Independent Contractors

Seyfarth Synopsis: The New York Court of Appeals recently rejected the narrow view of the Unemployment Insurance Appeal Board and found that substantial evidence did not support a finding that certain yoga instructors were misclassified as independent contractors.

Co-authored by Robert S. Whitman and Howard M. Wexler

As wage and hour “gurus” are aware, the “mantra” of most federal and state agencies these days is a restrictive view of independent contractor status. Accordingly, in a rare yet welcome decision that we hope will yield some good “karma,” the New York Court of Appeals held in Matter of Yoga Vida NYC, Inc. that substantial evidence did not warrant the Appeals Board’s finding certain yoga instructors were misclassified as independent contractors.

In Yoga Vida, a yoga studio employed both staff instructors (who were classified as employees) and non-staff instructors (who were classified as independent contractors). The State’s Unemployment Insurance Appeal Board held that the non-staff instructors were misclassified, applying a strict reading of the employer-employee test under the New York Labor Law.

The Court of Appeals held that substantial evidence did not warrant the Appeals Board’s finding. The Court relied upon the facts that the non-staff instructors:

  • Were paid only if a certain number of students attend their classes (unlike staff instructors, who were paid regardless of whether anyone attends a class);
  • Had no restrictions on where they could teach, and were free to inform Yoga Vida students of classes they teach at other studios so the students can follow them; and
  • Were not required to attend meetings or receive training.

Rejecting the position of the Appeals Board and the dissenting judge, the court held that the above factors outweighed the fact that Yoga Vida:

  • Inquired if the instructors had proper licenses, published the master schedule on its web site, and provided the space for the classes;
  • Generally determined what fee was charged, collected the fee directly from the students, and provided a substitute instructor if the non-staff instructor was unable to teach a class and could not find a substitute; and
  • Received feedback about the instructors from the students.

In reaching this decision, the Court held that, “The requirement that the work be done properly is a condition just as readily required of an independent contractor as of an employee and not conclusive as to either.”

Although it is certainly a welcome decision for employers, it is not time to say “Namaste” just yet. The mere fact that a worker is labeled an “independent contractor” and willing to work as such (without receiving minimum wage or an overtime premium) is not enough to remove the worker from the coverage of wage-hour laws. Careful compliance for employers in classifying workers as independent contractors rather than employees remains as important as ever. Om.

Co-authored by Robert Whitman and Adam J. Smiley

Seyfarth Synopsis: Fox Searchlight and Fox Entertainment Group have reached a preliminary settlement with a group of former unpaid interns, possibly resolving the lawsuit that resulted in a Second Circuit decision that redefined the test used to evaluate whether interns are properly classified under the FLSA.

As this blog has previously reported [here, here], former unpaid interns who worked on Fox film productions sued the studio in 2010, alleging that they were misclassified and entitled to minimum wage and overtime compensation. In a 2013 decision, Judge William Pauley of the Southern District of New York granted summary judgment to two of the interns, holding that they should have been treated as employees, and held that a third intern could pursue his related claims as a class and collective action under the FLSA and New York Labor Law. Fox appealed to the Second Circuit, which in July 2015 held that that the “primary beneficiary” test, rather than the Department of Labor’s stricter six-factor test, should be used to evaluate the classification of unpaid interns. The court sent the case back to Judge Pauley for resolution under its newly articulated standard.

Under the proposed agreement, any intern who served for at least two weeks from 2005-2010 will be entitled to a $495 payment. That amount is within the payout range that we’ve seen in other internship lawsuits. Three of the lead plaintiffs, Erik Glatt, Alexander Footman, and Eden Antalik, will receive service awards of $7,500, $6,000, and $3,500, respectively.

The settlement would resolve claims in two lawsuits before Judge Pauley: Glatt v. Fox Searchlight, which concerns New York interns, and Mackown v. Fox Entertainment Group, which concerns California interns. The total monetary value of the settlement, covering both lawsuits, is approximately $600,000, of which $260,000 is for attorneys’ fees.

In papers supporting the proposed settlement, the plaintiffs noted that the Second Circuit’s ruling presented “significant risk to [them] on the merits and with regard to certification.” They also acknowledged their “extreme challenge” in obtaining class and collective action certification, especially given that the interns “were engaged in various divisions, performing different duties, and reporting to different supervisors,” such that the Court “could conclude that [their differences] exceed their similarities.” While still professing the strength of their case, the plaintiffs admitted that they faced litigation risks because the Second Circuit’s standard was “largely untested.”

