Independent Contractors

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Co-authored by Christopher Truxler and Coby Turner

Seyfarth Synopsis: Earlier this month, a California federal court dismissed the misclassification claims of 7-Eleven franchisees on the pleadings, finding they did not and could not plead facts sufficient to show that they were employees of their franchisor.

All is well with one of America’s most beloved convenience stores. In October 2017, four 7-Eleven franchisees filed a class action lawsuit alleging the company misclassified franchise owners in California as independent contractors instead of employees. The plaintiff-franchisees sought hundreds of thousands of dollars in overtime pay and business expenses for each franchisee. But on March 14, 2018, the presiding judge put the plaintiffs’ Big Gulp gamble to rest, ruling that the franchisees are, in fact, independent contractor franchisees, and not employees, under California law or the FLSA.

As with most misclassification lawsuits, the heart of the dispute concerned the right to control. The plaintiff-franchisees claimed that 7-Eleven’s franchise agreement created an employment relationship because, they alleged, the company exerts control over certain details of store operations, such as temperature, operating hours, and other matters. The plaintiffs also focused on franchisees’ time spent in initial training.

The court was unmoved. Finding the alleged facts “wholly insufficient” to create an employment relationship under the Martinez v. Combs test, District Judge John Walter ruled that the plaintiffs failed to show that 7-Eleven exerted control over their day-to-day operations. Instead, 7-Eleven and the franchisees entered a “business format” franchising relationship—similar to that which the California Supreme Court ruled on in Patterson v. Domino’s Pizza—which permitted 7-Eleven to exercise the control necessary to protect its trademarks, brand, and goodwill.

Not only did the plaintiffs’ allegations regarding improper control all relate to 7-Eleven’s right to protect and control its brand, service standards, merchandise selection, and hours of operation, but, the court found, such uniformity ultimately benefitted the franchisees because of the increased goodwill it brought to the brand.

Of particular note, the court looked to factors under Martinez to conclude the franchisees were properly classified as independent contractors. The court noted that franchisees were generally entrepreneurial people, willing to commit time and money and assume a risk of loss in order to own and profit from their investment. Some operated multiple locations. The court found it significant that there was no cap on how much plaintiffs could earn on their investment, that they had complete discretion to do things like hire and fire employees, and that they had complete control over the day-to-day operation of their store(s). The fact that franchisees could terminate their agreement with 72 hours’ notice, while 7-Eleven could only terminate “for cause,” further weighed against a common-law employment relationship.

The court thus took a Big Bite out of potential liability for franchisor companies in holding that even standards and guidelines that require a franchisee to follow a list of marketing, production, operational, and administrative tasks is not enough to transform a franchisor into an employer. Other companies engaging independent contractors should also take note. Even though this case was analyzed with regard to a franchisee-franchisor relationship, the court took a view of “control” over independent contractors that is, “thank heaven,” quite practical and positive.

The Story Thus Far

As outlined in a previous blog article, the decision in Dynamex Operations v. Superior Court will be extremely important for all companies that use independent contractors, especially those in the emerging “gig economy.” Misclassifying workers can have painful consequences, involving not only liability for unpaid wages and employee benefits but also statutory penalties for each violation considered “willful.”

The Issue

In agreeing to review the case, the California Supreme Court defined the issue on appeal as whether, in a misclassification case, a class may be certified based on the expansive definition of employee as outlined in the California Wage Order language construed in Martinez v. Combs (2010), or on the basis of the common law test for employment set forth in S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989). In short, the California Supreme Court focused on whether to continue using the Borello test and on what test, if any, to apply instead.

The definition of employment identified in the California Wage Orders is broader than the prior common law test. California’s Wage Orders define “employ” broadly to mean “to engage, suffer or permit to work.” In contrast, Borello focuses instead on a multi-factor balancing test that depends on the unique facts of each situation and that is more likely to recognize the existence of an independent contracting relationship.

Oral Argument

Dynamex Operations Goes First

In its opening argument, Dynamex praised the Borello test as a tried and true California rule and warned against the danger that uncertainty in the classification of workers would pose to California’s booming “gig economy.” Dynamex raised concerns with any judicial adjustment to the definition of employment that would usurp the legislature role.

Justice Kruger, however, wondered whether judicial adoption of a bright-line rule would not be more instructive for employers, and suggested, as a possibility, adopting the ABC test followed in such jurisdictions as New Jersey and Massachusetts. The ABC test says that three conditions must all concur for a worker to be an independent contractor: (1) freedom from actual control over the work, (2) work beyond the usual course of business and off company premises, and (3) engaging in an independent trade. Unless A, B, and C all concur, then the worker is an employee.

