The world’s largest passenger elevator is inside the Jio World Center building in Mumbai, India. It can hold 235 people and is designed to cater to large gatherings, such as weddings or convention attendees.
The elevator has glass windows, offers panoramic views of the gardens below, and features a crystal-studded ceiling. It has two sofas so passengers can relax while ascending the maximum five floors at the slow but deliberate rate of 1 meter per second.
Thinking big doesn’t just work when building elevators. It also works when building independent contractor agreements.
Here’s what I mean.
When lots of contractors are being retained, an important feature to include in independent contractor agreements is the requirement to arbitrate disputes on an individual basis, with a waiver of class claims. Under the Federal Arbitration Act (FAA), arbitration agreements and class action waivers are generally valid and enforceable.
But there’s that pesky transportation exemption in Section 1 of the FAA, which says that the FAA does not apply to transportation workers. The Supreme Court recently issued its decision in Bissonette v. LePage Bakeries, holding that to determine whether the transportation worker exception applies, you need to look at what the worker does, not what industry the worker is in. But this post isn’t about Bissonette. It’s about a Ninth Circuit decision issued a few weeks earlier.
The Ninth Circuit ruled that the transportation exemption applies only to individual workers, not to entities. Why does that matter? Well, is your independent contractor agreement with an individual or an entity?
If it’s with an individual, and the worker is engaged in transportation work related to interstate commerce, the transportation worker exception of the FAA might apply, which means the FAA and all of its protections for mandatory arbitration agreements would not apply.
But, according to the Ninth Circuit, if your arbitration agreement is with a business entity, then the transportation worker exception does not apply, since it is inapplicable to business-to-business disputes. That means the FAA does apply.
Engaging small businesses, even single member LLCs, can offer a number of advantages when trying to protect independent contractor status. This recent Ninth Circuit decision offers another advantage, better protecting the parties’ ability to require arbitration of disputes and waivers of class claims.
So when engaging independent contractors, remember to think bigger than the individual. If you can contract with an entity, even a single member LLC, you might be better off — for lots of reasons, even if none of them come with a sofa or panoramic views.
It can mean the front part of the head, as in this selfie featuring two hairy-faced beasts. The one on the left has a wet drippy beard after sloppily drinking water from a bowl. No, I meant on your left.
It can mean the English rock band formed in 1969, which featured Rod Stewart and Ronnie Wood. Their 1971 album, A Nod Is As Good As a Wink… to a Blind Horse, reached #2 in the UK charts.
Or it can be a verb, as in “DOL Independent Contractor Test Faces Court Challenges.” In today’s post, we’re going with verb.
As expected, the independent contractor rule released by the DOL earlier this month is already being challenged in court.
A coalition of business groups is trying to invalidate the rule by asking the Fifth Circuit to reopen an earlier case. In the earlier case, these groups challenged the Biden DOL’s effort to withdraw the Trump DOL’s 2021 version of the independent contractor rule. The 2021 version would have simplified the test, focusing the analysis on two key factors — control and opportunity for profit or loss. In the lawsuit, the business groups argued that the Biden DOL’s efforts to delay and withdraw the Trump DOL’s 2021 rule violated the Administrative Procedure Act (APA).
These groups now argue that the new rule contains the same legal flaws and that that the Trump DOL rule should be the rule that rules. The case is Coalition for Workforce Innovation v. Su, 5th Cir., No. 22-40316.
A second challenge has been filed by freelancer writers and editors who argue that the new rule is impermissibly vague and “freewheeling” (an excellent word choice) and that it violates the APA. They claim that the new rule impermissibly threatens their ability to work as independent contractors and is too vague to allow them to reasonably structure their businesses.
These challenges will take a while to resolve, and more may be filed. Unless a court issues an injunction staying the rule while these cases proceed, the new rule will take effect March 11th.
In the meantime, we’ll keep watching to see what happens. It’s a real face off!
Aeschylus (525-456 BC) was a Greek playwright and is often described as the father of tragedy. While only seven of his estimated 70+ plays have survived, the story of his death remains solidly entrenched atop the list of all-time oddest deaths (if it’s true).
Apparently, Aeschylus died after being struck in the head by a tortoise dropped by an eagle which had mistaken his head for a rock suitable for shattering the shell. That qualifies as a surprise ending to an otherwise successful career.
