by Todd Lebowitz

What to Watch for in 2023: Big Changes May Be Coming for Independent Contractor and Joint Employment Laws

If you google “what to watch for 2023,” you’ll mostly get tips on soon-to-be-released movies and streaming video shows. You’ll get grammatically impossible generic hype like “movies we can’t wait to see” (except the whole point is that you have to wait to see them) and you’ll get grammatically impossible niche hype like “The most anticipated Korean dramas and movies we can’t wait to watch in 2023.”

We won’t peddle hype in this post, and you’ll literally have to wait for all of the things addressed below. But here are five important developments to watch for in 2023.

1. The test for Independent Contractor vs. Employee is likely to change, at least under the Fair Labor Standards Act (FLSA). The Department of Labor proposed a new multi-factor test, and the period for public comment ended December 13. The DOL is likely to roll out a new test in 2023. It will replace the current core factors test described here.

2. The test for Joint Employment is likely to change, at least under the National Labor Relations Act (NLRA). In September, the NLRB proposed a new test for determining when joint employment exists under the NLRA. You can read more here. The public comment period has closed, and we can expect a new test sometime in 2023.

3. The NLRB is likely to rule that independent contractor misclassification, by itself, is an unfair labor practice. The NLRB General Counsel has expressed an intent to reverse the Velox Express decision from 2019, in which the Board ruled that misclassification was not an automatic ULP. More information is here. Now that the Board majority has switched from Republican to Democrat, expect a decision in 2023 that creates an automatic ULP when there’s a finding of worker misclassification.

4. Expect state legislatures to keep changing the tests for Independent Contractor vs. Employee. Some states will try to make it harder to maintain independent contractor status by passing ABC Tests, in either a standard or strict version. A few conservative states may go the other way and adopt the latest version of the Uniform Worker Classification Act proposed by ALEC. The law would create a safe harbor for independent contractor classification if certain requirements are followed, including having a written contract. Versions of this law have been passed in West Virginia and Louisiana. You can read more here. Expect Oklahoma to be next.

5. Expect significant rulings on California independent contractor law. Several important cases are pending. These include Olson v. State of California, which challenges the constitutionality of AB 5. Oral argument was held in the Ninth Circuit in July 2022. In another case, the California Court of Appeal is considering the legality of Prop 22, the successful ballot measure that helped to protect independent contractor status for rideshare and delivery drivers using app services. Oral argument in that case, Castellanos v. State of California, was held in December 2022.

The law regarding contingent workforce is constantly changing, and 2023 looks to be another year of significant transformation. As always, it will be a good idea to watch these new developments carefully, as they will likely have a significant impact on companies using independent contractors and other contingent workforce arrangements.

Wishing you all a happy and healthy 2023!

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11.07.22

by Todd Lebowitz

Settling Misclassification Lawsuits Is Sometimes the Right Call, But It Might Make You Feel Dirty

The world’s dirtiest man died last month at the (ripe) age of 94, having reportedly going 60 years without bathing. Covered in soot and living in a cinder-block shack, the Iranian hermit was known for eating roadkill, smoking a pipe filled with animal excrement, and believing that cleanliness would make him ill.

The newest dirtiest man alive may be this guy in India, who as of 2009 hadn’t bathed in a mere 35 years. Instead of water, this man of the people opts for a “fire bath,” in which he lights a bonfire, smokes marijuna and stands on a leg praying to Lord Shiva. The man told a reporter from the Hindustan Times, “Fire bath helps kill all the germs and infections in the body.” Of course it does.

Sometimes when we settle lawsuits, we also feel dirty. Maybe not that dirty, but at least icky. It feels wrong to pay money to a plaintiff when we feel the other party doesn’t deserve it. But settlements are often driven by factors other than the merits of a claim, such as business conditions or considerations other than purely financial.

In independent contractor misclassification cases, a settlement is sometimes the only way to ensure that a lawsuit does not result in forced reclassification of workers. In a settlement, the parties can agree upon terms, including financial payments, without conceding that anyone was misclassified and without requiring a reclassification going forward.

That is what happened in a recent case involving A Place for Rover, which is an app-based gig economy company that connects dog walkers with dog owners.

