Don’t be a Hirtle: Here’s Why You Should Avoid “Works Made for Hire” Clauses in Independent Contractor Agreements

independent contractor works made for hireDon’t shoot yourself in the foot, Adam Hirtle of Colorado Springs. It’s an expression, not a thing to do with a real firearm. According to this article, Hirtle did it because he wanted to see how it felt. Presumably: Bad.

Shooting yourself in the foot is something many companies may be doing when trying to protect their intellectual property in independent contractor agreements. Generally, there are two ways to protect copyright: “works made for hire” and assignment.

Many independent contractor agreements use both. Intellectual property clauses often say that anything created by the independent contractor is a “work made for hire,” which would mean that the company — not the individual — owns the copyright. These clauses will also typically say that anything not deemed a “work made for hire” is assigned to the company. This is supposed to be a belt-and-suspenders way to ensure that the company owns the intellectual property created by the independent contractor.

Did you know that clause can turn the contractor into an employee?

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“Flooding” Tactic Creates New Risk for Using Mandatory Arbitration Agreements with Independent Contractors

flood arbitration independent contractorsIn the Biblical story of Noah’s Ark, a world-engulfing flood destroys everyone except Noah, his family, and his mini zoo. A similar story appears in the Quran, and a much earlier world-engulfing flood was described in the Epic of Gilgamesh, a Babylonian poem dating back to the 19th Century BC, featuring Utnapishtim as our hero, a fellow who was awarded with immortality but whose name (unfortunately, IMHO) appears much less frequently on the Social Security Administration’s list of most popular baby names than our more recent pal, Noah.

A more recent trend in flooding comes from our friends in the plaintiffs’ bar. A popular tactic by companies wishing to avoid class action misclassification lawsuits has been to require independent contractors to sign arbitration agreements with class action waivers. These agreements force misclassification clams into arbitration on an individual basis, where each individual single claim has little value. By forcing claims into individual arbitration, there’s much less incentive for plaintiffs’ lawyers to take these cases since each case is worth very little. It’s only in the class action arena that these claims are worth big money.

But according to a recent article in Bloomberg Law, some of the larger, more organized plaintiffs’ firms are fighting back by flooding companies with mass arbitration filings. Continue reading

Disco Meets “Permanent Temps”: NLRB Decides a New Joint Employment Issue

disco-297670__480On New Year’s Eve, Sister Sledge will be playing at the Seminole Casino in Coconut Creek, Florida. (You can buy tickets here.  You’re welcome.) The sisters will, of course, play the 1979 single, “We Are Family,” which is a disco song that it’s ok to admit you like. I don’t know what else they’ll play though.  It could be a long night.

“We Are Family” is also what happens when a company retains staffing agency temps for so long that they become, in that company’s words, “permanent temps.” It’s joint employment deluxe.

A recent decision by the NLRB examines what happens when a joint employer fails to apply a collective bargaining agreement to those “permanent temps.”

Orchid Paper Products Company in Pryor, Oklahoma, produces — wait for it — paper products. Their workforce is unionized and they make frequent use of staffing agency temps. The temps frequently remain on-site for long periods of time, at which point they acquire the status of “permanent temps.”

These workers are supervised and controlled by Orchid Paper, even though they are paid by their staffing firm. The Board found that under any test — Browning-Ferris or otherwise — they are joint employees.

One consequence of being a joint employee in a union environment is that the joint employer, Orchid Paper, has to follow the requirements of the collective bargaining agreement (CBA) as to those workers, even though they’re staffing agency workers. When Orchid Paper failed to follow the CBA as to those workers, it engaged in an unfair labor practice. So far, no big surprise.

The issue to be decided here, though, was the scope of the remedy that could be imposed.

As a result of an unfair labor practice, could the Board order a a remedy that held Orchid Paper to the entire CBA for its temps?

The Board said no, ruling that only certain parts of the CBA can be applied. In other words, “We Are Family, but Maybe Only Like Third Cousins.”

The Board ruled that an order intended to remedy an unfair labor practice had to be limited. The Board could only order the joint employer to apply the CBA provisions to the joint employees that related to the working conditions that Orchid Paper controlled.

