Author: Richard Reibstein Esq.

Three of the five court cases of note in this monthly update involve California’s Assembly Bill 5, ‎which has exponentially increased litigation involving independent contractor misclassification in ‎that state. That development dispels any notion that that law would provide clarity, simplify the ‎test for independent contractor status, and reduce litigation. Instead, it upended decades of ‎settled law by codifying a strict test for IC status that now contains as many as 75 exemptions. ‎Moreover, few businesses in California have reclassified workers from ICs to employees. The ‎three cases summarized below include one that validates Proposition 22, a voter initiative that ‎rejected A.B. 5 for app-based ride sharing and courier companies. Another involves a lawsuit by ‎companies in those same industries alleging that A.B. 5 did not provide them with an exemption, ‎as it does for dozens of other industries, due to the “animus” of the legislature toward those app-‎based businesses. A federal appellate court agreed that the lawsuit is plausible and may proceed. ‎The third case involves litigation filed in 2015 that has seen a number of appeals over the ‎application of A.B. 5. One way by which companies operating in California can minimize IC ‎misclassification exposure is to utilize one of the exemptions in A.B. 5 and its successor law, ‎A.B. 2257. Many have sought to do so by resorting to a process such as IC Diagnostics (TM), ‎which enhances IC compliance by restructuring, re-documenting, and/or re-implementing IC ‎relationships in a customized and sustainable manner in view of applicable law, including A.B 5. ‎

Ever since the New Jersey Supreme Court issued its 2015 decision in the Sleepy’s case, establishing an ABC test for wage and hour lawsuits, class action lawyers have targeted companies operating in that state for IC misclassification class actions.  We summarize below four developments in lawsuits and administrative proceedings in New Jersey: two settlements involving last-mile logistics firms; a case involving a lengthy appellate court process and legislation involving an industry seeking an exemption from the ABC test for independent contractor status; and an administrative investigation and assessment following a joint enforcement initiative by regulatory agencies.  The ABC test has triggered more litigation recently than any other test for independent contractor status.  Not surprisingly, five of the six legal developments we report on below involve three states with ABC tests: California, Massachusetts, and New Jersey.  While proponents of the ABC test argue that that this three-factor test simplifies this area of the law, experience has shown that it creates more litigation and uncertainty than multi-factor tests.  As we commented in a prior blog post, a professor who has studied the matter concluded that the ABC test “does not make the law of employee status clearer, simpler or more uniform [but rather] … makes the law more complex and less uniform than it was before.” That challenge has prompted more companies to undertake 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, regardless of the IC tests that may be applicable.

Case developments last month involved independent contractor misclassification lawsuits in the Southwest, Southeast, and Mid-Atlantic states. While more IC misclassification lawsuits have been brought in California than any other state, a quick search of our 250-plus posts published since we began this blog includes reports on several thousands of cases, legislative developments, and administrative initiatives in all 50 states and the District of Columbia. In terms of lawsuits, class action lawyers have taken the lead in filing IC misclassification class and collective actions across the county.  But many cases have also been brought by federal and state enforcement agencies, such as the first of four cases reported below, which was commenced by the U.S. Department of Labor and resulted in a mid-seven figure judgment against two related companies.  In the face of these types of litigation risks, many companies have taken steps to minimize IC misclassification exposure by using a process such as IC Diagnostics (TM) to restructure, re-document, and/or re-implement their IC relationships in a sustainable and customizable manner, consistent with their business models. Had the two companies targeted by the Labor Department in the first case we discuss below used a process such as IC Diagnostics, they likely would have avoided the lawsuit altogether or, even if sued, would have maximized their chances of success.    