Today’s post is intended to help businesses in California avoid their own surprising deaths, sans tortoises.
Businesses using independent contractors in California are reminded that misclassification risks extend beyond the usual laws you’d think to be worried about. The California Labor Code has a special section devoted to making willful misclassification of workers illegal, period, end stop, and the law imposes substantial fines.
In other words, if you are working with independent contractors who should — under California law — be classified as employees instead, your business may be subject to substantial fines, even if you are not violating any of the laws addressing overtime, meal and rest breaks, reimbursement of expenses, etc.
Under Labor Code section 226.8, “willful misclassification” of independent contractors is, by itself, unlawful. Penalties start at “not less than” $5,000 and “not more than” $15,000 for each violation. If the Labor and Workforce Development Agency or a court determines that the violations are part of a pattern or practice, the fines jump to “not less than” $10,000 and “not more than” $25,000 for each violation.
Violators will also be required to post a notice on their website or in a location accessible to the public.
If your business is registered with the Contractors’ State Licensing Board, violations will also be reported to the Board for disciplinary proceedings.
The law defines “willful misclassification” as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” The law applies to “any person or employer,” raising questions as to whether individuals may be penalized too.
So if you’re doing business with independent contractors in California, be aware of the usual range of potential violations — overtime, meal and rest breaks, wage statements, expense reimbursements, etc. But also be aware that willful misclassification is, by itself, unlawful. Fines under Labor Code section 226.8 should be something you’re aware of. Enforcement is more frequent and more likely than being hit in the head by a falling tortoise.
In the 1800s, P.T. Barnum used to promote the arrival of the circus with parades and clowns and band wagons through the town. By the late 1800s, politicians were noticing the excitement generated by the band wagons, and they would ride their own band wagons through town to generate support and excitement for the campaigns. Supporters would climb aboard, and the phrase “jump on the band wagon” was born.
So it seems fair to say, even back then, politicians were imitating clowns.
Over time, the phrase has come to mean rallying around any popular cause, clowns or no clowns.
And with the new statewide Freelance Isn’t Free Act, signed by Gov. Hochul on Nov. 22, the State of New York has done just that. New York’s statewide adoption of this freelancer law follows similar laws enacted in Illinois, New York City, Los Angeles, Minneapolis, Seattle, and Columbus. You can compare the four cities’ laws here and read more about Illinois’ law here.
Here’s what the NY State version will require, any time there is a contract with an individual independent contractor for services valued at $800 or more, either for one project or an aggregation of projects over 120 days:
Written contract required, which must include:
Name and address of hiring party and contractor
Itemization of services
Value of services
Rate and method of compensation
Date payment is due, or how due date will be determined
Any deadline by which the contractor must submit a list of services provided so that the hiring party can timely process payment.
The hiring party must provide a copy of the contract to the contractor.
The hiring party must retain the contract for six years!
Payment to the contractor must be made by the deadline specified in the contract or, if no deadline is specified, then within 30 days after the services have been completed.
The hiring party cannot require the contractor to accept less than the contracted amount. (The law does not seem to provide any exception for unsatisfactory services.)
Retaliation is prohibited against any contractor who seeks to exercise rights under the Act.
If there is a dispute over whether timely payment was made, the burden of proof is on the hiring party.
The law creates a private right of action.
The penalty for failing to provide a written contract is $250, if the contractor requested the written contract. Such a claim must be brought within two years.
The penalty for failing to make payment as required by the law or under the contract is the value of the contract, plus double damages, plus attorneys’ fees, and possibly injunctive relief. The statute of limitations for this type of claim is six years.
Waivers of any right under this Act are void as against public policy.
The law takes effect on May 20, 2024, and it will apply to contracts entered into after that date. In December 2022, Gov. Hochul vetoed an earlier version of this law, finding that it imposed too great a burden on the NYSDOL. Those concerns have been resolved in the new version of the Act.
The law does not apply to contracts with independent sales representatives, lawyers, medical professionals, or construction contractors.
The law applies not only to businesses, but to anyone in New York State who retains an independent contractor. As we discussed here when the New York City version of the law was enacted in 2017, the Act applies even to babysitters and dog walkers, if the minimum compensation amount is met.
Businesses and individuals who retain individual independent contractors in New York State, Illinois, Los Angeles, Minneapolis, Seattle, and Columbus need to know their obligations under these laws and act accordingly.
