleged violations of the Denver Civil Wage Theft Ordinance, the Colorado Wage Act, and the Healthy Families and Workplaces Act. Denver Labor assessed the fines due to alleged misclassification of about 3,000 workers as independent contractors and not employees. The two companies, Instawork and Gigpro, Inc., provide workers called “Pros” to hotels, caterers, and restaurants to fill “gigs” as servers, bartenders, dishwashers, cooks, and housekeepers. The Pros use the company’s mobile apps to apply for open gigs. According to the Denver Labor Auditor’s Liability Determination, issued on January 16, 2024, the companies failed to pay the Pros the applicable minimum wage and overtime compensation or provide statutorily required sick leave. Denver Labor charged Instawork for committing over 16,000 violations, for which it was assessed $823,000 in fines and ordered to pay another $275,000 in restitution to nearly 3,000 workers. Denver Labor assessed Gigpro about $50,000 in fines and ordered it to pay restitution to about 90 workers for allegedly committing over 1,000 violations. The companies were also ordered to cease and desist from misclassifying workers within 30 days.

In support of Denver Labor’s determination that Instawork and Gigpro misclassified the Pros as ICs, the agency found that the companies monitor and evaluate their Pros; the gigs do not require significant skill or expertise; the Pros are required to follow the company’s “Community Standards,” are supervised, and have no ability to negotiate their own pay; the Pros are paid on an hourly basis and are not customarily in engaged in an independent trade, occupation, profession or business; the Pros are expected to adhere to the companies’ dress, safety, and behavioral requirements; the companies discipline workers for a wide range of behavior; the Pros have no opportunity to negotiate their fees and are prohibited from assigning or delegating their gigs; and the Pros are not customarily engaged in an independent trade, occupation, profession or business.

U.S. LABOR DEPARTMENT FINALIZES ITS REGULATION ON IC STATUS UNDER THE FLSA.  On January 9, 2024, the United States Department of Labor issued its Final Rule on independent contractor status. As fully detailed in our blog post that same day, the DOL regulation, entitled “Employee or Independent Contractor Classification under the Fair Labor Standards Act,” was expressly intended to override the Trump Administration’s regulation covering the same subject, which the Biden Administration believed to be unduly weighted in favor of business. The final regulation issued by the current Administration is an “employee-friendly” version. It has already created consternation on the part of many businesses and otherwise legitimate ICs who want to retain IC status. As we stated in our blog post, the legal impact of the final rule, however, will be of little or no consequence because the courts create law on this subject, not regulatory agencies like the DOL, and, in any event, the final Rule pertains to ‎only one statute, the FLSA, and has no impact on state laws governing the test for IC status. ‎

Briefly stated, the proposed Rule rejects the Trump Administration’s construct that there are “core factors” that take precedence in determining IC status under the FLSA. Instead, the final regulation “returns to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.” Under the final Rule, six specific factors should be considered in determining the so-called “economic reality” of the parties’ relationship, which has, for decades, also been the general focus of the courts: opportunity for profit or loss depending on managerial skill; investments by the worker and the potential 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 potential employer’s business; and skill and initiative of the worker. The final regulation added a seventh factor: any other facts indicative of an IC or employee relationship.

The publisher of this blog was quoted on January 10, 2024 in a Bloomberg Law article in the Daily Labor Report by reporter Chris Marr: “Ultimately, the rule change—if it withstands any potential legal challenges by the ‎industry groups opposing the revamp—could help workers close to the line between ‎employee and independent contractor, but it isn’t likely to be a sea change for any one ‎industry. Does it help workers a little? ‎Yes, on the fringes. Those cases that are 50/50 in favor of contractor or ‎employee under the Fair Labor Standards Act may now potentially tilt slightly in their ‎favor. That’s assuming the courts look at the regulation.”‎

MARYLAND GOVERNOR ESTABLISHES TASK FORCE ADDRESSING IC MISCLASSIFICATION.  Maryland Governor Wes Moore has issued an executive order establishing a task force to combat workplace fraud with special emphasis on independent contractor misclassification. As announced in a January 11, 2024 press release, the Governor signed an executive order on that date to renew and expand a nine-member cross-governmental task force dedicated to strengthening investigations and enforcement of laws regarding workplace fraud, including misclassification. State Comptroller Brooke E. Lierman stated in the press release, “Companies that hire workers and misclassify them to circumvent our tax and labor laws are committing serious fraud that erodes basic rights and benefits, saddles workers with an undue financial burden, and undermines the economic well-being of our state. This executive order expands our ability to share information, coordinate resources, and investigate suspected workplace fraud to protect Marylanders and their families.” As outlined in the executive order, the task force will collaborate to share information and data across agencies and drive strategic and effective enforcement, will identify industries where workplace fraud is more prevalent, and focus efforts to address the problem, including stronger outreach to businesses and workers.

Written by Richard Reibstein