Chief Justice Cantil-Sakauye raised an additional response to Dyanamex’s plea to leave this issue to the Legislature: if the ABC test is a stricter version of the Borello test, then why should the Supreme Court be precluded from adopting a new version of the test to ensure clarity in enforcement when, after all, it was the Supreme Court that had adopted the Borello test in the first place? Finally, Justice Kruger and Dynamex had a robust discussion about adopting a modified rule, where the ABC test would govern for some Labor Code provisions, but a different test may apply to others. Dynamex opined that this result would be confusing for employers and might result in individuals being employees for some purposes but independent contractors for others.

Aggrieved Independent Contractors Respond

In their responsive argument, the workers portrayed what they saw as the sorry plight of California independent contractors. The workers called independent contracts the new “serf-class”: people who work hard while receiving none of the California Labor Code’s basic employee benefits. They argued that the court should adopt a new, broader definition of employee to protect workers from harm. The workers seemed open to several outcomes, including (a) a broader definition for some California Labor Code provisions, (b) the definition outlined in the state’s Wage Orders, or (c) any other new employment test that the California Supreme Court might come to favor.

Justice Liu seemed skeptical about a broader test. He referred to an “Amazon Analogy.” Although most people know Amazon sells goods online, many people also view Amazon Prime (with its delivery services) as within Amazon’s usual course of business. Justice Liu then asked: if the Justices were to adopt a strict interpretation of the ABC test, at what point would Amazon be considered a shipping business, meaning that all drivers who ship Amazon Prime goods would be employees of Amazon under the second ABC prong? This analogy caught the attention of Justices Cuellar and Justice Chin, who both seemed to appreciate how complicated, and blurry, a new test could be.

Dynamex Makes A (Brief) Comeback

In its rebuttal, Dynamex took up Justice Liu’s “Amazon Analogy” to argue why a flexible test is needed to ensure just results. Two justices followed up. The first was Justice Liu, who asked whether other jurisdictions have applied the ABC prongs strictly. The second was Justice Chin, who closed oral argument with a pointed question that represents the concerns of many observers: which employment test best fits the modern economy? Dynamex responded that the body of developing case law as well as the uniformity of Borello’s application has suited California well and that it provides all of the factors needed to fully determine employment relationships.

Our Crystal Ball

Although one cannot read the minds of seven justices, we sense the court will likely reject the call to leave this matter for the legislature and will lean instead toward a judicially fashioned test that, in the view of most justices, will best fit the needs of the modern economy. The court’s decision is expected within the next 90 days.

As always, we will remain vigilant and on the scene. Look for more updates about this case as they come out and in the meantime do not hesitate to reach out to your friendly neighborhood Seyfarth attorney for guidance or with any questions you might have.

Authored by Alex Passantino

On June 7, Department of Labor Secretary Alexander Acosta announced the withdrawal of the DOL’s 2015 and 2016 Administrator Interpretations (“AIs”) on joint employment and independent contractors. These documents were statements of the Wage & Hour Division’s interpretations of the FLSA’s (and Migrant and Seasonal Agricultural Worker Protection Act’s) definitions of “employ,” “employer,” and “employee.” The withdrawal does not change the law; it simply removes as the DOL’s position those statements made in the AIs.

The withdrawal likely indicates a changing focus in the Department’s enforcement efforts away from the “fissured” industry initiative of the Obama Administration. We may get additional insight when Secretary Acosta testifies before the House Labor appropriations subcommittee to discuss the Trump Administration budget.

Authored by Hillary J. Massey

Seyfarth Synopsis: It remains to be seen whether the Trump administration will redirect its enforcement priorities away from independent contractor misclassification issues or curtail the applicable standards in the coming years. Because states and plaintiffs’ attorneys likely will continue to aggressively pursue independent contractor matters, employers should consider auditing their independent contractor positions to identify and address potential exposure.

Employers are understandably optimistic about what the Trump administration will mean for many aspects of employment law, including the test for independent contractor (“IC”) status. While it remains to be seen what President Trump’s Department of Labor will do, federal enforcement priorities and guidance likely will make it easier to classify workers as independent contractors. Many employers, however, face more stringent tests and aggressive enforcement priorities at the state level as well as plaintiffs’ attorneys searching for their next class action. In light of these ongoing risks, employers should continue to monitor laws concerning IC misclassification and consider auditing their IC arrangements for potential misclassification.

IC Issues in Recent Past

Independent contractor misclassification has been in the forefront in recent years, due to the enforcement efforts of the Obama administration’s Department of Labor and IRS and the attention of plaintiffs’ attorneys.

First, we saw a barrage of class actions brought by workers seeking overtime pay, expense reimbursements, and pay for other benefits they did not receive as ICs. These cases were difficult to defend on the merits due to the uncertain legal standards. They were also difficult to defend on damages, as employers typically did not keep records of hours worked by ICs and often paid ICs more than they would have paid them on an hourly basis as employees with benefits (thus ratcheting up the damages).

