Polar Opposites Among Independent Contractor Tests: September 2020 News Update

Independent Contractor Misclassification
October 8, 2020

Last month presented a clash between the enactment of a new version of the most restrictive state law test in the nation for independent contractor status and the issuance of a proposed federal regulation that would create one of the more lenient legal standards for IC status.  The state law, California Assembly Bill 2257 (AB2257) which Governor Newsom signed into law on September 4, 2020,  replaced Assembly Bill 5 (AB5), which had codified California’s version of the so-called ABC test.  Many commentators regard this ABC test, which changed decades of settled law, as the death-knell for the overwhelming number of California independent contractor relationships that were structured in a lawful manner, causing many freelancers to lose their work opportunities with both gig economy and traditional businesses. Meanwhile, the U.S. Labor Department issued a proposed regulation establishing a test for IC status under the Fair Labor Standards Act that essentially preserves the legitimate nature of many independent contractor relationships but did so in a manner that may insulate more businesses from misclassification liabilities.

As we commented in an article late last year in Law360, which we republished on this blog, even the highest-ranking officials of the Obama Administration did not call for the federal government to articulate a new test for IC status or to emulate the strictest state law test in the nation. Instead, both the former Secretary of Labor and the former Wage and Hour Administrator articulated the view that federal and state governments should work together to enforce vigorously the existing state and federal laws governing ICs.  The companies they sought to target were those they felt were intentionally misclassifying workers and thereby abusing the legitimate use of independent contractors. Neither the new California statute nor the new proposed federal regulation arguably promote continuity and certainty for all stakeholders in the area of independent contractor law.

What should companies do if they operate in California and other states using independent contractors as part of their business model?  Many of those businesses, in an effort to maximize their compliance with state and federal IC laws, have resorted to a process such as IC Diagnostics™.  That process focuses on restructuring, re-documenting, and re-implementing independent contractor relationships in a customized and sustainable manner that substantially enhances IC compliance.

We also report below on a large food manufacturer’s inability to dismiss an IC misclassification case by sales representatives, a sizeable settlement of an IC misclassification class action, and a franchise case where a court granted summary judgment in favor of the franchisor where a state independent contractor law was held to be preempted by federal regulations under a state-specific court decision affecting highly regulated industries.

In the Courts (3 cases)

LARGE FOOD MANUFACTURER UNABLE TO DISMISS PROPOSED IC MISCLASSIFICATION CLASS ACTION BY SALES REPS.  A New Jersey federal court has denied Goya Foods’ motion to dismiss a proposed class action brought by sales representatives alleging violations of the Pennsylvania Wage Payment and Collection Law due to misclassification as independent contractors, not employees. The sales reps seek to recover unpaid wages in the form of deductions from commissions. According to the amended complaint in the case, the sales reps reside in Pennsylvania and maintain routes in that state  selling and distributing Goya products to retailers and others. Each sales rep receives compensation pursuant to a Broker Agreement identifying them as independent contractors and expressly disclaiming an employer-employee relationship. In support of their claim that they were misclassified as independent contractors, the sales reps assert they are assigned routes; required to attend periodic meetings for which they are not paid; must wear Goya-labeled apparel,  adhere to schedules set by Goya, and exclusively sell Goya products; and receive compensation unilaterally set by Goya. Applying a multi-factor test, the Court found that the amended complaint pleads factual allegations that, if proven, “would establish that Plaintiffs’ work and business operations were subject to substantial control by Defendants,” and constitute a “colorable prima facie demonstration that they are Goya employees.” The court also concluded that, without making a determination on the merits of the claim, the sales reps pleaded sufficient factual allegations that plausibly state that the sales commissions under the Broker Agreement constituted “wages” and that the wages earned were not paid in full, as required by the Pennsylvania wage law. On September 17, 2020, Goya filed a motion for reconsideration of the Court’s order denying Goya’s motion to dismiss. Ortiz v. Goya Foods Inc., No. 2:19-cv-19003 (D.N.J. Sept. 3, 2020).