In May 2021, the app company won summary judgment in a misclassification dispute. The company argued that dog walkers were independent contractors, not employees, even under California law. The company argued that it could satisfy each prong of the ABC Test and that, regardless, it was a referral service under California law, which would exempt it from the ABC Test usually used in California to determine whether a worker is an employee. The company urged the court instead to analyze the classification dispute using the S.G. Borello balancing test, not an ABC Test.

The district court did not reach a conclusion on whether the company was a referral service and instead determined that the ABC Test was satisfied. The court ruled that dog walkers controlled their own work, routes, and prices, making them legitimate independent contractors.

But the plaintiff appealed, and the company may have feared that the Ninth Circuit Court of Appeals would revive the case and send it to trial. Instead of taking a chance on a bad outcome, the company settled.

By settling, the company pays money to avoid the risk of a judgment that the dog walkers were employees, an outcome that would likely render the company’s business model no longer viable. The company’s decision makers probably felt a little dirty, paying any money at all after having won at the district court level. That is not a surprising outcome, even if they felt strongly about their case. Because the stakes are so high in misclassification litigation, that’s often how these cases conclude. Icky but sometimes necessary.

But at least in litigation, afterwards you can take a bath.

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10.17.22

by Todd Lebowitz

But the Onions! DOL’s Contractor Rule May Cause Companies Heartburn

Have you ever gone to a new restaurant that took over the space where one of your favorite restaurants used to be?

You’ve been wanting to try the new restaurant. You get there and the menu looks similar, so you order the fettucine with shrimp because that dish was always really good at the old place. It arrives and it looks the same but you’re not sure that it tastes quite the same.

Maybe the sauce tastes a little different but it’s hard to tell for sure. Then, you get home later that night and you feel a little queasy. You realize that the new restaurant must have put onions in the sauce. You probably didn’t notice because when the dish was served it looked just like it did at the old restaurant.

But you’re not supposed to eat onions, and now you have to wait and see if you’re going to start cramping up from eating the onions or if you’re going to be just fine. You really just don’t know. It could just as easily go either way, and now all you can do is wait.

That’s kind of how I feel after reading the Department of Labor’s proposed new independent contractor rule, released earlier this week.

Click here to read the rest of the story, originally published in Law360 on 10/13/2022.

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09.26.22

by Todd Lebowitz

Seattle Trades Nirvana & Ken Griffey for Burdensome New Independent Contractor Law

Back in the 1990s, Seattle was known for Nirvana and Pearl Jam, Ken Griffey Jr., Microsoft, Frasier (which I could never get into), the emergence of Amazon, and a lot fewer homeless people. The fewer homeless people may have been in part to the Fremont Troll, an 18-foot sculpture erected in 1990 under the Aurora Bridge, where it holds a crushed VW Beetle and would be scary as hell to sleep next to.

The troll’s still there, but Griffey and Frasier are gone and we all know what happened to Nirvana.

Having left the 90s behind, Seattle in 2022 apparently wants to be known instead as a city where it is pretty burdensome to retain independent contractors.

The Seattle City Council passed a law that requires immediate action from all companies that have solo independent contractors working in the city. The Independent Contractor Protections Ordinance, codified at SMC 14.34, took effect Sept. 1.

The rest of this article was originally published as a BakerHostetler Alert, here. Immediate action is needed for companies with solo contractors in Seattle, so read on. All the same helpful info is just below.

The law applies to solo independent contractors who perform any part of their work in Seattle for a commercial hiring entity if the contractor receives or is expected to receive at least $600 in total compensation from the hiring entity during a calendar year. If the hiring party knows or has reason to know that the work is being performed in Seattle, then the law applies, even if the hiring party has no preference as to where the work is performed.

Independent contractors are defined to include individuals and entities consisting of only one person. The law does not apply to workers being treated as employees by a staffing agency or consulting firm.

Commercial hiring entities are defined to include for-profit and nonprofit organizations. Modified rules apply to drivers for transportation network companies, such as ride-share services. There are also exceptions for lawyers and for contractors whose sole relationship to the hiring party is a property rental agreement.

