by Todd Lebowitz

Giving the Cold Shoulder: Court Denies ERISA Misclassification Claim Because Contractor Was “Not a Participant”

*^{Mutton: Not the origin of the term.}*

The term cold shoulder originated with Scottish novelist and poet Walter Scott in the early 19th century. A commonly repeated but incorrect origin story says that welcome houseguests were given a hot meal, but those who were not welcome would get a cold shoulder of mutton. But Scott’s use of the phrase had nothing to do with food. He described “shewing o’ the cauld shouther” as a physical gesture, turning the shoulder away from someone in a cold or indifferent manner.

No matter the origin, a federal judge in California recently showed some seriously cold shoulder to an independent contractor seeking ERISA benefits. The case shows the importance of a well drafted complaint in a misclassification lawsuit and highlights an important defense.

Tim Alders worked for YUM! Brands and Taco Bell for 25 years as an independent contractor. He then filed a lawsuit claiming he was misclassified.

He sued under ERISA, alleging that he should have been treated as an employee. He claimed that if he had been treated as an employee, he would have been a “participant” in YUM’s retirement plans, incentive plans, 401(k) plan, and executive income deferral program. Had he been a participant, he would have received financial benefits that he did not receive as a contractor.

Under ERISA, however, civil actions may only be brought by plan participants, beneficiaries, or the Secretary of Labor. ERISA defines a “participant” as “any employee or former employee of an employer . . . who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer . . . or whose beneficiaries may be eligible to receive any such benefit.”

As YUM argued in its motion to dismiss, Alder could not sue under ERISA because he was not a “participant.” Judge Phillip Gutierrez, with a wink and a nod to Joseph Heller, agreed and dismissed the case. The plaintiff never got to argue whether he was misclassified or not.

The decision relied on past rulings, including this synopsis of ERISA law by a different California federal judge: “[U]nder Ninth Circuit authority, a claim that a former employee plaintiff should have been included in a plan, but actually was not included in a plan, does not give [the] plaintiff a ‘colorable claim to vested benefits’ for ERISA standing purposes.”

That’s some serious cauld shouther.

This case is a reminder that there are a lot of ways to defend a misclassification case. The “not a participant” defense is a valuable tool and should be used when appropriate.

But don’t be fooled. This ruling does not mean that a misclassified contractor can never sue for employee benefits. Remember too that this is unpublished case by one district court. Let’s not give it too much weight as precedent. There have been many class actions, some highly publicized, in which in which misclassified contractors took home lots of cash (many millions of dollars) as a result of being denied employee benefits.

One more thing before you go. There’s one easy step that companies should take now, before facing a misclassification lawsuit. Companies should check their plans to make sure the plan eligibility language protects specifically against misclassification claims. This post, featuring a reggae cucumber, provides the magic language you should be including in your plan documents.

If you plan properly, you too can give the cauld shouther.

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02.14.22

by Todd Lebowitz

Twilight Zone? AFL-CIO Says “Not Now,” as NLRB Considers Redo of Independent Contractor Test

Raise your hand if you remember the 1982 song “Twilight Zone”? Seeing several hands raised, I will continue. The tune is catchy, but the lyrics are hard to understand. I heard the song this weekend and decided to finally check the lyrics. “There’s a storm on the loose, zarmines in my head” couldn’t be right, could it?

Raise your hand if you knew the chorus was this:

Help I’m steppin’ into the twilight zone
The place is a madhouse,
Feels like being cloned
My beacon’s been moved under moon and star
Where am I to go, now that I’ve gone too far?

Seeing no hands raised, I will continue.

It’s all very confusing to me, but it made sense once I read through it more carefully.

I had the same reaction after seeing an amicus brief that the AFL-CIO recently filed with the NLRB. The brief was filed in a case that may — yet again — change the test for independent contractor status.

In Atlanta Opera, the Regional Director for Region 10 ruled that a proposed unit of makeup artists and hairstylists were employees, not independent contractors, and that an election could proceed.

The NLRB then issued a notice asking the parties and the public for briefs addressing whether the Board should reconsider the test for determining whether workers are independent contractors or employees. It seems inevitable that the Board will rewrite the test to make it harder for a worker to be deemed a contractor. But is Atlanta Opera the right case to use for rewriting the test?

