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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NLRB’s Proposed New Joint Employment Rule: Same But Different

[Reposting with revised link to the article, not behind paywall]

When I was 5 years old, and my sister was 3, the rule was that we had to be in our rooms by 8 p.m.

We followed that rule, but in our own way. We’d put on our pajamas, say good night and go into our rooms. But then we would lie down on the carpet at the very edge of our rooms, with our bodies still in the room and our heads in the hallway so we could talk.

In the strictest sense, we followed the rule. But we did it in our own way, to serve our own purposes. In essence, we chose to define what it means to be in our rooms.

The same sort of rulemaking is happening at the National Labor Relations Board on the subject of defining joint employment.

Click here to read the rest of this article, published 9/12/2022 in Law360.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved. This article originally published on Law360, 9/12/2022.

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Are Independent Contractors Entitled to Military Leave? Eggcellent question!

Worker protection laws are a bit different in China.

According to this report, a Chinese company forces its employees to eat raw eggs as punishment if their work does not meet expectations. When one intern complained, the HR Manager allegedly responded, “What law is preventing you from eating a raw egg?”

Even if the company’s motivational techniques could be challenged under Chinese labor law, Chinese legal experts caution that the intern is probably not the right person to complain. His unpaid internship apparently doesn’t make him an employee under Chinese law. And there it is: The age old question of Who Is My Employee? is a thing in China too.

Back in the U.S., we know that the employee vs. independent contractor question makes all the difference in whether several types of employment, tax, and benefits laws apply. But what about military leave law?

Under the Uniformed Services Employment and Reemployment Rights Act (USERRA), employees are guaranteed reinstatement and other job protection rights after taking military leave. And employers must grant military leave when requested.

Do the same protections apply to independent contractors?

According to federal regulations, the answer is no — so long as the contractor is properly classified as a contractor.

Under USERRA, independent contractor status is evaluated using a Right to Control Test. The regulations say these six factors should be considered:

1.       The extent of the employer’s right to control the manner in which the individual’s work is to be performed;

2.       The opportunity for profit or loss that depends upon the individual’s managerial skill;

3.       Any investment in equipment or materials required for the individual’s tasks, or his or her employment of helpers;

4.       Whether the service the individual performs requires a special skill;

5.       The permanence of the individual’s working relationship; and,

6.       Whether the service the individual performs is an integral part of the employer’s business.

No single factor is controlling, but all are relevant for determining whether an individual is an employee or an independent contractor.

As with so many other laws, it’s not enough just to assume USERRA doesn’t apply because a worker is classified as an independent contractor. The workers has to be properly classified as an independent contractor, according to the test that applies to that particular law.

Getting it wrong means failure to comply with military leave law. That sounds unpatriotic and unfair. And it could leave you with egg on your face.

[Note to self for future blog post idea: Can you require independent contractors to eat raw eggs in the U.S.?]

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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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How to Support Prong C of the ABC Test, and Why You Can’t Lie Down When Faced with an Audit

Zippy practices for the 13th Annual Lying Down Championships

Lying down in the face of a challenge is rarely a good strategy. I did, however, find one exception.

A man from Montenegro recently won the 12th Annual Lying Down Championships, beating out nine other competitors by remaining horizontal under a tree for 60 hours. As a reward for his (lack of) effort, he received 350 euros, lunch for two at a restaurant, a weekend stay at a local village, and a rafting trip.

Then things got weird. Local media reported that shortly after the competition, the winner was taken into police custody for (allegedly) physically attacking journalists and damaging the headquarters of a newspaper that called him “the biggest swindler in all of Montenegro.”

I suppose there’s a lesson in here somewhere: Offer a man an award and he’ll lie still for 60 hours, but call him a swindler and he won’t take that lying down.

But I digress. In this post, I want to share some tips gleaned from a recent New Jersey Supreme Court case involving prong C of the ABC Test. The case also serves as a reminder never to take a misclassification audit lying down.

The dispute involved East Bay, a drywall installation company that used independent contractor drywall installers for residential jobs. Until 2013, the company treated its installers as employees. It then switched to an independent contractor model. Risky move. This sparked an audit.