Commercial hiring entities with independent contractors covered under the new law must:

Provide a written precontract disclosure to the contractor that includes at least 12 specified categories of information about the engagement. This disclosure must be in a single document in the contractor’s primary language. A model notice is available.
Provide written updates before making changes to any of the required information.
Provide timely payment consistent with the precontract disclosure terms or a later written contract. If no deadline for payment is specified, then the contractor must be paid no later than 30 days after the work is completed.
Provide an itemized, written payment disclosure accompanying each payment. The disclosure must be in a single document, such as a pay stub or invoice, and it must contain information in at least 12 specified categories.
Provide a written notice of the contractor’s rights under the new law. The notice must be in English and, if applicable, the contractor’s primary language. A model notice is available.
Maintain for three years records that demonstrate compliance with these requirements.
Refrain from retaliating against any contractor who asserts rights protected under the new law. Prohibited retaliation includes threatening to report that the contractor is an illegal immigrant. If any adverse action is taken within 90 days of a contractor’s exercise of rights, the law creates a rebuttable presumption that the action was retaliatory.

The precontract disclosure and disclosure of rights must be provided before work begins or, for contractors already providing services, by Sept. 30, 2022.

Penalties for violating this law may include payment of unpaid compensation, liquidated damages, civil penalties, other penalties payable to an aggrieved contractor, fines and interest. These penalties are in addition to any other relief available under any other law.

BakerHostetler’s Contingent Workforce team continues to monitor state and local developments affecting companies that retain independent contractors. Please reach out to your BakerHostetler contact or any member of the Contingent Workforce team for compliance assistance.

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09.20.22

by Todd Lebowitz

Don’t Get Armboxed: Strict ABC Test Results in $100 Million Misclassification Liability

In Russia, a new variant on boxing involves chaining the two combatants to opposite sides of a podium, with one arm of each boxer immobilized. They then pound each other with the remaining good arm and, because they’re tied to the podium, they have nowhere to go.

The contests, called armboxing, last for three one minute rounds. If the fighters last two rounds, their arms are both freed up for round three, but the boxers remain chained to the podium.

Getting pummeled with nowhere to go is also a fair way to describe Uber’s most recent run-in with the New Jersey Department of Labor over unpaid unemployment contributions. The NJDOL claims that under the Strict ABC Test governing New Jersey unemployment law, rideshare drivers are employees, not independent contractors.

The NJDOL pursued Uber and a subsidiary for failing to pay into the state’s unemployment fund over a five-year period, 2014-2018.

Last week, the NJDOL announced a settlement with Uber to cover the unpaid assessments – for a cool $100 million. The amount was based on $78 million in unpaid contributions plus $22 million in interest. Uber has made the payment but did not concede there was any misclassification.

New Jersey uses a strict ABC Test to determine employee status for unemployment coverage, but uses a different version of the ABC Test for wage and hour law. The strict ABC Test used for unemployment law follows the same formula as the tests in Massachusetts and California. The danger in these tests, of course, lies in prong B, which requires that to be an independent contractor, the work being performed must be “outside the usual course” of the hiring party’s business.

State departments of labor are notoriously aggressive in pursuing misclassification, and courts often defer to their judgment, even if the facts could support independent contractor status. The NJDOL is among the most aggressive enforcers, as you might expect when its Labor Commissioner says this: “Let’s be clear: there is no reason temporary, or on-demand workers who work flexible hours, or even minutes at a time can’t be treated like other employees in New Jersey or any other state.”

For businesses using independent contractors, tools such as arbitration agreements with class action waivers can be effective in preventing class action litigation. But arbitration agreements can’t stop a state agency from conducting an audit and imposing its own penalties for noncompliance.

And that’s how Uber found itself tied to a podium with one arm immobilized as it got hit.

Businesses in states using strict ABC Tests need to be particularly careful when setting up their business plans, their contracts, and their external messaging. State audits can be random, or they can be initiated after a worker complaint.

Unemployment filings by independent contractors can be especially dangerous. State departments of labor will typically investigate those claims, assess whether the worker is misclassified and — most troubling of all — will find that if the one worker was misclassified, then all similarly situated workers were also misclassified. The state DOL may then issue back assessments based on its assumptions about how many workers are similarly situated and how many were therefore misclassified.

