The most significant legal development in the past month in the area of independent contractor compliance was the enactment of California’s Freelance Worker Protection Act, which goes into effect on January 1, 2025. We have reported on freelance pay protection laws enacted recently in Illinois and New York, as well as similar laws in municipalities including New York City, Los Angeles, Minneapolis, Columbus, Ohio, and Seattle. These types of enactments impose statutory liabilities on businesses that either fail to pay freelancers the agreed upon fees for services rendered or neglect to enter into independent contractor agreements encompassing the terms required by these laws. As we note below in our summary of this new California law, it actually covers only a limited number of freelancers – those who provide a diverse array of “professional services.” This new California law is unclear as to which companies and independent contractors it covers. While the law states that it governs a business “organization in the State of California that retains a freelance worker to provide professional services,” it is unclear whether it only covers companies operating in California that engage such freelancers located in California, or it if also covers companies engaging those types of contractors where the business or contractor is located outside the state. More importantly, this and other independent contractor payment protection laws only cover workers that have been properly classified as ICs under applicable legal tests. Companies using workers they classify as ICs may mistakenly regard themselves as being free from liability if they comply with these freelancer pay protection laws. But such compliance does not immunize businesses from exposure to IC misclassification liability. Companies using an IC business model also need to structure, document, and implement their IC relationships in manner that maximizes compliance with applicable state and federal tests for IC status. A process such as IC Diagnostics (TM) can enhance IC compliance while also satisfying these new freelance pay protection laws.

Legislative Initiatives

CALIFORNIA ENACTS PAY PROTECTION LAW THAT APPLIES TO A LIMITED NUMBER OF IC’S, BUT IT PROVIDES FOR COSTLY DOUBLE DAMAGES. The California Freelance Worker Protection Act (Senate Bill 988) was recently signed into law by California Governor Gavin Newsom. While this new statute has been characterized by columnists and a number of legal commentators as covering all freelancers, it does not. Instead, as codified in Section 18100 of the California Business and Professions Code, it only requires written contracts with freelancers providing “professional services.” Regrettably, there is no description in the law itself as to what constitutes “professional services.” Instead, it defines “professional services” by cross-referencing Section 2778(b)(2) of the California Labor Code. And that section covers only a relatively small and varied group of independent contractors, including creative marketing professionals, human resources administrators, travel agents, graphic designers, grant writers, fine artists, tax preparers, payment processing agents, still photographers, photojournalists, freelance writers, translators, editors, newspaper cartoonists, cartographers, manicurists, barbers, appraisers, and registered professional foresters. California businesses operating in Los Angeles, in addition, are governed by that city’s pay protection law, which covers freelancers providing any and all types of work and not just these select “professional services.”

As noted in the introductory paragraph of this blog post, the new law does not make clear whether it only covers contractors if the professional freelance services are rendered within California and whether it only covers companies operating in California. This lack of clarity is not, however, the most troubling aspect of this law. Rather, the new law includes a provision for double damages if a hiring party does not pay the contractor’s fees within 30 days or as otherwise agreed by the parties “after completion of the freelance worker’s services under the contract.” This double damages provision is problematic because, as we recently pointed out in a blog post critiquing a similar double damages clause in the New York freelancer pay protection law, the term “completion of … services” can be very subjective. Has the contractor “completed” his or her work if, in the good faith view of the company engaging the contractor, the services either were not performed satisfactorily or fail to meet all of the express and implied specifications of the parties’ contract? A hiring party’s genuine good faith view that work was unsatisfactory or failed to “meet specs” should not expose it to the risk of double damages. Indeed, most employment laws only add double or liquidated damages where there is a “willful” violation on the part of the employer or where the employer has failed to demonstrate its bona fides in not making payment of wages. Nonetheless, companies can minimize the risks of double damages by utilizing the tips we have suggested to businesses seeking to comply with other state and local freelancer pay protection laws.