Then, on July 15, 2015, then administrator of the DOL’s Wage and Hour Division David Weil issued Administrator’s Interpretation No. 2015-1, taking the position that the “economic realities test” should be applied when determining if a worker is properly classified as an independent contractor under the FLSA. In sum, AI 2015-1 provided that if a worker was “economically dependent” upon an employer, the worker typically would be regarded as an employee. It described the employment relationship as “very broad” and stated that “most workers are employees.” The AI left no doubt that, in DOL’s view, proper IC classification would be rare.

In the meantime, at the state level, legislatures passed laws that made it more difficult (by applying a stricter test) and riskier (by increasing penalties and creating task forces) to classify workers as independent contractors. States likely focused on IC issues because they were not receiving unemployment insurance contributions, workers’ compensation premiums, and employee income tax withholdings related to these workers.

Notably, other states moved in the opposite direction in order to attract businesses, by passing laws specific to certain industries (e.g., ride-hailing) that explicitly define workers (drivers) as independent contractors for certain purposes.

Likely Upcoming Developments

Many employers are optimistic that, once confirmed, the new Secretary of Labor will repeal or replace AI 2015-1. In fact, the House Freedom Caucus requested repeal of the AI and many other regulations during an initial meeting with President Trump.

Even if that occurs, however, employers will not be relieved of the risk of complex IC litigation. There can be no doubt that plaintiffs’ attorneys and some states will continue to aggressively pursue IC misclassification.

Also, as the workforce changes (see Seyfarth’s Future of Work initiative), businesses in emerging industries such as the on-demand economy may be particularly vulnerable to enforcement initiatives and class actions. While lawmakers are considering options to address the gig economy, including creating portable benefits that would move with a worker from job to job and creating a third classification of worker, employers must continue to apply old laws and guidance to nontraditional jobs.

Next Steps for Employers

In light of this uncertain environment, employers should consider:

  • Continuing to monitor legal developments, especially at the state level;
  • Reviewing internal practices for the classification of new workers as ICs;
  • Training managers and others involved in hiring decisions about IC issues; and
  • Working with counsel to audit IC relationships (especially if operating in states like Massachusetts with stringent IC standards).

Authored by Gerald Maatman, Jr. 

Seyfarth Synopsis: Workplace class action filings were flat overall and even decreased as compared to levels in 2015. However, that is apt to change in 2017. In the 4th in a series of blog postings on workplace class action trends, we examine what employers are likely to see in 2017.

Introduction

Overall complex employment-related litigation filings increased in 2016 insofar as employment discrimination cases were concerned, but decreased in the areas of ERISA class actions, governmental enforcement litigation, and wage & hour collective actions and class actions. For the past decade, wage & hour class actions and collective actions have been the leading type of “high stakes” lawsuits being pursued by the plaintiffs’ bar. Each year the number of such case filings increased. However, for the first time in over a decade, case filing statistics for 2016 reflected that wage & hour litigation decreased over the past year.

Additional factors set to coalesce in 2017 – including litigation over the new FLSA regulations and the direction of wage & hour enforcement under the Trump Administration – are apt to drive these exposures for Corporate America. To the extent that government enforcement of wage & hour laws is ratcheted down, the private plaintiffs’ bar likely will “fill the void” and again increase the number of wage & hour lawsuit filings.

Complex Employment-Related Litigation Filing Trends In 2016

While shareholder and securities class action filings witnessed an increase in 2016, employment-related class action filings remained relatively flat.

By the numbers, filings for employment discrimination and ERISA claims were basically flat over the past year, while the volume of wage & hour cases decreased for the first time in over a decade.

By the close of the year, ERISA lawsuits totaled 6,530 filings (down slightly as compared to 6,925 in 2015 and 7,163 in 2014), FLSA lawsuits totaled 8,308 filings (down as compared to 8,954 in 2015 and up from 8,066 in 2014), and employment discrimination lawsuits totaled 11,593 filings (an increase from 11,550 in 2015 and a decrease from 11,867 in 2014).

In terms of employment discrimination cases, however, the potential exists for a significant jump in case filings in the coming year, as the charge number totals at the EEOC in 2015 and 2016 reached record levels in the 52-year history of the Commission; due to the time-lag in the period from the filing of a charge to the filing of a subsequent lawsuit, the charges in the EEOC’s inventory will become ripe for the initiation of lawsuits in 2017.

The Wave Of FLSA Case Filings Finally Crested

By the numbers, FLSA collective action litigation filings in 2016 far outpaced other types of employment-related class action filings; virtually all FLSA lawsuits are filed and litigated as collective actions.  Up until 2015, lawsuit filings reflected year-after-year increases in the volume of wage & hour litigation pursued in federal courts since 2000; statistically, wage & hour filings have increased by over 450% in the last 15 years.