The deal is not final: it still must be preliminarily approved by Judge Pauley, which will trigger the issuance of a notice informing class and collective members of their rights under the settlement. Putative class members will then have an opportunity to object to the settlement or opt out, and the deal must be finally approved by the Court after conducting a fairness hearing.

We’ll keep you posted as the settlement approval process moves forward, as well as any developments regarding the motion for summary judgment filed by the Hearst Corporation in a similar lawsuit, currently pending before Judge J. Paul Oetken, also in the Southern District of New York.

On a related note, the Wall Street Journal recently reported on a study conducted by the National Associate of Colleges and Employers, which found that paid interns are more likely to receive a job offer after graduation—and earn more money—then their fellow students who had an unpaid internship. The article also discusses important issues regarding income inequality and diversity between paid and unpaid interns, and employers may be well-served by reviewing the cited data when contemplating whether to offer paid or unpaid internship programs.

Authored by Patrick Bannon and Anne Bider

Independent contractor misclassification claims have become an epidemic — nationally and especially in Massachusetts.  Under most tests for independent contractor status, whether an individual’s services are within the usual course of the business of the company for which they are performed is an important factor.  Under Massachusetts’ Independent Contractor Statute it is an essential element of independent contractor status.  But who gets to define the scope of the company’s business, and how?

After a stream of cases under Massachusetts law in which courts rejected defendants’ attempts to define the scope of their businesses, the U.S. District Court for the District of Massachusetts recently issued a decision that gives businesses hope.  In Ruggiero v. American United Life Insurance Company, the Court held that plaintiffs cannot use the independent contractor statute to expand the boundaries of a legitimately defined business—even if those boundaries exclude services that are important to and closely integrated with a company’s business.

The plaintiff in Ruggiero was an insurance agent who entered into a contract with American United Life Insurance Company (“AUL”) to sell AUL’s insurance products and recruit and train other agents to do the same.  With the help of a loan from AUL, the plaintiff established an agency in Massachusetts.  After a few disappointing years, the plaintiff sued under the Massachusetts Independent Contractor Statute, claiming the rights and benefits of an AUL employee.  To defend the claim, AUL was required to show that: (1) Ruggiero was free from the company’s direction and control; (2) Ruggiero’s services were “outside the usual course of the business” of AUL; and (3) Ruggiero was engaged in an independently established trade.

The crux of the dispute was Prong 2.  AUL contended that, while some insurance companies issued products and sold them—taking a product from inception all the way to the customers’ hands—others limited their business.  AUL argued that it drafted policy language, obtained regulatory approval of policies, and invested premiums.  It did not, however, sell policies.  Instead, it left distribution to third parties, including banks, credit unions, wholesalers, and insurance agents, including the plaintiff.

In ruling on cross-motions for summary judgment, the Court agreed with AUL.  It found that while sales were “essential” to AUL’s success, AUL had legitimately outsourced that function.  And, unlike cases involving delivery services, cleaning companies, and adult clubs, where defendants artificially attempted to deconstruct their businesses to avoid proper classification of employees, AUL’s definition of its business was bona fide.  In reaching the conclusion that the plaintiff’s services were outside the scope of AUL’s business, the Court also found it relevant that the plaintiff mostly sold non-AUL policies, thus benefitting competing insurance companies as well as AUL.

The Court also held that AUL established Prongs 1 and 3 of the Independent Contractor Test, noting that the plaintiff was free to run his agency as he pleased and sell the products of AUL’s competitors.  That the plaintiff sold the insurance products of a number of unrelated insurance companies – indeed, sold mostly non-AUL products – undoubtedly also helped as to Prong 2, by persuading the judge that the plaintiff’s services could legitimately be considered outside AUL’s business.

The Ruggiero decision offers Massachusetts employers insight into how courts may approach the most contested provision in the nation’s most stringent independent contractor laws.  For employers outside of Massachusetts, it also provides a counterpoint to the idea, recently  advocated by the Wage and Hour Division of the U.S. Department of Labor, that close coordination between a company and an individual who provides services that are important to the company’s business automatically creates an employment relationship.  Employers who think that theory is unreasonably broad can find support in the Ruggiero decision.

Authored by Alex Passantino

‘Twas the week before Christmas, 2-0-1-5
When the poetry elves on the blog came alive.
Crafting their rhymes with a purpose so clear:
Presenting the wage-hour gems of the year.

In January, for new regs in this year our breath bated.
Then for six painful months, we speculated and waited.
And just as we geared up to celebrate Independence,
Out came a proposal that will create more defendants.