The AFL-CIO, somewhat surprisingly, said no. Like the lyrics to “Twilight Zone,” that was confusing to me at first, but it makes sense when I read through it more carefully.

Undoubtedly the unions want a rewrite of the test to make it as hard as possible for someone to maintain contractor status. But the AFL-CIO urged the NLRB to wait, arguing this isn’t the right set of facts to make a sweeping change.

The AFL-CIO’s brief argued that, even under the existing test, it was pretty clear the makeup artists and stylists were employees. It would be more impactful to wait for a closer case to rewrite the test. Ah, so that’s their angle — wait til later then really shake things up.

Eventually, the NLRB is going to change the test. The current test, explained in SuperShuttle DFW (discussed here), examines ten Right to Control factors.

At a minimum, it seems clear that the Board would like to go back to the FedEx Home Delivery test. The FedEx test asked whether the worker was “in fact, rendering services as part of an independent business” and essentially adopted an Economic Realities Test, rather than the Right to Control Test that had always been applied.

When the Board revises the test, it could go back to FedEx or it could try to adopt a new, more stringent test, like an ABC Test. (The courts probably would not allow the Board to adopt an ABC Test without Congressional action, but that’s for another day.)

And the Board will revise the test. It’s just a question of when and to what. The Board will make it harder to be an independent contractor under federal labor law. That means it will become easier for unions to file election petitions and try to organize groups of workers that might now be operating as independent contractors.

Yeah there’s a storm on the loose, sirens in my head.

Oh. That makes more sense.

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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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01.31.22

by Todd Lebowitz

That’ll Cost You 96 Camels: Court Headlocks Staffing Agency with $7.2M Misclassification Judgment

*Mom feeding a non-wrestling camel, May 2010*

If you weren’t in Turkey last month, you missed the annual Selçuk Efes Camel Wrestling Festival, which featured 162 competitors in four categories.

The camels are paired by weight and skill, and their techniques include tripping their opponents with foot tricks or applying headlocks then sitting on their opponents. Some just push until the other camel gives up. A winner is declared when one camel scares away the other, making him scream or collapse. The camels are muzzled so there is no biting.

Among those missing the spectacle were the owners of Steadfast Medical Staffing, a Virginia-based firm that maintains a database of nurses and pairs them with healthcare facilities. That’s because they were in federal court, defending against a lawsuit by the Department of Labor. The DOL alleged that they had misclassified the nurses as independent contractors in violation of the Fair Labor Standards Act (FLSA).

After a bench trial, the judge agreed with the DOL and ruled that the nurses — which included CNAs, LPNs and RNs — were employees of the staffing agency. The Court applied the Economic Realities Test, which is the proper test for determining who is an employee under the FLSA.

The Court considered all relevant factors, then applied camel-style headlocks while sitting on the defendant, causing the staffing agency to either scream or collapse (unclear from the opinion). The Court ruled that the staffing agency failed to pay overtime and failed to comply with FLSA record keeping requirements. The agency will be liable for approximately $3.6M in back wages plus another $3.6M in liquidated damages.

Following the judgment, the DOL issued a statement with quotes from the Secretary of Labor, Marty Walsh, and the Solicitor of Labor, Seema Nanda, that the DOL was sending an “unequivocal message” to Steadfast and other staffing companies that the DOL is serious about pursing independent contractor misclassification.

Staffing agencies that treat workers as independent contractors are on notice that the DOL is serious about enforcement. Remember, the facts of the relationship determine whether a worker is an employee or an independent contractor, not how the parties choose to characterize the relationship.

More than 1,100 nurses will share in the award, with a healthy-but-to-be-determined amount of fees headed to the plaintiffs’ lawyers.

A prized wrestling camel can be sold for more than a million Turkish lira. That’s about $75,000. Large awards like this for systemic misclassification are not surprising. This one will cost the staffing firm about 96 wrestling camels.

