by Todd Lebowitz

Don’t Be Like These Sheep: Check Your Contract Recitals to Avoid This Misclassification Mistake

In Inner Mongolia, these sheep have been walking in a circle for about two weeks, with a few sheep occasionally standing in the middle. Here’s video.

Various theories have been circulating to try to explain the odd behavior, including that it may be some sort of bacteria-induced delirium.

But I think I know the real reason. (And a hearty Mazel Tov! to the wooly couple!)

When drafting independent contractor agreements, it’s never a good idea to be unsure of why you’re doing something. Too often, businesses use generic agreements and don’t understand the impact or purpose of what they’ve written.

One common place I see mistakes is in the very beginning of contracts – the contractual recitals.

Recitals are often used to provide context for the reader. Recitals are also used for six-year old piano players to play chopsticks for grandma, but that’s for another day. For example, an off-the-shelf independent contractor agreement might start with something like this: We’re in the business of doing X, and we are retaining Contractor to do this part of X. Therefore, the parties agree to the following terms.

The problem with that innocent sounding recital is that it may be evidence the contractor is misclassified.

Under a Strict ABC Test, if the work being performed by the contractor is within the hiring party’s usual course of business, the contractor is automatically considered an employee. That fact fails prong B of a strict ABC Test.

Under an Economic Realities Test or a Right to Control Test, one of the factors often considered is often whether the work being performed is “an integral part” of the business, or some variation on that theme. Unlike ABC Tests, these tests are balancing tests and so one factor will not necessarily determine a worker’s classification, but there’s no reason to give the factor away, especially in a contract recital.

In a misclassification challenge, every fact and contract term will be subject to scrutiny.

If you’re unsure whether the term is needed, then question whether to include it. Recitals generally aren’t needed at all, and I often omit them from my independent contractor agreements. Don’t include off-the-shelf terms if you don’t understand their effect.

Unexplainable behavior makes for good blog posts and tweets, but not good contracts.

Which is why I never ask unfamiliar sheep to help me draft contracts.

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06.06.22

by Todd Lebowitz

Get Aligned on Commissions: Ten Tips For Using Independent Sales Reps

*Zippy incorrectly chooses portrait instead of landscape*

Getting properly aligned is important. That’s true not only when using a dog bed, but also when using independent sales reps.

Sales reps generally receive commissions. When commissions systems are unclear, disputes arise. We don’t want disputes. You may think your commission system is clear, whether by tradition or otherwise. But it’s probably not as clear as you think. Unclear commission plans lead to lawsuits, especially after the relationship with a sales rep ends.

Here are ten tips for avoiding commission disputes. These tips are helpful whether your sales rep is an independent contractor or an employee.

1. Put the commission plan in writing, and get the rep to sign it. Many states require written, signed commission plans for employees. (California, I’m looking at you!) But even when not required by law, a clearly drafted and accepted plan is the best way to avoid disputes.

2. Define what constitutes a sale. Is a sale complete when the customer pays for the good? When the good is delivered? When it’s accepted? When some period for returns has expired? Whatever you decide, state it clearly.

3. Define when a commission is earned. Usually there are several things that have to happen before a commission is earned. List them all, and make clear that a commission is not earned until all of these things have occurred.

4. Specify the timing of when commission payments are due. For employee sales reps, you might have less flexibility than with contractors, since state laws often require that employees are paid at certain intervals. But you can also create some space for yourself in your definition of when a commission is considered “earned.”

5. Clarify whether the sales rep must still be employed (or still under contract) to earn a commission. This term will be viewed in tandem with your explanation of when a commission is considered “earned.” Some states (hey there, California!) require that the commission has been paid if the employee has basically done everything needed to earn the commission, even if employment has ended. Calling the rep a contractor won’t necessarily get around that, since as we know, California does not grant a lot of deference to classifying workers as contractors instead of employees.

6. Explain how the commission amount is calculated. The formula might be A times B times C. Whatever it is, write it out.

7. Clarify the relevant time period. If the commission plan is for 2022 only, say so. If the commission plan overrides all prior year plans, say that too.

8. What about charge backs? Are there circumstances when a commission might be paid but you’d have to recoup some of the payment through a charge back? Describe when chargebacks are permitted, if at all.