With a salary level that for 10 years has been flat,
They looked at New York’s and said “higher than that.”
More than double the old; and then they got clever …
The proposed sal’ry level will increase for forever.

Anticipated changes to duties caused quite a fuss
When DOL said “If you’ve got some ideas, just tell us.”
Of the Department’s proposal, employers were understandably wary,
So we wrote down some ideas on how to make it less scary.

Nearly 300 thousand comments they have to review,
It will be late into next year before they are through.

Next up on the list of your wage-hour joy,
Are the efforts to change what it means to employ:
ContractorsJoint employment. Fissured industry.
Interns. The “third way” and gig economy.

Economic realityRight to control.
They’re integral to your business? Now you’re in a deep hole.
So many angles, it can drive you berserk.
As agencies and courts figure out what is “work.”

And if divergent decisions bring you a sense of elation,
Then please focus attention on class certification.
Approvals, denials, and some decerts, too.
No matter the side, there’s a case for you.

But as summer approached, there arose quite a stir,
A case that’d explain what the class cert rules were.
A Supreme explanation, o my-o, o me-o
We’d learn about class via Bouaphakeo.

They’ve argued, but there’s no decision, not yet,
And a limited ruling on records might be all that we get.
But the cases keep coming. Their numbers broke the charts.
Whether giant class actions or cases broken in parts.

And the response to those filings? The employers’ retort?
A wide range of ways to get them out of court.

Some cases get mooted. Some cases do not.
At Genesis’s open question, SCOTUS might take a shot.
Does an offer of judgment that’s not been accepted
Mean the plaintiff cannot proceed with his class as expected?

Increasingly used as a litigation life saver
Arbitration agreements with a class action waiver;
And when asked if state laws could class waivers prevent, yo,
The Supremes laid the smack-down to dear Sacramento.

With all of these options, it comes as a surprise then,
That one resolution keeps on getting the Heisman.
For reasons that many cannot understand,
To settle wage claims courts think they must hold your hand.

That’s our year in review, we whipped you right through it.
Next year? The new regs and a mad dash to review it.
But before 2015 joins the past’s ranks,
You keep on reading our blog, and for that we give thanks!

THANKS TO ALL OF OUR READERS. BEST WISHES FOR A HAPPY, HEALTHY, AND PROSPEROUS NEW YEAR!

Co-authored by Robert S. Whitman and Adam J. Smiley

As this blog revels in the newest installment of the Star Wars saga, we remind you of our previous reports (here and here) regarding an equally enthralling (to your humble bloggers, anyway) legal showdown: the legal issues swirling around the “on-demand” workforce. Lawsuits by drivers for on-demand ride services have received the most publicity, but courts and state agencies are paying increasing attention to the question of whether on-demand workers are employees—and thus entitled to minimum wage, overtime pay, and other protections—or independent contractors in businesses for themselves.

While we are continuing to monitor these key lawsuits, several recent policy initiatives seek to clarify the classification of on-demand workers through means other than litigation.

DOL Symposium

On December 10, 2015, the U.S. Department of Labor held a “Future of Work” symposium. This full-day conference explored the trends associated with the on-demand economy and what they mean for the DOL in the future. The symposium addressed questions such as:

  • “How [does the DOL] ensure that enforcement of core worker protections within the [agency’s] jurisdiction remain effective while allowing for, and encouraging, innovation?”
  • “How do we make it easier for new-model companies to do right by workers?”

Leading up to the conference, DOL Wage and Hour Administrator David Weil commented that, “the discussion of the gig economy is often couched as if it is the future of work … . [It] is certainly an emerging issue … but it is not the future of work. It is part of what is evolving.” This sentiment is not surprising given Weil’s view, as expressed in an Administrator’s Interpretation last summer, that the existing legal framework used to evaluate independent contractor status, which was crafted decades before the on-demand economy could even be fathomed, is still applicable to the workforce in 2015 and beyond.

New Worker Classification?

Two former senior members of the Obama Administration, Seth Harris (former Acting Secretary of Labor) and Alan Kreuger (former Chairman of the Council of Economic Advisers), authored a report that proposed creating a third classification of worker in addition to “employee” and “independent contractor”: the “independent worker.” The report, issued December 7 by The Hamilton Project, a think tank affiliated with the Brookings Institution, aims to “modernize labor laws for the 21st century workforce.” According to the proposal, this third category of workers would “occupy a specific part of the gray area” between employees and independent contractors, and would “enable businesses to provide benefits and protections that employees currently receive without fully assuming the legal costs and risks of becoming an employer.”

