Author: Richard Reibstein Esq.

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.

It has been well over a year since the U.S. Department of Labor issued its proposed rule entitled ‎‎“Employee or Independent Contractor Classification under the Fair Labor Standards Act.” The ‎regulation was expressly intended to override the Trump Administration’s regulation covering ‎the same subject, which the Biden Administration felt was weighted in favor of businesses. ‎Earlier today, the Labor Department issued its final rule on independent contractor status under ‎the FLSA. No surprise: little was changed substantively in comparison to the proposed rule. ‎Only a few tweaks were made despite the fact that 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. The final rule addressing the independent ‎contractor (IC) status of workers in the U.S. is an “employee-friendly” version that will ‎undoubtedly prompt jubilation among worker advocate organizations and unions while creating ‎consternation on the part of many businesses and otherwise legitimate ICs that want to retain IC ‎status. The legal impact of the final rule, however, will hardly ripple the waters. After all, it is ‎the courts that create law on this subject, not regulatory agencies. We nonetheless project that ‎the final rule issued today will give renewed impetus to disaffected workers classified as ‎independent contractors to file class actions seeking minimum wage, overtime payments, and ‎employee benefits under applicable laws. This is likely to propel more companies using ‎independent contractors to take steps to enhance their IC compliance by using a process such as ‎IC Diagnostics (TM) to restructure, re-document, and re-implement their relationships with ICs ‎in a customized and sustainable manner, consistent with their business model. ‎

We have had the opportunity, in the course of our independent contractor practice, to represent ‎clients in over 75 diverse industries including some in rather esoteric businesses. These clients ‎have included musical bands, hail repair companies, meditation centers, adult entertainment ‎clubs, amusement parks, dog walking services, cultural exchange programs, museums, libraries, ‎athletic teams, and song writing. We never have been called upon to serve a client in the clown ‎industry or a business providing children’s party entertainment – the lead case of this month’s ‎update of legal developments in December 2023. This case underscores that virtually every ‎industry these days uses independent contractors, even companies with service providers who ‎wear costumes and paint their noses and cheeks red. While companies in offbeat industries ‎typically have a limited number of workers, an adverse determination of independent contractor ‎misclassification by a workforce or tax agency can have disastrous financial implications, and a ‎class action lawsuit typically entails expensive defense costs. For that reason, many companies, ‎both large and small, that wish to minimize the likelihood of an independent contractor audit or ‎lawsuit, have chosen to use a process such as IC Diagostics (TM) to structure, document, and ‎implement their independent contractor relationships to enhance compliance in a customized ‎and sustained manner, consistent with their business models. As we have written previously in a ‎blog post, even strip clubs can comply with applicable IC laws. Clown companies can, too. ‎

New York Governor Kathy Hochul signed into law on November 22, 2023 the Freelance Isn’t Free Act bill (S 5026), after the Governor had vetoed the exact same bill (S 8369) the year before. This freelancer law, which was modeled after the 2017 New York City freelancer pay protection law of the same name, is plagued with ambiguities and other critical defects, similar to flaws in the City law including a pyramiding damages provision. We highlight below concerns about this new law and how to navigate through the traps it creates for unwary businesses. 

This past month, new independent contractor misclassification lawsuits were filed in Illinois, Maryland, New Jersey, and Washington by EMTs, cellular service “drive testers,” home health aides, and app-based couriers making deliveries for a big box store. In addition, last month the U.S. Department of Labor recovered a sizeable amount of damages from a local Alabama health care company, while a court in California approved a $30 million settlement between a nationwide cleaning franchisor and its franchisees. These lawsuits show that IC misclassification lawsuits arise in every region of the country and cover an endless array of industries. Why? Because the use of independent contractors has become ubiquitous in the U.S. While states and cities have enacted laws over the past decade to curtail the misclassification of workers as independent contractors, they have now begun to pass laws to protect independent contractors that have been properly classified as such. The most recent state to do so is New York, which last month passed an independent contractor payment protection law, as we report below, affording ICs double damages if they have not been paid all their fees in a timely manner. Now, when advising businesses how to enhance their compliance with laws affecting independent contractors, we not only use a process such as IC Diagnostics (TM) to minimize misclassification exposure, but also provide suggestions for ensuring that those companies don’t expose themselves to liability under these new IC pay protection laws.   

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? ‎