When an independent contractor files an unemployment claim, pay attention and be prepared to defend your classification decision. Merely denying that the worker was an employee may not be enough, and a full-fledged audit could follow. In a full-fledged audit, the stakes can be high, and it might not feel like a fair fight.

Be proactive, plan ahead, and don’t chain your business to a podium.

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08.01.22

by Todd Lebowitz

Summer of Fun? FTC Announces Plans to Crack Down on Gig Economy

In my house, we have declared this to be the Summer of Fun, and we’ve committed to going to events around Cleveland that we haven’t tried before. Sometimes the dog gets to come too. Last month, we took Zippy to her first reggae concert. You can tell she enjoyed it because she’s smiling. (Or she’s thirsty. Still not sure.)

No concert t-shirt for Zippy though. They had suitably small sizes but nothing with four arm holes.

The Federal Trade Commission is also trying new things this summer. In a July press release, the FTC announced that one of its new initiatives is a crackdown on gig economy abuses.

The FTC can’t bring independent contractor misclassification cases, but it can bring enforcement actions when it believes there have been unfair or deceptive business practices that disadvantage gig workers.

The FTC announced that “the agency will continue to take action to stop deceptive and unfair acts and practices aimed at workers; particularly those in the ‘gig economy’ who often don’t enjoy the full protections of traditional employment relationships.” The press release then listed several examples of enforcement actions the FTC has been pursuing against gig economy companies. The cases tend to involve deceptive claims about earning opportunities, including for gig workers who use their platforms.

The FTC further announced that it’s teaming up with the NLRB to share information about alleged wrongdoers in the gig space. We already know that the NLRB’s General Counsel is on a mission to crack down on independent contractor business models. The decisions by the NLRB and FTC to join forces only heightens the risks for companies using an independent contractor business model.

Business using an independent contractor model need to remember that misclassification claims are not the only legal risk. Be sure that representations made to independent contractors about potential earning opportunities and other business practices are accurate and realistic.

Otherwise, despite it being the Summer of Fun, with reggae concerts and other goodness, the FTC may soon be on your doorstep, ready to Stir It Up.

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07.18.22

by Todd Lebowitz

Watch Your Back, AB 5! Ninth Circuit Case Could Wipe Out California’s ABC Test

Yes, that’s a goat on my back.

This weekend we tried goat yoga. Highly recommended. It was a mix of basic yoga (my kind of yoga) to help get me stretched out, but held in a pen with goats who know no boundaries.

We then toured the farm, which featured llamas, long-haired pigs, guinea hens, a few obligatory dogs, and several varieties of goats, including the kind of fainting goats featured in that George Clooney movie.

Having to watch my back during yoga was something I signed up for and was part of the fun. Not so for California’s AB 5, which should be watching its back after what we saw at the Ninth Circuit last week.

The Ninth Circuit held oral argument in a case brought by Uber called Olson v State of California. Uber is arguing that AB 5 is unconstitutional.

While it’s hard to predict cases based on oral argument, the three judges on the panel seemed pretty sympathetic to Uber’s argument, which is that the statute arbitrarily picks winners and losers, i.e., the exemptions make no sense from an equal protection/due process standpoint.

Unlike the strict ABC Test in Massachusetts, the California ABC Test codified in AB 5 (and later AB 2257) contains loads of exceptions. The statute says to use the ABC Test to determine employee vs independent contractor status for all workers — except for dozens of categories of workers and other situations.

Let’s not pretend. We all know this bill was written to target ride share and delivery app companies. The unfairness of making this law apply to everyone soon became apparent and led to the insertion of dozens of exceptions. If an exception applies, the Borello balancing test applies instead of the ABC Test.

The exceptions just about swallow the rule, and a law targeting a handful of companies presents constitutional problems. Or so the argument goes.

We can expect a decision in the next few months, and this is one to watch. Unlike me at goat yoga, imagining a decision that strikes down or severely limits AB 5 is not a big stretch.

AB 5, watch your back.

