Biden Plan: Independent Contractor Misclassification Will Be An Enforcement Priority

Money
Get away
You get a good job with good pay and you’re okay
Money
It’s a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream
Think I’ll buy me a football team

Pink Floyd just gets it. When I was a young lawyer, someone described civil litigation to me as just moving piles of money from one party to another. But that cynical view tells only part of the story. It excludes the emotion, frustration, stress, and workload involved in defending disputes and in dealing with the consequences, which can include destroying an entire business model.

For businesses making widespread use of independent contractors, all of these concerns are about to get worse.

President Biden’s proposed FY2022 budget includes expanding resources to combat independent contractor misclassification. The Administration’s “commitment” to combatting misclassification is spelled out pretty unambiguously on page 15:

The Administration is also committed to ending the abusive practice of misclassifying employees as independent contractors, which deprives these workers of critical protections and benefits. In addition to including funding in the Budget for stronger enforcement, the Administration intends to work with the Congress to develop comprehensive legislation to strengthen and extend protections against misclassification across appropriate Federal statutes.

The President’s proposal includes $14.2 billion for DOL enforcement efforts, including to “address the misclassification of workers as independent contractors.” This represents a $1.7 billion increase from 2021.

Expect the Department of Labor to place much greater scrutiny on independent contractor relationships than during the Trump Administration. The nomination of David Weil to head up the Wage and Hour Division signals that the President is serious about this enforcement priority. Weil served in the same role under Obama, and he made independent contractor misclassification a focal point of his enforcement efforts.

If your independent contractor arrangements have not been closely examined recently, it’s time for a check up. $14.2 billion for enforcement efforts is a lot of money. I think I’d buy me a football team.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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What Are “Contract Workers”? You’ll Need Some Clarification First.

Did you know that Monaco’s flag looks the same as the flag of Indonesia? The differences are subtle. The Indonesian flag is wider, with a width-to-length ratio of 2:3, compared to Monaco’s 4:5; and Monaco flies a slightly darker shade of red. The flag above is Monaco’s. Fans of Indonesia, don’t be fooled by that pushy sales clerk at the flag store.

Now take your screen and flip it 180 degrees. That’s the flag of Poland. Its proportions are 5:8.

Sometimes, things look the same, even when they’re not. True with flags. Also true with “contract workers.”

When a client starts talking about its “contract workers,” the first thing I want to know is what they mean. Are you talking about 1099 independent contractors? Staffing agency workers employed by a staffing agency? Or your own W2 employees with contracts to work for specific period of time?

Each is as different as Monaco and Indonesia.

If discussing 1099 independent contractors, we’re talking about workers that no one is treating as an employee. The legal risk here is independent contractor misclassification. In other words, are laws being broken by not treating these workers as employees?

If discussing staffing agency workers, we’re talking about someone else’s W2 employees. The issue here is not whether these workers are anyone’s employees. We already know they’re the staffing agency’s employees. The legal issue here is whether these workers are joint employees. In other words, are they employees of both the staffing agency and your company?

If discussing your own W2 employees with contracts for a definite period, we’re probably discussing contract terms and we’ll probably need to see the contract. These are employees but not employees at-will.

The flags of Monaco and Indonesia may look the same, but the countries and their laws are very different. Same thing here. These three types of “contract workers” are as different as a European principality with a population of less than 40,000 and a Southeast Asian chain of islands with a population larger than every country on earth except China, India, and the United States.

Yes, Indonesia really does have the world’s fourth largest population. Fun fact! (And one of the world’s most common flags, tied with Monaco and Poland, as you now know.)

If you’re asked about “contract workers,” be sure you know what you’re being asked about. Any of these three types of worker can be called “contract workers,” but they’re very different, and the legal issues involved are very different too.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Independent Contractors May Have a Weil Problem On Their Hands

Crash Test Dummies is a band from Winnipeg that I really like — especially the 1993 album, God Shuffled His Feet. It’s full of thoughtful questions asked in a booming deep voice. The song In the Days of the Caveman takes a look back, with some keen observations added for good measure:

In the days of the caveman
And mammoths and glaciers
Bugs and trees were your food then
No pajamas or doctors

See, that’s all true and probably not something you had thought about before.

President Biden has given us another reason to look back and reconsider some things you hadn’t thought about in a while. Last week, Biden nominated David Weil to serve as Wage and Hour Administrator. Weil served in the same role under Obama, so we’ve seen that movie too.

