DOL Gets Aggressive with $5.6 Million Consent Judgment on Independent Contractor Misclassification

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.

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© 2023 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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When They Get Around To It: Update on the DOL’s Independent Contractor Rulemaking

In Denbighshire, Wales, the Howatson family lives in a small house that sits… wait for it… in the middle of a roundabout.

In the early 1980s, after the family had been in the house for 20 years, local authorities told them their property sat smack in the middle of where a roundabout was to be built. The family refused to sell, and they now have lovely 360-degree views of people driving around their house all day and night.

The Department of Labor is taking is a more direct approach in its effort to update the worker classification test under the Fair Labor Standards Act. But it’s a slow process, and it will be several more months before we see a final rule.

But this post will provide a status update. Long story short, we’ll see a new rule when the DOL gets around to it.

In October 2022, the DOL released its proposed new test for determining who is an employee under the Fair Labor Standards Act (FLSA). The proposed rule generated more than 50,000 comments in response. I posted some initial reactions to the proposed rule in this article here.

The proposed rule identifies seven factors to consider when determining whether an independent contractor has been misclassified under the FLSA:

1. Opportunity for profit or loss depending on managerial skill;

2. Investments by the worker and the employer;

3. Degree of permanence of the work relationship;

4. Nature and degree of control;

5. Extent to which the work performed is an integral part of the employer’s business;

6. Skill and initiative; and

7. Additional factors.

Under federal law, the rulemaking process involves three main steps. First, the agency posts a proposed new regulation. That’s what the DOL did in October.

Second, there is a public comment period, in which anyone can submit a comment to the DOL. The most effective comments tend to assist the agency in evaluating its proposed rule, such as explaining likely unintended consequences or identifying concerns with how it is written. Comments can also offer legal arguments as to why the agency’s proposed rule is not consistent with the law it is supposed to be interpreting.

Finally, after reviewing the comments, the agency will publish a final rule. The final rule might differ from the proposed rule, or it could be the same. Or the agency can jettison the proposed rule entirely and do nothing. Here that last option is unlikely. The DOL will almost certainly issue a new rule.

On December 13, I submitted a lengthy comment on behalf of Flex, the trade organization representing app-based rideshare and delivery platforms. The full comment is available here, and I thought it might be helpful to summarize the main points for this audience.

The comment included two parts.

Part One argues that the DOL should not abandon the current rule (the 2021 Rule), which was passed less than two years ago. The 2021 Rule was adopted after a thorough rulemaking process and comment period, and the rule was developed based on a detailed analysis by the DOL of decades of case law. The 2021 Rule focused on two core factors, rather than offering a multitude of factors that have no pre-assigned weight. The 2021 Rule offered more predictability for businesses and contractors, and predictability in the law is — to put it bluntly — good. A regulation should add clarity, and the 2021 Rule added clarity.

Part One also pointed out that the 2021 Rule had done little to damper the DOL’s efforts at combatting misclassification. The DOL has published a long list of successes in obtaining settlements and judgments in the last three months alone.

Abandoning the 2021 Rule would also be arbitrary and capricious, meaning it might not survive a legal challenge, and we urged the DOL not to make a change.

Part Two argues that even if the DOL decides to abandon the 2021 Rule, the proposed new rule needs some work. Part Two focused on seven aspects of the proposed new rule that the DOL should change.

The key thing to remember is that the DOL wants to go back to a multi-factor test. Multi-factor tests have been around for a long time, but the devil here is in the details. If you read the DOL’s description of each factor and how it should be applied, the DOL is putting its fingers on the scale, taking every close call (and some that aren’t close) and resolving them in favor of employee status.

I will list the seven arguments below to provide a general sense of the key points. But, since this is supposed to be a quick read format, I’m not going to wade into the details. You can read the full comment if you like.

From the Table of Contents to Part Two:

1) In Factor #1, the Commentary about “Managerial Skill” Should Be Deleted or Revised Because It Fails to Account for the Realities of 21st Century Work.

2) Factor #2 Should Be Substantially Revised to Remove Provisions That Are Illogical, Incompatible with Economic Realities, and Contrary to FLSA Case Law.

3) Factor #4 Should Remove the Commentary That Legally Required Control May Be Relevant Evidence of Control Because This Commentary Is Contrary to Controlling Case Law, Contrary to this Department’s Own Guidance, and Not Probative of the Economic Realities of a Relationship.

4) In Factor #4, Use of Technology to Supervise Should Not Be Referenced as a Relevant Control Factor.

5) Factor #5 Should Preserve the Current “Integrated Unit of Production” Analysis and Should Not Adopt a Flawed “Integral Part” Analysis That is Contrary to Case Law and Legally Unsupported.

6) Any Final Rule Should Preserve the Helpful Subregulatory Guidance in Fact Sheet #13, Clarifying That Certain Factors Are Not Relevant.

7) Any Final Rule Should Replace the Term “Employer” with “Principal” or a Similarly Neutral Term.

You can read the complete arguments here.

And now onto Step Three of the DOL’s rulemaking process. Last week, the Biden Administration published its overall regulatory agenda for 2023. It included a May 2023 placeholder for a proposed final rule. That’s just a best guess at this point, and with more than 50,000 comments for the DOL to review, the actual release date may be several months later. But the DOL, at least at present, appears prepared to move forward with a new rule to determine independent contractor vs. employee status under the FLSA.