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07.18.22

by Todd Lebowitz

Watch Your Back, AB 5! Ninth Circuit Case Could Wipe Out California’s ABC Test

Yes, that’s a goat on my back.

This weekend we tried goat yoga. Highly recommended. It was a mix of basic yoga (my kind of yoga) to help get me stretched out, but held in a pen with goats who know no boundaries.

The Ninth Circuit held oral argument in a case brought by Uber called Olson v State of California. Uber is arguing that AB 5 is unconstitutional.

The exceptions just about swallow the rule, and a law targeting a handful of companies presents constitutional problems. Or so the argument goes.

We can expect a decision in the next few months, and this is one to watch. Unlike me at goat yoga, imagining a decision that strikes down or severely limits AB 5 is not a big stretch.

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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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04.18.22

by Todd Lebowitz

It’s a Mistake? Too Bad. NLRB Might Soon Make Misclassification an Automatic Unfair Labor Practice

*Cover art from the single, released on Epic Records*

In the early 80s, I had two cassettes by the Australian band Men at Work — Business as Usual, released in 1981, and Cargo two years later.

Cargo includes the single, “It’s a Mistake,” a satirically upbeat Cold War-inspired song in which a soldier tries to figure out whether the Cold War is about to turn hot. The video features too-short shorts, bad lip syncing, and old ladies hitting the band members with umbrellas on the battlefield, all of which leads to an accidental nuclear launch, triggered when an officer tries to stub out his cigar in an ashtray but hits the wrong button.

All in all — a good song, a mediocre video, and a strong commentary on the politics of the day.

A recent move by the NLRB’s General Counsel revives the “It’s a Mistake” narrative, this time in the context of independent contractor misclassification. There are no accidental nukes involved, but the move is definitely politically motivated.

If the General Counsel has her way, the Board will rule that independent contractor misclassification is an automatic unfair labor practice (ULP), even if it’s a mistake.

To reach that conclusion, the Board would have to overturn its 2019 decision in Velox Express, in which the Republican-controlled Board ruled that misclassifying a worker, by itself, is not automatically a ULP.

The GC’s actions are no surprise. In mid-2021, she issued a strategy memo announcing that one of her strategic (political) priorities was to get Velox Express overturned during her tenure. With the NLRB now featuring a 3-2 Democratic majority, she’s likely to prevail.

What does this mean for companies that use independent contractors?

It means the stakes are higher. If Velox Express is overturned, misclassification of independent contractors would likely become an automatic ULP, even if the classification was well-intentioned. Essentially, there would be strict liability for misclassification.

Traditional remedies for ULPs include back pay and reinstatement, which could mean forced reclassification as employees. The GC has been pushing to further expand the scope of available remedies because, hey, why not.

If your business is hit with a ULP and forced to reclassify workers under the NLRA, good luck trying to maintain independent contractor status under wage and hour laws or other laws.

A reversal of Velox Express, therefore, may have sweeping ramifications, making it much harder to maintain independent contractor status across a broad range of federal and state laws.

The consequences of this expected reversal will be serious — not quite on the scale of nuclear devastation, but worse than old ladies hitting you on the head with an umbrella.

Who Is My Employee?

Exploring Independent Contractor Misclassification & Joint Employment Issues

Category Archives: Gig Economy

What to Watch for in 2023: Big Changes May Be Coming for Independent Contractor and Joint Employment Laws

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Settling Misclassification Lawsuits Is Sometimes the Right Call, But It Might Make You Feel Dirty

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But the Onions! DOL’s Contractor Rule May Cause Companies Heartburn

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Seattle Trades Nirvana & Ken Griffey for Burdensome New Independent Contractor Law

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Don’t Get Armboxed: Strict ABC Test Results in $100 Million Misclassification Liability

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Summer of Fun? FTC Announces Plans to Crack Down on Gig Economy

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Watch Your Back, AB 5! Ninth Circuit Case Could Wipe Out California’s ABC Test

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Watch Your Back, AB 5! Ninth Circuit Case Could Wipe Out California’s ABC Test

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

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It’s a Mistake? Too Bad. NLRB Might Soon Make Misclassification an Automatic Unfair Labor Practice

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