The proposal would confer the following benefits on “independent workers”:

  • The freedom to organize and collectively bargain;
  • The ability to pool benefits such as health insurance and retirement accounts or income and payroll tax withholding;
  • Civil rights protections; and
  • An opt-in program for workers’ compensation insurance.

The proposal would treat “independent workers” similarly to independent contractors in other respects, and would not confer to them the following benefits:

  • Overtime benefits and protections;
  • Guaranteed minimum wage protections; and
  • Unemployment insurance.

We will monitor reactions to this proposal and other initiatives that would seek to create a new classification of on-demand workers.

New York City & Seattle Legislation

Also on December 7, a bill was introduced to the New York City Council that would establish certain protections for freelance workers, many of whom provide on-demand services. The “Freelance Isn’t Free” bill would require any person or company who hires a freelance/on-demand worker to execute a written contract describing the work to be performed, rate, method of payment, and due date. The law would also require payment in full within 30 days after the completion of service, or the contractual due date. Penalties would include double damages, attorney’s fees, and civil penalties.

While this bill does not directly address the worker classification issue, it seeks to address the perceived underpayment or non-payment of wages—a complaint often raised when discussing alleged misclassification. It is too early to speculate about whether this bill will pass, but if enacted it would impose important legal and administrative obligations on companies with an on-demand or freelance workforce.

On the other side of the country, Seattle’s City Council unanimously passed a law on December 13 that would give Uber and Lyft drivers the right to form labor unions. Seattle Mayor Ed Murray refused to sign the bill, but it is still likely to become law because the City Council may override his decision with a 2/3 vote. In a statement explaining his disapproval, Mayor Murray noted “several flaws” in the legislation, including the “relatively unknown costs of administering the collective bargaining process and the burden of significant rulemaking the Council has placed on the City staff.”

Assuming the City Council enacts the law, Seattle will become the first city to give on-demand drivers collective bargaining rights. However, the law will almost certainly be challenged in the courts on the basis that it is preempted by the National Labor Relations Act and violates antitrust law.

If this law is enacted and survives legal challenges, it may serve as a template for other cities to take similar action, and possibly for the expansion of such rights to all on-demand workers, not just drivers.

May the workforce be with you!

Co-authored by Richard Alfred and Patrick Bannon

The National Labor Relations Board’s decision in Browning-Ferris Industries of California, Inc., announced last week, dramatically expands joint employer liability under the National Labor Relations Act. A business can be found to be a joint employer of individuals, the Board concluded, even if the business has only unexercised potential power to control the individuals’ work indirectly. The Board argues that this broad concept of joint employment is necessary because otherwise an entity with real control over the economics of a business could insulate itself from the obligations of an employer by contracting with a third party to employ the workers who keep the business running. Seyfarth Shaw’s discussion of the ramifications of the Browning Ferris decision, for both unionized and non-unionized employers, is available here.

Wage and hour lawyers who treat the Browning-Ferris decision as simply a matter of traditional labor law overlook the potentially major significance of the decision for wage and hour law. Even though the NLRA and the FLSA embody different tests for identifying employer-employee relationships (common law v. eceonomic realities), the Wage and Hour Division will undoubtedly cite the NLRB’s expanded view of who can be a “joint employer” to support the Wage and Hour Division’s expected further efforts to expand the range of parties that may be found responsible for wage and hour violations.

The Wage and Hour Division is likely to argue that the NLRB’s increased readiness to recognize joint employers under the NLRA, which has always been understood to embody a more stringent common-law agency test for establishing joint employer status, supports a broad view of joint employment under the Fair Labor Standards Act’s “economic realities” test for whether an employment relationship exists. The NLRB’s majority labored to explain how its joint employer concept is consistent with the common-law agency test. The Wage and Hour Division is not constrained by the common law’s right to control test and is likely to be emboldened to adopted an expansive joint employer standard under the more flexible economic realties test.

Indeed, last month, the Wage and Hour Division issued an Administrator’s Interpretation addressing the distinction between employees and independent contractors under the FLSA. That guidance is noteworthy for emphasizing the importance of whether an individual’s services are an integral part of a company’s business and downplaying the importance of whether the business controls an individual’s work. The Administrator’s view of what constitutes an employment relationship–if the courts accept it–would potentially support a joint employer doctrine that is dramatically broader than employers have seen to date and that could be used by the DOL and aggressive plaintiffs’ lawyers to pursue businesses for wage and hour violations involving individuals with whom the defendant companies have never had a direct relationship.