Half of the court cases that we report on below from last month involve legal proceedings related to the sports industry: golf caddies, tennis pros, and sports editors.  Misclassification within the multi-faceted sports and athletics industry has been addressed by courts and administrative agencies in many of the cases about which we have reported over the years, including high school referees, security representatives for the NFL, tennis officials at the U.S. Open, lacrosse officials, pro football cheerleaders, and basketball arena crew members including camera, audiotape, and replay operators, to name just a few.  Sports and athletics businesses including golf courses, instructional firms, professional leagues, amateur athletic organizations, stadiums, tournaments, sports publishers, and a host of others that use independent contractors can minimize their IC misclassification exposure by using a process such as IC Diagnostics (TM) that many companies in other industries have used for years.  That type of process restructures, re-documents, and/or re-implements independent contractor relationships in a manner than maximizes compliance with federal and state IC laws and regulations in a customized and sustainable manner.   

The most publicized legal development in the area of independent contractor law last month involved an opinion issued by a federal appellate court in a gig economy case that generated national attention.  In a decision discussed below, the United States Court of Appeals for the First Circuit held that local couriers who make deliveries to Postmates’ customers of products they pick up from retail stores are not interstate transportation workers.  As a result, the court held that the couriers do not fall into the interstate transportation exemption from arbitration under the Federal Arbitration Act.  In reaching this decision, the First Circuit distinguished the couriers from drivers making last-mile deliveries of products for Amazon, whom the court found to be interstate transportation workers under the federal arbitration law.  While this Postmates decision provides companies involved in local delivery services with additional legal authority when they seek to compel arbitration of a proposed class action, the decision is not nearly as momentous as many commentators have suggested. Why? Because companies can also compel arbitration under state arbitration laws, almost all of which do not contain an exemption for interstate transportation workers.  We pointed that out in a blog post last year involving a case holding that certain ride-sharing drivers were exempt from arbitration under the Federal Arbitration Act but were nonetheless compelled to arbitrate under a state arbitration law. Prudent companies seeking to compel arbitration of proposed class actions based on allegations of independent contractor misclassifications would be also be wise to take the steps we outlined in an earlier blog post where we offered suggestions as to how to draft effective arbitration clauses as part of a process designed to minimize misclassification liability.

In response to the U.S. Department of Labor’s proposed regulation released to the public on October 11, 2022 entitled “Employee or Independent Contractor Classification under the Fair Labor Standards Act,” an unprecedented number of comments – 54,644 – were posted by individuals and organizations as of 11:30 pm Eastern Time this evening, December 13, 2022, only one-half hour prior to the deadline to submit comments.  On the date the Labor Department released its proposed rule, we issued a comprehensive blog post entitled, “The Labor Department’s Independent Contractor Rule Has Little If No Legal Impact But Is Likely to Cause Anxiety for Many Stakeholders.” We asked in the introductory paragraph of that post, “What does this mean legally for both workers and businesses who are currently classified as ICs?”  Our response was:  “Not much, … since it is the courts that create law on this subject, not regulatory agencies.  But as a practical matter, the issuance of the proposed regulation, once finalized, will likely create anxiety among businesses and many of those who currently receive 1099s that the ground beneath them is shifting.  It will also give impetus to some workers who currently receive 1099s to file class actions seeking minimum wage or overtime payments under federal and state laws.”  Set forth below are the comments filed by the publisher of this legal blog on December 12, 2022.

Among the legal developments we report on below from October is a decision by a federal district court in California certifying a lawsuit for independent contractor misclassification as a collective action under the federal wage and hour law, allowing similarly situated individuals to join the lawsuit seeking unpaid overtime.  What was most significant about the decision is that the certification was based on little more than threadbare allegations and conclusory declarations. Unlike the more rigorous standard for class action certification under Rule 23 of the Federal Rules of Civil Procedure governing class actions, federal court judges have traditionally been given wide latitude in deciding whether to grant collective action certification for alleged violations under the federal Fair Labor Standards Act.  Few judges, however, have applied a more lenient standard than the one applied by the court in the first case summarized below, where it granted collective certification based on plaintiff’s declaration that she and other prospective members of the collective action “often worked more than 40 hours a week,” despite documentary evidence to the contrary. How can a business avoid the costs of defending against these types of claims that can turn into collective actions so easily? The answer is to elevate compliance with state and federal IC laws, minimizing the odds of being sued. Savvy companies have done so using a process such as IC Diagnostics (TM), which restructures, re-documents, and/or re-implements their IC relationships in a manner than maximizes IC compliance in a customized and sustainable manner consistent with their business models.