The Freelance Isn’t Free laws do not weigh in on whether the contractor is properly classified as an independent contractor.
There is a clear trend toward passing these types of laws, and we can expect more cities and states to jump on the band wagon.
Invented by Virgil A. Gates of West Virginia, the Guard is intended for “holding the moustache out of the way of food or liquid while eating or drinking.” As you may have already guessed, Virgil filed for a patent in 1876. Why would you have guessed that? Because 1876 was the last time anyone was named Virgil.
Moustaches, while certainly worth guarding (especially those of the handlebar variety), aren’t the only thing in need of protection. Solo independent business owners in the delivery and rideshare industries have been under attack, as class action lawsuits and government agency activity increasingly seek to take away their independence by declaring them employees.
In 2020, California enacted Prop 22, which preserved independent contractor status for these drivers so long as the app companies provided a list of preset benefits and guaranteed pay. In a statewide vote, Prop 22 passed overwhelmingly with 59% of the vote.
Massachusetts may soon follow suit. A similar ballot measure is likely to be considered by voters in the Bay State about a year from now.
The ballot measure, if successful, would create a system like Prop 22 in Massachusetts. Delivery and rideshare drivers would be granted independent contractor status, so long as the app company they were using provided them with a litany of worker benefits. The required benefits would include:
Guaranteed pay at 120% of state minimum wage for time spent completing delivery or rideshare requests;
Additional per mile pay for each mile driven in a personal vehicle;
A healthcare stipend for drivers who average 25 or more hours per week;
One hour of paid sick time per 30 hours worked;
Accident insurance; and
Prohibitions on discrimination based on race, sex, sexual orientation, and other protected characteristics.
Click here for the official summary of the proposed law.
If the ballot initiative receives enough signatures, it may appear on the ballot for a statewide vote in November 2024. Alternatively, the legislature may choose to consider the issue on its own, before the 2024 general election.
Initiatives like this one and California’s successful Prop 22 provide a reasonable, common sense third alternative to what is usually a binary choice between classification as an independent contractor (with no employee rights) and an employee. Rideshare and delivery drivers generally value their independence and the ability to operate their own business. Laws like this one allow them to do so as contractors while receiving certain benefits and guarantees.
It’s going to be hard to move my garage. I figure I’ll need at least four or five strong guys to help. My garage is heavy and seems pretty securely attached to the ground, so the work will be hard and I’m sure that I’d have to pay them at least $500 apiece.
But at least I don’t live in Illinois. Starting July 1, 2023, freelance labor will be governed by the Freelance Worker Protection Act (FWPA), another freelancer law similar to the ones in Los Angeles, Minneapolis, New York City, Seattle, and Columbus Ohio.
Here’s what you need to know before retaining a solo independent contractor in Illinois:
When the Law Applies
Independent contractor who is a natural person (i.e., a human, not an entity)
Providing services in Illinois
Providing services for a person or entity in Illinois
Total value is $500+, including all work aggregated over 120 days
Exclusions
N/a to construction or subcontractors, as defined in the Illinois Employee Classification Act (construction industry)
N/a to employees, as defined by the Illinois Wage Payment and Collection Act
Requirements
There must be a written contract that includes:
The name and contact information of both parties (including the hiring party’s mailing address);
An itemization of all products and services to be provided by the freelance worker;
The value of the products and services to be provided;
The rate and method of compensation;
The date when payment is due, which must be “no later than 30 days after the products or services are provided”; and
If the hiring party requires a list of products and services rendered in order to meet any payment processing deadlines (such as an invoice), the date by which the freelance worker must submit the list. (IDOL will provide model contracts)
Prohibitions
Once the IC “has commenced preparation of the product or performance of the services under the contract,” the hiring party cannot require, as a condition of timely payment, that the IC accept less compensation
Hiring party cannot threaten to withhold payment unless IC takes a lesser amount (no exception for unsatisfactory performance?)
Hiring party cannot do anything that would discourage the IC from exercising rights under the Act
No retaliation
Waivers are void against public policy (does that mean you can’t settle a dispute?)