The Administrator of the Wage and Hour Division has long expressed concern about what is termed the “fissuring” of the employment relationship. At the heart of this concept, is the notion that business giants profit from the services of individuals who are direct employees of third-party companies, usually lower on the economic totem-pole. For example, the employees who run hotels and restaurants are often employees of local franchisees, not of the well-known national companies whose names are on the door. Similarly, the employees who work in a call center or distribution center are often employees of a staffing company, not of the business whose customers they help or whose products they handle.

The Wage and Hour Division has adopted a strategic enforcement plan that seeks to hold top-level companies responsible for wage and hour compliance as to the individuals who work in their business sector–regardless of whether a direct employment relationship exists. As the Wage and Hour Division appears to see things, a broad joint employer theory is essential to its efforts to target supposedly deep-pocketed national companies. Businesses that could be vulnerable to joint employer claims include suppliers, contractors, lessors, private equity and venture capital investors, companies that outsource work, staffing agencies, franchisors, creditors, and parent entities that have subsidiary businesses.

The combination of the Browning-Ferris decision and the Wage and Hour Division’s recent independent contractor guidance should serve as a warning to businesses in general to assess their potential exposure to wage and hour claims based on a joint employer theory. Assessments of this type should start with a close examination of contractual relationships with third-party employers to determine whether changes can be made to those agreements to reduce the risk of joint employer liability under the expanded definition of that term adopted by the NLRB and likely on the horizon from the Wage and Hour Division.

We will continue to report in the months ahead on developments regarding the joint employer issue and its impact on wage and hour law.

Co-authored by Robert S. Whitman and Adam J. Smiley

Last week, this blog reported on the guidance from the Department of Labor (DOL) regarding the classification of independent contractors under the FLSA. The 15-page Administrator’s Interpretation (AI) seeks to restrict the use of independent contractors by reading the FLSA’s definition of “employ” as broadly as possible and by tightening the requirements of the “economic realities” test used to evaluate worker classification.

While applicable to all businesses, the AI seems to specifically target the “on-demand” business model.

For instance, despite the fact that no one factor is supposed to be controlling, the DOL now finds “compelling” the first factor of the economic realities test: “the extent to which the work performed is integral to the employer’s business.” This may be problematic for many on-demand companies, as the service provided by their contractors may be deemed to be at the heart of the enterprise. This is the argument pursued in many pending legal challenges, including those against ride services and home cleaning businesses.

On-demand companies have argued that their core business is technology and that they simply connect customers with service providers through an app or website. Plaintiffs’ lawyers have disagreed, and the AI appears to side with the latter view by elevating the importance of this factor.

The AI also stresses that a “worker’s investment must be significant in nature and magnitude relevant to the employer’s investment … to indicate that the worker is an independent businessperson.” The AI does not include an acceptable ratio, and says only that a worker’s investment should not be “relatively minor.” It cites one case where a worker’s investment of $35,000 to $40,000—roughly the amount required to purchase and maintain an automobile—was dismissed as an inconsequential amount. This may be the DOL’s subtle way of taking aim at any on-demand company that utilizes drivers to provide transportation or delivery services, where the worker’s investment may be limited to an automobile.

Finally, given the spike in independent contractor lawsuits, many on-demand companies have chosen to decrease the amount of control they exercise over independent contractors as a preventative measure to avoid being sued (or better defend themselves if they are sued). However, the AI goes out of its way to minimize the importance of the “nature and degree of control” factor—seemingly in an effort to downplay the importance of the factor that on-demand businesses have worked to solidify.

Ultimately, the DOL’s intent to more aggressively police the classification of independent contractors will only heighten the scrutiny placed on the on-demand business model. We’ve already seen one major casualty: Homejoy, an on-demand cleaning service, recently announced that it was shutting down, saying that the “deciding factor” behind this decision was the four pending independent contractor lawsuits filed against the company.

The extent to which courts will defer to the AI, if at all, is likely to be the subject of much debate and litigation. But we anticipate that the plaintiffs’ bar will soon try to use the guidance as a binding precedent, especially in New York and California federal courts, where many on-demand tech companies are based. Company attorneys will likely argue that the DOL cherry-picked cases to support its argument, cite more reasonable interpretations of the FLSA and economic realities test, and ultimately argue that the AI should receive minimal deference. We will keep readers apprised as the courts have their say.