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01.24.22

by Todd Lebowitz

Keep Litigation Far Away: Tips for Nonprofits so Volunteers Won’t Be Considered Employees

Jonathan photographed in April 2021. (Photo: Xben911 via Wikimedia Commons, CC BY-SA 4.0)

Jonathan turns 190 this year, but you won’t see his mug on the cover of People. That’s because Jonathan lives a solitary life in St. Helena, a remote volcanic island in the South Atlantic. Once a week, he is hand-fed cabbages, cucumbers, carrots, and apples to boost his nutritional intake. Jonathan is a giant tortoise, and he is believed to be the oldest living land animal.

You could volunteer to help feed Jonathan, but St. Helena is hard to get to. The island is 1,200 miles west of Africa, and commercial air service is limited. Sea transport is available on the RMS St. Helena, but it takes five days to get there from Cape Town.

If you want to volunteer closer to home, however, opportunities abound. Nonprofits thrive on the services of volunteers. But every once in a while, we hear of a volunteer who later claims to be an employee and who wants to be paid.

A recent case against the American Film Institute serves as a good reminder that expectations should be clearly established when working with volunteers.

When engaging volunteers, consider asking all volunteers to sign a short acknowledgement. Consider including these types of representations in the acknowledgement, customized to fit the specific project and organization:

That this is volunteer work and is purely optional;
That the decision to work is made freely, without pressure or coercion;
That the volunteer does not expect to be paid; and
That the work is being performed to support a nonprofit organization, and is being performed for [insert] objective [e.g., public service / religious / charitable / humanitarian / civic / some other similar non-commercial].

If the work could result in physical injury or damage to the individuals’s clothing or other property, consider adding that the individual acknowledges the risks (e.g., bodily injury, damage to personal property), knowingly assumes these risks, and will not hold the nonprofit responsible if those things occur.

Please don’t use the exact language above. This is not legal advice or a template. I’m just giving you ideas here — for the greater good. Work with counsel to draft an appropriate agreement.

Be sure the volunteer work is really voluntary. The voluntariness of the work was at issue in “the Lord’s Buffet” case a few years back, which has quite the backstory.

Volunteer service is important, and nonprofits unfortunately need to protect themselves against the occasional ungrateful troublemaker.

A simple acknowledgement can go a long way toward keeping litigation far away — like St. Helena and Jonathan, 1,200 miles from the nearest land mass.

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01.18.22

by Todd Lebowitz

More Than One Iota: Supreme Court Agrees to Decide Scope of Arbitration Law; Outcome Will Affect Independent Contractor Agreements

Last week I read that Sirhan Sirhan had been denied parole again. No surprise there. But what captured my attention was his attorney’s comment that there was not “one iota” of evidence he would be a threat to society if released.

Not even one iota? Why are there never any iotas? And what is the plural of iota anyway? And how do you even respond to that? Well, actually, we had a few iotas. Let me check my notes here. Yes, three iotas.

“Iota” means an infinitesimal amount. Synonyms include bupkus and diddly-squat. But if you search for “iota” online, no one ever has any iotas. The word is always used in the negative.

Well here are a few iotas for you. The Supreme Court has agreed to hear two cases that will affect when arbitration agreements with independent contractors can be enforced. The Supreme Court generally gets involved when there are at least a few iotas of good arguments on both sides.

Both cases address the scope of the Federal Arbitration Act (FAA), which creates a presumption that arbitration agreements should be enforced, but includes a few iotas of carveouts.

In the first case, Viking River Cruises v. Moriana, the Supreme Court will determine whether cases brought under California’s Private Attorneys General Act (PAGA) are subject to arbitration. California courts have said they are not.

In the second case, Southwest Airlines Co. v. Saxon, the Court will address the scope of the Section 1 exemption, which makes the FAA inapplicable to certain types of transportation workers in interstate commerce. The Saxon decision is likely to clear up the mass confusion (and circuit split) over whether last mile delivery drivers and local rideshare fall within the exemption.

In the political arena, arbitration agreements have come under fire, and there is a movement among Democrats to abolish mandatory pre-dispute arbitration agreements. The Supreme Court, on the other hand, appears more likely to enforce the contracts as written, deferring to the contractual intent of the parties and interpreting any exemptions to the FAA narrowly.

There is more than one iota of evidence to support both sides of these disputes. But expect some 6-3s.