Here are some highlights from Weil’s last stint as W&H Administrator:

  • Administrator’s Interpretation 2016-1: Joint Employment under the FLSA, which I wrote about here when it was issued. Weil embraces the broadest possible view of joint employment. The Trump Administration’s DOL rescinded this guidance in 2017.
  • Administrator’s Interpretation 2015-1: Applying the FLSA’s “Suffer or Permit” Standard to Independent Contractor Classification, which I wrote about here. Weil advocates an expansive view of employment, declaring that “most workers are employees under the FLSA’s board definitions.”

Here’s what we can expect from Weil 2.0:

  • Increased enforcement activity by the DOL against companies using independent contractors.

Right now, claims generally arise through lawsuits, and class/collective actions present the most danger. The risk of class claims can be limited with arbitration agreements and class waivers. But arbitration agreements provide no defense against a DOL action. Those agreements don’t bind the government. Expect the DOL to go after companies that make extensive use of independent contractors.

  • Increased enforcement activity by the DOL on joint employment claims.

Remember, unlike independent contractor misclassification, joint employment is not illegal. Joint employment is a problem when a primary employer (such as a staffing agency or vendor/subcontractor) fails to comply with some aspect of the FLSA and its wage payment rules. Under a broad theory of joint employment, the company benefitting from the services is going to be liable for the errors of the primary employer, even though the alleged joint employer had no control over the primary employer’s wage practices.

  • New regulations on independent contractor classification and joint employment.

The standards and test keep changing, depending on who holds the White House. One step the Wage and Hour Division can take to try to make its views more permanent is to adopt its views as formal regulations, not just Administrator’s Interpretations. This is what the Trump DOL tried to do for both independent contractor misclassification and joint employment. Expect a strong push by the DOL to adopt new regulations that make it harder to maintain independent contractor status and easier to find joint employment.

The bottom line is that we’re going back in time. Maybe not so far back that bugs and trees were your food then, but back to 2015 and 2016 interpretations of the FLSA. Expect no pajamas or doctors.

What to do about it? Businesses that rely on independent contractors should tighten their agreements now. Businesses that engage staffing agencies should review those contracts now.

These posts contain a few of my favorite tips:

Good luck out there, and beware of mammoths and glaciers.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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What Are the I-9 Requirements for Independent Contractors?

The Munker-White Illusion, image by David Novick (UTEP)

This is one of my favorite optical illusions. The spheres here are all beige. They are not red, green, or purple. Look closely and you’ll see. David Novick, a professor of engineering at UTEP, explains the illusion here.

It’s fun to be fooled with optical illusions. But it’s not fun to be fooled with federal immigration law.

Companies retaining independent contractors should remember these key points for I-9s and immigration law compliance:

1. Properly classified independent contractors do not need to complete I-9 forms.

2. Misclassified independent contractor — that is, those who are really employees under federal law — are employees and should have a completed I-9. A multi-factor test is used to make this determination. According to federal regulations, these factors should be considered:

  • Who supplies tools or materials;
  • Whether the worker makes services available to the general public;
  • Whether the worker works for a number of clients at the same time;
  • Worker’s opportunity for profit or loss as a result of labor or services provided;
  • Worker’s investment in facilities for work;
  • Who directs the order or sequence in which the work is to be done; and
  • Who determines the hours during which the work is to be done.

3. Federal law prohibits individuals or businesses from contracting with an independent contractor to provide services in the U.S., knowing that the contractor is not authorized to work in the U.S. [8 U.S.C. 1324a(a)(4)]

4. Staffing agency temps employed by the staffing agency must complete I-9s as employees of the staffing agency. Contracts with staffing agencies should make clear the staffing agency accepts this obligation. If an agency sends a bunch of undocumented temps to your worksite, you might get an unscheduled visit from ICE, which is not a good look.

For those keeping a list at home (wait, that’s just me?), you can add immigration law noncompliance to the list of Things That Can Go Badly When Independent Contractors are Misclassified.

And that’s no illusion.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Breaking News? DOL Rescinds Independent Contractor Rule That Never Took Effect

Remember when TV news was on at 6 p.m. and 11 p.m. and that was it? Every once in a while, there would be a Breaking News! alert, and it was always something really important. They wouldn’t interrupt Diff’rent Strokes for just anything. (Bonus points if you remembered there was an apostrophe in the title instead of the first ‘e.’)