Co-authored by Richard Alfred, Alex Passantino, Patrick Bannon, and Adam Smiley

Today, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued its first Administrator’s Interpretation (AI) on the Fair Labor Standards Act (FLSA) in more than a year. As the Administrator, Dr. David Weil, had forecast in a speech last month, today’s AI discusses the important topic of independent contractor and employee classification under the FLSA. The AI is an unapologetic effort to restrict the use of independent contractors: “[M]ost workers,” the Administrator concludes, “are employees under the FLSA’s broad definitions.”

As background, an AI is an agency interpretation, and is not subject to the notice and comment process required for rulemaking, such as the Department of Labor’s proposal to amend the “white collar” exemption regulations. The extent to which courts should defer to the AI, if at all, is likely to be the subject of debate and litigation. It is clear, however, that the AI does not have the force of a regulation properly issued after notice and comment. The AI does not announce a new test for employee, as opposed to independent contractor, status. Rather, it grafts the multi-factor “economic realities” test that courts commonly use onto an extremely expansive reading of the FLSA’s “suffer or permit to work” definition of “employ.” In so doing, the Administrator’s analysis and examples further WHD’s recent efforts to investigate the use of independent contractors. Combined, WHD’s efforts indicate a significant hostility towards the use of independent contractors.

The result that the Administrator seeks is to severely restrict the use of independent contractors and to require businesses to reclassify those workers as employees subject to the minimum wage and overtime requirements of the FLSA as well as to other federal and state laws applicable to the employment relationship. The Administrator also notes that the same analysis of independent contractor versus employee status under the FLSA applies to the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act.

The Administrator’s Interpretation relies on the “economic realities” test to assess whether an entity “suffers or permits to work” individuals who are entitled to the FLSA’s statutory protections. At the highest level, the AI states this test as “whether the worker is really in business for him or herself (and thus is an independent contractor) or “is economically dependent [on the business for which he or she provides services] (and thus is its employee).”

In the AI, WHD continues its use of six factors typically included in an analysis of the “economic realities” test, and restates its belief that no one factor is controlling or should be given “undue weight.” And, additional factors relevant to any particular situation may also be considered. The key is to determine whether workers have sufficient economic independence by operating a business of their own. These six factors include:

  1. The extent to which the work performed is integral to the employer’s business;
  2. Whether the worker’s managerial skills affect his/her opportunity for profit and loss;
  3. The relative investments in facilities/equipment by worker and the employer;
  4. The worker’s skill and initiative;
  5. The permanency of the worker’s relationship with the employer; and
  6. The nature and degree of control exercised by the employer.

Starting from the premise that “most workers are employees under the FLSA’s broad definition,” WHD rejects the parties’ understanding of their relationship, as well as whether they have an agreement regarding the nature of their relationship. As the AI states: “[A]n agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status.” (Emphasis supplied).

Instead, today’s AI reviews and considers each of these factors—emphasizing the extent to which the services at issue are integrated into the business of the entity receiving them and de-emphasizing whether the business has control over the service provider. Rather than simply restating the factors, however, WHD cherry-picks court decisions to support its position, ultimately concluding that the most important question is whether an individual runs a “truly independent business.”

Here are the key points made by WHD regarding each factor of the test:

Integral To Business: 

  • Although the AI notes that no one factor is controlling, this factor is described as “compelling,” and appears to have a heightened importance in the analysis.
  • Work can be found to be integral to a business “even if the work is just one component of the business and is performed by hundreds or thousands of other workers.”
  • How this factor applies will be especially important to the growing “on-demand” business model, which often involves an attempt to redefine the structure of an industry so that services that were once performed by employees are performed by independent service providers.

Potential For Profit/Loss: 

  • The guidance explicitly rejects the theory that a worker’s ability to work fewer or more hours at their own discretion equates to an opportunity for profit or loss.
  • An independent contractor’s opportunity for loss appears to now be a requirement under the test: “it is important not to overlook whether there is an opportunity for loss, as a worker truly in business for him or herself faces the possibility of a loss.”

Relative Investments: 

  • The “relative” investments between the worker and a business “matter” under the AI, and “the worker’s investment must be significant in nature and magnitude relevant to the employer’s investment…to indicate that the worker is an independent businessperson.”
  • This adds a quantitative analysis to the equation, but fails to provide an acceptable ratio—only that a worker’s investment should not be “relatively minor”; WHD then proceeds to dismiss the investment of $35,000 to $40,000 by a worker as, essentially, an inconsequential amount.