My research in preparing this blog revealed that Sister Sledge, in fact, had two other Top 20 hits in 1979 — “He’s the Greatest Dancer” and “Lost in Music.” Those of you who remember those two songs will thoroughly enjoy the New Year’s Eve Show. Bring your platform soles.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Lessons from a Reggae Cucumber Song: Draft Benefit Plan Eligibility Language Carefully

ERISA independent contractor misclassification cucumber

Reggae artist Macka B has a song touting the nutritional benefits of the cucumber. The song includes verses like:

Get the cucumber cut it inna slice
Put it inna jug of water overnight
You know what you get for a fraction of the price
Energy drink full of electrolytes

I learned about this song when I asked The Google for songs about benefits. But as much as I like the song (youtube here), this post is about a different kind of benefits.

One of the biggest risks of independent contractor misclassification is having to provide employee benefits to workers you thought were independent contractors. If it turns out those workers were misclassified and are really employees, they may suddenly be eligible for all sorts of employee benefits, including retirement plans like 401(k) match and employee stock ownership. And they’ll be eligible retroactively. This can be expensive. A goof of this type cost one major corporation $97 million back in the late 1990s.

As one recent federal court decision from Georgia reminds us, businesses can avoid this risk with careful drafting in its benefit plan document.

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Exotic Dance Marathon Ends with $4.5 Million Misclassification Award

Dollar independent contractor misclassification millionsThe Penthouse Club of Philadelphia was hit with a $4.5 million jury award for having misclassified its dancers as independent contractors. This case was filed in 2013, and the federal court just recently entered the judgment order.

For those of you seeking business lessons from stripper lawsuits, today is your lucky day!

The dancers had alleged that they were treated as employees but not paid as employees. For example, they alleged that the club required them to work a set number of hours and days each week, required them to comply with physical appearance guidelines, and took deductions from their tips for what we’ll call special kinds of dances.

The Club fought hard for five years but could not overcome the negative facts in the case. Remember, the determination of whether someone is an employee or a true independent contractor is not based on what the parties agree. It’s based on the facts of the relationship.

This was primarily a Fair Labor Standards Act lawsuit, and so the Economic Realities Test is used. Other laws apply a Right to Control Test. Some states use a more difficult ABC Test.

Independent contractor misclassification lawsuits can be a tremendous liability, and businesses using contractors should be proactive and set up the relationship in a way that will withstand a challenge. When a business maintains control over hours, days of work, worker appearance, location of work, and other aspects of how the work is performed, the relationship starts to resemble employment.

In this case, the Club not only is on the hook for $4.5 million. They had to pay their attorneys’ fees, they’ll continue to pay their attorneys’ fees if they appeal, and they had to slog through six years of painful, time-consuming litigation that was undoubtedly a distraction from the business of running whatever type of classy joint they have going there. [Note to wife: I did not do any onsite investigation.]

We’ve seen lots of activity lately in the field of “exotic dancing.” I mean misclassification activity, and lawsuit activity, just to be clear on what I’ve been “seeing.” See other multi-million dollar misclassification awards here and here, all of which are SFW.

Businesses that use independent contractors need to evaluate the facts of the relationship and need to be proactive in setting up the facts to support true independent contractor status. Those who fail may get an extra long high-heeled kick in the rear.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Epic Ruling Clears Path: Arbitration Agreements Can Save Millions in Independent Contractor Misclassification Claims

Arbitration agreements for independent contractorsToday in the Epic Systems case, the Supreme Court ruled 5-4 that in employer-employee relationships, mandatory arbitration agreements with class action waivers are lawful.

A class action waiver means that employees cannot file class actions. They must instead bring any claim individually to arbitration, one person at a time, even if there are a lot of others in the same situation.

The issue before the Supreme Court was whether the employers could require employees to sign these agreements.

  • The argument for allowing the agreements was that the Federal Arbitration Act (FAA) favors arbitration as a way to resolve disputes and says that most attempts to invalidate arbitration agreements are against the law. But there are narrow exceptions.
  • The argument against allowing the agreements was that the NLRA grants workers the right to engage in protected concerted activity, and filing class actions (they argue) is a type of protected concerted activity.