If the contract failed to specify a due date for payment, the hiring party violates the Act if payment is made more than 30 days days “after the completion of the freelance worker’s services under the contract”
Record Keeping
Hiring party must retain a copy of the contract for two years
Enforcement
IC can file a civil lawsuit, or
IC can file an administrative complaint, which can lead to a broader investigation as to overall compliance
Penalties
For failure to timely pay: 2x amount owed, plus attorneys fees and costs
For failure to contract or to provide the contract: value of the contract or $500, whichever is greater
For discrimination or retaliation: value of contract, plus attorneys fees and costs
In addition, the IDOL may impose civil penalties up to $5000 for each violation, or $10,000 for each repeat violation within a five-year period, plus monetary damages to the state, restitution, and equitable relief, including injunctions.
Other Stuff
The law does not weigh in on whether the worker is misclassified
The Illinois DOL will issue regulations
Problems I See with the Law, as Written:
I see a few problems, and hopefully the IDOL will address these issues in its rulemaking.
First, suppose the IC’s work is unsatisfactory. Suppose the IC is slow or sloppy or rude or has terrible body odor. Suppose the IC does the work you requested but stomps all over your prized rose garden when walking in an out of the building. Suppose the IC comes into your home or business and breaks stuff or takes a cell phone picture of confidential information.
The law does not take into consideration all of the things that could warrant reduced or nonpayment, even if the products or services are ultimately provided. It seems that you’d still have to pay the value of the contract.
Second, the law seems to prohibit settlements. It says that any waiver of rights under this law is void as against public policy. It does say “except as otherwise provided by law,” so maybe a settlement would fall into that category.
Tips for Retaining ICs in Illinois after July 1, 2024
Consider including specifications or other requirements in the contract, to preserve an argument that the work is not yet completed or that the work was not performed as contractually agreed. (But don’t impose control over how the work is done, because that could lead to misclassification.)
Evaluate current use of individual ICs in Illinois, and consider whether this law will apply to those relationships.
Implement a Gatekeeper System like this, prohibiting managers from retaining ICs without going thorough an internal chokepoint for vetting. Managers who don’t know about the FWPA might retain ICs to get something done, creating liability for the company under the FWPA.
Look for the IDOL to release regulations that will hopefully provide clarity on the poor performance and settlement concerns.
Be careful about any IDOL investigation. If your business uses freelancers and the IDOL receives a complaint of a potential FWPA violation, the IDOL is likely conduct a thorough investigation that extends beyond the one complaining worker. With fines of $5,000 per occurrence, the penalties for noncompliance can get big in a hurry.
The scope of this law is broad. It applies to all “natural persons” (hey, no jokes about the weird guy down in the cubicle down the hall) who perform services for $500 or more. That would include your regular babysitter, your house cleaner, the guy you pay to wash the windows, solo consultants, or the guy you pay to assemble all the new modular furniture.
That would also include the guys I’m gonna need to pick up and move my garage.
Not a hawk, but I like this picture I took in Utah a couple years ago
A woman in Texas was mowing her lawn last month when she was suddenly attacked by a snake and a hawk — at the same time. The hawk had been carrying the snake but dropped it. It landed on poor Peggy Jones. The snake wrapped itself around her arm. Still hungry, the hawk dove at Peggy to retrieve its tasty treat, clawing at her and the snake, and ripping up her arm in the process. Eventually the hawk won and flew off with the snake. Peggy had severe cuts and bruises, and her husband had to finish mowing the lawn.
We’ve got another double attack to report, this one in the world of temporary staffing.
Last week we wrote about New Jersey’s new temporary staffing law, which imposes new burdens on companies using temp staffing. Not wanting to be left out of the fun, Illinois has followed suit with a similar law.
The Illinois law imposes several new burdens on companies using temp staffing workers.
I’ve listed those obligations here, on the BakerHostetler Employment Law Spotlight blog. I list eight things that companies in Illinois will need to know.
I haven’t yet decided which law is the hawk and which is the snake. But both will inflict some pain.
Meanwhile, enjoy this song called Snake Hawk, by The Budos Band.
Today we offer some fun facts about New Jersey. Raise your hand if you knew these things, but only if you are working from home because otherwise it would be weird:
The Lambert Castle Museum in Paterson has a spoon exhibit with over 5,400 spoons from every state and almost every country in the world.
The Passaic River in Paterson was the site of the first submarine ride in 1878 by its inventor John P. Holland.