But now, with 24-hour news on a dozen stations, everything is Breaking News! – even this story about a New Mexico man who went grocery shopping, then returned to his car to find 15,000 bees in the back seat. (Man walks back into store, returns jar of honey.)

The Breaking News! you’re reading about today is the Department of Labor’s (DOL) latest announcement, rescinding its proposed rule for determining independent contractor status under the Fair Labor Standards Act (FLSA).

Click here for the rest, posted by me on Friday on the BakerHostetler Employment Law Spotlight blog.

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By Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Schrödinger’s Cat? Ninth Circuit Disrupts Trucking Industry with Contractor Misclassification Ruling

Have you heard of Schrödinger’s cat? It’s not a real cat, like Felix or Brian Setzer. It’s a hypothetical, seemingly impossible cat that exists only in the world of quantum physics. Schrödinger’s cat refers to a thought experiment in which a cat in a box is simultaneously alive and dead, until you open the box and observe the cat. Then, stubborn as cats are, it will be only one or the other, and that’s when you realize you prefer dogs anyway.

In a ruling last week, the Ninth Circuit has tried to give the trucking industry Schrödinger’s cat.

The issue was whether California’s infamous ABC Test applies to the trucking industry. The answer now is both yes and no, depending on where you look.

If you’re in California, the Ninth Circuit says yes, the ABC Test applies to the trucking industry. Under the ABC Test, now part of California’s Labor Code, most workers are classified as employees, not independent contractors, unless the work they perform is “outside the usual course of the hiring entity’s business.” (There’s more to the ABC Test, but that’s Part B, the hardest part to meet.)

In the trucking industry, it’s hard to argue that owner-operator truckers retained by a trucking company are performing work that is “outside the usual course” of the trucking company’s business. The ABC Test would likely reclassify most owner-operators as employees. The California Trucking Association brought a lawsuit in 2018, arguing that the Federal Aviation Administration Authorization Act of 1994 (FAAAA) preempts this California law from being applied to trucking. The FAAAA preempts state laws “relating to a price, route or service of any motor carrier … with respect to the transportation of property.” Cal Trucking argued that applying the ABC Test and reclassifying owner-operators as employees would affect the prices, routes, and services provided.

Last week, the Ninth Circuit ruled that the ABC Test is a “generally applicable” law that does not sufficiently affect prices, routes, or service to be preempted. California’s ABC Test therefore applies to trucking and is not preempted by the FAAAA.

Now remember the cat – both alive and dead?

If you’re in Massachusetts, the answer to the same question is no, the ABC Test does not apply to trucking. In 2016, the First Circuit ruled that the FAAAA preempts Massachusetts’ ABC Test (which is the same as California’s) because of its effect on prices, routes, and service, when applied to trucking.

So what happens now? How can one federal law simultaneously mean two different things?

There are three ways this can play out:

  • The full Ninth Circuit might rehear the case and could reverse its ruling (which was a 2-1 split) to conform with the First Circuit’s view;
  • The ruling might stay as it is, meaning that the interpretation of a federal law (the FAAAA) is different in California and Massachusetts, even though their state ABC Tests are the same; or
  • The Supreme Court will take the case and resolve the circuit split.

I grew up in Miami where they had greyhound racing, which you can bet on. I don’t think there’s anywhere you can go and bet on cats. But if I were a betting man on this one, I’d wager that the Supreme Court weighs in at some point.

The owner-operator model in the trucking industry is so well-established and has been permitted for so long under federal law that it seems impossible for the Supreme Court to allow the FAAAA to mean two different things in two different states.

And what about the rest of the country?

The Third and Seventh Circuits have ruled that the FAAAA does not preempt state wage and hour laws when applied to trucking, but those courts were not considering strict ABC Tests like those reviewed by the First and Ninth Circuits. The ABC Test aims to reclassify most contractors as employees; it is no ordinary wage and hour law. More states are considering adopting strict ABC Tests and, in those states, we don’t know whether the FAAAA would preempt state classification law for truckers or not.

In other words, for most of the country, the cat is both alive and dead, and we won’t know which it is until we look. Unfortunately for tens of thousands of truckers, this is not a mere thought experiment. The disruption to the industry is massive, and the sooner we get a clear answer, the better it will be for everyone. Except maybe the cat.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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A Million Dollar Bill? Be Careful Before Relying on the Direct Seller Exemption for Contractor Status

All this cash is available on Amazon for just $13.67!

