Author: Richard Reibstein Esq.

In the waning days of 2022, New York Governor Kathy Hochul vetoed the New York State Freelance Isn’t Free Act bill (S 8369B) that had been awaiting her action for over six months. In early June 2023, the New York legislature passed the identical bill (S 5026) and once again sent it to the Governor.  On November 21, 2023, the Governor reversed course and signed the bill.  Evidently, the reasons Governor Hochul gave in her veto message in December 2022 were discounted. As noted below, this new independent contractor law is plagued with ambiguities and other critical defects. Perhaps one of the most glaring defects in the law is an unreasonable double damages provision for late payment or nonpayment by a company even if it had a good faith belief the freelancer’s work was unsatisfactory or did not meet contract specifications.

Companies can use two independent grounds to compel arbitration of independent contractor misclassification lawsuits: the Federal Arbitration Act (FAA) and state arbitration laws. The FAA, however, includes an exemption for workers engaged in interstate transportation. This exemption has consumed the attention of lawyers and courts for years, with numerous disputes over which types of workers are covered by the FAA’s arbitration exemption. Last month we reported in a blog post that the U.S. Supreme Court accepted a case addressing the application of that exemption to independent contractors who distribute food products to grocery and convenience stores for companies that manufacture the goods. The question presented to the Supreme Court is whether the FAA exemption applies to workers that are actively engaged in interstate transportation for companies that are not in the transportation industry. The Supreme Court typically grants review of cases only where they have outsized legal significance, but because lawsuits are also subject to arbitration under state law – regardless of whether the litigants are covered by or exempt from arbitration under federal law – there is little reason for the courts to continue to spend time and resources deciding if the FAA’s exemption applies. As reported below, this very issue was posed by a court last month when it stated that a state’s arbitration law may well have given it grounds to compel arbitration of an independent contractor misclassification dispute, even if the workers were covered by the FAA’s interstate transportation exemption. As we have noted repeatedly in several of our blog posts, an arbitration clause drafted in an effective manner as one part of an IC compliance program should provide sufficient grounds for a company to compel arbitration of misclassification disputes by independent contractors, even if the FAA’s interstate transportation exemption otherwise applies.

The highly controversial joint employer regulation just issued by the National Labor Relations Board (NLRB) on October 26 is not so different than the standard that has historically been applied in determining whether a group of workers are employees or independent contractors under many state and federal laws. Indeed, a legitimate criticism of the NLRB’s joint employer rule is that it improperly relies upon one of the most important factors used by the courts to determine independent contractor status: reservation of the “right to control” the manner and means by which the agreed upon services are performed, “regardless of whether control is exercised.” 29 C.F.R. 103.40(e)(1). 

Every so often a large settlement of a class action lawsuit reverberates in the independent contractor world – but last month there were two mega-settlements. The first was between Flowers Foods, a large nationwide baked goods company, and a class of distributors who sued for allegedly misclassifying them as independent contractors in violation of the California Labor Code. The $55 million settlement covering 475 distributors is a very high per plaintiff result. In addition, Flowers Foods reports that it will be incurring another $50 million to buy back about 350 distributor routes and then convert them to an employee distributor model. The other mega-settlement involves a large commercial cleaning company, JanPro, which was sued in California by over 2000 janitorial franchisees for misclassification under the state’s Labor Code and fair trade practices laws as well as breach of contract. JanPro is settling for $30 million. These two settlements demonstrate that California’s very strict test for IC status is extraordinarily unfavorable to many companies with IC relationships that are otherwise lawful under most other state and federal IC laws, assuming the IC relationships are structured, documented, and implemented in a compliant manner. Many businesses that seek to maintain their IC relationships across the U.S. but minimize misclassification exposure in California and other states have followed a process such as IC Diagnostics (TM), which offers companies a customized and sustainable approach to enhance IC compliance.