9. Don’t assume. Spell everything out. Just because there haven’t been commission disputes in the past doesn’t mean they won’t happen in the future. A recently departed sales rep is going to be more aggressive about a commission dispute than one who is still happily engaged, especially if the rep just closed a big deal was separated before the company received payment from the customer. Without a clearly drafted plan, that’s a lawsuit waiting to happen.

10. Write for the jury. A stranger reading your commission plan should be able to tell whether a commission is earned or not, how much the commission should be, and when the commission is due. It needs to be that clear. If there’s ambiguity, expect that the disputed term will be interpreted in favor of the sales rep. After all, you wrote the plan, not the rep.

Bonus 11th Tip: Don’t forget state law. State law may contain requirements for commission plans. Know where your salespeople are working and where they are selling. If multiple states are involved, consider adding a choice of law clause.

Getting aligned on commissions before there’s a dispute can go a long way toward preventing a dispute. Getting misaligned on a dog bed may lead to back pain or a funny picture, but getting misaligned on commissions can lead to expensive litigation.

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05.16.22

by Todd Lebowitz

Here’s a Bizarre Lawsuit, Plus Tips for Avoiding Misappropriation Trade Secrets

A couple in Uttarakhan, India, has sued their 35-year old son for $650,000 on the grounds that he failed to provide them a grandchild. The monetary claim reflects the amount they supposedly invested in him over the years, apparently viewing him as some sort of horse stud when they paid for his education and wedding.

Their petition explains, “We killed our dreams to raise him” and “despite all our efforts, my son and his wife have caused mental torture by not giving us a grandchild.”

In the business world it seems more reasonable to demand a return on your investment in someone. But that has limits too.

Last week in Virginia, a jury awarded $2 billion to a software company for misappropriation of trade secrets, finding that a rival had paid a disloyal employee of the victim company to steal trade secrets and pass them along. Investing in someone to steal trade secrets is not kosher. Unlike the “no grandbabies” case, that seems like solid ground for a lawsuit.

While the theft of trade secrets appeared intentional here, it’s possible to acquire a rival’s confidential information unintentionally too. The risk may be especially high when you’re retaining an independent contractor who has expertise in an industry and who has likely worked for various competitors in the same space.

When retaining independent contractors, businesses should take steps to ensure they are not going to be acquiring confidential or trade secret information from the contractor.

Here’s an easy tip to help protect your company from inadvertently acquiring confidential or trade secret information from a competitor: Include in your independent contractor agreement a clause that prohibits the contractor from using any confidential or trade secret information from any past client or employer. Prohibit the contractor from incorporating any such information into any work that the contractor creates for your business.

The same type of clause can be inserted into your employment agreements.

While intentionally stealing a rival’s trade secrets is obviously a no-no, an accidental taking or an accidental incorporation of such information into your software or other systems can also create liability. Taking a clear stand that you prohibit that sort of thing will help avoid a problem later. And, if something bad does occur (assuming you didn’t solicit the improper disclosure), you’ll be in a much better place to defend against a misappropriation claim.

As for the Uttarakhan man and his wife, I don’t know what the best defense is to that sort of claim. But I do know the next family get-together is likely to be a bit uncomfortable.

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05.09.22

by Todd Lebowitz

Not Dead Yet: Arbitration Agreements May Sit Dormant, But They Can Still Save You From a Class/Collective Action

This spring has been a bad time for injured civilians who prefer not to be buried alive.

In Peru last month, a funeral procession was interrupted when the 36-year old car accident victim was heard banging on the lid of her coffin, trying to get out. Days earlier the woman had been pronounced dead, in what turned out to be an unfortunate mispronunciation.

In Shanghai, a nursing home mourned the passing of an elderly resident, who was placed in a body bag and sent to the mortuary. As seen in this video taken by a bystander, the mortuary workers unzipped the bag and found the man still moving. He was transferred to a hospital, which seems to me like a more appropriate place for someone still alive.

People may go quiet, but that doesn’t mean they should be treated as dead. The same holds true for individual arbitration agreements. They may exist quietly in the background, but courts can’t just ignore them, as a recent Fifth Circuit Court of Appeals decision made clear.