If I am pulling out my crystal ball, I expect the Supreme Court will uphold the arbitration agreements, at least in Saxon. Moriana is tougher to predict since PAGA is a state law creation in which the individual bringing the claim acts as a private attorney general, bringing the claim on behalf of the state. On one hand, the state never agreed to arbitrate. But on the other hand, the individual bringing the PAGA claim did agree to arbitrate any disputes, not to bring them in court under the guise of PAGA.

Whenever the Court rules, we’ll see arbitration agreements back in the news. More visibility on this issue will mean louder and more urgent calls from politicians to abolish pre-dispute arbitration agreements.

We can expect many iotas of news on arbitration agreements later in 2022.

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01.10.22

by Todd Lebowitz

Low-Hanging Fruit? DOL and NLRB Join Forces to Fight Misclassification

Much has been written about the phrase low-hanging fruit. The metaphor’s origins are fairly obvious, referring to obtaining quick wins through minimal effort.

But how good is the metaphor? For harvesters, starting with the lowest hanging fruit is not the best strategy. Fruit near the top of a tree is generally riper and ready to eat, due to better sun exposure. Fruit can also be heavy, and harvesters who start at the top of the tree can work their way down as their bags grow heavier. Then there’s this insightful warning from one author’s mother, who cautioned that the blackberries near the bottom of the bush are the ones most likely to have been peed on by an animal.

Pee notwithstanding, the Department of Labor and the NLRB have seized on the low-hanging fruit strategy as a way to go after companies that misclassify independent contractors.

Last month the two agencies signed a Memorandum of Understanding, agreeing to share information and better coordinate investigations when they suspect there have been violations of the law.

While the DOL and NLRB apply different tests to determine Who Is My Employee?, it’s likely that a relationship failing one test also fails the other. Violators of one law are the low-hanging fruit.

What does that mean for businesses? It means that if the NLRB believes your company misclassified its independent contractors, they’ll share that information with the DOL, which would be pleased to piggyback on the NLRB’s finding and tag you with wage and hour violations as well. And vice versa.

The information sharing arrangement raises the stakes for alleged violators. Companies found to be in violation of one law are more likely to be found in violation of multiple laws. And that means more fines, more assessments, and more disruption to your business.

For the DOL and NLRB, the information-sharing arrangement means they’ll go after each other’s targets and seek to double up on penalties. For companies whose independent contractors may resemble employees, it means you’re the blackberry that’s about to get peed on.

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01.03.22

by Todd Lebowitz

New Year’s Resolutions: 5 Tips for Avoiding Trouble in 2022

Last spring in Poland, a menacing brown object appeared in a tree. Locals grew concerned about the mysterious beast and closed their windows. After a few days it was still there, and a call was placed to the local animal welfare society.

The authorities responded to the call and arrived on the scene to investigate. The citizens were relieved to learn it was not a bird of prey, a dangerous rabies-infested rodent, or a trapped pet. It was a croissant.

Somebody probably threw it into the tree while trying to feed birds.

The locals were likely embarrassed, but better safe than sorry. When in doubt, take steps to avoid problems. Be proactive.

Here are five tips to start off the new year the right way, with or without arboreal baked goods:

1. Review and revise your agreements with staffing agencies. Make sure you include The Monster with Three Eyes and these other clauses. Consider requiring all individual workers to sign arbitration agreements, and don’t forget the impact a choice of law clause may have.

3. Self-audit your use of independent contractors to determine whether these relationships are defensible. Here’s a tip for quickly identifying the riskiest relationships.

2. Review and revise your agreements with independent contractors. Add safe harbor clauses if you do business in WV or LA. Remember these rules, akin to discomfitting a bear.

4. Create a gatekeeper system so that managers and procurement team members cannot retain non-employee labor without first going through a designated individual. You can’t guard against the risks you don’t even know about.

5. Check your website for references to independent contractor relationships. Don’t refer to your contractors as “our whatevers” or “our team of whatevers.”

Remember, to those who say they haven’t been sued for misclassification, I say you haven’t been sued yet.

Wishing you all a happy and healthy 2022!