New Jersey’s capital city, Trenton, was once the capital of the United States – but only for about eight weeks in 1784.
A less fun fact about New Jersey is that this past weekend, the NJ Temporary Workers’ Bill of Rights went into effect. It is a well-intentioned law that will have loads of unintended consequences. Rather than helping temp workers, the law’s requirements seem more likely to cause companies to stop using temp workers entirely.
The law’s requirements have been discussed elsewhere, and you can check out the BakerHostetler blog, The Bargaining Table, for a more complete discussion. But I want to focus on one aspect of the law that I think is particularly dumb and poorly drafted.
Section 7(b) requires that temp workers “shall not be paid less than the average rate of pay and average cost of benefits, or the cash equivalent thereof, of employees of the third party client performing the same or substantially similar work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions for the third party client at the time the temporary laborer is assigned to work at the third party client. Each violation of this subsection for each affected temporary laborer shall constitute a separate violation….”
Take a minute to digest that. It requires that temps are paid at least as much as similarly situated regular employees, but not just in wages. You also have to add in the cost of benefits. The cash value of benefits is often around a third of total compensation.
Suppose you have full time maintenance employees who average $20/hour plus benefits. If the cash value of benefits are one-third of the worker’s compensation package, then the temp worker “shall not be paid less than” $26.67/hour. And that’s before the staffing agency takes its markup of, maybe, 35%. You’d have to pay $36/hour for a temp maintenance worker, and the temp worker’s take home pay will be 33% higher (because of the cash value of benefits) than your comparable maintenance employee.
What if the temp agency provides benefits? Unclear. Poorly drafted. The law sets the temp worker’s minimum wage based on the cash value of the benefits the similarly situated employees receive. Maybe if the temp worker gets benefits, then the temp’s hourly wage floor would be $20, not $26.67, but that’s not clear.
Not only does the law greatly increase the cost of using temp labor, it also requires the company using the staffing agency’s services to disclose to the staffing agency the average wages and cost of benefits it provides to its similarly situated employees. If your company didn’t disclose this information, the staffing agency wouldn’t be able to comply with the pay floor requirement.
A failure to comply results in joint liability. So now you need to make sure the staffing agency pays its temps a particular wage, calculated based on the wages your company pays its employees. In your staffing agency agreement, you’ll need to require the agency to pay a particular wage to ensure compliance.
Here’s where things get tricky. An indemnity provision might not be sufficient to shift liability because the law says both parties are liable. So you need a breach of contract claim to rely on instead.
To build a potential breach of contract claim, the company will want to contractually require the agency to pay the workers a wage that is not less than the average cost of the company’s wages and cost of benefits. But directing and controlling wages is a strong indicator of joint employment under other laws. The act of complying with the NJ law could turn companies into joint employers. The wording in any staffing agreement, therefore, needs to thread the needle.
The text in a staffing agency agreement (or amendment) will need to be carefully drafted so that the company is requiring only that the agency comply with NJ law with respect to wages and benefits and is not directing or controlling the wages and benefits that the agency pays its temps.
Something like this might work: “If required under N.J.S.A. [insert citation], but only to the extent required by such statute, Agency shall pay the temporary workers at a rate not less than the average rate of pay and average cost of benefits, or the cash equivalent thereof, of employees of the company performing the same or substantially similar work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions for the company at the time the temporary laborer is assigned to work at the company.”
I don’t like telling the agency what it must pay its workers, but you’ll want a breach of contract claim available to you if the agency fails to comply and your company is jointly liable under the NJ law. An amendment to your staffing agency agreement is appropriate, but it needs to be carefully drafted.
And here’s another possible unintended consequence. How will your maintenance employees like being paid less than the maintenance temps? Maybe we need a union in here to get us a fair wage! I could see things going in that direction. If a temp can take home $26.67/hour, we want $26.67/hour too, not $20!
The NJ law does not apply to all temps. It applies to temps in these “occupational categories as designated by the Bureau of Labor Statistics of the United States Department of Labor:
33-90000 Other Protective Service Workers;
35-0000 Food Preparation and Serving Related Occupations;
37-35 0000 Building and Grounds Cleaning and Maintenance Occupations;
39-0000 Personal Care and Service Occupations;
47-37 2060 Construction Laborers;
47-30000 Helpers, Construction Trades;
49-0000 Installation, Maintenance, and Repair Occupations;
51-0000 Production Occupations;
53-0000 Transportation and Material Moving Occupations; or
any successor categories as the Bureau of Labor Statistics may designate.”