A plaintiff alleged violations of the Fair Labor Standards Act (FLSA), claiming she was misclassified as an independent contractor and therefore was denied overtime pay. She asked the court to treat her lawsuit as a collective action, claiming that other contractors were also misclassified and were also denied overtime pay. In FLSA cases, plaintiffs have to opt in to join the class. The district court approved the distribution of opt-in notices to similarly situated contractors, letting them know about the lawsuit and their right to participate.

The defendant opposed the notices, pointing out that the contractors had all signed individual arbitration agreements that included class action waivers. They couldn’t opt in, the defendant argued, so they should not get the notice. When the court approved the notices anyway, the defendant filed a writ of mandamus with the Fifth Circuit Court of Appeals, asking the appeals court to intervene and stop the notices from going out.

The Fifth Circuit granted the writ and stopped the notices from going out. The Court of Appeals ruled that the arbitration agreements required all disputes to be resolved through individual arbitration, and therefore the contractors could not opt in to the lawsuit. Since they could not opt in, they could not be sent notices inviting them to opt in.

It’s unusual for a Court of Appeals to grant a writ of mandamus. But here, the Court of Appeals recognized that the arbitration agreements were very much alive, even if the contractors who signed them were silent in the background.

This case is a good reminder of the value of individual arbitration agreements with class action waivers. A well-drafted arbitration agreement will require all claims to be resolved on an individual basis and will include a waiver of the right to participate in any class or collective action. The agreement should also deprive the arbitrator of jurisdiction to preside over a class or collective action.

Businesses that rely on independent contractors should check their agreements and consider adding robust, carefully-drafted arbitration clauses.

Arbitration agreements can sit silently in the background for years, but that doesn’t mean they are dead.

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02.28.22

by Todd Lebowitz

Upside Down? U.S. Companies Can Learn from Australian High Court Ruling on Independent Contractors

There’s no reason our maps are oriented the way they are, with Australia at the bottom and Canada near the top. There’s no right side up in space, and we could just as easily think of the world with Australia on top, in the middle.

Same with our way of deciding Who Is My Employee? The process for determining whether someone is an employee or an independent contractor doesn’t have to be the way Americans conduct that analysis.

Two High Court decisions this month in Australia highlight a key difference between the American approach and what is now the new Australian approach.

In the U.S., courts look past the written contract and analyze a worker’s status based on the actual facts of the relationship.

The Australian High Court says the U.S. approach is upside down.

In two highly publicized decisions, the Australian court ruled that the contract establishes the rules of the relationship and therefore also determines the worker’s status. In one case, the agreement said the work would be controlled by the hiring party. By contractually reserving the right to control the work, the hiring party inadvertently made the worker an employee. The court still looked past the fact that the parties called the worker an independent contractor, but the court said the contractual requirements of the relationship — the terms and conditions — controlled the outcome.

The other High Court case involved two truck drivers. Their contracts exhaustively set forth terms preserving their flexibility to work for others and to control how their work was performed. Their contracts also called for the drivers to use their own equipment, which involved a significant investment by the drivers. The court overruled a lower court decision that deemed the workers to be employees. The lower court focused on actual control exerted by the hiring party. But the High Court said the contract controls and, in this case, the contract established requirements consistent with independent contractor status. It is up to the parties to follow the contract, but the contract establishes the independent contractor relationship.

There are lessons for American companies here too.

While under U.S. law, the actual facts of the relationship control whether the worker is an employee, the independent contractor agreement is an opportunity to memorialize the helpful facts. That’s why off-the-shelf templates in the U.S. are of no value. (Hot tip: Google & Bing is not a law firm.) See related posts here and here, including how to discomfit a bear.

An independent contractor agreement in the U.S. should be drafted with the particular facts of the relationship in mind. Does the worker get to decide when and where the work is done? If so, put that in the contract. The worker controls when and where the work is performed, and the hiring party has no right to control when and where.

If the worker’s status is challenged, you want the contract to be a helpful piece of evidence. You want to be able to say to a court: Not only does the worker get to decide when and where the work is done (or insert other factor), but the contract forbids us from controlling that.

In the U.S., contract terms like that will be persuasive evidence, but only if the actual facts align. In Australia, the contract sets the rules, and the parties are in breach if they fail to follow the rules established in the contract.

But no matter where you sit, and no matter which way your map is aligned, companies should view independent contractor agreements as an opportunity to build the case that an independent contractor is properly classified.