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12.21.21

by Todd Lebowitz

Dole-Kemp ‘96? NLRB Announces Plan to Go Back to Old Rules on Joint Employment (But Not That Old)

The internet may be a playground and an encyclopedia, but it’s also a living graveyard. For those of you politically inspired, it’s not too late to join up with Dole-Kemp ‘96. Fans of the X-Files, who still await the next episode, can stay caught up at Inside the X. And anyone still looking to join the Heaven’s Gate cult can check out the group’s webpage here. The site is supposedly maintained by two of the only members who did not commit suicide in 1997, so leadership opportunities may be available.

The NLRB is hopping on the retro train too. Earlier this month, the Board announced its intent to adopt a new rule on joint employment. The new rule would displace the Trump-era regulation, which currently requires direct and substantial control over essential terms and conditions of employment before joint employment can be found.

The NLRB’s Notice of Proposed Rulemaking follows the trail blazed by the Wage and Hour Division (WHD) of the DOL, which in July rescinded the joint employment regulations passed during the Trump Administration. The WHD didn’t make a new rule; it just left a giant crater in the landscape, and now for Fair Labor Standards Act claims, there is no regulation at all.

The NLRB seems intent on adopting its own rule, not just rescinding the current regulation. There’s little doubt as to what the new rule will look like. Expect it to track the Browning-Ferris standard imposed by the Board in 2015. Under Browning-Ferris, when one company has the right to control aspects of the work, joint employment exists — regardless of whether control is actually exerted, and regardless of whether the control is over wages, hours, scheduling or anything else that fits within the meaning of essential terms and conditions.

Expect a substantial expansion in the scope of who a joint employer under the NLRA after the new rule is released. The impacts of joint employment under the NLRA can include being forced into bargaining with workers directly employed by a different company (a subcontractor, for example), being accused of a broader range of unfair labor practices, and being subjected to picketing that would be illegal secondary picketing if there were no joint employment relationship.

Back when Bob Dole was seeking the White House, actual control was required to be a joint employer under the NLRA. Since 2015, the standard has ping-ponged back and forth as the political winds have shifted. We’re about to see another major change sometime in mid-2022. If after the change you find yourself missing the good ol’ days, at least you can still cozy up with your Apple 2E and check out the Dole-Kemp campaign website.

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12.13.21

by Todd Lebowitz

Famed Miami Nightspot Gets Hit with $15 Misclassification Verdict

I grew up in Miami, but not this Miami. My weekends were Miami Jai-alai and Coconut Grove, certainly not the hip hop adult club scene.

But if I had grown up in that other world, I might have heard of the King of Diamonds, which I am now aware was the place to be seen if you are looking to spot celebrities at a famous adult entertainment venue. According to Miami newspaper archives, the original club went bankrupt in 2018 after failing to pay its mortgage and its rent. This came on the heels (high heels?) of being cited for serious safety code violations, including malfunctioning fire sprinklers.

Making matters worse, at about the same time, 27 of the club’s dancers sued, alleging wage and hour violations and that they had been illegally misclassified as independent contractors.

The case was delayed because of COVID-19, but it finally went to trial last fall, and the jury agreed that the dancers had been misclassified. Two weeks ago, the judge entered a final judgment, awarding the dancers more than $15 million. Some of the dancers’ individual awards exceeded $800,000.

The takeaway here is that independent contractor misclassification claims are big dollar claims. The defendants in this case drew more attention than usual because of the high profile of their club, but the legal risks apply to any business making widespread use of contractors.

Remember, it’s the law that decides whether a worker is an independent contractor or an employee. It doesn’t matter what the parties call the relationship or what the written contract says.

The club (or, a club with essentially the same name) reopened in 2020 with new ownership. I don’t know whether they’ve changed the classification and pay structure of their performers, but that would seem like a good idea. They’ll want to keep the place up and running in case Floyd Mayweather comes back with his infamous Money Truck to drop $100,000 on an evening’s entertainment.

For some other wild tales at the old joint, you can read more here.

I was oblivious to that whole scene growing up, but I sure had some great times at Miami Jai Alai (video highlights from 1980s), rooting for Michelena, Benny, and Harretche, and hoping to hit on my trifecta. Good times.

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