The Biden Administration’s Labor Department earlier today issued a proposed regulation that seeks to define the worker classification test for independent contractor or employee status under the Fair Labor Standards Act (FLSA). Once finalized, the regulation would alter the test for IC status under the FLSA as last articulated by the Trump Administration, which had likewise changed the FLSA test for IC status previously issued by the Obama Administration. What does this mean legally for both workers and businesses who are currently classified as ICs?  Not much, as explained below, since it is the courts that create law on this subject, not regulatory agencies.  But as a practical matter, the issuance of the proposed regulation, once finalized, will likely create anxiety among businesses and many of those who currently receive 1099s that the ground beneath them is shifting.  It will also give impetus to some workers who currently receive 1099s to file class actions seeking minimum wage or overtime payments under federal and state laws. Prudent businesses should anticipate an increased risk of litigation and seek to minimize their exposure to IC misclassification liability in a two-pronged approach, as discussed below in our “Takeaway.”

Undoubtedly the most meaningful legal development in September 2022 was Uber’s agreement to pay $100 million in settlement to the New Jersey Department of Labor and Workforce Development for back unemployment taxes. As described below, Uber settled for a fraction of the amount it had been assessed, did not admit to liability, and did not agree to reclassify drivers providing services to its customers in New Jersey.  Yet the amount of the settlement is so substantial that, as the publisher of this blog was quoted in an article about the settlement, “When a company pays a nine-figure amount dealing with the classification of their workers, other states … ‎take note.”  This settlement should prompt other gig economy companies using independent contractors to take action that an increasing number of companies have taken: restructuring, re-documenting, and/or re-implementing their independent contractor relationships, using a process such as IC Diagnostics (TM), to enhance compliance with federal and state independent contractor laws.  That process allows companies to minimize misclassification liability in a customized and sustainable manner consistent with the company’s business model, affording it far better defenses not only to class action lawsuits, but also when workforce or tax agencies conduct an audit seeking taxes on the payments to independent contractors.  

We highlight below the independent contractor misclassification and compliance developments that occurred in July and August 2022, but three deserve special mention. One of the most important judicial developments is a new lawsuit alleging that Perdue Farms misclassifies chicken growers as independent contractors. This lawsuit may signal that agribusiness is the next industry being targeted by class action lawyers. Another key legal development is a bipartisan initiative in Congress to propose legislation recognizing the legitimate use of independent contractors.  While there is little likelihood that the pending bill will become law in this Congress, the fact it has bipartisan support suggests that it will be reintroduced in future sessions of Congress and may gain momentum.  A third legal development is a regulatory initiative by the National Labor Relations Board and the Federal Trade Commission to coordinate agency action against companies, particularly those in the gig economy, regarded as undermining competition and the right to unionize through the misclassification of employees as independent contractors.  There have been many coordinated agency efforts in the past that have focused on misclassification of independent contractors, but they have failed to result in any meaningful enforcement actions. Moreover, as explained below, the NLRB is not statutorily authorized to investigate companies referred to it by other administrative agencies, making any coordinated enforcement action between the NLRB and the FTC highly unlikely.  Nonetheless, the heightened focus on the use independent contractors since President Biden’s election has sent a strong message to companies that use contractors: enhance your compliance with federal, state, and local independent contractor laws.  Many companies have utilized a process such as IC Diagnostics (TM), which restructures, re-documents, and/or re-implements independent contractor relationships in order to minimize risk of misclassification liability in a customized and sustained manner, without altering the company’s business strategy or objectives.