We’ll continue to monitor developments, in a roundabout way.

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© 2023 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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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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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Hairy Situation: Misclassification Settlement Disputes Settle for $6.5 Million; Multiple Tests Would Have Applied

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.)

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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

Say cheese!

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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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Silly Old Moo: Watch What You Say When Trying to Preserve Independent Contractor Status

The parliament of New Zealand maintains a list of words and phrases that are considered unbecoming to say about another member and are therefore banned from use during parliamentary debates. These include:

  • His brains could revolve inside a peanut shell for a thousand years without touching the sides.
  • Energy of a tired snail returning home from a funeral.
  • Could go down the Mount Eden sewer and come up cleaner than he went in.
  • Silly old moo.

Words matter when trying to preserve a worker’s independent contractor classification too. Avoid possessives when referring to independent contractors, who are not “your” anything. The terminology you use should be consistent with the concept that the contractors are in business for themselves.

Check your company’s website and public facing materials and try to avoid phrases like this:

  • Our technicians [or representatives or whatever]
  • Our team of [whatevers]
  • We install/repair/other verb

Other words and phrases can also suggest employment and should be avoided when referring to contractors:

  • Hire (instead, retain)
  • Wages (instead, compensation)
  • Assignment (instead, project or engagement)
  • Duties (instead, services)

Using terminology that does not sound like employment will help when trying to show a court of agency that the relationship is not employment.

And never, ever tell anyone that your independent contractor’s brains could revolve inside a peanut shell for a thousand years without touching the sides. That’s just unbecoming.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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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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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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No Bear Wrestling? Poorly Drafted D.C. Law Turns Contractors Into Employees, Sort Of

According to this article in USA Today, state and local legislatures pass all kinds of strange laws. In Tennessee, you can’t hold office if you’ve been in a duel. In North Carolina, you can’t hold a meeting if you are dressed in costume. In Louisiana, it’s illegal to wrestle a bear.

Other times, legislatures pass laws that make sense, but they do it in a way that’s sloppy or lazy. A recent amendment passed by the D.C. Council falls into this second category.

Like many state and local anti-discrimination laws, the D.C. Human Rights Act prohibits discrimination and harassment in the workplace. An amendment to the Act, effective 10/1/2022, expanded the law’s protections to most independent contractors. Seems reasonable, right?

But the way the law extends these protections is lazy drafting, and the lazy drafting creates problems for those of us who are careful about preserving the distinctions between employees and independent contractors.

The amendment expands the Act’s coverage by changing the definition of “employee.” Under the amended text, the term “employee” now also includes individuals “working or seeking work as an independent contractor,” as well as unpaid interns. The amendment then excludes some independent contractors from coverage, explaining that an independent contractor for purposes of the Act “does not mean a service vendor who provides a discrete service to an individual customer.”

There are two problems here. First, starting at the end, what does the exception really mean? I presume the exception exists to carve out rideshare and delivery services, but if that’s what they meant, they should have said that. It’s unclear. Maybe some guidance will be issued later.

But the larger problem is the second one, and that’s what I want to focus on here. Instead of amending the law so that it applies to “employees and covered independent contractors,” the law lazily changes the definition of “employee” to say that “the term ‘employee’ includes … an individual working or seeking work as an ‘independent contractor.’”

But the word employee (as everyone commonly understands it) doesn’t include individuals working or seeking work as independent contractors. That’s the whole point of differentiating them by calling them independent contractors.

Let’s try an analogy. If you wanted to expand coverage for a law that applies to police officers so that the same protections applied to fire fighters, you wouldn’t redefine the term “police officers” to “include” fire fighters. You’d say the law applies to police officers and fire fighters.

The same principle applies in every day life. If you went to the ice cream store and ordered vanilla soft serve, you’d be unhappy if the clerk handed you a vanilla-chocolate twist. You’d complain, but the clerk would point you to the sign on the wall that says “We define vanilla to include chocolate.” That’s dumb and would never happen. I think. But I would check twice before ordering soft serve at the D.C. Council cafeteria.

Preserving independent contractor status is already complicated, with so many different state and local tests for determining who is an employee and who is a contractor. We don’t need lazy amendments that define the term “employee” in a way that just includes “independent contractors.” It makes everything more confusing for everyone, especially when it remains important to differentiate between contractors and employees in every other context.

We don’t even need to look beyond D.C. to see how the D.C. Council has messed this up. Let’s compare the amended Human Rights Act to other D.C. laws.

The D.C. unemployment compensation law uses a common law test to determine whether someone is an employee or an independent contractor. So does D.C. wage and hour law. The D.C. workers comp law uses a different “relative nature of work test,” but that’s a balancing test too. The point is, under these other D.C. laws, the term “employee” definitely does not include independent contractors, and there’s a way of differentiating which is which.

It’s laudable that the D.C. Council wants to extend anti-discrimination protections to independent contractors. Some state laws do that too. (Federal anti-discrimination laws do not.) But don’t lazily do it by calling independent contractors “employees.” Because they’re not.

At least in D.C. it’s still legal to wrestle a bear.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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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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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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