A Tennessee woman was recently busted for trying to use a $1 million bill to buy a cartful of personal items at a dollar store. The clerk reported the woman to Blount County police, who issued a no trespass order.

That really had no chance of working. Did the woman really think the register at a dollar store had $999,900 or so in change? She did not think that one through too carefully.

Thinking things through is important in all walks of life, including when classifying sales personnel as contractors or employees.

You may have heard that the Internal Revenue Service treats a “direct seller” as an independent contractor, not an employee. But don’t assume all directs sellers are contractors, not employees. Here are two important notes of caution:

First, the definition of “direct seller” is narrow. Here’s what it means, according to IRS Guidance on Direct Sellers:

Direct sellers include any of the following:

  • A person who sells consumer products in the home or a place of business other than a permanent retail establishment,
  • A person who sells consumer products on a deposit or commission basis, or to other persons who will sell the products in the home or place of business,
  • A person who delivers and/or distributes newspapers or shopping guides.

Direct sellers have certain things in common. Their compensation is related to sales rather than to the number of hours worked. Services are performed under a written contract between the seller and the person for whom the seller performs the services.

And the contracts involved provide that sellers are not treated as employees for federal tax purposes.

But wait, there’s more. The Internal Revenue Code also requires, for someone to be a “direct seller,” that:

(B) substantially all the remuneration (whether or not paid in cash) for the performance of the services described in subparagraph (A) is directly related to sales or other output (including the performance of services) rather than to the number of hours worked, and

(C) the services performed by the person are performed pursuant to a written contract between such person and the person for whom the services are performed and such contract provides that the person will not be treated as an employee with respect to such services for Federal tax purposes.

The full statute is here. Further IRS Guidance can be found here.

Second, even if someone is a “direct seller” under the Internal Revenue Code, that doesn’t mean they’re automatically independent contractors under other laws, including federal wage and hour laws state laws.

For example, the FLSA says that “outside sales” professionals are exempt from minimum wage and overtime requirements, but the requirements are different. DOL Fact Sheet #17 explains this exemption.

California’s ABC Test does not apply to “direct salespersons,” but only if those individuals meet the test in California’s unemployment law. Other states have different rules for sellers.

The bottom line when classifying direct sellers is to remember that different tests apply to different laws. Be thorough, and remember that a worker’s classification may be different under federal tax law than under wage and hour law or state law. You’ve got to think this all the way through.

Getting it wrong can be costly, especially for businesses that use lots of independent contractors, and — most important — novelty U.S. currency like million-dollar bills won’t cover those penalties or litigation damages. But, according to the seller of these bills on Amazon, these are the “million dollar bills that get the WOW response.” So there’s that.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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West Virginia Adopts Pro-Business Independent Contractor Test

Three Fun Facts about West Virginia:

  1. The New River is actually one of the world’s oldest rivers and, unusually, flows south to north.
  2. The nickname and team mascot for Poca High School in Poca, WV is the Dots.
  3. West Virginia just adopted the most pro-business worker classification test in the nation.

While I would love to write about the Poca Dots, I’m going to focus on the state’s new worker classification test, enacted March 11, 2021. It takes effect 90 days later, on June 9, 2021.

The new test creates a safe harbor. If you comply with a list of requirements, including a written contract, your worker is automatically an independent contractor under WV wage and hour law, anti-discrimination law, workers’ compensation, and unemployment.

The bill nearly had a disastrous flaw. In its original form, passed by one chamber, if you failed to meet the safe harbor criteria, you’d automatically be deemed an employee. That would have had absurd unintended consequences, including that a worker would automatically be an employee if there was no written contract or if the contract did not include all required clauses.

I drafted a last-minute amendment that was adopted and inserted into the bill at the eleventh hour. The amendment said that if the safe harbor was not met, the worker would not automatically be an employee. Instead, the worker’s status would determined by using the 20-factor Right to Control Test in IRS Rev. Ruling 87-41. (The 20 factors are explained here in this PDF from the Texas Workforce Commission.)

The bill is very pro-business.

Businesses retaining contractors in WV should review the safe harbor provisions and be sure to comply. Compliance means a free pass for independent contractor status under state law (but not under federal law). Contracts may need to be adjusted to include the required clauses. Now is the time to do that.

Here is a link to the bill. The blue text contains the safe harbor. Read it closely and make sure these provisions are in your WV independent contractor agreements.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Sign up now for the BakerHostetler 2021 Master Class on The State of Labor Relations and Employment Law. Twelve sessions, one hour every Tuesday, 2 pm ET, all virtual, no cost. Click here for more information. List me as your BakerHostetler contact so I know you’ve registered. 