In the Courts (5 cases)

COLLEGE RESEARCH UNIT SUED BY GRADUATE STUDENTS FOR IC MISCLASSIFICATION. Three graduate students who conduct research while pursuing Ph.D. degrees at a UCLA-affiliated biomedical research center have filed individual lawsuits in California state court based on their allegations that they were misclassified as independent contractors instead of employees. The grad students claim the center denied them overtime compensation, provided inaccurate wage statements, and failed to provide meal and rest breaks in violation of the California Labor Code. The defendant in these cases, the Lundquist Institute for Biomedical Innovation at Harbor – UCLA Medical Center, is an independent, non-profit biomedical research organization. According to the complaints, the students worked over 40 hours per week without any overtime compensation, did not have their hours tracked, and were told they would receive a monthly stipend instead of wages. Although the complaints assert that the students were told that the research center was in the process of obtaining its accreditation and that the work they did at the research center was going to be credited toward their Ph.D. degrees, the students discovered that no degrees would ever be issued and the Institute had no authority to grant doctoral degrees. ‎These lawsuits raise the question as to whether other graduate students who are paid on a 1099 or stipend basis will also bring IC misclassification cases in California or elsewhere. Pena v. The Lundquist Institute, No. 24STCV25777 (Cal. Super. Ct. Los Angeles County Oct. 3, 2024), Cherry v. The Lundquist Institute, No. 24STCV25761 ‎(Cal. Super. Ct. Los Angeles County Oct. 3, 2024)‎, and Aguilar v. The Lundquist Institute, No. 24STCV25783 ‎(Cal. Super. Ct. Los Angeles County Oct. 3, 2024).

RIDESHARE COMPANY UNABLE TO OBTAIN DISMISSAL OF NOVEL FRAUD CLAIM BY DRIVERS. A Nevada federal district court has allowed a novel fraud action under the Nevada False Claims Act to proceed against a rideshare company due to its alleged misclassification of drivers. The lawsuit alleges that Lyft engaged in a “reverse false claim” by seeking to avoid paying state unemployment taxes. Under the state’s False Claims Act, a reverse false claim occurs when a person “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the State ….” The plaintiff commenced what is sometimes called a qui tam action in the name of the state against Lyft on behalf of the Nevada Department of Employment Training and Rehabilitation. Lyft filed a motion to dismiss arguing that businesses are not required to seek a prior exemption before engaging ICs, that the court lacks jurisdiction over the plaintiff’s claims, and that the complaint failed to satisfy the court’s pleading requirements because it did not allege a false statement. In opposition to Lyft’s motion to dismiss, the plaintiff argued that the drivers do not fall within the IC exemption under the state’s unemployment compensation tax, that Lyft failed to affirmatively apply for the exemption, and that Lyft defrauded the state of Nevada by failing to pay monies to the state’s unemployment compensation system. In denying Lyft’s motion, the court concluded that factual issues existed that could not be resolved at the motion to dismiss stage, including the threshold issue of whether the drivers should have been classified as employees, giving rise to an obligation by Lyft to pay unemployment taxes, and whether Lyft failed to do so knowingly. The court noted that the plain language of the statute does not require a false statement, and held that plaintiffs’ general allegation that Lyft had knowledge of its wrongdoing was sufficient to establish the requisite intention to defraud. Like the case of the three Ph.D. students discussed above, this case raises the question whether Lyft’s inability to obtain a dismissal will prompt more fraud claims against it and other gig economy companies. Nevada v. Lyft, Inc., No. 3:23-cv-00442 (D. Nev. Sept. 30, 2024).

OIL AND GAS COMPANY TO PAY $2.6 MILLION TO SETTLE IC MISCLASSIFICATION COLLECTIVE ACTION BROUGHT BY GEOLOGISTS. An oil and gas company has reached a proposed settlement of an IC misclassification collective action ‎filed by a geologist on his own behalf and on behalf of those similarly situated. The geologist alleged that the company violated the overtime provisions of Fair Labor Standards Act by its payment of a flat day rate regardless of the actual number of hours the workers worked each day and week. According to the complaint, the company controls the workers’ rates and method of pay, schedules and assignments; requires the workers to follow the company’s policies, procedures, and Well Plan; directs and supervises the workers; predetermines the tools and equipment to be used at the job site; prohibits the workers from subcontracting their work; and ‎sets their work schedules, which effectively bar them from working other jobs. The geologist claimed that he and the other workers typically worked 12-hour shifts, 7 days a week, for two-week hitches.‎ The unopposed motion to approve the settlement indicates that about 100 class members each will receive an average gross amount of $26,000, meaning the total settlement fund will equate to approximately $2.6 million. Garvey v. SM Energy Co., No. 1:23-cv-02508 (D. Colo. Oct. 31, 2024).