The New Jersey Department of Labor and Workforce Development wanted to know why this company, which was still active, suddenly lacked employees. The audit looked at the individuals who continued to install drywall and examined whether, under New Jersey’s ABC Test, they were independent contractors or employees.

You can guess what happened next. The Department found that 16 installers were misclassified, and it issued a hefty back assessment against the company for failing to pay into the state unemployment fund. The company appealed and lost.

The New Jersey Supreme Court’s opinion focused largely on what it takes to prove prong C of the ABC Test — that the individual “is customarily engaged in an independently established trade, occupation, profession, or business.” (You can read more about New Jersey’s ABC Test here, but otherwise I am going to assume that readers are familiar with the basic concept of the ABC Test.)

The drywall company put forth evidence that the independent contractors had registered business entities and certificates of insurance. The New Jersey Supreme Court held that wasn’t enough to satisfy prong C. This evidence wasn’t enough to prove that the individuals truly operated independently. Evidence in support of prong C should demonstrate that the independent contractor would not become unemployed if the work from this company went away.

The Court gave some examples of evidence that would have been more persuasive in satisfying prong C, including:

  • That the IC’s business will continue when this engagement ends;
  • That the IC’s business is stable and lasting, or other evidence of longevity;
  • That the IC has other customers;
  • That the IC has other sources of revenue, and the company being audited is not the primary source of income for the IC;
  • That the IC provides the tools, equipment, vehicles, and other resources needed to perform the work;
  • That the IC has telephone listings or business stationery;
  • That the IC advertises;
  • That the IC has its own employees;
  • That the IC maintains inventory;
  • That the IC bears the risk of loss;
  • That the IC benefits from the goodwill generated from a job well done;
  • That the IC is required to maintain educational and licensure requirements;
  • That the IC is permitted to obtain work from other businesses; and
  • That the IC in fact performs work for other businesses.

The court cited these as examples of the types of evidence that would have been helpful to prove prong C. This is not a mandatory list. The point here was just that business registrations and certificates of insurance were not enough. Strategically, there is other evidence that would be helpful too, and there are steps that can be taken when retaining ICs to help build a defense. I maintain a longer list but, hey, I can’t give away all the secrets here.

Other observations from the New Jersey Supreme Court decision:

1. How to invite an audit. Switching from an employee model to an independent contractor model is, by itself, enough to prompt an audit.

2. An ominous footnote about prong B. There was also a dispute in this case over the meaning of prong B. Remember, New Jersey has a standard ABC Test, which allows prong B to be satisfied by showing either the work is outside the hiring party’s usual course of business or the work is performed outside of the places of business of the hiring party. (This is different than the California version of the ABC Test.) All drywall installation work was performed at customers’ residences. After the audit, the Commissioner of Labor found (inexplicably) that prong B was not satisfied. It is unclear from the opinion whether that was based on a conclusion that the customers’ residences were East Bay’s places of business or was based on some other fact, such as some kind of work being done at East Bay’s place of business. If the Commissioner believed customer’s residences to be East Bay’s places of business, then it is hard to see how the latter part of prong B could ever be satisfied. But the NJ Supreme Court did not consider prong B in its decision. The Court ruled that prong C was not satisfied, and so it chose not to wade into the morass of prong B.

But there is an ominous footnote. When the Court declined to consider prong B, it noted that in its prior decisions, the place of business meant locations where the hiring party had a “physical plant or conducts an integral part of its business.” That’s consistent with common sense and would exclude a customer’s residence. The Court then, however, invited the Department of Labor to issue regulations explaining how the Department thinks prong B should be interpreted. Yikes!

3. You need to fight unemployment claims by ICs at the initial audit level; you can’t expect a court to save you on appeal. Courts will defer to the findings of an agency if its factual findings have any support in the record, no matter how flimsy. In other words, the agency can be wrong in its overall weighing of the factors, but a court is supposed to affirm the agency’s decision if there’s evidence to support it. Not “a preponderance of evidence” or “ample evidence” or even “sufficient evidence.” Just “evidence.” Folks, the reason we have trials is because there’s almost always at least some evidence on both sides, even if the preponderance of the evidence leans the other way. You shouldn’t have to pitch a shutout to win the game.