By planning ahead and drafting carefully, you can maximize your chances of coming out on top.

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02.07.22

by Todd Lebowitz

Iguanas with Jackets: Here’s One Exhibit to Include with Every Staffing Agency Agreement

*I met this little guy in Costa Rica, 2017*

It happens every year.

When the temperature in Florida drops into the 30s, the iguanas freeze. Unable to regulate their body temperature, they drop out of trees, landing on sidewalks and in yards like solid rubber toy animals.

The freeze doesn’t kill them though. It just stuns them for a while, then they eventually warm up, reanimate, and go about their daily iguana business.

Getting stunned like this can’t be avoided for the iguanas. Amazon is not yet selling iguana jackets, and online delivery to lizards is notoriously complicated. (Note to self: Business opportunity?)

But unlike iguanas, businesses can reduce their chances at getting stunned — at least when it comes to avoiding lawsuits from staffing agency workers.

When staffing agency workers file wage and hour lawsuits, they often sue both the staffing agency and the business where they worked. The workers allege that both are joint employers, often bringing class claims or a collective action.

Businesses that carefully draft their staffing agency agreements will have some natural defenses against these claims. I’ve written about that here. I call this strategy The Monster with Three Eyes.

But there’s a fourth strategy too. Force individual staffing agency workers to arbitrate these claims instead of pursuing them in court, and include class action waivers with the agreement to arbitrate.

There are two ways to introduce arbitration agreements with class waivers in your staffing agency agreements.

First, you can mandate that staffing agencies sign arbitration agreements with their own employees. Some courts have found that arbitration agreements between a staffing agency and its employee protect the third party business too, even if the third party hasn’t signed the agreement.

But that approach carries risk. The agency’s arbitration agreement might be poorly written, or it might include terms that make it unenforceable. Your protection is only as good as whatever form agreement the agency presents to their workers.

There’s a second approach I like better. It goes like this:

Draft your own individual arbitration agreement (with class waiver) for staffing agency workers to sign, requiring them to arbitrate any claims against you. Make it mutual, of course.
Append it to the staffing agency agreement as an exhibit.
Include a clause in the staffing agency agreement requiring the agency not to assign anyone to your business unless they’ve first signed this agreement.

The agreement will be short. No more than two pages. It can also include an agreement by the agency worker to protect your confidential information and assign inventions.

If the document is properly characterized as an offer by your business, accepted by the worker, you have offer plus acceptance equals contract — even if your business doesn’t sign it. There is specific language you can include that can make that work.

So if you use staffing agency workers, don’t assume you won’t get sued as a joint employer. You particularly want to avoid class and collective actions, and this type of arbitration agreement will do the trick.

Plan for bad weather in advance. Include this layer of protection with your staffing agency agreements. Consider it your own little iguana jacket.

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12.06.21

by Todd Lebowitz

Don’t Get Stuck Naked: Tips for Enforceable Arbitration Agreements When Using Staffing Agency Workers

*He was in here. Really. Source: Syracuse Fire Dept Facebook*

A Syracuse man was rescued from inside the walls of a historic theater last month after spending two days trapped, naked. The man apparently had entered the building’s crawlspace (why?) and fell from the ceiling into a gap between walls in the men’s restroom. No word on why he was au naturale.

But I’m sure he was glad to be freed from this unexpected situation. He should have planned better — like by not hiding in a crawlspace or, if he had a really, really good reason to hide there, by at least wearing clothes.

You can protect your business from unexpected situations (different ones), such as by making sure your staffing agency agreements include valid arbitration clauses with the staffing agency’s workers. The goal here is to avoid being left naked and stuck, if faced with a joint employment claim.

In a recent Oklahoma case, two staffing agency workers sued the staffing agency and the company where they provided services, alleging a failure to pay overtime.

The company where they worked filed a motion to compel arbitration, arguing that the arbitration agreement the workers signed with the staffing agency should cover all claims against both defendants. The district court initially ruled that the arbitration agreement was only between the worker and the staffing agency, and so it could not be relied upon by the other company. Motion denied.

But the Tenth Circuit disagreed, finding that the non-signatory company could enforce the agreement because the plaintiffs’ claims “allege substantially interdependent and concerted misconduct” against the two defendants. The plaintiffs were therefore “estopped from avoiding their duty to arbitrate their claims arising out of their employment relationship.”