The fact of the first decrease in FLSA lawsuit filings in 15 years is noteworthy in and of itself. However, a peek behind these numbers confirms that with 8,308 lawsuit filings, 2016 was the second highest year ever in the filing of such cases (only eclipsed by 2015, when 8,954 lawsuits were commenced).

Given this trend, employers may well see record-breaking numbers of FLSA filings in 2017.  Various factors are contributing to the fueling of these lawsuits, including: (i) new FLSA regulations on overtime exemptions in 2016, which have been delayed in terms of their implementation due to legal challenges by 13 states; (ii) minimum wage hikes in 21 states and 22 major cities set to take effect in 2017; and (iii) the intense focus on independent contractor classification and joint employer status, especially in the franchisor-franchisee context. Layered on top of those issues is the difficulty of applying a New Deal piece of legislation to the realities of the digital workplace that no lawmakers could have contemplated in 1938. The compromises that led to the passage of the legislation in the New Deal meant that ambiguities, omitted terms, and unanswered questions abound under the FLSA (something as basic as the definition of the word “work” does not exist in the statute), and the plaintiffs’ bar is suing over those issues at a record pace.

Virtually all FLSA lawsuits are filed as collective actions; therefore, these filings represent the most significant exposure to employers in terms of any workplace laws.  By industry, retail and hospitality companies experienced a deluge of wage & hour class actions in 2016.

This trend is illustrated by the following chart:

The Dynamics Of Wage & Hour Litigation – Low Investment / High Return

The story behind these numbers is indicative of how the plaintiffs’ class action bar chooses cases to litigate. It has a diminished appetite to invest in long-term cases that are fought for years, and where the chance of a plaintiffs’ victory is fraught with challenges either as to certification or on the merits. Hence, this reflects the various differences in success factors in bringing employment discrimination and ERISA class actions, as compared to FLSA collective actions.

Obtaining a “first stage” conditional certification order is possible without a “front end” investment in the case (e.g., no expert is needed unlike the situation when certification is sought in an ERISA or employment discrimination class action) and without conducting significant discovery due to the certification standards under 29 U.S.C. § 216(b).  Certification can be achieved in a shorter period of time (in 2 to 6 months after the filing of the lawsuit) and with little expenditure of attorneys’ efforts on time-consuming discovery or with the costs of an expert. As a result, to the extent that litigation of class actions by plaintiffs’ lawyers are viewed as an investment, prosecution of wage & hour lawsuits is a relatively low cost investment without significant barriers to entry relative to other types of workplace class action litigation. As compared to ERISA and employment discrimination class actions, FLSA litigation is less difficult or protracted, and more cost-effective and predictable. In terms of their “rate of return,” the plaintiffs’ bar can convert their case filings more readily into certification orders, and create the conditions for opportunistic settlements over shorter periods of time. The certification statistics for 2016 confirm these factors.

What Is In Store For 2017

Has the wage & hour litigation crested for good, or will 2017 see more case filing? My bet is that employers will see more case filings.

An increasing phenomenon in the growth of wage & hour litigation is worker awareness. Wage & hour laws are usually the domain of specialists, but in 2016 wage & hour issues made front-page news.  The widespread public attention to how employees are paid almost certainly contributed to the sheer number of suits.  Big verdicts and record settlements also played a part, as success typically begets copy-cats and litigation is no exception. Yet, the pervasive influence of technology is also helping to fuel this litigation trend. Technology has opened the doors for unprecedented levels of marketing and advertising by the plaintiffs’ bar – either through direct soliciting of putative class members or in advancing the overall cause of lawsuits. Technology allows for the virtual commercialization of wage & hour cases through the Internet and social media. These factors all suggest that 2017 will see an increase in wage & hour lawsuit filings.

And state court cases are not to be forgotten. In 2016, wage & hour class actions filed in state court also represented an increasingly important part of this trend.  Most pronounced in this respect were filings in the state courts of California, Florida, Illinois, Massachusetts, New Jersey, New York, and Pennsylvania.  In particular, California continued its status in 2016 as a breeding ground for wage & hour class action litigation due to laxer class certification standards under state law, exceedingly generous damages remedies for workers, and more plaintiff-friendly approaches to class certification as well as wage & hour issues under the California Labor Code.  For the fourth year out of the last five, the American Tort Reform Association (“ATRA”) selected California as one of the nation’s worst “judicial hellholes” as measured by the systematic application of laws and court procedures in an unfair and unbalanced manner. Calling California one of the worst of the worst jurisdictions, the ATRA described the Golden State as indeed that for plaintiffs’ lawyers “seeking riches and the expense of employers …” and where “lawmakers, prosecutors, and judges have long aided and abetted this massive redistribution of wealth.”

 

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:
Contractors. Joint employment. Fissured industry.
Interns. The “third way” and gig economy.

Economic reality. Right 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!