TRANSPORTATION COMPANY SETTLES IC MISCLASSIFICATION LAWSUIT FOR $2.5 MILLION. An Arizona federal district court has approved a $2.5 million class action settlement between a transportation company, Knight Transportation Inc., and a class of 183 owner-operator truck drivers alleging they were misclassified as independent contractors instead of employees. The terms of the settlement, reached after ten years of litigation, include $125,000 in PAGA awards. The complaint alleged that the company classified some of the drivers as employees, while others were classified as “owner operators” or independent contractors, with little or no difference in the amount of type of direction and control that the company imposed on the drivers. Roger Yanez v. Knight Transportation Inc., No. 2:15-cv-00990 (D. Ariz. Oct. 16, 2024).

NEW JERSEY SUES PATIENT TRANSPORT COMPANY ALLEGING DRIVERS WERE MISCLASSIFIED AS IC’S. The New Jersey Attorney General and the Commissioner of the New Jersey Department of Labor and Workforce Development (NJDOL) have filed a lawsuit against a medical transport company and its owner for alleged violations of the New Jersey Wage and Hour Law, New Jersey Wage Payment Law, and the New Jersey Earned Sick Leave Law due to its alleged misclassification of at least 52 drivers as independent contractors. According to a News Release issued by the Attorney General’s Office on October 30, 2024, the NJDOL received complaints from individual drivers alleging that TransCare, the company for which the drivers transported patients to and from non-emergency medical appointments, had failed to pay them their full ‎wages. The NJDOL conducted an investigation, which concluded that the drivers did not operate their own independent businesses and, under the state’s ABC test, were therefore employees of ‎TransCare.‎ The State’s court complaint also asserts that the company exercised considerable control over the drivers, including directing where, when, and how they ‎obtained work, assigning passengers and routes to them, setting their work hours and rates of pay, requiring them to undergo unpaid training before working with the company, and mandating that they use a specific third-party mobile app to receive instructions ‎and assignments.‎ Asaro-Angelo v. TransCare LLC, No. CAM-C-116-24 (Super. Ct. Chancery Div., Camden County N.J. Oct. 30, 2024).

Regulatory and Administrative Developments

PRINTED MEDIA DELIVERY COMPANY TO PAY $2.7 MILLION TO SETTLE IC MISCLASSIFICATION INVESTIGATION IN NEW JERSEY. The New Jersey Department of Labor and Workforce Development conducted an IC misclassification investigation of Publishers Circulation Fulfillment, Inc., which engages drivers to deliver printed media such as newspapers, magazines, catalogs, and other material to New Jersey households. As a result of the investigation, the company has agreed to a $2.75 million settlement covering approximately 2,400 drivers. According to a press release issued on October 21, 2024 by the New Jersey Attorney General’s ‎Office,‎ the investigation of the company began in 2021 covering the company’s compliance with state employment labor ‎laws between 2019 and 2022. The investigation reportedly concluded that the delivery workers, many of whom were immigrants performing services for low wages, were subjected to considerable direction and control ‎by the company, had unlawful deductions taken from their pay, and should have been treated as employees instead of ICs.‎ The terms of the $2.7 million settlement include $410,000 to be paid by the company to satisfy NJDOL penalties and other fees, and $700,000 in suspended penalties payable to the NJDOL if the company breaches the agreement. The company also agreed to prospectively treat all current and future delivery workers as employees under all state labor and employment laws, including the state’s Unemployment Compensation Law. The Press Release noted that the $2.7 million payment by the company is in addition to the payment of $2,675,492 the company made in October 2022 to the New Jersey’s Division of Employer Accounts for contributions required by the State’s Unemployment Compensation Fund and Disability Benefits Fund between 2015 and 2018. In re: Publishers Circulation Fulfillment Inc., No. GE-688-0824-MAC (N.J. Dep’t of Lab. & Workforce Dev. Oct. 11, 2024).