If all of this makes you want to take a long walk and get away, then fun fact: New Jersey has more than 4,000 miles of trails!
Rock history is filled with questions. There’s “Questions 67 and 68,” a 1969 release by the band then known as Chicago Transit Authority, about a girl that singer Robert Lamm was seeing in 1967 and ‘68. There’s “Question” by the Moody Blues, reflecting on the war in Vietnam. There’s even ? and the Mysterians, a typographically monikered pre-punk band that gave us “96 Tears.” (Fun fact: The band members were the children of migrant workers who had settled in Michigan.)
I can’t sing at all, but I can field questions. One question I get a lot is, “Should I make this person an independent contractor?”
Note the phrasing of this question. It’s not “Can I?” — that’s a legal question — but “Should I?” That’s partly a legal question and partly a business question. The answer largely depends on your tolerance for risk.
When trying to decide “Should I?” ask yourself three questions:
1. What is the likelihood the IC relationship will be challenged?
If no one ever questions the relationship, it never becomes an issue. But it’s not enough to consider whether you think the contractor will ever challenge the relationship. You need to worry about federal and state agencies, auditors, and other similarly situated contractors who might not be as content with their classification. Consider also that a contractor who is happily working might be less happy if your company terminates the relationship. A contractor who wants to be a contractor now might have other ideas later if the relationship ends badly and the contractor seeks legal advice.
Here are a few situations where there’s a high likelihood of a classification challenge:
Volume: The company works with a lot of independent contractors.
Industry: The contractors are performing services in an industry that is under heightened scrutiny, such as rideshare, installers, delivery drivers.
High Dollars: The independent contractors are paid a substantial amount of money, either individually or collectively.
General Audit Risk: The company considers an audit to be likely for any reason, even if unrelated to worker classification.
Similar Employees: The company has employees who do the same or similar work as the independent contractor.
Here are a few situations where there’s a low likelihood of a classification challenge:
One-off. It’s a one-off retention, meaning there’s just one independent contractor; there are no other independent contractors who are similarly situated.
Shared Expectations: The independent contractor wants to be an independent contractor (although that can change if the relationship ends badly).
Low Dollars: Low dollar value of the contract.
No Similar Employees: There are no employees doing what the contractor has been retained to do.
2. If there’s a challenge, what is the likelihood of success?
This is the purely legal question. Is the independent contractor classification correct under all of the applicable laws (federal, state, and local)?
That’s the question we usually explore in this blog (see all other blog posts, haha), but the legal analysis is only part of the equation you should be considering when asking the “Should I?” question. The answer to the legal question will depend on the facts, the contract, the applicable law, and the jurisdiction. This is the part where you want to reach out to a lawyer.
3. If misclassification is found, what are the likely damages or adverse consequences?
Often it’s a close call whether a worker is misclassified. Do you want to take that risk? Sometimes the stakes are so low that a company might be more willing to take the risk. If there are only a few independent contractors and they are not paid much money, you might be more willing to take the risk if there are facts that could support IC status (even if there are also facts that go the other way).
In making this assessment, there are generally several factors to consider:
A) What laws might be violated if the contractor is misclassified?
Sometimes an IC classification seems questionable on the facts, but the impact of misclassification would be very low. Suppose the IC works 15 hours a week, never more than 8 hours in a day, is paid at a rate of $20/hour or more, performs non-manual labor, and has other clients. Even if this worker is misclassified:
There’s no federal minimum wage or overtime violation (hourly rate exceeds minimum wage, no overtime hours).
There’s no state or local minimum wage or overtime violation (same).
There’s no failure to provide employee benefits (probably not eligible because part-time).
The risk of a workplace injury and resulting workers’ compensation claim is minimal (based on the nature of the work).
An unemployment claim is unlikely because the IC would continue to have other work (has other clients).
There could be local wage statement violations, meal or rest break violations, or disclosure violations. There could be a failure to reimburse business expenses. There could be tax penalties for failure to withhold. There could be an unfair labor practice charge under the National Labor Relations Act (see point #3 in this post). There could be penalties for failing to comply with local freelancer laws. There could be assessments for failing to pay into the unemployment and workers compensation systems. But none of these adverse findings are likely to create significant economic exposure under this fact pattern.