That was good news in this case, but I wouldn’t count on that result every time. This case turned on Oklahoma estoppel law. But with proper planning, you can achieve the same result.

Here’s how:

First, in your agreement with staffing agencies, require the agencies to have all individuals assigned to perform services at your company sign an individual arbitration agreement.

Second, make sure it’s not just any old arbitration agreement, but one that includes customized terms. For example:

Require the worker to acknowledge that signing is a condition to being placed at your company.
Make sure the scope of covered claims is broad enough to include claims that are not just against the staffing agency.
List your company as a third party beneficiary with authority to enforce the agreement.
Make the obligation to arbitrate bilateral and binding on your company, even though your company will not sign the agreement. In other words, if you agree to perform services at the company, the company will agree to arbitrate any claims against you.

There are a few more tricks of the trade, but these are some of the key items. Keep the agreement short, and use simple language.

With some careful advance planning, you can avoid being left naked and stuck if faced with a joint employment lawsuit filed by staffing agency workers.

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08.09.21

by Todd Lebowitz

Now is the Time to Add These Safe Harbor Clauses to Your Independent Contractor Agreements

I just finished reading The Longest Day, the 1959 book by Cornelius Ryan that tells the story of the D-Day landing from Allied, French, and German perspectives. The book covers June 6, 1944 and the days leading up to it, but it doesn’t get into what happened next. To facilitate supply lines into Europe right after D-Day, the British built two artificial harbors off the Normandy coast. Mulberry Harbours A and B allowed for the transport of up to 7,000 tons of vehicles and supplies to the mainland each day.

A harbor is a place where ships can seek shelter from the open ocean. Switching our focus to peacetime and the law, a “safe harbor” is the legal term for a provision that protects against liability if you meet certain conditions. No ships are required. Know the required conditions, and you can find shelter from a legal storm.

Two states recently passed laws that create safe harbors against claims of independent contractor misclassification.

Businesses using independent contractors in West Virginia and Louisiana should update their contracts immediately to take advantage of these new statutes.

Each state’s law provides a list of conditions that, if met, will make someone an independent contractor, providing a safe harbor against claims that these workers are misclassified and should be employees. The LA law creates a presumption of contractor status; the WV law is conclusive.

One of the conditions in WV, for example, is that the written contract “states…that the person understands” a list of five specific facts. The contract needs to “state” these five things. The WV law has other requirements too.

The LA law requires that 6 of a possible 11 conditions are met to fall within the safe harbor.

Other states are considering similar laws. Missouri and North Carolina are considering similar bills. Oklahoma was headed down the same road during the last legislative section but has not yet passed a bill.

Businesses using independent contractors in these states should amend their agreements to take advantage of these safe harbor opportunities.

At a time when the federal government is pledging to crack down further on independent contractor misclassification, it’s important to have contracts that are built to withstand classification challenges by any governmental body. Even under federal law, which doesn’t have these safe harbors, these recitations can be helpful when trying to meet the Right to Control and Economic Realities Tests used in federal law and in most states.

Your agreements with independent contractors provide an opportunity to build your defense against claims of misclassification. They should not be treated as a mere formality.

You want to be able to point to your agreements as Exhibit 1 in your defense against a misclassification claim. Play offense, not defense. Adding the WV and LA clauses — and even the proposed NC and MO clauses — can go a long way toward protecting your independent contractor relationships.

You might not be into reading books about World War II and that’s ok. But please read your contracts carefully. Now is a great time to amend and improve independent contractor agreements.

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11.30.20

by Todd Lebowitz

Discomfit a Bear? Here’s a Quick Tip To Improve Your Independent Contractor Agreements

In this story from the Illustrated Police News, 1877, we see the courageous exploits of a young lady from Runcorn, England, skillfully discomfiting a bear with her parasol. Now, I question whether this really happened as captioned. The caption says she punched the bear in the eye with her parasol, but this artist’s rendering depicts more of a body blow, so I’m not sure which to believe. But either way, as you can see, the bear was discomfited and this atypical encounter ended well.

In this instance, a parasol was more than a mere umbrella. It served as a defensive weapon.

The lesson here is that objects we take for granted can be used as a defensive weapon with some proper planning. That includes your independent contractor agreements.

