Last week I was in Boston, spending time with many of my favorite people at our BakerHostetler Labor and Employment Group Retreat. I always enjoy spending time with the people in our other offices. They are wonderful, kind, smart, and a joy to be around.
As part of the programing, each practice team leader gave a six-minute TED-style talk. In my session about the Contingent Workforce Practice Team, I included a slide that I wanted share here.
We sometimes hear from companies that they don’t think they’re at risk for an independent contractor misclassification claim. They sometimes say, we’ve been doing it this way forever, and we haven’t been sued.
To that I would say, you mean you haven’t been sued yet.
Here’s what can happen when companies get sued for independent contractor misclassification.
This headline does not refer to the Chinese spy ballon.
Instead, I’m thinking about 1968. Jimmy Page and John Paul Jones had joined up to form a new band after the breakup of the Yardbirds. Drummer Keith Moon of The Who supposedly said the project would go down like a lead balloon.
One of the largest balloons, of course, is the zeppelin. The zeppelin was a passenger airship used until the Hindenberg disaster in 1937. So the band named itself Led Zeppelin, dropping the ‘a’ in Lead so people wouldn’t mispronounce the name of the band.
In 1971, the band released Led Zeppelin IV, which included the song “Going to California” and this lyric:
Spent my days with a woman unkind Smoked my stuff and drank all my wine Made up my mind to make a new start Going to California with an aching in my heart
For today’s post, I’m going to California with an aching in my heart.
Cities in California have upped their game when going after companies that use independent contractors. They’re taking the lead (not led) in bringing their own lawsuits.
In January 2023, the City of San Francisco secured a $5.25 million settlement to cover 5,000 independent contractor delivery drivers. The lawsuit alleged a failure to comply with the city’s health care security and paid sick leave ordinances, which apply to employees.
In October 2022, San Diego’s city attorney settled its own independent contractor misclassification lawsuit for $46.5 million. That deal covered 300,000 independent contractor delivery drivers.
In 2021, San Francisco reached agreement on another delivery driver misclassification lawsuit, settling for $5.3 million to cover 4,500 local drivers.
The mountains and the canyons start to tremble and shake The children of the sun begin to awake (watch out)
States are following a similar playbook, as we recently saw when New Jersey obtained a $100 million settlement, alleging that a rideshare app company failed to pay into the state unemployment insurance fund for independent contractor drivers.
It seems that the wrath of the gods got a punch on the nose And it's startin' to flow, I think I might be sinkin'
Government-initiated lawsuits can be particularly dangerous because arbitration agreements and class action waivers are ineffective. The governments are fighting for funds they think are rightfully theirs.
They also have political motives driving their prosecutions. Officials facing re-election want to be able to show their constituents they’re making a difference and fighting for workers’ rights (and ignoring, as usual, the fact that most IC drivers want to remain ICs).
Throw me a line, if I reach it in time I'll meet you up there where the path runs straight and high
The trend of government-backed compliance efforts is going to continue and will likely increase. Companies making widespread use of independent contractors should be proactive in evaluating these relationships, the contracts, and the local laws to build a comprehensive defense strategy — before getting sued.
There’s an island in Quebec that’s larger in area than the lake in which it sits. René-Levasseur Island was supposedly formed by the impact of a meteorite 214 million years ago, although eyewitness accounts differ. The land mass became an island in 1970, when the Manicougan reservoir was flooded, merging two crescent shaped lakes that surrounded the area.
I like fun geography facts, and an island larger than the lake in which it sits is a fun fact. But feels a bit aggressive for the Canadians to merge two crescent shaped lakes to turn this land mass into an island. I’m sure they had their reasons. If nothing else, it looks good on a map.
The Department of Labor is also being aggressive, but they’re not flooding any reservoirs. Instead, they’re channeling their aggression toward independent contractor misclassification.
In a news release this month, the DOL announced that it had obtained a consent judgment for $5.6 million against a national auto parts distributor and an Arizona logistics firm for allegedly misclassifying 1,398 drivers as independent contractors. The award included back wages and liquidated damages.
The DOL had alleged that, by misclassifying the drivers, the companies failed to meet minimum wage requirements, failed to pay overtime rates, and failed to keep required timekeeping records. These failures each were violations of the Fair Labor Standards Act (FLSA).
The award covered an eight-year period between April 2012 and March 2020.
I see three takeaways here:
First, the DOL is being aggressive in filing lawsuits when it thinks independent contractors have been misclassified. This consent judgment shows how expensive these claims can be for companies that improperly classify workers. Companies using independent contractors needs to be proactive in evaluating their risks and taking steps to minimize those risks. There are lots of ways to reduce risk if you plan ahead, before you’ve been sued or investigated.