On the other hand, suppose the IC works varying hours per week, perhaps up to 60 hours, is paid on a fixed per project basis that would result in an hourly wage below the minimum if the IC worked a high number of hours, has no other clients, and performs manual labor. Suppose there are several ICs doing the same kind of work with the same IC classification. Now the risks are much higher in each category. You’re looking at possible violations of many laws, with potentially significant economic consequences.
B) What does the statute say about damages?
What damages are available? Are there penalties? Liquidated or punitive damages? Attorneys’ fees?
C) Is the potential misclassification systemic?
If the potential misclassification is of one person, the damages are going to be limited. If there are many ICs doing the same thing, the potential damages are multiplied. And, if there are many similarly situated ICs, a plaintiff’s lawyer might find the case attractive as a potential class action. If there are violations of law, your company may be liable for the plaintiff’s attorneys’ fees.
D) Is the use of contractors vital to the business?
For some companies, a finding of widespread misclassification could put the entire business model at risk. For other companies, a few adjustments can be made and life goes on.
E) Are there individual arbitration agreements in place?
Individual arbitration agreements can prevent class action litigation, but they don’t solve every problem. Is there a risk of mass arbitrations? Is your business still subject to California PAGA claims? Is the arbitration agreement enforceable as written?
F) Are there other practical or business considerations?
If there’s a finding of misclassification, what else might happen? Can you justify your decisions if questioned by your CEO or the board? Will there be adverse publicity? Would the business suffer reputational damage? Would the company’s value or stock price suffer? What would it cost to defend a claim, even if you win? If the company gets sued based on the decision to retain workers as contractors not employees, would your job be at risk?
That’s a lot of questions.
I know.
And we haven’t covered it all either. There are other factors to consider too, but hopefully this is enough to get you to start thinking about how to conceptualize the “Should I?” question.
The main point to remember is that “Should I?” is not purely a legal question. It requires business judgment and risk calculation too.
If you’ve had enough of the questions for today, I will leave you with this, courtesy of the best band to come out of Jacksonville, Florida.
A Nigerian comedian recently set out to beat the world record for continuous crying, seeking to cry for 100 consecutive hours. I expect that many new parents would object right here and point out that this record is bullsh@# because their infants have cried continuously for twice that long. But let’s assume the record here is for adult crying. Lacking the stamina of a newborn, the comedian failed miserably.
After six hours, the man experienced headaches, a swollen face, and lost his vision for 45 minutes.
A California Supreme Court decision last week may cause businesses to shed a few tears, but the ruling was no surprise, and companies just need to be prepared.
Remember how we loveindividual arbitration agreements as a tool for avoiding class action lawsuits? Companies that make widespread use of independent contractors should have these agreements in place, and most do. Courts generally enforce these agreements, which require claimants to bring any claims on an individual basis, not as part of a class action.
In California, there was an open question about whether an individual who is subject to an individual arbitration agreement could nonetheless bring a PAGA claim in California. PAGA refers to the Private Attorneys General Act, a California state law that allows “aggrieved individuals” to bring a claim on behalf of the state government, seeking relief for other employees. It’s not a class action but, to a defendant company, it feels like one.
In Adolph v. Uber, the California Supreme Court ruled that an individual whose claims are subject to an individual arbitration agreement may still be considered an “aggrieved employee” who can bring a PAGA claim seeking to remedy a defendant’s Labor Code violations against other employees.
The ruling was no surprise to the business community, but it clarifies an important point of law. You can read more about the decision here, in this BakerHostetler alert.
Businesses do not need to do anything differently on the preventive side, as a result of this ruling.
Businesses making widespread use of independent contractors should continue to require the contractors to sign individual arbitration agreements with class action waivers. While these agreements cannot prevent PAGA claims, they can often be used to delay PAGA claims. The agreement can include a clause requiring the parties to jointly request that any PAGA claim be stayed while the individual claim is arbitrated. This delay may frustrate the purpose of the PAGA claim, especially if your business prevails in arbitration against the individual.
So for now, nobody needs to follow the lead of the temporarily blind Nigerian comedian. Instead, follow the advice in this song:
Who Is My Employee? 