I have seen the same deference standard applied to unemployment decisions in New York and Ohio. The courts defer to the agencies. It is unfair. The result can be that the agency’s decision gets affirmed, even if it made the objectively wrong decision.

This unfair standard highlights how important it is to win at the earliest stages in an unemployment claim, if independent contractor status is being challenged. The initial investigation is your best chance to defend independent contractor status. If you wait, it’s too late. Provide the auditor your best evidence on every factor, and don’t hold back.

Remember the consequences too. If one contractor is misclassified, the agency will likely deem all other similarly situated contractors to be misclassified, and you’ll be on the hook for unpaid assessments for all of them. The stakes are high. Companies using independent contractors should spend the time and money to mount a full defense of their contractor’s status at the audit stage. It’s worth the investment, especially because the state courts will generally defer to the agency’s findings, even if the agency is wrong.

Here’s the ultimate takeaway: If you’ve entered a Lying Down Competition, it’s ok to lie down for as long as you want. But if you’re faced with a worker classification audit, or a 1099 audit, or an unemployment claim by a former independent contractor, do not take that lying down.

You need to fight hard in the audit, producing evidence to support independent contractor status. You’ll have the right to appeal if you lose, but don’t expect a fair chance to prove your case. You’ve got to do your best to win any classification dispute at the initial audit. That’s the time to retain counsel and invest time and resources. If you lose the audit and bring an appeal, you’re fighting a steep uphill climb.

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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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Smackdown, Live!: Joint Employer Test Must Consider ‘Reserved or Indirect Control,’ D.C. Circuit Rules

Picture Source: nypl.org

In 2009, the James Brown compilation album The Godfather’s Smackdown, Live! was released. It’s a two-disc compilation of live shows from 1980. I never saw James Brown live, but I did see James Brown’s Celebrity Hot Tub.

The D.C. Circuit Court of Appeals issued a different kind of smackdown, chastising the National Labor Relations Board (NLRB) for ignoring the Circuit Court’s earlier directive about the joint employer test. Believe it or not, this case is another chapter in the ongoing Browning-Ferris saga.

Click here to read the rest, originally posted on the BakerHostetler Employment Law Spotlight blog.

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

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Yes, This Applies to You: Why Non-Union Employers Should Be Concerned with the NLRB’s View On Worker Misclassification

Good news for old passengers traveling to New York!

The caption above may be too small to read, but it’s from a recent New York Times article about updates to the airport. The caption says, “An old passenger walkway in the process of being demolished at La Guardia Airport.”

You might not think this applies to you, but I say it’s about time! The idea of a walkway for old passengers doesn’t seem right, and old passengers should be allowed to use the same walkway as everyone else.

Another area where I sometimes hear “this doesn’t apply to me” is when we talk about the National Labor Relations Board’s views on independent contractor misclassification. But even if your business is union-free (meaning no union, not that the union is complimentary), the NLRB’s position on independent contractor misclassification matters. (Also, how is it that we intuitively know caffeine free means there’s no caffeine, rather than there’s lots of it and there’s no extra charge?)

The NLRB wants to make it harder to maintain independent contractor status under the National Labor Relations Act (NLRA).

Here are four reasons your non-union business should care about the NLRB’s views on independent contractor misclassification:

