Author: Richard Reibstein Esq.

Class action independent contractor misclassification cases continue to be filed and most seem to settle, often for large sums, as we have reported in our blog posts on legal developments each month. But some industries have countered this trend in one of three ways: legislation, voter initiatives, and a choice not to settle but rather vigorously defend. Two of those approaches were on display last month. In one, the real estate industry in New Jersey effectively used the legislative approach. In the face of what it regarded as a likely industry-altering development if the strict ABC test for IC status under the New Jersey wage payment and wage and hour laws was applied to certain real estate salespersons in that state, the industry sought a legislative change. In 2022, the New Jersey legislature amended the real estate law to exempt real estate salespersons from the state’s ABC test. Last month the New Jersey Supreme Court held that the law not only overrode that strict test for IC status, but it did so retroactively. Another industry used the vigorous defense approach in a class action invoking the wage payment law in Pennsylvania. That case involved a well-known baked goods manufacturer, which successfully secured a federal court appellate ruling that it was entitled to summary judgment holding that distributors of its food products were properly classified as ICs. Although other food product manufacturers had not prevailed in similar class and collective action cases initiated by distributors, this case demonstrates that structuring, documenting, and implementing IC relationships in a manner that maximizes compliance with IC laws – the three key steps in a process such as IC Diagnostics (TM) – can lead to successful results in court, especially in situations involving well-compensated independent contractors.

We are frequently asked by businesses about workers’ compensation coverage for independent contractors. Clients ask us: Can our company cover independent contractors with workers’ compensation insurance? Is it safer for us if we do so? Or better not to? Like many issues involving independent contractor compliance, there is no one answer to these questions because workers’ comp is governed by state laws, which vary from state to state, and even under a single state’s law, the answer may depend on the nature of the services being provided by the independent contractor. One part of a comprehensive compliance process such as IC Diagnostics (TM) provides businesses with approaches to enhance compliance with independent contractor laws and minimize misclassification liability relating to workers’ comp matters.

Is an independent food distributor exempt from an arbitration agreement under the interstate transportation worker exemption in the Federal Arbitration Act (FAA)? That was the question that the U.S. Supreme Court addressed in its April 12, 2024 opinion involving a distributor of products manufactured by a baked goods company. In its opinion, the Supreme Court made it clear that a worker need not provide services to a company in the transportation industry to be considered an interstate transportation worker; to the contrary, it ruled that an individual can provide services to a company in an industry other than transportation and still invoke the interstate transportation worker exemption. But that only answered the threshold question about the scope of the exemption, leaving a very fact-specific inquiry for lower courts to address: in what activities must the worker be engaged in order to be considered an interstate transportation worker under the FAA, and to what extent must the worker be involved in such activities? The Supreme Court’s test for the availability of the exemption, explained below, will create years of litigation in the lower courts and a great deal of uncertainty. Fortunately, for companies that face these issues, such uncertainty can be averted by drafting arbitration agreements that rely on state arbitration laws in addition to the FAA. Effective and well-drafted arbitration agreements are one of the tools businesses have utilized to minimize independent contractor misclassification exposure from class actions. They remain an essential part of a compliance process such as IC Diagnostics (TM), which is used by an increasing number of savvy companies to manage their IC relationships.

Two court cases we summarize below, decided in March 2024, demonstrate that while some companies may prevail in an IC misclassification lawsuit, others do not. Why? As a starting point, the legal test for IC status under the federal wage and hour law differs from the test under most state wage laws, and a number of states have different tests for IC status depending on whether the claims are brought for unpaid wages, reimbursement of expenses, workers’ compensation, or unemployment benefits. Do cases typically turn on what law is applicable? Sometimes, but not usually. More often, it’s the facts that matter more than the law. For example, the first case reported below involves a carpenter who was found to have been misclassified as an IC. Yet, in a prior blog post, we reported on a case in which other carpenters were found to be properly classified as ICs. The different results have far less to do with the law than the facts in those cases. What these types of cases teach is that companies can minimize their misclassification liabilities, regardless of the applicable tests for IC status, if their IC relationships are structured, documented, and implemented in a way that maximizes compliance with most if not all IC laws. Can that be done? Yes, indeed many companies have accomplished that objective in a customized and sustainable manner through a process such as IC Diagnostics (TM).

Independent contractors can pose safety and security risks as much as employees. Some go into customer homes. Others have access to personally identifiable information and proprietary business information. Some independent contractors drive trucks making deliveries for companies identified by logos on the vehicles. So, businesses should be able to lawfully obtain criminal background checks on these types of independent contractors, right? Not so fast.

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.

On January 9, 2024, the same day the U.S. Department of Labor issued its final rule on independent contractor status, we published a comprehensive blog post analyzing and commenting on the new regulation, which goes into effect less than a week from now on March 11, 2024.  We have heard from numerous clients that have an IC business model, expressing concern that the legal landscape will change on that date.  It won’t. As we noted in our January 9 post, “The legal impact of the final rule … will hardly ripple the waters. After all, it is the courts that create law on this subject, not regulatory agencies.”  But we also cautioned 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.” We commented further that “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.”  That is exactly what we have seen – more companies have been attacked by IC misclassification lawsuits while at the same time more companies are seeking to maximize their compliance with laws governing ICs.

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. ‎