independent contractors

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.

Co-authored by: Steve Shardonofsky and John P. Phillips

Seyfarth Synopsis: On November 7, 2017, the U.S. House of Representatives passed the Save Local Businesses Act. If passed by the Senate, the bill would overturn Obama-era decisions and agency guidance broadly defining and holding separate, unrelated companies liable as “joint employers” under federal wage & hour and labor law. Perhaps more importantly, the bill signifies a broader trend to provide more clear guidance and roll-back various Obama-era rules on wage & hour issues.

The Broad Approach to “Joint Employment” Under the Obama Administration

Under the prior Administration, and particularly during the later years, employers who had traditionally relied on contract labor, temporary workers, staffing agencies, subcontractors, and franchise arrangements found themselves in the crosshairs of federal agencies and regulators. Traditionally, joint employer status was found where separate, unrelated entities shared responsibility and exercised direct control over the employment relationship, including decisions affecting the terms and conditions of employment. In that case, both entities could be held jointly liable for violations of wage & hour and other employment laws. The Obama Administration upended this traditional test, however.

In August 2015, the NLRB issued its much-discussed Browning-Ferris decision (addressed here), where the Board adopted an expansive definition of joint employment focusing on the right to control the terms and conditions of employment and the indirect exercise of those rights. (Seyfarth Shaw LLP is leading the appeal of Browning-Ferris to the D.C. Circuit Court of Appeals.) In 2015 and 2016, then-WHD Administrator Dr. David Weil issued two separate Administrator’s Interpretations (“AIs”) concerning independent contractors and joint employment. In 2015, in an effort to reduce the classification of workers as independent contractors and increase the number of workers subject to the FLSA’s minimum wage and overtime requirements, Dr. Weil issued guidance espousing a broad interpretation of who qualifies as an “employee” under the FLSA and highlighting the DOL’s position that almost all workers are employees. In 2016, Dr. Weil followed-up with guidance emphasizing the DOL’s position that joint employment must be determined based on the economic realities instead of (in their view) artificial corporate or contractual arrangements, including situations involving “horizontal” and “vertical” joint employment (discussed here). This guidance focused on the economic realities of a business’s relationship with a given worker, especially noting that indirect control (e.g., control excised solely through a staffing company) can be sufficient for a finding of joint employment. While the AIs were not entitled to judicial deference, we anticipated that some judges would treat Dr. Weil’s words as gospel.

As we previously reported, the broader tests espoused by the NLRB and the WHD exposed employers to a myriad of new wage and hour liabilities, investigations, and enforcement actions, and were especially relevant to companies that outsource work, utilize staffing agencies and contractors, or employ a franchisor/franchisee business model. If recent activity by Trump’s DOL and Congress is any indication, a shift in regulatory enforcement and focus is well underway.

The Winds of “Joint Employment” Are Shifting

As we reported here and here, this summer the DOL withdrew its AIs on joint employment and independent contractors. More recently, on November 7, 2017, the U.S. House of Representatives passed the Save Local Businesses Act by a vote of 242-181, including yes votes from eight Democrats. The bill clarifies the standard for “joint employer” status under the FLSA and the NLRA, and returns to a traditional test that requires “direct, actual, immediate,” and “significant” control over the essential terms and conditions of employment, such as hiring, discharging employees, determining rates of pay and benefits, day-to-day supervision, and administering employee discipline.

Implications for Employers

The DOL’s decision to withdraw its AIs and the passage of the Save Local Businesses Act are welcome changes for employers who faced significant liability and uncertainty under the Obama-era rules. Although the bill itself still faces a tough road in the Senate—where it will require Democratic support to reach 60 votes and avoid a filibuster—it would represent a significant shift in the federal government’s focus. Even if the bill stalls, it nevertheless solidifies a broader regulatory and enforcement trend that may prompt federal courts to return to the traditional and more predictable joint employer test under the FLSA.

Full passage of the Save Local Businesses Act in Congress and signature by the President, however, will not be a panacea for these thorny joint-employer issues. Many states, such as California, still have broad joint-employer tests under their respective wage-hour laws. Courts will also continue to grapple with the proper application and interpretation of these rules, as evidenced by a recent decision from the Fourth Circuit Court of Appeals purporting to define joint employment even more broadly than the Obama Administration. Furthermore, the plaintiffs’ bar will continue to push the outer contours of the law in their search to apply joint employer principles more broadly and thereby reach the “deep pockets” of franchisors and other principals. Regardless of what happens to the Save Local Businesses Act, we foresee continued potential exposure and litigation in this arena. Employers—and particularly those in industries that make heavy use of franchises, subcontractors, and staffing agencies—should remain engaged and focused on these issues, and continue to scrutinize their independent contractor relationships, staffing arrangements with third parties, and related contracts.