Second, this case is a reminder that companies who classify delivery drivers as independent contractors are at heightened risk. Federal and state agencies and the plaintiffs’ bar seem to be filing a disproportionate number of claims involving delivery drivers. If your business uses delivery drivers who are classified as independent contractors, you may be at an increased risk of an audit or lawsuit.
Third, remember the DOL’s proposed new rule for independent contractor classification under the FLSA? (Read more here, here, and here.) The DOL wants to change the current test for who is an employee under the FLSA, replacing a regulation adopted by the Trump Administration in 2020. But cases like this one show that the current regulation is not impairing the DOL’s ability to enforce what it perceives as misclassification. The DOL’s many recent successes — as posted in DOL news releases — show that the DOL is doing just fine under the current rule when it comes to misclassification enforcement. The new rule is a solution without a problem.
Large judgments like this one seem shocking, but they are a reminder of the substantial dangers of misclassification.
Learn more by joining me at the 10th Annual 2023 BakerHostetler Labor Relations and Employment Law Master Class, all virtual, one hour every Tuesday starting February 7, 2023. My program on Contingent Workforce issues will be on March 7, 2023. Registration is free.
If you have a beard at least 8 inches long, here’s an opportunity you might not have considered. At a bar in Casper, Wyoming, a group of bewhiskered patrons tied their beards together to take the world’s record for Longest Beard Chain.
How long? 150 feet, shattering the previous record of 62 feet, set by a shaggy German crew in 2007.
But that wasn’t even the hairiest highlight of the weekend. Down the street was the National Beard and Moustache Championships, a visual delight featuring moustache categories such as best handlebar, Dali, freestyle, and uber-stache, and partial beard categories including best friendly sideburns, goatee freestyle, musketeer, and Fu Manchu.
Meanwhile, 1,000 miles to the west, a different sort of hairy situation was nearing conclusion for several operators of gentleman’s clubs or nightclubs or strip joints, depending on your preferred terminology.
Last week, a federal district court in San Francisco approved a settlement that combined multiple class action claims of independent contractor misclassification brought by exotic dancers. The settlement covered more than 8,000 dancers and included a total payout of $6.5 million.
The cases were complicated by a number of legal issues, including the fact that — because of the timing of the lawsuit — the question of whether the dancers were contractors or employees was to be determined using different tests for different claims. The dancers’ classification for their California wage order claims would be determined using an ABC Test, but their classification under other Labor Code claims would be determined using the Borello balancing test, which is a California hybrid of Right to Control and Economic Realities Tests.
The class period covered 2010 through 2018, so the Dynamex decision applied to the wage claims, but AB5 had not yet been enacted, which left the Borello test to govern the Labor Code claims. This post explains the complicated situation that existed at the time. Had the class covered the period from January 2020 forward, the ABC Test likely would have been used to determine classification under all of the California claims.
But there were also Fair Labor Standards Act (FLSA) claims. The FLSA uses an Economic Realities Test to determine a worker’s classification, but that test is fluid too. The Economic Realities Test used by most courts is different from the test that was written into the current FLSA regulations in 2020, which is different from the test the DOL recently proposed to enact in a new set of regulations currently under consideration.
So for these class members, there were at least three different tests that would determine whether they were employees or independent contractors under different laws. That’s kind of like trying to determine who had the best musketeer or Fu Manchu but with everyone’s facial hair tied together in a 150-foot beard chain.
There are a few takeaways here for the rest of us.
First, misclassification claims by exotic dancers remain common. The business model needs some internal review. But that’s probably not your concern.
Second, the settlement is a good reminder of how complicated it can be to determine a worker’s classification when multiple laws apply. Different tests apply to different laws, even within the same state. The dancers, had they gone to trial, might have been employees under some laws and contractors under other laws.
Third, there are significant costs in reclassifying contractors to employees. The settlement required the clubs to reclassify their dancers to employees, which means the dancers would become eligible for unemployment, workers’ comp coverage, and protection under the anti-discrimination and leave laws that apply to employees.
Regardless of your business, it’s always a good idea to proactively review independent contractor relationships to see how well they would withstand a classification challenge in court. Misclassification cases are high stakes and can take many twists and turns. Sort of like the facial hair in the Full Beard Freestyle category. (Photos here.)
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.
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.
In Return of the Living Dead, a warehouse owner accidentally reanimates some cadavers, who then become unkillable zombies. While not based on a true story, the 1985 film does have some parallels in real life (if you squint real hard and just go with it).
As discussed last week, copyright claims can also return from the dead when the author is an independent contractor. This week we discuss what can be done to avoid this zombie copyright scenario.
