Two cases reported below in our review of legal developments in February 2024 address reclassification of independent contractors. The first case is one in which a state and county sought enforcement of California’s strict ABC test for independent contractor status and secured a settlement against a staffing company including its agreement to reclassify workers as employees whom it had previously classified as ICs. The second lawsuit involves a group of workers first engaged as independent contractors and then converted to employees. Many companies that use ICs question whether they should reclassify their contractors and begin to treat them as employees in the hope that they can avoid IC misclassification lawsuits. The act of reclassifying workers as W-2 employees after treating them as 1099 independent contractors can, however, not only prompt an IC misclassification lawsuit but, if not done in an appropriate manner, can also be used as evidence that the workers were initially misclassified. In contrast, especially in states like California and Massachusetts with their ultra-strict ABC tests for IC status, reclassifying workers from IC to employee status as part of a settlement of a lawsuit is an option some employers have considered. The approach taken by the overwhelming number of companies, however, is not to reclassify, which can create the impetus for an IC misclassification lawsuit and typically is not financially feasible. Rather, most prudent businesses seek to enhance compliance with laws governing the use of ICs. One process used by an increasing number of businesses is IC Diagnostics (TM), which enhances IC compliance by restructuring, re-documenting, and re-implementing IC relationships in a customized and sustainable manner consistent with the company’s business model. The only approach that makes little sense is to do nothing and instead risk a legal proceeding brought by a government agency or plaintiffs’ class action lawyer, as in the first two cases reported below.

In the Courts (4 cases)

GIG ECONOMY STAFFING COMPANY AGREES TO RECLASSIFY WORKERS AND PAY $2.1 MILLION IN IC MISCLASSIFICATION LAWSUIT. Staffing company Qwick Inc. has agreed to pay $2.1 million in a settlement with the City of San Francisco and the State of California for allegedly misclassifying as independent contractors the gig workers it referred to its hospitality clients.  The settlement provides that the on-demand staffing company will convert all of its 10,000 allegedly misclassified California workers to employees. According to a news release issued by San Francisco City David Attorney Chiu, the settlement ends an action brought in 2023 in a California state court by the State of California and City of San Francisco alleging that Qwick violated the state’s Labor Law and Unfair Competition Law by classifying its hospitality workers as independent contractors and not employees and by failing to provide them with meal and paid rest breaks. According to the news release, the company, through its mobile app, provides restaurants, caterers, and event production companies with on-demand workers to fill empty shifts. The workers are engaged in many different front-of-house and back-of-house roles, including shifts for servers, bussers, bartenders, baristas, dishwashers, cooks, barbacks, event staff, and concession workers. When the workers fill a shift, they work alongside and perform the same functions as hotel and restaurant employees. ‎‎Under the terms of the court-approved settlement, the company must pay its California workers $1.5 million in restitution and reclassify workers that stay on as employees and provide them with a bank of accrued sick leave hours valued at up to $350,000. The company must also pay $250,000 to the City in civil penalties. California v. Qwick Inc., No. CGC23608756 (Cal. Super. Ct. San Francisco County Feb. 22, 2024).

WASTE COMPANY’S TRASH SORTERS FIRST TREATED AS IC’S AND THEN CONVERTED TO EMPLOYEES ARE CERTIFIED AS A COLLECTIVE. A Maryland federal district court has granted collective action certification to group of 80 workers who sort recyclables and trash for a waste company in their independent contractor misclassification lawsuit. In their amended class and collective action complaint, the sorters allege that WB Waste Solutions LLC “hires employees to work the sorting line on a purported ‘temporary basis’ and treats them as independent contractors, despite the fact that [the company] controls all aspects of the work they do, including setting their schedules, assigning their tasks, and requiring them to follow policies established by [the company.” The sorters also claim that the company allegedly pays the “temporary” employees a daily rate below the legal minimum wage, does not account for how many hours they work in a workweek, fails to pay overtime compensation, and reduces the daily rate if the sorter starts work late or leaves early, all in violation of the Fair Labor Standards Act and Maryland wage and hour laws. Although the sorters claim that after a certain period of time they are reclassified as “full-time” employees, their pay is still allegedly reduced in violation of law by deductions made for meal breaks “that are not bona fide” under the FLSA and Maryland law. Lopez v. WB Waste Solutions LLC, No. 8:23-cv-00963 (D. Md. Feb. 1, 2024).

HEALTHCARE STAFFING AGENCY TARGETED BY U.S. LABOR DEPARTMENT FOR IC MISCLASSIFICATION. An Illinois healthcare staffing agency and its owner have been sued by the U.S. Department of Labor on behalf of 41 registered nurses, licensed practical nurses, and certified nursing assistants who allegedly were misclassified as independent contractors following an investigation into the agency’s employment and pay practices. According to a news brief published by the DOL’s Wage and Hour Division, the investigation revealed that the workers provided nursing services pursuant to contracts entered into between the NurseRight Staffing Agency LLC and a number of nursing homes, but were not paid overtime. In its complaint, the DOL alleged that the workers are not independent contractors but rather employees because the staffing company oversees the services provided by the workers and sets performance guidelines; dispatches assignments to the workers; directs the workers’ performance of the services; expects the workers to adhere to the schedules and sites assigned by the staffing agency; tracks the workers’ location via GPS; handles complaints by the nursing homes about the workers; and determines the hourly rates for the nurses. In addition, the complaint alleges that the workers have an exclusive relationship with the agency; are not in business for themselves; do not invest in advertising; and do not assign or delegate their services. Su v. NurseRight Staffing Agency, LLC, No. 3:24-cv-‎‎50063 (N.D. Ill. Feb. 7, 2024).

DELIVERY COMPANY IN OHIO ABLE TO DECERTIFY COLLECTIVE ACTION FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION. SBK Delivery, LLC has prevailed in its motion to decertify a collective action under the Fair Labor Standards Act seeking overtime on behalf of a driver and other drivers whom he claims were similarly misclassified as independent contractors. In February of 2022, the parties stipulated to a grant of conditional certification and to the issuance of notice to the putative collective group. Nineteen employees timely opted into the putative collective. Defendant then moved to decertify the collective. The Court ruled that there was no collective to “decertify” because Plaintiff had not conclusively shown that the opt-ins worked overtime under a uniform policy of the company but rather chose to work overtime based on their own decisions under differing individual circumstances. Miller v. SBK Delivery, LLC, No. 2:21-cv-4744 (S.D. Ohio Feb. 29, 2024).

Regulatory and Administrative Initiatives (1 matter)

FTC FOCUSES ON INDEPENDENT CONTRACTOR MISCLASSIFICATION AS FORM OF UNFAIR COMPETITION. Federal Trade Commissioner Alvaro M. Bedoya describes independent contractor/employee misclassification as a “pervasive and national scandal” in his February 2, 2024 speech at the Global Competition Review summit explaining that misclassification “takes billions of dollars from working people and it gives it to lawbreakers.” Commissioner Bedoya, whose speech focused on the construction, port transport, trucking, in-home health care, in-home cleaning, landscaping, and janitorial industries, stated that “the next step in confronting misclassification is making sure that we use every tool in our toolbox to fight it – including competition law.” He continued: “And so today I want to make the case for using the extensive statutory prohibitions against unfair methods of competition to closely examine allegations of misclassification.” In his remarks, Commissioner Bedoya noted that section 5 of the Federal Trade Commission Act charges the FTC with prosecuting unfair methods of competition which include conduct that may be coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power, and must tend to negatively affect competitive conditions.

Written by Richard Reibstein.

Edited and compiled by Janet Barsky, Managing Editor.