Authored by Alex Passantino

The White House announced its intent to nominate Cheryl Stanton to serve as the Administrator of the U.S. Department of Labor’s Wage & Hour Division. Stanton currently serves as the Executive Director for the South Carolina Department of Employment and Workforce. Prior to that, she worked in private practice as a management-side labor and employment attorney. She also previously served as Associate White House Counsel for President George W. Bush, where she was the administration’s principal liaison to the U.S. Department of Labor, the National Labor Relations Board, and the Equal Employment Opportunity Commission.

Ms. Stanton is nominated to join a Labor Department in which only Secretary of Labor Alexander Acosta has successfully navigated the Senate confirmation process. Deputy Secretary nominee Patrick Pizzella was formally nominated in June 2017; his nomination remains pending in the Senate. With a full Fall agenda including Hurricane Harvey (and likely Irma) relief, the debt ceiling, tax reform, border wall funding, and potential immigration-related issues, it is unclear when the Senate might confirm Ms. Stanton. It would not be surprising to see her nomination linger until the end of the year–or even into 2018.

When she does arrive at WHD, she’ll be facing a full plate of issues as the agency tackles a new rulemaking process increasing the salary level required for exemption under the FLSA’s white-collar exemptions, a proposal revising the rules surrounding tipped employees and the use of tip credit, and, presumably, filling the vacuum left by the Department’s withdrawal of the Administrator Interpretations on independent contractors and joint employment. In addition, with the Department’s announcement that it would once again be issuing opinion letters, there’s likely to be quite a queue of requests awaiting Ms. Stanton’s review.

We’ll keep you posted as Ms. Stanton’s nomination works its way through the confirmation process.

 

Authored by Alex Passantino

On June 7, Department of Labor Secretary Alexander Acosta announced the withdrawal of the DOLs 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 FLSAs (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 DOLs 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 Cheryl A. Luce

Seyfarth Synopsis: On May 25, 2017, Noah Finkel spoke at our full-day summit about what to expect from the DOL under the new administration. Noah’s forecast: “They say that the policy is the people, and we don’t yet have the people.” We have a Secretary of Labor and an interim Solicitor of Labor, but are still waiting for the President to fill the two most important wage and hour law positions: the Administrator and Deputy Administrator of the Wage and Hour Division (“WHD”). While we wait to see who will be at the WHD’s helm, we should not expect any policy changes from the WHD, but should continue to be vigilant about developments in the courts.

Enforcement Efforts Expected to Remain the Same

WHD, the enforcement arm of the DOL, is not very political and does not tend to change directions when new leaders take over. WHD investigators focus most of their efforts on individual complaints—not on targeted investigations that follow top-down DOL initiatives. This is likely to continue, and we can expect the number of investigations to remain stable. The Obama administration increased the investigator headcount of the WHD from 700 to 1,000, and there is no proposed budget cut that makes us suspect that the headcount will wane. One possible change on the enforcement front: the Trump administration is unlikely to continue the Obama administration’s focus on certain areas (e.g., the hospitality world and fissured industries).

The New Salary Rules Likely to Remain in Limbo for 2017

The new salary rules that would have increased the salary threshold for white collar exempt employees (sometimes referred to as the new overtime rules) are in limbo. The rules, which were set to go in effect December 1, 2016, remain enjoined by a Texas court while the DOL appeals to the Fifth Circuit. The DOL, through the Acting Solicitor of Labor, has requested several extensions on briefing the appeal. We can expect the DOL to continue seeking extensions until at least as long as it takes to fill the Solicitor of Labor position on a non-interim basis and the vacant WHD Administrator positions.

If the Fifth Circuit affirms the injunction, it could invalidate not only the minimum salary level, but the salary basis test as well. Elimination of that test would provide employers and exempt employees with more freedom around schedules and pay. The DOL could also withdraw the rule and retain the old salary rules. If the injunction is overturned and the new salary basis rules remain in place, we expect that WHD may propose a middle ground, g., something higher than the $455 per week set by the old rules, yet lower than $913 per week. For 2017, employers should not expect any new requirements.

Courts Will Drive Changes to Joint Employer and Independent Contractor Tests

We expect courts to be the primary drivers of change affecting joint employment and independent contractor standards. We’ve blogged about expectations of the new Secretary of Labor here, and while the DOL does not actually make the law, its guidance and interpretations can influence courts. The Obama DOL attempted to broaden the employment relationship with respect to both joint employment and independent contractor classification. For example, the Obama DOL changed the joint employment analysis from “actual control” to “right to control.” It also shifted the focus of whether a worker should be classified as an independent contractor away from the degree to which the business controls the work and instead focused on the economic realities of the relationship, while also stating that most workers should be employees (a position we do not believe the new administration will follow, but it remains to be seen).