In the case of Horror Inc. v. Miller, the Second Circuit ruled that screenwriter Victor Miller could reclaim the copyright to Friday the 13th after 35 years, since he wrote the script as an independent contractor.
The case highlights a serious risk when retaining a writer as an independent contractor instead of as an employee. If a work is not a “work made for hire” under the U.S. Copyright Act, the author can reclaim a copyright 35 years after having transferred the rights away.
Horror, Inc. argued that Miller was an employee when he wrote the script, which made it a “work made for hire.” The court disagreed, but the rights holder should have had another argument in its back pocket – one that would have been much cleaner and could have changed the result of the case.
Employment is just one path for designating something a “work made for hire.” Another path toward the same designation is to have a “specially commissioned work.”
If Miller’s contract to write the movie had indicated that the movie was a specially commissioned work for use as part of a motion picture, it would not have mattered whether he was an employee or an independent contractor. The “specially commissioned work” designation would have made the work a “work made for hire” without getting into the messiness of employment, which would mean that Miller could not reclaim any rights after 35 years. This circular from the copyright office explains the “specially commissioned work” rule.
There are important lessons from this case for anyone seeking to engage a writer, whether it’s a freelancer or a script writer.
First, think through the implications of employee vs. independent contractor, not only in the context of employment law but also copyright law.
Second, consider a belt-and-suspenders approach. Even if the writer is your employee under labor law, the writer might not be your employee under U.S. Copyright Act — at least according to the Horror, Inc. case. Consider Plan B. You maybe able to designate the work a “specially commissioned work” or use one of the other definitions of a “work made for hire,” assuming that the facts fit within the definition.
But there are pitfalls to the second approach too. The California Labor Code says that if a work is a “work made for hire,” then the relationship between the writer and the acquirer is automatically employment, at least under certain provisions in the Labor Code. See Cal. Unemp. Ins. Code Section 686 and Cal. Lab. Code Section 3351.5(c).
If the California Economic Development Department (EDD) performs a misclassification audit, it will likely ask for all independent contractor agreements, and if a deliverable has been designated as a “work made for hire,” that may serve as conclusive proof of misclassification, with back assessments owed for failure to pay unemployment taxes.
You can get around the whole “work made for hire” issue by assigning the work, but that leaves the door open for the writer to reclaim the copyright after 35 years. And we’re right back where we started.
The independent contractor vs. employee decision has important implications in copyright law that are often overlooked. The Horror, Inc. case is a good reminder of some of the surprises that may arise many years later.
By now, we’ve all heard that the new tax code provides a 20% tax deduction for many small businesses, including potentially independent contractors. (More info here.) As a result, some workers might prefer to be called contractors instead of employees to take advantage of the new deduction. Contractor status may be particularly appealing to workers who don’t need health insurance or other employee benefits. But, as we covered here, it doesn’t matter what a worker wants. The facts of the relationship determine a worker’s classification, no matter what the parties want it to be.
Don’t expect this change in the tax law to mean that independent contractor misclassification claims are going away. They’re not. Continue reading →
If you retain freelancers in New York City, pay attention.
As we wrote here, NYC’s Freelance Isn’t Free Act requires a written agreement when retaining an individual independent contractor, if the value of services is $800 or more. The law covers any individual non-employee, including nannies and babysitters. (Loyal readers, please read this earlier post for details.)
The law took effect May 15, 2017, but new rules — effective July 24, 2017 — create additional burdens.
The NYC Department of Consumer Affairs has published final rules implementing the Act. While the purpose of the rules is (supposedly) to clarify the Act, the Rules go much further and create new requirements — some of which may be contrary to federal law.
When I was an undergrad at Michigan, any time I would drive to the airport or to Tiger Stadium, I’d see billboards for Deja Vu, a strip club with (apparently) lots of locations. I never visited (not into that sort of thing, thanks for asking), and I never thought much of it. I certainly did not expect to be writing about Deja Vu and independent contractor misclassification 25 years later. But here goes.
When patrons of these fine establishments partake in the traditional lap dance, it’s doubtful they’re thinking about whether these often-single-mom “entertainers” who are just trying to make a living have been properly classified under wage and hour law. More likely, they’re thinking about — never mind.
But that’s an important issue, as Deja Vu recently learned, when it was sued by a class of 28,177 dancers alleging they were misclassified as independent contractors, rather than Continue reading →
If you retain freelancers in New York City, pay attention.
When I was an undergrad at Michigan, any time I would drive to the airport or to Tiger Stadium, I’d see billboards for Deja Vu, a strip club with (apparently) lots of locations. I never visited (not into that sort of thing, thanks for asking), and I never thought much of it. I certainly did not expect to be writing about Deja Vu and independent contractor misclassification 25 years later. But here goes.
Who Is My Employee? 