Independent contractor agreements should not be generic, off-the-shelf documents. Every agreement is an opportunity to build your defense against a claim of independent contractor misclassification.

Think about all of the factors that go into determining whether someone is an employee or an independent contractor. For a refresher, you can review some earlier posts on Right to Control Tests and Economic Realities Tests. Also here.

On factors where are you do not exert control and do not need to exert control, put that in the contract. Put in the contract that the contractor controls these factors and you have no right to control them.

For example, do you care what time of day the contractor works? Do you care if the contractor retains helpers? Do you care whose tools the contractor uses?

If not, put that in the contract: The contractor decides when to work, whether to hire helpers, and what tools to use. There are dozens more factors like these to consider. The point is to customize your agreement so that it is defensive weapon to help fend off a claim.

Then go a step further and put in the contract that you have no right to control these decisions. Remember, the Right to Control tests generally focus on whether you have the right to control something, even if you don’t actually exercise that right.

If you use your agreement to memorialize the good facts—those that support independent contractor status—then you can turn that agreement into a defensive weapon.

The agreement might not help if confronted with a bear in Victorian England (“here, read this contract while I run!”), but it may help to discomfit an independent contractor misclassification lawsuit.

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07.27.20

by Todd Lebowitz

Up North, Uber Can’t Make Drivers Go to Amsterdam to Sue. (Wait, What?)

expos I bought a Montreal Expos t-shirt last week. Why? I needed some new work clothes.

I’ve been emailing with a friend in Ontario about the difference between the U.S. and Canada when it comes to coronavirus precautions, and we both agree it’s a good idea to keep the border closed for now. Did you see the Maid of the Mist pictures showing the Canadian boat with six well-distanced (and undoubtedly polite) passengers and the American boat packed like it’s 2019. Canada has hardly any cases. Anyway, I digress. As usual.

While Canada is on my mind, I’ll share a recent decision by the Supreme Court of Canada. The ruling will allow a proposed $400 million class action against Uber to proceed in Ontario on the issue of whether drivers are misclassified as independent contractors.

At issue was the validity of Uber’s arbitration agreements for drivers in Canada. The agreement required drivers to arbitrate any disputes in Amsterdam, following the rules of the International Chamber of Commerce and Netherlands law. Wait. What? Yes.

And there’s this: Filing a case would cost a driver US $14,500 in up-front administrative fees.

The Court’s opinion called the arbitration clause “unconscionable,” and Uber responded by confirming to The Star that it planned to update its arbitration agreements accordingly.

Gig economy platforms are under attack in Ontario, much like in the U.S. Think of Ontario as Canada’s version of California or Massachusetts but with better access to poutine.

According to The Star, the Ontario labour relations board ruled earlier this year that couriers for a food delivery app were not true independent contractors and therefore had the right to join a union. Drivers using the Uber Black platform are also challenging their classification as contractors. American expats are challenging the use of a superfluous U by the labour relations board.

Lesson: If you’re going to require arbitration, be reasonable. Amsterdam might be a nice place to visit (see the Vondelpark!), but it’s too much of a stretch to require an Ontario rideshare driver to go there to file a claim. Next time, try Greenland?

Who Is My Employee?

Exploring Independent Contractor Misclassification & Joint Employment Issues

Category Archives: Contracts

Don’t Be Like These Sheep: Check Your Contract Recitals to Avoid This Misclassification Mistake

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Get Aligned on Commissions: Ten Tips For Using Independent Sales Reps

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Here’s a Bizarre Lawsuit, Plus Tips for Avoiding Misappropriation Trade Secrets

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Not Dead Yet: Arbitration Agreements May Sit Dormant, But They Can Still Save You From a Class/Collective Action

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Upside Down? U.S. Companies Can Learn from Australian High Court Ruling on Independent Contractors

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Iguanas with Jackets: Here’s One Exhibit to Include with Every Staffing Agency Agreement

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Don’t Get Stuck Naked: Tips for Enforceable Arbitration Agreements When Using Staffing Agency Workers

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Now is the Time to Add These Safe Harbor Clauses to Your Independent Contractor Agreements

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Discomfit a Bear? Here’s a Quick Tip To Improve Your Independent Contractor Agreements

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Up North, Uber Can’t Make Drivers Go to Amsterdam to Sue. (Wait, What?)

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