In this area, most of the risk comes from the courts themselves. Earlier this year, the U.S. Court of Appeals for the Fourth Circuit issued the broadest definition of joint employment that we’ve seen and held that unless two entities are completely disassociated with each other, they are joint employers under the FLSA. To minimize risks, we advise continuing to watch how the courts rule on this issue rather than waiting for new DOL guidance.

Opinion Letters Could Return

A glimmer of hope in the new administration is that WHD opinion letters could return. For decades, these opinion letters provided helpful guidance to both employers and employees in how to comply with the FLSA. The Obama administration stopped issuing WHD opinion letters in 2009. We hope to see a return of these. A return of opinion letters also may present employers an opportunity to receive guidance from a WHD that, when its positions are filled, may be more sympathetic to employers’ positions. This, or other forms of interpretive guidance, could be helpful on a number of technical issues—tip credit rules, the fee basis of payment, or interpretation of the fixed salary for fluctuating hours pay plan—on which the WHD under the Obama administration took unfriendly positions.

We’re Keeping Our Eyes on the Courts

Under the new administration, a lot is left up in the air, but as before, most of the risks come from the courts, and the cases plaintiffs’ counsel file in them. We’ve got our eyes on them and will continue to report on key decisions and other wage and hour developments.

Co-authored by Brett Bartlett and Kevin Young

Seyfarth Synopsis:  Last Thursday, the Senate confirmed Alexander Acosta as the 27th United States Secretary of Labor. Filling the final post in President Trump’s cabinet, Acosta will lead a Department of Labor that has, since inauguration, operated without political leadership in the Secretary role. With Secretary Acosta in place, the DOL now has a leader to advance the new administration’s agenda. Here, we offer a brief introduction to Secretary Acosta, as well an overview of the action and opportunity employers may expect on the wage and hour front over the next few months.

Who is Alexander Acosta?

Secretary Acosta is a Florida native and son of Cuban immigrants. After graduating from Harvard Law School in 1994, he clerked for now-Justice Samuel Alito, then a federal appellate judge for the Third Circuit. After spending several years in private practice, he turned to public service, first as a member of the NLRB, next as the civil rights chief at the Department of Justice, and then as the U.S. Attorney for the Southern District of Florida. Since 2009, he has served as Dean of the Florida International University College of Law.

Secretary Acosta is known to be intelligent, thoughtful, and experienced in political matters. Through years of public service, he has demonstrated an interest in protecting the rights of non-majority individuals. Compared to some of President Trump’s other cabinet nominations, he drew only light opposition during the confirmation process, with comparatively bi-partisan support and a confirmation vote of 60 to 38.

Expectations in the Wage and Hour World.

We expect Secretary Acosta to move quickly on several fronts. First, the Secretary will begin filling pivotal DOL roles that have remained vacant since President Trump took office—among them, the Wage and Hour Division’s Administrator and the Solicitor of Labor (which has been filled on an acting basis).

Second, Secretary Acosta will likely turn his attention to critical DOL initiatives that have been in limbo since the election, including the new overtime exemption rules that were temporarily enjoined by a federal district court in Texas just before their December 1, 2016 effective date. Even as they have languished before the Fifth Circuit following the Obama administration’s appeal of the injunction order, the rules have been a major source of consternation for employers. Secretary Acosta can now take careful steps to determine an exit from the litigation that has stuck the new rules in procedural purgatory, while at the same time assessing future changes to the exemption rules.

Third, once a new Administrator is in place, we expect a clearer message around the Wage and Hour Division’s enforcement and education policies, which have remained fairly static since the end of 2016. We would not be surprised to see the Division reduce its focus on widespread investigations and liquidated damages, which became more common in the last administration, and reopen its doors to working with employers to ensure compliance. This could to a renewal of the process by which employers may seek an Administrator’s opinion letter, which can provide an absolute defense against claims challenging the practices covered by the letter.

Potential Opportunities for Employers?

Employers should pay attention to the new Secretary’s first steps in this new administration, especially to the team that he nominates to be confirmed by Congress. While we do not expect sub-regulatory agencies like the Wage and Hour Division to stop enforcing the laws they are empowered to oversee, we do anticipate that an Acosta-led DOL will present fresh opportunities to address and ensure compliance in a less hostile regulatory environment.

Parting Thoughts.

While it’s difficult to know the exact steps that Secretary Acosta will take to advance the new administration’s agenda, it seems clear that the next few months could be quite momentous at the DOL. Not only do we expect increased clarity into how the DOL will operate under new leadership, but we believe the changes that the DOL makes may create new opportunities for employers seeking to proactively ensure compliance with the various laws that the DOL enforces. We will, of course, continue to keep our readers apprised of the latest developments.

 

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).
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.