FRANCHISOR PROTECTED FROM MASSACHUSETTS INDEPENDENT CONTRACTOR LAW UNDER UNIQUE STATE COURT “PREEMPTION” DECISION.   In a proposed class action brought under the highly restrictive Massachusetts independent contractor law, franchisees of 7-Eleven have claimed they have been misclassified as independent contractors and should instead be reclassified as employees because of the high degree of control 7-Eleven exerts over them as set forth in their 7-Eleven franchise agreements. 7-Eleven filed a motion for summary judgment asserting the state’s independent contractor law was preempted by the Federal Trade Commission’s franchise regulations. Its motion relied on a decision issued by the highest court in Massachusetts involving the real estate industry, where the court had held that the state’s independent contractor law was completely preempted by a state law requiring real estate companies to supervise real estate agents. 7-Eleven conceded that it exercises some level of control over its franchisees, but argued it did so consistent with the FTC franchise regulations. Under the FTC franchise rules, “The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation.” A federal district court in Massachusetts agreed, finding that the state court’s real estate decision applied as well to franchisors that exercise control over franchisees.  The court concluded that “[w]here there is a conflict between the Massachusetts [Independent Contractor Law] and a regulatory scheme, the specific [FTC Rule] trumps the general [ICL].” Patel v. 7-Eleven, Inc., No. 17-11414 (D. Mass. Sept. 10, 2020).  The district court decision will undoubtedly be appealed, but even if upheld, it may be limited to Massachusetts   because it is based on a decision unique to that jurisdiction.

TRUCKING COMPANY SETTLES INDEPENDENT CONTRACTOR MISCLASSIFICATION CLASS ACTION FOR $2.8 MILLION.  A California federal court has granted preliminary approval to a $2.8 million settlement reached between a trucking company and 275 drivers in an IC misclassification class action alleging violations of the California Labor Code. The drivers claimed they were not reimbursed for business expenses such as mileage, fuel, and other truck-related costs; and they were not paid at least the minimum wage for non-productive time including vehicle inspections, waiting to be dispatchedto pick up loads, and truck washes. Of the $2.8 million settlement, $66,666.67 will be allocated for settlement of the Private Attorneys General Act (PAGA) claims.  Garcia v. Evans Delivery Company, Inc., 2:19-cv-04316 (C.D. Cal. Sept. 24, 2020).

Legislative Initiatives

AB2257 NOT MUCH BETTER THAN AB5.  In response to alarm by many freelancers and other independent contractors that California’s Assembly Bill 5 (AB5) was causing widespread loss of work for contingent workers there, the California legislature passed a replacement law, Assembly Bill 2257 (AB2257), that was signed into law by Governor Newsom on September 4, 2020.  However, the new law is not much better than AB5 for most industries using independent contractors. As discussed more fully in our blog post of September 7, 2020, AB2257 expanded the list of 50 industries granted a form of exemption from the overly restrictive ABC test enunciated by the California Supreme Court in the Dynamex case.  Under AB2257, an additional 15 industries were afforded the right to establish their legitimate independent contractor status by satisfying a well-established common law multi-factor test the Supreme Court of California articulated decades ago in a case called Borello.

Those 15 industries include recording arts; music; performing arts; landscape architecture; translation of documents; copy editing and illustrations; forestry; real estate appraising; home inspections; insurance underwriting inspections, auditing, risk management and loss control; manufactured housing sales; international and cultural exchange services; competition judging; digital content and feedback aggregation; and teaching of master classes by specialized performers for limited periods of time. AB2257 also added to the list exempt individuals referred to customers by referral services companies when the service providers render interpreting, event or wedding planning services oryouth sports coaching, caddying, and consulting.

As noted in our blog post, many independent contractors were not granted exemptions even though they provide services similar to the types of work byfreelancers who have been exempted in AB2257 from having to meet the strict ABC test.  Further, the law maintained most of the ambiguous language that AB5 used to define exemptions, and added even more ambiguities.  Overall, AB2257 is no better then AB5 except for a few select industries.  Finally, we noted that an exemption under AB2257 is not a “get-out-of-jail free” card; those businesses carved out from the ABC test must still comply with the less stringent multi-factor Borello test.