It’s been almost a full year since the U.S. Department of Labor issued its proposed regulation ‎entitled “Employee or Independent Contractor Classification under the Fair Labor Standards ‎Act.” The proposed regulation was fully intended to overwrite the Trump Administration’s ‎regulation covering the same subject, which the Biden Administration felt was weighted in ‎favor of businesses. Over 55,000 comments to the proposed regulation were posted in a two-‎month period by individuals and organizations both in support of and in opposition to the ‎proposed regulation. Informed sources indicate that a final regulation is expected to be released ‎this month, perhaps as soon as this coming week. We anticipate that the final regulation will ‎contain few if any meaningful changes from the proposed regulation despite the tens of ‎thousands of comments. But, does it really matter – at least legally? And what will the practical ‎effects be? ‎

Last month, Illinois became the first state to enact legislation requiring companies using ‎independent contractors to offer contracts to ICs with prescribed terms and to pay such ‎freelance contractors all of their fees within a specified number of days. The legislation follows ‎on the heels of similar laws passed by several cities, including New York City, Los Angeles, and ‎Minneapolis. While all of these laws are a bit different in terms of their coverage and ‎obligations imposed on companies engaging independent contractors, more importantly each ‎provide for substantial damages and penalties if a freelance independent contractor is not paid ‎his or her fees within a relatively short period of time after service are rendered. We describe ‎below many of the features of this new Illinois law including a number of legislative defects. ‎On the one hand, these laws address the need to protect freelancers, yet on the other hand many ‎class action lawyers continue to bring independent contractor misclassification cases such as the ‎two new cases filed last month, which we summarize below. Those lawsuits claim that workers ‎classified as independent contractors are misclassified employees and entitled to minimum ‎wage and overtime compensation available under federal and state wage and hour laws. ‎Businesses that use independent contractors in Illinois and these other jurisdictions can ‎minimize their exposure to contractor pay dispute and misclassification lawsuits by using a ‎process such as IC Diagnostics (TM) to enhance compliance with both types of laws.‎

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. The most important tip is to ‎update arbitration clauses in view of this evolving area of the law. ‎

We report below on four case developments during June 2023 in the area of independent ‎contractor misclassification: two of which are centered on Illinois. That state has one of the ‎most stringent statutory tests for independent contractor status. As construed by the courts in ‎that state, the Illinois ABC test for IC status is similar to the tests in California and ‎Massachusetts, creating a hotbed for IC misclassification cases. While states with ABC tests ‎make it more challenging for companies to survive a legal challenge to their IC classifications, ‎there are ways many companies doing business in such states can still comply with such laws. ‎Many companies operating nationwide and in “ABC states” have used a process such as IC ‎Diagnostics (TM) to enhance their compliance and minimize exposure to IC misclassification ‎liability in all states in which they operate or engage the services of independent contractors. ‎

Yesterday, June 13, 2023, the NLRB issued a lengthy decision in its Atlanta Opera case dealing ‎with the applicable test for independent contractor status under the National Labor Relations Act ‎‎(NLRA). This decision reversed the Board’s prior test for IC status as expressed in the ‎SuperShuttle case decided by the NLRB in 2019. In a lengthy decision, three of the four ‎members of the Board expressly declined to follow a 2017 decision by the U.S. Court of Appeals ‎for the District of Columbia Circuit in a case referred to as FedEx II, where the circuit court ‎concluded that the NLRB was seeking to “nullify this court’s [prior FedEx] decision” as to the ‎applicable test for independent contractor status. The bulk of the Board’s majority 19,000-word ‎decision focused on the supposed fallacies in the NLRB’s SuperShuttle decision and the ‎correctness of the NLRB’s prior FedEx decisions, which has twice been rejected by the D.C. ‎Circuit. But when the NLRB majority’s new decision is analyzed, does it really make a ‎difference what test the NLRB uses to determine IC status? As vividly demonstrated by the ‎Atlanta Opera case, nearly all of these independent contractor cases will be decided the same ‎way, regardless of which test is used. ‎

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.