The court had to decide whether the NLRA’s right to engage in protected concerted activity created an exception to the FAA’s rule favoring arbitration. As expected, the conservative court held that mandatory employee arbitration agreements — including class action waivers — are lawfulIn other words, businesses may require their employees to sign away their right to bring class actions. Read that again slowly. It’s important.

What does this mean for independent contractor agreements?

The decision does not directly address independent contractor agreements, but the decision does say that the Supreme Court has rejected every other challenge to the FAA’s policy favoring arbitration.

It seems pretty safe, then, to assume that the Court would allow mandatory arbitration agreements, with class action waivers, in independent contractor agreements.

Should businesses include mandatory arbitration provisions in independent contractor agreements?

There are pros and cons to arbitration, and the answer depends largely on how reliant your business is on independent contractor relationships as part of the business model. In other words, are you at risk of a class action?

If yes you are, then yes you probably should. (But please consult counsel.)

Businesses that may be at risk of a widespread finding of independent contractor misclassification can use these agreements to prevent class actions from being filed. If contractors who claim misclassification have to bring their claims individually, there is a lot less money at stake and, strategically, the incentive for plaintiffs’ lawyers to take these cases is greatly diminished. Few lawyers will take a case that may be worth a few thousand dollars (or often less). Most lawyers would love a case that may be worth a few million dollars. The difference is in the numbers. Class action waivers can greatly reduce your company’s risk of a large misclassification verdict.

Other advantages of arbitration include:

  • The results of individual arbitrations can be kept confidential, unlike court decisions. That means a finding against you will not hit the social media feeds or trade publications;
  • The parties select the arbitrator, which means you can ensure that your fact finder is a lawyer or has a background in the industry or type of dispute involved;
  • There’s no risk of a runaway jury, populated by regular folks who might have an axe to grind and no sense of the value of money;
  • The dispute gets resolved quickly, with finality, and with no right to appeal (except in very limited circumstances)

But there are potential downsides to arbitrations too:

  • Filing fees can be expensive;
  • Arbitrators can be expensive too. They get paid by the hour, unlike a judge who is not being paid by either side (we hope);
  • The barrier for employees to bring a claim is lower. They don’t need an attorney, and they can initiate a claim with ease, which could mean that more individual claims would be filed than if employees had to go to court;
  • There is no right to appeal (except in limited circumstances). This is both an advantage and a disadvantage, depending on whether you win!

Arbitration agreements have pros and cons, but for businesses that make substantial use of independent contractors, an arbitration agreement with a class action waiver can be critically important in avoiding a large claim.

One final reminder: If you use an mandatory arbitration agreement, remember to include a class action waiver. That’s one of the main benefits of these agreements.

Please consult with your employment lawyer to decide whether arbitration agreements are right for your business.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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When Sharks Talk to Bears: Beware of Cross-Agency Communications When Defending Independent Contractor Misclassification Claims

Shark independent contractor misclassification information sharing agreements

According to National Geographic, A 20-year old Colorado man has been bitten by a shark, a bear, and a snake.

Either the animal kingdom hates this guy, or he simply tastes delicious.

Formal information sharing across species is probably unusual, but within government agencies, it’s a thing. Businesses need to be aware of cross-agency information sharing when defending audits and defending agency enforcement actions related to independent contractor misclassification.

Federal and state agencies are particularly focused on sharing information about independent contractor misclassification. The Wage and Hour Division of the DOL has signed information sharing agreements with 27 states. The IRS and the DOL have a Memorandum of Understanding. Tax agencies share information too.

This network of cooperation can spell trouble for businesses undergoing 1099 audits or other agency investigations related to potential independent contractor misclassification.

A small assessment by a state agency may not seem like it’s worth fighting, but beware. Information sharing agreements may cause the assessment to multiply. Adverse findings might also be discoverable in litigation if there’s a civil lawsuit.

In other words, you could be viewed as an easy target, having been found already to be in violation.

A finding of independent contractor misclassification by one state agency may feel like a minor snake bite (I don’t know if there is such a thing as a minor snake bite, but stay with me here).  The snake, however, may share information with the shark, who will tell the bear, and before you know it, you’re that guy in Colorado who’s been bitten by all three.

Ouch!

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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