Skill/Initiative Requirement: 

  • The DOL’s guidance emphasizes a worker’s “business skill, judgment, and initiative” and not his or her technical skills under this factor.
  • This language seems to explicitly dismiss any consideration of a worker’s technical ability and would focus the analysis solely on the worker’s business acumen.

Permanency Of Relationship: 

  • The AI states that “the key is whether the lack of permanence … is due to the operational characteristics intrinsic to the industry.”
  • As an example, staffing agency workers were viewed as employees given the nature of the industry and the permanency in the working relationship.

Degree Of Control: 

  • The AI specifically de-emphasizes the importance of this factor and says it “should not play an oversized role in the analysis.”
  • A company’s exercise of control due to the nature of their business, regulatory requirements, or their desire to maintain high customer satisfaction are not permissible reasons to exert control over independent contractors and still indicate an employee relationship.
  • The fact that workers control the hours they work is “largely insignificant” where such freedom is typical in the worker’s specific industry.

Taken collectively, these views—supported by cases cited by WHD, but dismissing virtually all contrary authority—represent an effort to expand dramatically the “economic realities” test. Coupled with WHD’s proposed massive increase to the salary level required for the “white collar” exemptions—published less than 10 days ago—WHD’s actions have the potential to fundamentally alter countless business models, without Congressional activity, without proposed language (in the case of the duties tests for the exemptions), and, in this case, without any opportunity for the regulated community to provide its comments on WHD’s position.

Any business that uses independent contractors extensively or to receive services that are important to its success should review this AI and consider carefully how the WHD and courts applying the economic realities test would view its independent contractor relationships. A business that misclassifies an individual as an independent contractor may face significant exposure under the FLSA, including liability for any failure to pay at least the minimum wage for all time worked, failure to pay overtime for work in excess of 40 hours per week, violations of the FMLA and other statutes that borrow the FLSA’s definition of “employee,” and violation of the FLSA’s recordkeeping requirements. Failing the FLSA economic realities test may also indicate possible misclassification under other federal and state statutes, which may carry even greater exposure, including liability for failure to reimburse employee expenses, provide various employee benefits, withhold income taxes and FICA, pay unemployment insurance contributions, or provide workers compensation insurance coverage.

Lawsuits challenging workers’ classifications under the FLSA have become common; plaintiffs’ lawyers have challenged both individual classification decisions and new and old industry models involving independent contractors. The broad guidance issued by WHD today will likely be used by the plaintiffs’ bar to try to chip away at independent contractor classifications. Businesses and management-side practitioners should take inventory of those decisions that have a more reasoned and neutral application of the “economic realities” test and be prepared to use those cases—and not those cited in the AI—as a more appropriate view of the standard.

In addition, WHD has aggressively sought to enforce independent contractor standards through investigations and audits, which may ultimately give rise to lawsuits filed by the DOL. Indeed, WHD has requested budget increases for more than 300 new full-time enforcement positions, and has provided millions of dollars for worker misclassification detection and enforcement initiatives. On top of that, of course, are the back wages WHD has recovered for newly-determined employees. And as we’ve previously reported, the spike in “on demand” services available via smart phones has created a wave of independent contractor misclassification lawsuits that has greatly increased the visibility of this issue.

Taking the long view, Dr. Weil’s guidance is also in keeping with the WHD’s apparent goal of affecting widespread change in the manner in which U.S. businesses designate workers as independent contractors. Indeed, Dr. Weil has previously written that, “we need to create ripple effects that impact compliance far beyond workplaces where we physically conduct investigations, or organizations to which we provide outreach directly. We need to continue to find ways to make our investigations of one employer resonate throughout that particular sector and influence the behaviors of employers across the entire industry … .”

Ultimately, the AI is consistent with the DOL’s stated intent to aggressively challenge independent contractor classifications. The guidance  now makes it likely that DOL investigations and enforcement actions and private litigation contesting the classification of such workers will intensify. Businesses should, therefore, carefully evaluate the DOL’s guidance and its potential impact on their operations. We will continue to inform our clients and the broader employer community about the effect of the AI and to blog about these issues at www.wagehourlitigation.com.

Co-authored by Robert S. Whitman and Adam J. Smiley

This blog recently reported on the first wave of lawsuits challenging the classification of independent contractors in the “on-demand” economy. The second wave has now arrived, as numerous tech companies have been hit with class or collective action lawsuits alleging misclassification of their workers, most filed by the same plaintiffs’ attorney who avoided summary judgment against Uber and Lyft earlier this year.