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Macaques & The Guess Who: Why the New Independent Contractor Rule Won’t Take Effect March 8

Photo by Hectonichus and, yes, this fella is sticking his tongue out at you (but he can’t remember why).

A Swedish study concluded that baboons, pig-tailed macaques, and squirrel monkeys have some of the worst short-term memories in the animal kingdom, barely exceeding that of bees. The point is, never ask a pig-tailed macaque where you left your car keys.

Having a short memory can be a problem in some situations, but not it’s not an issue if you’re just trying to recall the latest Department of Labor test for independent contractor misclassification. Everything you recall from six weeks ago is being undone anyway. (Or Undun, if you’re a fan of the spelling-impaired Canadian band The Guess Who.)

Remember the new rule issued by the DOL in January 2021 for determining employee vs. independent contractor status? It was going to modify the Economic Realities Test to focus on two core factors: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss based on personal initiative or investment. The new rule was to take effect March 8. The test would apply only to claims under the Fair Labor Standards Act (FLSA).

No more. Last week, the DOL delayed implementation until May, but the rule most likely will be rescinded completely. Undun.

This decision comes on the heels of the DOL rescinding two opinion letters that were also issued in January. Undun. The letters provided guidance on determining independent contractor status in a few particular situations.

The Economic Realities Test remains the test used to determine who is an employee under the FLSA. It’s a multi-factor balancing test.

So if you’ve been relying on recent DOL guidance for how to apply that test, channel your inner pig-tailed macaque. Whatever you recall from January can be forgotten. And where did I put my car keys?

© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Sign up now for the BakerHostetler 2021 Master Class on The State of Labor Relations and Employment Law. Twelve sessions, one hour every Tuesday, 2 pm ET, all virtual, no cost. Click here for more information. List me as your BakerHostetler contact so I know you’ve registered. 

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Beary Scary: Will UK Uber Decision Bite US Businesses?

We saw this fella in Yellowstone. (C) my wife. Used with permission after arms-length negotiation involving chocolate.

Sometimes trouble comes at you from an unexpected direction. One Alaska resident learned this the hard way when she sat on her outhouse toilet and was bitten by a bear — from below. Didn’t see that coming.

US law on Independent Contractor vs. Employee is based on federal and state statutes and common law, but a decision last week from overseas has US businesses concerned. Should they be?

On Thursday, the UK High Court ruled that Uber drivers were “workers” under UK law, not independent contractors, and were therefore protected by minimum wage and other laws.

But I don’t think this ruling will bite US businesses in the arse. There are important differences between US and UK law, and those differences drove the outcome here.

In the US, someone is either an employee or an independent contractor. Those are the only two options. But under UK employment law, there are three categories:

  • Those employed under a contract of employment (US: employee; UK: employee/worker);
  • Those self-employed people who are in business on their own account and undertake work for their clients or customers (US/UK: independent contractor);
  • and an intermediate class of workers who are self-employed but who provide their services as part of a profession or business undertaking carried on by someone else (UK: worker).

Some UK statutory rights, such as the right not to be unfairly dismissed, are limited to those employed under a contract of employment; but other rights, including those claimed in the UK case, apply to all “workers.”

The question in this case, therefore, was not whether the Uber drivers were employees, but merely whether they were “workers.” They were.

The decision also turned largely on a City of London requirement relating to licensing requirements for drivers for hire. The Uber drivers were under contract with Uber London, which had the required license.

The court considered elements of control, but this case was not decided under a US-style Right to Control Test, Economic Realities Test, or ABC Test. The rules we are used to seeing in the US don’t apply in the same way overseas.

In the end, this case is noteworthy in its result — that Uber drivers were protected by UK minimum wage law and other worker protections — but the legal basis for reaching that conclusion just doesn’t apply in the US.

We will continue to see increased pressure in the US for more worker protections, and we will continue to see challenges to worker classification. But US businesses don’t need to worry about the bite from this ruling from a few thousand miles east. Of more immediate concern, at least to Alaskans visiting the outhouse, is what might be waiting a few feet below.

© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

Sign up now for the BakerHostetler 2021 Master Class on The State of Labor Relations and Employment Law. Twelve sessions, one hour every Tuesday, 2 pm ET, all virtual, no cost. Click here for more information. List me as your BakerHostetler contact so I know you’ve registered. 

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