  1. The NLRB’s General Counsel has issued a policy memo indicated that she intends to have independent contractor misclassification declared to be an automatic unfair labor practice (ULP). This spring, the Board issued a complaint in a case that may help it achieve this policy goal. If misclassification becomes an automatic ULP, that would overturn the Board’s 2019 decision in Velox Express, when the Board said it was reasonable for a company to express its opinion that a worker was a contractor, not an employee, even if the company turned out to be wrong.
  2. If the NLRB rules that your contractors are employees, you can hang up a welcome shingle for your favorite union. (Aside: I don’t think anyone would welcome shingles, but you can buy welcome shingles on amazon.) Such a ruling would empower the unions to try to organize your newly-declared employees. If some independent contractors were already feeling mistreated enough to seek employee status, they’ll likely welcome union representation to help them fight back against The Man.
  3. The protections granted to employees under the NLRA apply to non-union employees too. But the NLRA doesn’t apply to independent contractors. Non-union employees have the right to engage in protected, concerted activity without fear of retaliation or reprisal. Contractors don’t. Protected, concerted activity can include more than you might think. Any time two employees get together to object to a business practice, that’s potentially protected, concerted activity. If two contractors jointly complain, the NLRA doesn’t apply.
  4. The NLRB has an information sharing agreement with the Department of Labor (DOL). If the NLRB thinks your contractors are misclassified, they’re probably gonna tell on you. The DOL may then starts its own investigation, viewing your company as an easy target for misclassification, even though the tests for employee status are different under the NLRA and the federal wage and hour laws administered by the DOL.

Like La Guardia, the NLRB is trying to do a little remodeling, but the NLRB’s remodeling is not for the benefit of old passengers. Instead, the Board is trying to make it harder to classify a worker as an independent contractor. The Board also wants to declare worker misclassification to be an automatic ULP.

Whether your workforce is union or non-union, businesses should pay attention. This is a rebuild that’s worth watching.

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

Yes, that’s a goat on my back.

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

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

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

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

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

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

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

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

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

AB 5, watch your back.

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

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

Yes, that’s a goat on my back.

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

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

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

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

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

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

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

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

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

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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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Dead End for Class Certification? Ninth Circuit Provides Roadmap for Defending Independent Contractor Misclassification Class Claims

For businesses using independent contractor vendors, misclassification claims are usually well-suited for class certification. A plaintiff’s path toward certifying a class can be relatively smooth when all vendors of a particular kind are treated as contractors. The argument goes that if one is misclassified, all are misclassified.

But a new Ninth Circuit ruling may help businesses change the path toward class certification into a dead-end road.

Click here to read the rest of the post, originally published on BakerHostetler’s Employment Class Action Blog.

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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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Hear This: Ballot Measure to Limit Mass. ABC Test is Blocked

Have you heard? There’s a baby goat in Pakistan who may have set the world record for Longest Ears by a Goat. The ears are each 1.6 feet long. Which also means there’s category for Longest Ears by a Goat.

The goat, named Simba, reportedly trips on its ears, which are so long that they drag on the ground. That’s a problem, I hear.

I’m also hearing of a problem in Massachusetts, but it’s of a different sort entirely.

Efforts to add exceptions to Massachusetts’ ABC Test for independent contractor misclassification have been scuttled by the state’s Supreme Judicial Court. A ballot measure modeled after California’s Prop 22* would have created exemptions to support independent contractor status for app-based rideshare and delivery drivers. The Court, however, ruled that the proposed ballot measure covered too many subjects and could not lawfully be placed on the ballot.

What does all this mean?

As many of you know, Massachusetts has the toughest test in the nation when it comes to classifying independent contractors. Under Massachusetts wage and hour law, a worker is deemed an employee unless —

A) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and

B) the service is performed outside the usual course of the business of the employer; and,

C) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

That’s a strict ABC Test, like California’s. But California’s ABC Test has a slew of exceptions, memorialized in AB 2257, formerly AB 5. The Massachusetts Independent Contractor Law has no exceptions, which makes Massachusetts a favorite venue for plaintiffs’ lawyers who like to bring misclassification cases.

With the ballot measure struck down, voters will not have an opportunity to pass a Prop 22-like bill in Massachusetts that would have allowed app-based rideshare and delivery drivers to maintain independent contractor status, so long as certain requirements were met.

States with ABC Tests continue to pose significant compliance risks for businesses that rely on independent contractors. It’s easy to trip and fall, regardless of the size of one’s goat ears.

*California’s Prop 22 is in limbo too. As explained here, a state court ruled the ballot measure unconstitutional. The issue is now on appeal.

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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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