The rundown:

  • Washio, an on-demand laundry service, was sued in San Francisco federal court by a driver alleging California state law wage violations;
  • A group of bike and vehicle couriers for Shyp, a package delivery company, brought a claim for arbitration alleging California state law wage violations;
  • Handy, a cleaning and “handyman” service provider, was sued in Massachusetts federal court by a Boston-area cleaner who alleges violations of the FLSA and Massachusetts wage laws;
  • Postmates, a general delivery service, was sued by a group of foot, bicycle, and vehicle couriers in San Francisco federal court alleging violations of the FLSA, as well as California, New York, and Massachusetts wage laws; and
  • Lyft is immersed in litigation on two fronts, as a former driver just filed a class and collective lawsuit in Florida federal court alleging violations of the FLSA and Florida law.

These legal actions come on the heels of an eye-opening decision by the California Labor Commissioner, who ruled in June that a former Uber driver was an employee, not an independent contractor. This decision, which is not binding on any court and applies only to a single employee (and is subject to appeal), still created shockwaves and has led to widespread speculation about a similar ruling in the class-action lawsuits pending against Uber and Lyft in federal court. (Uber is opposing class certification in its litigation and on July 9 submitted statements from over 400 drivers.)

Meanwhile, the U.S. Department of Labor, fresh off its proposed amendments to the FLSA’s “white collar” exemptions, has indicated that it will issue guidance regarding the independent contractor classification. This guidance will come sometime this summer in the form of an “Administrator’s Interpretation,” according to David Weil, head of the DOL’s Wage and Hour Division. While we can’t predict the exact content, we anticipate that the AI will tighten the requirements of the independent contractor classification, which would be consistent with the DOL’s aggressive enforcement in this area.

These developments are critical if you’re an on-demand business, or are thinking of rolling out on-demand services. If you utilize independent contractors, it is imperative to properly evaluate the service relationship to ensure compliance with the law.

Stay tuned for more developments.

Authored by Kara Goodwin

Last week, a federal district court decertified a Rule 23 class of more than 1,000 insurance agents who claimed that Bankers Life and Casualty Co. misclassified them as independent contractors, and, as a result, they were entitled $16.9 million in overtime damages under the Washington Minimum Wage Act. In decertifying the class, the court held that “[d]etermining whether class members are employees or contractors under the economic-dependence test” — the same “economic reality” factors typically applied under the Fair Labor Standards Act — “would require an individualized inquiry into each agent’s experience,” meaning “individualized fact questions predominate over common ones” and “[c]lass treatment would be unmanageable.”

Although the procedural history of David et al. v. Bankers Life & Casualty Co. is unique —initially brought in state court; removed under CAFA; remanded where the amount in controversy was not established; state-wide class of 1,000 agents certified, after which plaintiffs asserted a claim for damages exceeding $16.9 million; removed again under CAFA; defendant moved to decertify class — the underlying class certification issues are familiar: whether the common evidence presented provides for a class-wide answer to resolve the misclassification issue “in one stroke” and whether common questions predominate.

Plaintiffs offered the standard form contract that all agents were required to sign and 21 declarations to show that agents operated under a “common regime of control,” which, they argued, supported class certification. Bankers, in turn, relied on declarations from 50 current agents and several managers to demonstrate that many agents had very different experiences from those described by the plaintiffs. Bankers also explained why its declarants had such different experiences from plaintiffs’ declarants, including that the more successful and established agents enjoy greater independence, and that the named plaintiffs and certain declarants enjoyed less independence because of the management style of a particular former supervisor, a style not shared by other supervisors.

As a preliminary matter, the court rejected the plaintiffs’ argument that the defendant’s so-called “happy camper” declarations should be discounted because the declarants were current employees presumably testifying in a light favoring their employer to avoid professional reprisal. Instead, the court relied heavily on the varied experiences described in the declarations, especially as to each agent’s ability to regulate his own hours, to conclude that there was no commonality and that determining whether class members were employees or contractors would require a “mini-trial” on each agent’s experience — i.e., “common issues cannot predominate.”

Also significant was the court’s rejection of the standard form contract as “common evidence,” stating that such evidence is insufficient to support class certification “in light of agents’ varied experiences.” The court also rejected the argument that class certification was appropriate because, even if at differing levels, Bakers had some level of control over all of the agents, concluding that such control “does not strongly suggest that all agents are employees” because any company using a contractor will have “some control over his performance by nature of its power to fire him.”

This case is a powerful testimonial for the use of targeted declarations to highlight differences among class members. The decision undoubtedly will help many employers build their strategy and defenses to class and collective certification.