Regulatory and Administrative Developments (2 items)

U.S. LABOR DEPARTMENT ISSUES PROPOSED INDEPENDENT CONTRACTOR REGULATIONS.  On September 22, 2020, the United States Department of Labor issued a proposed regulation addressing the classification criteria of workers as independent contractors or employees under the Fair Labor Standards Act. In our blog post that same day, we discussed the details of the proposed regulation and noted that it analyzed decades of court decisions and sought to issue a uniform interpretation for the courts to apply in the future. At the same time, however, the preamble to the proposed rule acknowledged that almost all courts have uniformly applied the test for IC status under the FLSA.

The first part of the proposed regulation would rescind all inconsistent or conflicting administrative rulings, interpretations, practices and enforcement policies of the Labor Department relating to the classification of ICs and employees. The next section recites the “time-honored” principle under the FLSA that a worker is an independent contractor only if he or she is, as a matter of economic reality, “in business for him- or herself.” Five factors are then listed for consideration, although the list is not exhaustive and no single factor is dispositive. The five factors are the nature and degree of the individual’s control over his/her work; the opportunity for profit and loss; the amount of skill needed; the degree of permanence of the working relationship; and whether the work is part of an integrated unit of production.

Additionally, the proposed regulation states that a company’s actual practice is more significant than what is written in an independent contractor’s contract. As mentioned in our blog post, the proposed regulation does not provide new or clear-cut rules. It may never become final if the upcoming election brings a new administration and a change in the Congressional majority, and it may be subject to legal challenge if it becomes final.

MISSOURI CREATES WORKER CLASSIFICATION TASK FORCE.  The Governor of Missouri has created an Interagency Task Force on worker classification. According to a Press Release issued on September 11, 2020 by the Office of Governor Michael Parson, Executive Order 20-15 was signed by him on that dat, creating the Interagency Task Force on Worker Classification.  The agencies and departments on the task force are the Department of Labor and Industrial Relations, Department of Revenue, Department of Commerce and Insurance, and the Attorney General, all of which are to coordinate efforts to promote the proper classification of Missouri workers. In coordination with other Missouri state agencies, the task force is to work collaboratively with business, labor, and community groups to assess the effectiveness of existing investigative and enforcement mechanisms for identifying and preventing worker misclassification. The task force also will engage in community outreach campaigns designed to inform and educate stakeholders on the legal difference between independent contractors and employees. Governor Parson stated: “Misclassifying workers creates an unnecessary cost to Missouri taxpayers and puts Missouri businesses at an unfair disadvantage. The Interagency Task Force on Worker Classification will work jointly with state agencies and private stakeholders to identify these misclassifications and propose solutions to ensure Missouri workers and businesses receive fair treatment.”

Other Noteworthy Matters

In a September 29, 2020 article published in Law360 and entitled, “Will Barrett Tip Transport Worker Exemption Cases?”, reporter Linda Chiem presented the viewpoints of several attorneys – including the publisher of this blog – regarding the impact that President Trump’s Supreme Court nominee, Amy Coney Barrett, may have on future cases involving transportation and gig economy companies.  In her article, Ms. Chiem stated, “In two notable Seventh Circuit decisions just issued last month [Wallace v. GrubHub Holdings, Inc. and Burlaka v. Contract Transport Services LLC], Judge Barrett strictly limited a Federal Arbitration Act exemption that traditionally applies to interstate commerce workers and adopted a broad view of a Motor Carrier exemption that excludes certain workers from overtime benefits afforded by the Fair Labor Standards Act.” Regarding those cases, the publisher of this blog was quoted in the article: “Judge Barrett’s Wallace opinion was consistent with a limited application of the FAA’s Section 1, but her decision in the Burlaka case was based on an expansive application of the Motor Carrier Act exemption from the FLSA. The one consistency in those two recent decisions is that Judge Barrett decided both in favor of the business defendants. But one should not jump [to] the conclusion that Judge Barrett favors businesses. The issues in those cases were straightforward and the arguments advanced by the plaintiffs’ lawyers were a stretch. If anything, one can fairly conclude from these recent FLSA cases that Judge Barrett would not feel comfortable expanding the contours of the law. That is consistent with judicial restraint.” For a more detailed discussion of the GrubHub decision, please see our blog post of September 18, 2020.

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